Nonprofit Industry: Audit Guide

Oct 11, 2017Audit & Assurance, Nonprofit

Is your nonprofit organization required to have a financial statement audit in the current fiscal year? If so, the information below will help you gain an understanding of what to do before, during and after the audit.

Before the Audit – Selecting an Auditor

The first step is to select an independent CPA firm to perform your financial statement audit. It is important to select a firm with the necessary skills and nonprofit experience to provide the services your organization needs. Look for a CPA who is willing to help educate your staff on how to prepare for the audit, especially if it is the first audit for your nonprofit organization. 

In Minnesota, audit firms are required to be audited themselves by a third party. This is called a “peer review” and the results should be shared with potential audit clients. Ask for these results and references from other nonprofit clients.

It is important to note, auditors need to be independent of your organization. There cannot be any real or perceived conflicts of interest between the CPA firm and your nonprofit organization. This means the CPA who is the treasurer of your Board of Directors, cannot perform your audit.

During the Audit – Preparing Documentation

After you have selected an auditor, the most important preparation for the audit is to ensure your accounting records are updated, organized and as accurate as possible. During the audit, your auditors will review your financial records and transactions, and may ask for documentation to support any of the transactions.

Pro Tip: Place all the documents the auditors request in a single folder on your computer. Then next year, you will have a record of what the auditors reviewed and it will be easier to prepare.

Some common items reviewed by auditors include:

  • Bank and investment statements
  • Grant funds received and expected
  • Listing of year end accounts payable
  • Payroll reports, W-2s and 1099s
  • Minutes of board of directors meetings
  • Financial policies

Your auditor is required to gain an understanding of the internal controls in place at your nonprofit organization and determine whether they are being followed properly.

After the Audit- Review with the Auditor

After the audit fieldwork has been completed, your auditor will issue a report to the board of directors, expressing an opinion as to whether the financial statements fairly present the financial position of your nonprofit organization.

Your auditor is required to send two additional letters to the board of directors. The first letter is an overall summary of the audit discussing your nonprofit organization’s accounting practices, any difficulties encountered in performing the audit, any disagreements with management, and any other audit findings or issues. The second letter, sometimes referred to as a “management letter” or “internal control letter,” is meant to identify areas of operations or procedures where your nonprofit can strengthen or redesign internal controls. The insights shared by the auditor in these letters should be discussed with management PRIOR to discussion with the audit committee and/or full board of directors.

Smith Schafer has helped local nonprofits throughout Minnesota grow and thrive in their communities for the past 45 years. Our Nonprofit Service Group is committed to serving over 300 Minnesota nonprofits. We have the experience and the resources you need to manage your organization and achieve your mission. If you have questions or concerns about your situation, ask a Smith Schafer professional for help.

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