External audits offer many benefits to nonprofits

How are you handling your nonprofit audits? When it comes to auditing your nonprofit books, you may be required to hire an independent outside CPA. While the need for this can depend on your annual gross receipts and other factors, it can be a good idea even if it’s not required. These external audits give you insight into your bookkeeping, your operational practices, and give invaluable assurance to donors and stakeholders that your nonprofit is acting as a good steward of its resources. 

But what is the difference between internal and external audits? When are they best used and how do you get ready for them? Let’s take a deeper dive. 

Internal audits

Nonprofits should strive to conduct internal audits on a regular basis, whether annual or quarterly. These audits are typically conducted by a staff member or board member of the organization. The goal? Review financial statements, accounting policies, and spending habits. 

One of the big values provided by an internal audit is that they promote fiscal responsibility. They’re essential to good governance. However, the downside is that, depending on the resources and staffing of the organization, the individual conducting the audit may not have extensive training in audits. Moreover, because of their relationship to the organization, they have a vested interest in issuing a clean bill of health. 

External audits

Outside audits can often provide a more neutral appraisal of an organization’s financial statements and overall financial wellbeing. During an external audit, a CPA will examine the organization’s financial statements and issue an opinion on whether the statements adhere to Generally Accepted Accounting Principles (GAAP) or another reporting framework. 

It’s important for the CPA to provide support for their statement. To this end, the auditor will test underlying records like bank reconciliations, accounts payable records, and contribution classifications. They’ll also review the organization’s internal controls, such as the procedures used to prevent and detect fraud. 

Internal and external audits are completely separate actions. Depending on where an organization is located, they may be required by state law to have external audits, so it’s important to know all the laws and regulations that apply to your nonprofit. 

Preparing for the audit

How do you prepare for an external audit? There are several steps you’ll need to take to be ready for the auditor. Preparing in advance can streamline the process and make the task more efficient for the auditor. Consider what information requests and inquiries the auditor might make. They will ask for access to a range of financial documents, including: 

• Financial statements,
• Bank correspondence,
• Budgets,
• Board meeting minutes, and
• Payroll, accounts receivable and accounts payable records.

Depending on your organization’s activities, the auditor may also need to review records related to loans, leases, grants, donations, and fundraising activities. You’ll also want to be able to answer questions about how money and resources are received and spent, how your organization complies with laws, and what your practices are for recording financial transactions. 

Every nonprofit should conduct internal audits - they’re an essential practice for operational and financial health. However, they’re no substitute for help from a qualified external CPA. As practices change and adapt to new ties - for example, major changes in GAAP or the increasing scrutiny of nonprofit organizations - it’s imperative that your organization handles its financials in a transparent manner. Wondering what state and federal requirements might apply to your nonprofit? Contact us today to see how you can benefit from the expertise of an independent financial professional.  

Please reach out to your trusted Smolin professional with any questions or concerns: https://www.smolin.com/contact-us/