Going through an audit can be a stressful undertaking for a nonprofit organization. It is necessary to have an audit performed by an external auditor every fiscal year. In addition to the external auditor, there are other people involved in the auditing process as well.
Key Players in the Auditing Process
- An Independent External Auditor: The nonprofit organization hires an independent external auditor to review the financial records. Their job is to verify the records follow the generally accepted accounting principles (GAAP) and the generally accepted auditing standards (GAAS). Hire a CPA to fulfill this function. It is best if the external auditor doesn’t have any direct personal or professional ties with the cause or staff of the organization. Steer clear of conflicts of interest.
- An Internal Auditor and Audit Committee: Federal legislation requires that the nonprofit has an internal audit committee. It is helpful to have an internal checks and balance system in place. Make sure one or two bookkeepers or the finance manager is running regular reports and verifying their accuracy. The audit committee must help select an independent external auditor to serve the organization. Referrals from other nonprofits or the local chamber of commerce are good sources for reputable CPAs. The committee must consist of at least three people. Individuals are appointed or elected by the board of directors. The treasurer plays a role and any others on the board with a background in accounting, general management, finance or law.
Who Needs an Audit Committee?
A nonprofit which is considered:
- Small (having a budget under $300,000) does not need an audit committee.
- Medium (having a budget between $300,000-$500,000) may consider forming an audit committee but it is not required.
- Large (having a budget of $500,000 or more) must have an audit committee.
The external auditor works with the internal audit committee. The external auditor reports his findings to the committee. In addition, he makes recommendations for improving the bookkeeping procedures to them.