Organizations often ask about whether or not they need an annual audit when they are sure that funds are being used appropriately and that fraud is not occurring. Having an outside certified public accountant (CPA) review the financial records on an annual basis is a best practice for nonprofits and ministries and in many cases, is required for funding.
So, what exactly is an audit? An audit is conducted by a CPA who “tests” transactions and internal controls within the organization. The goal of an audit is to form an opinion on the fairness of the organization’s financial statements. It provides reasonable assurance that the organization’s financial statements are free from misstatements in accordance with accounting principles. It is important to note that an audit does not provide 100% assurance that fraud is not occurring and the purpose of an audit is not to detect fraud. Instead, an audit is used to assess risk. The focus during the audit is on materiality—in other words, it looks at whether an amount, transaction or discrepancy is important or significant.
The organization’s accountant should never be its auditor. The audit needs to be conducted by an external, independent auditor who is not affiliated with the organization. Check the audit requirements of your state to determine if the organization is required to have an annual audit.
For organizations with smaller budgets, an audit is not always necessary. However, to meet donor guidelines and grant funding requirements, it is advisable to have an auditor review the financial records of the organization, In this case, a financial review is a step-down from a full audit. The financial review provides limited assurance by the auditor that the organization is managing its financial records in accordance with accounting principles. It includes an inquiry of organizational staff/volunteers and analytical procedures.
Other organizations whose budgets are really small may want to consider a financial compilation. A compilation provides no assurance or “opinion” on the financial records of the organization. Instead, the accountant takes the financial records of the organization and organizations them into financial statements that complies with generally accepted accounting principles.
The board of directors needs to make a decision about the level of financial review the organization needs in its current position. In addition to its current position, the board will also want to analyze where it plans to go in the future and how its financial policies/statements will impact the organization’s ability to attract and retain donors. Recognize the importance of providing assurance to your donors and potential donors that their funds will be used for the purpose for which they are donated.