Our Simple Guide to Nonprofit Audit Reports
"Audit" can be an intimidating word for anyone in the nonprofit world. It is also a confusing word, as many tax-exempt organizations are unsure of nonprofit audit requirements — especially when, or even if, they need to perform them.
Despite the apprehension surrounding independent audits, they are a useful tool: they ensure financial accuracy. In this guide, we take a look at the basics of nonprofit audit standards and reports.
- What Is an Independent Audit?
- What Is an Audit Report?
- What To Do With an Audit Report
- Final Thoughts
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What Is an Independent Audit?
From an operational audit to a compliance audit, there are many types of audits. For example, sometimes the IRS audits you after finding discrepancies in your IRS tax return. However, in this guide, we focus on independent audits. Let’s begin by defining what an independent audit is and what process it follows.
Nonprofits hire audit firms to conduct independent audits for them. These third-party firms ensure that nonprofits are following generally accepted accounting principles (GAAP) and have accurate financial statements.
Emily is reflecting on what all a nonprofit audit entails.
If you decide to conduct an independent audit, a certified public accountant (CPA) from the firm of your choosing will give you a nonprofit audit checklist with all of the financial documentation that they need. You will provide that information, and they will perform a nonprofit financial analysis on it.
When the CPA completes their audit, they will send their findings back to you in the form of a report. A committee made up of some members of your board and finance team will review it.
Pro Tip: Annual audit fees are not cheap. If your organization does not have the budget for a full-blown audit every year, alternate it with one of the cheaper alternatives. There are two types of cheaper alternatives: a compilation and a review. We recommend a review because it is cheaper than an audit but more comprehensive than a compilation. This way, you save money but stay on top of federal and state nonprofit audit requirements.
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What Is an Audit Report?
It is a common assumption that audit reports are long and lengthy. The truth is, an audit report is simply a signed letter that shares an auditing firm’s final opinion on your nonprofit’s financial state.
An audit report, also known as a management letter or a letter to management, identifies what financial operations, if any, you need to improve. It opens with an opinion statement, in which the auditor says whether they found your organization’s financial statements to be reliable. Next, the auditor reports any issues that they observed.
Let’s take a closer look at the components of this document.
There are four types of opinions that an auditor can issue:
Unqualified opinion: The goal of every audit is to get this type of opinion. It signals that the auditor did not find any issues with your transactions, funds, and other financial items.
Qualified opinion: This is the second best outcome. The auditor found one or two instances in which you are not following GAAP, but, overall, you are in good financial standing.
Adverse opinion: An adverse opinion means that the auditor found several issues, suggesting that you are not conforming to GAAP.
Disclaimer of opinion: When an auditor issues a disclaimer of opinion, it means that they are choosing not to give an opinion on your finances. Auditors choose to do this for any number of reasons. For example, maybe they felt like you were uncooperative in providing them with all of the financial documentation that they needed, preventing them from forming a complete opinion. A disclaimer of opinion is by far the worst outcome you can get.
If the auditor finds issues to report, they will mention them after they state their opinion. There are two types of issues:
Material internal control issues: These are internal controls that you need to adjust moving forward to ensure accurate and GAAP-compliant financial reporting.
Operating inefficiencies: Operating inefficiencies are more serious in nature. They indicate red flags that could lead to issues down the line.
Pro Tip: Even if you correct issues that the auditor finds during the examination, the auditor will still mention them in the audit report.
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What To Do With an Audit Report
Now that you know what an audit report looks like, what do you do when you get one? As we mentioned earlier, the auditor sends the report to the audit committee that you assembled. They review it before hosting a formal presentation to the board of directors.
Next, the board has an open discussion about whether to implement the changes that the auditor recommends. The board sends any changes that it deems necessary to the finance team to implement.
Tristan is feeling confident on what to do with his audit report!
During the next fiscal year, the auditor may check in to determine whether you are implementing their recommendations. The larger your organization is, the more often you can expect to hear from the auditor. After all, larger organizations are handling lots of financial information, so operational changes have a larger impact.
Pro Tip: Even if you like your chosen auditing firm, you should still request proposals from other firms every few years. This way, you can get fresh eyes on your operations to receive new insights and recommendations into them. After all, different auditing firms have different nonprofit audit procedures.
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Though arduous and time-consuming, audits are a net good for your organization. Think of them not as a punishment, but as an opportunity to tighten up operations and procedures. Understanding what an audit report is and how to implement any suggestions from it can help your finance department run smoothly and prepare you for future audits.
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💡What is a nonprofit audit?
A nonprofit audit is when you hire an outside accounting firm to assess the financial state of your organization. Find out more.
🔑 What does a nonprofit audit report look like?
An audit report is a single document that outlines the auditor’s findings. It starts with an opinion on the financial standing of the nonprofit and ends with any issues and recommendations. Find out more.
📝 What happens after a nonprofit gets an audit report?
Both the audit committee and board review the audit report before deciding what recommendations to implement. They then send these recommendations to the finance department. Find out more.