Nonprofit organizations must constantly demonstrate where it receives from, where those funds go and what percentage is used for charitable work. While no official requirements for a nonprofit audit exist, most organizations require audits in their bylaws. The annual audit is an essential component for closing the fiscal year and showing that the nonprofit spent the donated money according to the mission of the organization.
An audit reviews and verifies the financial books of an organization. Audits are most often associated with the IRS and taxes, but nonprofits conduct audits through a trained accountant or CPA. An audit verifies deposits with checks and deposit slips, verifies receipts and expense reimbursements, and reconciles bank statements. The audit provides a way for a nonprofit to maintain transparency in its spending methods and use of donations.
The treasurer maintains the books of any nonprofit with other board members as co-signers for checks. Some firms require financial secretaries to categorize all deposits according to how donations are designated then to deposit the funds. A third person, the auditor, is familiar with the organization but may not participate in the money management. The auditor conducts the actual audit and requires input from the treasurer and financial secretary.
For income, the audit reviews procedures to ensure a two-person system is used to count cash accurately and deposit it into the correct sub-accounts. Since money may be donated or granted for specific purposes, funds must be categorized upon receipt.
The auditor confirms that expenses are legitimate. The auditor uses meeting minutes and approved budgets to confirm that all money spent received proper authorization. The auditor reviews expense receipts provided by anyone using his own funds to purchase something for a specified budget. All receipts must equal the money reimbursed as approved by the board. Nonprofits must have an open-book policy, so anyone can scrutinize expenses and ask questions. The audit shows the money trail with validation.
Closing the Fiscal Year
To close the financial books for the fiscal year, the auditor uses the income and expense records to create a yearly balance sheet with as much detail as possible. The auditor reconciles bank statements to determine outstanding checks as well as determines additional anticipated funds that have not yet arrived. A grant that was awarded but not funded during the fiscal year is an example of income that has not yet hit the books but is part of the fiscal year.
Of course, the IRS can audit a nonprofit organization even though it is tax-exempt. When the IRS audits, it looks for specific items, such as a a 3:1 ratio of charitable work to fundraising efforts. What this means is for every fundraiser, an organization must do at least three giving campaigns in accordance to its bylaw mission.