Understanding NPO Financial Audits: A Comprehensive Checklist for 2023

In today’s dynamic nonprofit sector, maintaining financial integrity and operational efficiency is paramount. Nonprofit organizations (NPOs) face unique challenges in managing their finances, from adhering to regulatory requirements to ensuring transparency and accountability. Financial audits play a pivotal role in this landscape, providing valuable insights and ensuring compliance with legal and ethical standards. This guide delves into the intricacies of NPO financial audits, offering a detailed checklist tailored for 2023 to help organizations navigate the complexities and maintain trust among stakeholders. Whether you’re a seasoned nonprofit manager or new to the field, this comprehensive resource will equip you with the knowledge needed to conduct thorough audits and uphold your organization’s financial health.

Financial Audit Requirements for Nonprofits

Nonprofits subject to financial audit typically must meet specific requirements to ensure transparency and accountability. These requirements often depend on factors such as organizational size, revenue levels, and regulatory environment. Below are the key financial audit requirements for nonprofits:

Scope of Audit

• • Audit must cover the nonprofit’s financial statements, including balance sheet, income statement, cash flow statement, and notes to the financial statements.

Generally Accepted Accounting Principles (GAAP) must be applied.

Generally Accepted Auditing Standards (GAAS) must be followed.

Conducting the Audit

• • Audits must be performed by an independent Certified Public Accountant (CPA) or qualified auditor.

The CPA must have no conflicts of interest with the nonprofit.

Audit must be conducted in accordance with the nonprofit’s governing documents and applicable laws.

Reporting Requirements

• • Audit reports must be submitted to the board of directors, key stakeholders, and relevant regulatory agencies.

Reports must be made available to the public, typically within a few months after the fiscal year end.

Quarterly or annual financial reviews may also be required depending on the organization’s size and complexity.

Exceptions and Exemptions

• • Some smaller nonprofits may be exempt from full audits if they meet specific criteria, such as gross revenue below a certain threshold.

Nonprofits filing Form 990 with the IRS may be required to have their financial statements audited if they meet certain revenue requirements.

Timing and Frequency

• • Audit must occur after the completion of the nonprofit’s fiscal year.

Audit findings must be reviewed and accepted by the audit committee and executive leadership before public distribution.

Annual audits are typically required for nonprofits with significant revenue streams or complex operations.

By adhering to these financial audit requirements, nonprofits can ensure compliance with legal and ethical standards, build trust with stakeholders, and maintain financial integrity.

What is Non-Financial Services Audit?

A non-financial services audit refers to the process of evaluating and assessing various aspects of an organization that fall outside of its financial operations. This type of audit focuses on areas such as governance, operations, compliance, risk management, and stakeholder engagement. It is particularly important in industries like healthcare, education, and nonprofit organizations where financial performance alone does not guarantee effectiveness or compliance with regulatory standards.

Key Components of Non-Financial Services Audit:

1. Governance and Oversight :
   This involves reviewing the organizational structure, decision-making processes, and ethical standards. Ensuring that leadership is accountable and that policies align with organizational goals is a critical aspect of this audit.
2. Operational Efficiency :
   Evaluating how effectively resources are utilized, processes are managed, and outcomes are achieved. This includes assessing the effectiveness of programs, services, and workflows.
3. Compliance and Legal Requirements :
   Ensuring that the organization adheres to relevant laws, regulations, and contracts. This may involve checking for adherence to ethical guidelines, labor laws, and contractual obligations.
4. Risk Management :
   Identifying and managing potential risks that could impact the organization’s objectives. This includes assessing financial, operational, and reputational risks.
5. Stakeholder Engagement :
   Evaluating how the organization interacts with key stakeholders, such as donors, volunteers, board members, and clients. Effective communication and transparency are essential for building trust and maintaining relationships.

Who Conducts Non-Financial Services Audits?

These audits are typically conducted by internal audit teams or external experts with specialized knowledge in non-financial areas. The findings are often shared with management to inform decision-making and strategic planning.

By focusing on these key components, a non-financial services audit helps organizations identify strengths, weaknesses, and areas for improvement, ultimately contributing to better governance, efficiency, and stakeholder confidence.

For further reading on non-profit management and compliance, visit our NPO Expert resources.

Where to Find Audited Financial Statements for Nonprofit Organizations

Nonprofit organizations are required to disclose their financial activities through various channels, including audited financial statements. Here are the primary sources where you can locate these documents:

• IRS Financial Disclosures : Nonprofits with gross receipts exceeding $50,000 are mandated to file IRS Form 990 or 990-EZ. These forms are publicly accessible via the IRS website . The forms provide detailed financial information, including revenue, expenses, and assets.
• Guidestar : This nonprofit database aggregates financial data from various sources, including IRS filings and audit reports. Visit their official website at Guidestar to access comprehensive financial information on thousands of nonprofits.
• State Charity Registries : Many states maintain online databases listing nonprofit entities registered within their jurisdiction. Check your state’s official charity registry, such as California’s Secretary of State , for access to financial records.
• Nonprofit Websites : Many nonprofits voluntarily publish their audited financial statements on their official websites. Visit the organization’s website directly to locate these documents, often found in the “About Us” or “Financials” sections.
• BBB (Better Business Bureau) : The BBB provides ratings and evaluations for charities, which may include access to financial audits. Visit the BBB’s website at BBB to explore this resource.

When accessing these resources, keep in mind that some may require fees or registration to view detailed financial information. Always verify the credibility of the source to ensure accuracy and completeness of the data.

Does the IRS Audit Non-Profit Organizations?

The IRS does indeed conduct audits of non-profit organizations to ensure compliance with federal tax laws and regulations. While most non-profits are not required to submit annual reports, the IRS may initiate an audit under specific circumstances.

• 1. Excessive Fundraising Expenses

The IRS closely examines non-profits with unusually high fundraising costs compared to their revenue. Non-profits must demonstrate that funds are used appropriately for mission-related activities rather than personal gain.

• 2. Executive Compensation

High salaries for top executives, particularly those exceeding reasonable market rates, can raise red flags. Non-profits are expected to justify such compensation as necessary for organizational effectiveness.

• 3. Program Expenses

If a non-profit’s program costs appear excessive or lack clear public benefit, the IRS may investigate. This includes questioning the allocation of resources and their alignment with the organization’s stated goals.

• 4. Financial Mismanagement

Significant discrepancies in financial records, poor record-keeping, or evidence of embezzlement can lead to IRS scrutiny. Non-profits must maintain accurate and transparent financial reporting.

• 5. Failure to File Required Forms

Non-profits must file Form 990 with the IRS, detailing their finances and operations. Failing to do so or filing incomplete forms can result in an audit or penalties.

• 6. Allegations of Abusive Practices

If there are credible allegations of unethical or abusive practices, such as exploiting donors or engaging in prohibited transactions, the IRS may investigate to ensure compliance with tax-exempt rules.

For more detailed guidance on IRS compliance and audit preparedness, visit our IRS Compliance Guide and explore our Nonprofit Audit Checklist .

What Triggers a Non-Profit Audit?

A non-profit audit is typically triggered by specific financial thresholds or organizational milestones, depending on the state in which the non-profit operates. Here’s a breakdown of the common triggers:

1. Revenue Threshold : Many states mandate an audit when a non-profit’s total revenue exceeds a certain amount. This threshold often ranges between $50,000 to $150,000 annually, though exact figures vary by state.
2. Contributions Received : In addition to revenue, the amount of contributions (funds received from donors) may also determine whether an audit is required. Similar to revenue, this threshold can vary significantly by jurisdiction.
3. Organizational Size and Complexity : Larger non-profits with more complex operations may face more frequent or rigorous audits due to their size and scope. Smaller organizations might have fewer audit requirements.
4. State Laws and Reporting Requirements : Each state has unique laws governing non-profits. Some states may require audits based on specific financial reporting standards or if the non-profit fails to meet annual filing requirements.
5. Exceptions and Additional Criteria : Certain states may have exceptions, such as requiring an audit only in cases of financial misconduct or upon receiving a formal complaint. Others may exempt very small non-profits with minimal income.

By understanding these triggers, non-profits can better prepare for compliance and ensure they meet their state’s regulatory requirements.

How Far Back Can a Non-Profit Be Audited?

The IRS generally includes returns filed within the last three years in an audit. However, if significant errors are identified, the audit may extend further back. While the standard timeframe is typically three years, extensions are possible depending on the nature of the issues discovered. It’s important for non-profits to remain informed about any changes in audit policies to ensure compliance and avoid potential issues.

NPO Expert recommends staying updated with the latest IRS guidelines to understand the current audit limitations and ensure proper record-keeping. For more information on IRS audit processes and non-profit compliance, visit our resources section.

Learn More About IRS Audit Guidelines