A Full Audit Checklist for Your Nonprofit (+ Free Download)
Hearing the word "audit" can send a chill down your spine. However, they are a necessary aspect of running an effective nonprofit organization.
Audits can be internal or external. No matter which type of audit you have coming up, some planning and organization can go a long way to ensuring that you meet all of the nonprofit audit requirements. That is what this guide will help you do.
No time to read the article now? Download the free nonprofit audit checklist for later.
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Nonprofit Audits: The Basics
Understanding what an audit is can take some of the scariness out of the process. Plus, more knowledge about the nonprofit audit process makes it easier for you to prepare properly.
What Are Audits?
To start, we need to define an audit. Strictly speaking, an audit is a review or inspection of an individual’s or organization’s financial accounts. Most people associate the Internal Revenue Service (IRS) with audits; however, other third-party organizations may also perform these reviews.
Nonprofits rarely need to submit to an IRS audit. Yet, there are some other scenarios where they may need this type of nonprofit financial analysis. For example, a grantor may require audited financial information from you before giving you their funding.
Sadie is thinking about who conducts nonprofit audits.
Who Conducts Audits?
There are two types of audits: independent audits and IRS audits. Third-party accounting agencies — not associated with you or the government — conduct independent audits. Generally speaking, nonprofits pay for independent audits on a yearly basis because it is an accounting best practice to keep their finances in order. However, as previously mentioned, grantors or other funders may require independent audits. The federal government also requires an independent audit if your nonprofit brings in over $750,000 per year.
As you might have guessed, the IRS performs IRS audits. These are rare, but they occur if the IRS has received a complaint about your nonprofit or if it has found an issue in your financial statements. The IRS audit process looks pretty similar to the independent audit process: the auditor asks you to gather all of your financial information and then takes a few weeks to review it. With that in mind, you can use the checklist we provide later on as a reference for both independent and IRS audits.
Pro Tip: No matter what type of audit you are undergoing, gather an internal committee of board and staff members to help prepare for it. There needs to be at least a few individuals with finance experience to ensure accurate and positive results.
Why Are Audits Important?
Aside from being legally required in select situations, there are other purposes to audits. Transparency is essential in the nonprofit world. You cannot gain supporters if you do not show that your organization is true and fair, and you cannot get funding to operate without supporters. Submitting to a regular outside audit shows the authorities, stakeholders, and general public that you operate above board.
Audits can also help improve your nonprofit organization. They can identify weaknesses in your internal controls. With this insight, you can improve your policies to avoid future problems and operate at peak efficiency.
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How To Prepare for an Audit
There are several tasks you need to do to prepare for an audit. Creating a timeline like the one below can help you get organized and eliminate a lot of stress. Be sure to tailor your timeline specifically to the needs of your nonprofit organization.
Pro Tip: Keep in mind that nonprofit audit requirements by state may vary. These requirements often differ at least slightly from the ones from the federal government. Depending on who is auditing you or asking you to get an audit, you must follow either the state or federal nonprofit audit procedures. For your reference, here is a list of each state’s requirements.
12 Months Before
Schedule a meeting with your internal audit committee. Assign a role to each person. For example, you should assign a point person who is responsible for communicating with the auditor.
6 Months Before
These preparation tips are only relevant for independent audits, as the IRS will use one of its in-house auditors for an IRS audit.
Conduct research into the firms in your area. Check for conflicts of interest and nonprofit-specific auditing experience.
Pick three or four nonprofit audit firms for the audit committee to consider.
Assemble the audit committee to choose the final firm.
Once you have chosen your auditor, create a contract. The contract should explain the fee and the process, including what documents you need to provide and how long the review takes. This protects both parties.
Eva is excited to learn about how to prepare for an audit!
3 Months Before
Create a checklist with all of the documents you will need for the audit. We provide a checklist template for your convenience in the next section.
Begin to assemble your documentation. You should keep both digital and hard copies of everything. Hard copies are especially important in case you experience internet issues. Place these items in an organized binder.
Meet with the committee to discuss the expectations and procedures for the audit.
1 Month Before
Run through the document checklist one last time. Make sure that all of the files are ready and organized.
Prepare for the auditor’s in-person or virtual visit. For an in-person visit, figure out who will escort them, where they will sit, and other logistics.
Have one last meeting with the committee for any last-minute questions.
During the Audit
Give the auditor space. They have an important job to do, so you do not want to be constantly interrupting them.
Ensure that the point person on the audit committee is always available to answer any of the auditor’s questions.
After the Audit
Schedule two wrap-up meetings. The first meeting should be with the auditor to review the audit report with their results. The second one is with the board to come up with an action plan for what the auditor recommends. If the auditor does not recommend anything, you can simply use this meeting to talk about how the process went.
While the audit is still top of mind, update your checklist with any documents that you were not prepared for this time around.
Celebrate! You have put in a lot of hard work.
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Download the free nonprofit audit checklist.
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While an audit is intimidating, you can take some of the stress out of getting ready for one by creating a tailored timeline. The nonprofit audit checklist we provide in this article can be a total game-changer in your preparation practices.
Try our tips, and be amazed at how streamlined your next audit becomes!
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💡How do you prepare for a nonprofit audit?
The key to audit preparation is organization. Create a timeline of the tasks, draft a checklist of the required documents, and have digital and hard copies of the documents. Find out more.
🔑 What goes in an audit checklist?
An audit checklist should include all of the financial information for your nonprofit organization, including bank statements, tax returns, and lease agreements. Find out more.
📝 What triggers a nonprofit audit?
The trigger depends on whether it is an independent or IRS audit. The IRS may audit you if it receives a compliance complaint or notices financial inconsistencies. The rules for independent audits are less streamlined, with instances when they are required or recommended. Find out more.