What do we mean when we talk about an audit? There are several kinds of audit, each for a different purpose, but the one most likely to be needed by a charity or nonprofit is an independent financial audit. It is an examination of an organization’s records to determine the accuracy of its financial statements covering a specific time period, and it is conducted by a Certified Public Accountant (CPA) at the organization’s expense. The IRS does not require this type of audit, but an independent audit may be required by large donors, by state agencies, by lenders, or by the organization’s own Board of Directors—in other words, anyone who has a need to determine the organization’s financial health.
Many states where a charity must register to solicit donations require an independent audit to be performed each year that the organization’s revenue or contributions reach a certain level. State audit requirements vary, from Pennsylvania’s threshold of $300,000 in revenue to California’s threshold of $2 million. Organizations with less annual revenue may be required to have an independent review of their financial statements, conducted by a CPA. A review is similar to an audit but requires less work by the auditor and is less expensive for the organization.
An independent audit must comply with what are known as Generally Accepted Accounting Principles (GAAP), but there can be additional requirements. For example, an organization which receives federal funds and expends $750,000 or more of those funds in one year must comply with the Single Audit Act of 1984. Guidelines for this type of audit are issued by the federal Office of Management and Budget. This requirement applies whether the organization receives the funds from one or from multiple sources, including government contracts, grants, loans, subsidies, and donated property. Also, federal funding does not only mean the funding that comes directly from the federal government; instead, money that reaches an organization by a pass-through entity, such as a state government or local agency, is also included in this definition.
A ‘Single Audit’ as defined in the law is very similar to an independent audit, but its scope is usually widened to all financial activities and operations of the organization. It also includes more detailed and in-depth testing of expenses, in order to ensure that all financial data is presented fairly and accurately and that adequate internal controls and checks are in place. At the same time, this audit also reviews compliance with any federal or state regulations related to the specific program or funding source. The report of the Single Audit must be made available to the public.
The auditor performing the Single Audit must have a higher level of certification and the increased testing means an increased cost to the organization. However, the cost is an allowable indirect cost of administering the federal funds.