Navigating audits can feel overwhelming for nonprofit leaders, but understanding the process is key to turning a stressful obligation into an opportunity for growth and transparency. Whether it’s a financial audit, compliance audit, or desk audit, being prepared ensures smoother outcomes, protects your nonprofit’s reputation, and strengthens trust with donors, grantors, and stakeholders.
The good news? You don’t have to handle it alone. At MBS Accountancy, we specialize in helping nonprofits like yours stay audit-ready with prompt, accurate accounting and audit preparation services. With the right support and preparation, audits can be less daunting and more of a strategic advantage for your organization.
Why Nonprofits Need Audits
Audits play a crucial role in maintaining the health, transparency, and trustworthiness of a nonprofit organization. While the idea of an audit might seem intimidating, the benefits far outweigh the challenges. Here’s why audits are essential for nonprofits:
Regulatory Requirements
Depending on your state and federal guidelines, audits may be legally required. Many states mandate audits based on your organization’s revenue or the size of donations you receive. For example, nonprofits receiving federal funding of $750,000 or more must undergo a Single Audit to ensure compliance with federal grant requirements. Staying compliant with these regulations protects your nonprofit from penalties or loss of funding.
Donor Expectations and Trust
Donors want to know their contributions are being used effectively. An independent audit enhances your nonprofit’s credibility, showing donors that you are committed to transparency and responsible financial management. A clean audit report can encourage ongoing and increased support from donors who value accountability.
Grant Compliance
Many grantors and foundations require audited financial statements as part of their funding conditions. Audits demonstrate that your nonprofit manages grant funds appropriately and adheres to the terms of the grant. Being audit-ready helps secure future funding and maintain strong relationships with grantors.
Organizational Growth and Governance
Audits can uncover weaknesses in internal controls or financial processes. By addressing these issues, your nonprofit can improve operations, reduce the risk of fraud, and strengthen governance. This proactive approach supports long-term growth and sustainability.
Desk Audits and Remote Reviews
Sometimes, a desk audit may be required by a grantor or regulatory body. These audits are conducted remotely, focusing on the review of specific documentation without an on-site visit. Even though they are less comprehensive than full audits, desk audits still require careful preparation to ensure that all requested documents are accurate and complete.
Types of Audits for Nonprofits
Nonprofit organizations may encounter different types of audits depending on their funding sources, regulatory requirements, and internal needs. Understanding these types of audits can help you prepare effectively and maintain compliance. Here’s a breakdown of the most common types of audits for nonprofits:
Financial Audits
A financial audit examines your nonprofit’s financial statements to ensure they are accurate, complete, and comply with accounting standards (such as GAAP). Conducted by an independent auditor, the goal is to provide an unbiased opinion on the integrity of your financial records. Financial audits are often required by large donors, grantors, or regulatory bodies. The following situations are when you might encounter financial audits:
- Annual revenue surpasses state-mandated thresholds.
- Required by donors, grantors, or board policies.
Compliance Audits
A compliance audit assesses whether your nonprofit is following specific laws, grant conditions, or donor restrictions. This type of audit ensures that your organization is adhering to the terms of grants, contracts, or federal and state regulations. When compliance audits happen, it’s usually because:
- Your nonprofit receives restricted grants or government funding.
- Grantors require proof of compliance with funding terms.
Internal Audits
An internal audit is conducted by your nonprofit’s internal team or an outsourced professional to evaluate financial controls, processes, and governance. The purpose is to identify risks, detect inefficiencies, and recommend improvements before an external audit occurs. In an internal audit, the following happens:
- Regular review of internal processes and controls.
- Preparation for external audits to avoid surprises.
Single Audits
A Single Audit is required for nonprofits that spend $750,000 or more in federal funding during a fiscal year. This audit examines both financial records and compliance with federal grant requirements, ensuring that funds are used appropriately. When a single audit happens, it’s usually because your organization receives significant federal grants above the $750,000 annual threshold.
Desk Audits
A desk audit is a remote review of specific documents requested by grantors, state agencies, or regulatory bodies. These audits are less comprehensive than full on-site audits but still require accurate, well-organized records. Desk audits may focus on grant expenditure reports, financial statements, or compliance with funding conditions.
- Grantors request documentation to verify fund usage.
- Regulators require a preliminary review of financial records.
- Compliance checks that don’t warrant a full on-site audit.
Common challenges encountered during audits for nonprofits
Nonprofits often encounter several challenges during audits due to limited resources, evolving compliance requirements, or documentation issues. Understanding these challenges and knowing how to address them can make the audit process much smoother. Here are some common challenges—and practical solutions to resolve them.
Missing or Incomplete Documentation
Nonprofits may struggle to provide complete records of grants, expenses, or donor contributions due to inconsistent record-keeping practices. To address this, implement consistent record-keeping by using accounting software or a digital document management system to track financial records, grant agreements, receipts, and donor communications. Regularly reconcile accounts on a monthly basis to ensure everything is up-to-date. Additionally, create an audit checklist to know exactly what documents are needed before the audit begins.
Weak Internal Controls
Ineffective internal controls can lead to errors, mismanagement of funds, or even fraud—issues that auditors are likely to identify. Strengthen internal controls by ensuring the separation of duties so that no single person handles both recording and authorizing transactions. Conduct regular internal audits to identify weaknesses early and develop written policies for financial procedures.
Misclassification of Funds
Nonprofits sometimes misclassify restricted and unrestricted funds, leading to compliance issues and donor mistrust. To avoid this, carefully track any restrictions on funds and maintain clear records distinguishing between restricted and unrestricted funds. Review donor agreements thoroughly to understand any limitations on fund usage, and provide staff training to ensure accurate fund classification.
Lack of Preparation for Desk Audits
Because desk audits are conducted remotely, nonprofits may be caught off guard when grantors or regulators request specific documentation on short notice. Stay prepared by keeping financial records and grant documentation easily accessible. Maintain clear documentation of how funds were spent and ensure compliance with grant terms. Regularly review records to keep everything in order.
Noncompliance with Grant Restrictions
Failing to adhere to specific grant terms can lead to penalties, loss of funding, or audit findings. To resolve this, review grant conditions thoroughly before using funds and assign someone to monitor compliance throughout the grant period. Maintain clear communication with grantors, especially if issues arise.
Staff Turnover or Limited Accounting Knowledge
High turnover or limited financial expertise can lead to inconsistencies in accounting practices. To mitigate this, offer ongoing financial training for staff, develop standard operating procedures (SOPs) to maintain consistency, and consider outsourcing your accounting to maintain continuity and expertise.
How MBS Accountancy Can Help
Whether you need a financial audit, compliance audit, or desk audit, preparation is key to success. At MBS Accountancy, we offer nonprofit accounting services to help your nonprofit:
- Understand which audits apply to their organization.
- Organize and review financial records.
- Ensure compliance with grant and donor requirements.
- Prepare for audits efficiently and confidently.
With prompt and accurate audit preparation services from MBS Accountancy, you can reduce stress, maintain compliance, and focus on your mission.