When Does My Nonprofit Organization Need an Audit?
An annual audit is an examination of an organization’s financial systems and transactions at the end of a year by an independent, certified, professional auditor. The audit assesses whether or not financial statements have been prepared in conformity with Generally Accepted Accounting Principles (GAAP) or Other Comprehensive Basis of Accounting commonly referred to as OCBOA. The audit is an assessment or professional judgment of the financial statements prepared by an organization’s management. An auditor seeks to understand the nature of an organization, reviews and evaluates internal control procedures, confirms major transactions and balances, and tests underlying accounting records. An audit states the opinion that financial statements accurately reflect the finances of an organization.
An audit may identify weaknesses in an organization’s internal control system which the organization can accept and incorporate improvements into its practices and procedures.
Many organizations are subject to special requirements for audits depending on their geographic location and/or their funding sources. In Maryland, if a charitable nonprofit receives charitable contributions equal to or exceeding $500,000, an audit must be performed and submitted to the Office of the Secretary of State along with its annual charitable solicitation registration form. In other states, the requirements may be higher or lower. Some organizations have a by-law provision requiring an audit. Others are required to complete an audit because their funding sources (i.e., United Way or a government entity) require an audit. The Standards for Excellence® program calls for audits to be performed for organizations with budgets over $500,000.
There are many variables that determine how much an audit will cost. If you circulate a request for proposal (RFP), most auditing firms will keep their quotes competitive. The cost of an audit will depend on such factors as the size of the organization, the complexity of the organization, the existence of internal controls, and record keeping practices.
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From the Standards for Excellence®: An Ethics and Accountability Code for the Nonprofit Sector. The Standards for Excellence code, developed by the Standards for Excellence Institute, includes specific benchmarks and measures that provide a structured approach to building capacity, accountability, and sustainability in your nonprofit organization. The code identifies 6 major areas of nonprofit governance and management: Mission, Strategy, and Evaluation; Leadership: Board, Staff, and Volunteers; Legal Compliance and Ethics; Finance and Operations; Resource Development and Fundraising; and Public Awareness, Engagement and Advocacy.
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