A nonprofit audit is conducted to provide an objective perspective of the organization’s financial health and help identify areas of improvement. Transparency and accountability are paramount, especially for nonprofit organizations seeking to build trust with donors. 

One of the most effective ways to ensure financial integrity is through audited financial statements. These independently verified documents provide an in-depth look at an organization’s financial health, ensuring the information presented is materially accurate, complete and compliant with regulatory standards. 

Some independent financial audits are required by state or federal regulations. However, even when not required, a nonprofit may choose to have an independent audit for a few important reasons:

• Independent audits are important for inspiring and maintaining donor trust because they demonstrate the nonprofit is committed to financial transparency and accountability.
• Audited financial statements help the board of directors have more confidence in the organization's finances because they are based on an analysis by an objective third party.
• Some grantors require grant applicants and grantees submit audited financial statements, or similarly certified financial statements, to be eligible for funding.

Understanding an Independent Audit 

The terms “audit" or "audited financial statements” refers to the work product resulting from the independent examination of a nonprofit’s financial records by a licensed certified public accountant (CPA). A nonprofit audit will: 

• Evaluate internal controls.
• Analyze financial data.
• Assess risks.
• Detect any material misstatements or errors in the financial statements.
• Determine whether the organization is following generally accepted accounting principles (GAAP) properly.
• Generate accurate reports that reflect the true state of the organization’s finances. 

The tests conducted are not designed to discover fraud, but if fraud is discovered during the audit process risk, the risks would be reassessed and procedures modified accordingly. 

The Financial Accounting Standards Board (FASB) principles require auditors to issue a report to the board of directors, presenting a professional opinion about the nonprofit’s financial practices. It will determine whether the audited financial statements represent the financial position of the organization without inaccuracies or material misrepresentations. There are four types of reports:

• Unmodified Opinion – Shows no red flags or material misstatements of any financial position.
• Modified Opinion – The auditor believes the financial statements are fairly presented, except for a specific matter, which is material but not a pervasive issue.   
• Adverse Opinion – Shows auditors found a material misstatement. Overall, the organization is not conforming to GAAP.
• Disclaimer of Opinion – The auditor is unable to form or has not formed an opinion on the financial statements due to a lack of sufficient audit evidence or a scope limitation, which is considered pervasive.

Key Components of Audited Financial Statements

Audited financial statements typically consist of several essential components that provide a detailed overview of an organization’s financial activities and position:

• Statement of Financial Position - This document provides a snapshot of the organization’s assets, liabilities and net assets at a specific point in time. It helps stakeholders understand the financial stability and liquidity of the organization.
• Statement of Activities - This statement outlines the organization’s revenues, expenses and changes in net assets over a specific period. It highlights the financial performance and operational efficiency of the organization.
• Statement of Functional Expenses - This statement details the organization's expenses by nature and function. It provides insights into how much of the organization's expenses are going toward the direct conduct and direct supervision of their programs.
• Cash Flow Statement - This statement details the cash inflows and outflows from operating, investing and financing activities. It provides insights into the organization’s cash management practices and its ability to generate cash to meet obligations.
• Notes to the Financial Statements - These notes provide additional context and detailed explanations of the financial information presented in the statements. They include information on accounting policies, contingent liabilities and other relevant disclosures.

Benefits of Conducting an Independent Audit

Conducting an independent financial audit offers more than just compliance with GAAP—it can provide significant advantages for your nonprofit. For example, by performing regular audits every year or every few years, your organization ensures accountability to financial reporting and compliance standards, even as it evolves and expands. This consistency helps maintain secure and properly allocated finances. 

Audits also reveal opportunities for improvement, highlighting areas to optimize policies and procedures for more efficient processes and sound management. Establishing a review schedule can protect your nonprofit from risks such as fraud and theft. Furthermore, transparency with donors can be enhanced if you choose to share that an audit was conducted and communicate the improvements made. Donors will have confidence that their contributions are managed responsibly to advance your mission. 

Lastly, audits may improve your nonprofit’s reputation, as charity watchdogs often consider audits a positive indicator, potentially ranking your organization higher. This added transparency appeals to donors who research organizations before contributing.

How We Can Help

Our nonprofit CPAs possess the specialized technical skillsets, experience and training to successfully address challenges faced by nonprofits, improve organizational efficiencies, mitigate risks, systematically track progress against goals and help your organization deliver on its commitment to its mission in the most efficient, cost-effective way possible. 

We work with you throughout the entire audit process, providing a blueprint for how your nonprofit can improve its financial management processes for the future.