Audit of Non Profit Organisation
Audit of Non Profit Organisation
Unlike publicly traded companies, nonprofit organizations are not required by the Securities and
Exchange Commission to undergo annual audits. Many not-for-profit organizations, however, are
required to receive an audit if they accept certain types of funding or earn a large amount of revenue.
A positive audit opinion can increase donor and board member confidence in the nonprofit's
operations.
Evaluate Risks
Auditors usually kick off an audit by evaluating a nonprofit's inherent risk -- the risk that employees
are misstating financial information. Such risk may arise when management has strong incentives to
misstate financial information or when an accountant makes an honest mistake in reporting. Inherent
risk can be high in not-for-profit organizations that must report certain results to continue receiving
grants. Nonprofits that pay low wages may have trouble attracting qualified accountants. If the
auditor deems inherent risk to be high, he should increase testing to compensate for the potential
mistakes.
Perform Testing
Auditors typically test a variety of accounts and transactions. They should pay special attention to
revenue accounts when auditing a nonprofit. Nonprofit entities have different sources of revenue
than their for-profit counterparts, and all employees may not be familiar with the revenue recognition
rules for donations and grants. Auditors should check to see if the nonprofit has adequate supporting
documentation and determine the correct timing of revenue recognition for grants that have strings
attached.
Report Results
After testing an adequate number of transactions and accounts, auditors compile their
findings into an audit report. They must identify the accounting framework and auditing
framework used during the process. In the United States, most nonprofits are set up as
corporations and use generally accepted accounting principles. Because nonprofits are
corporations but not publicly traded, auditors should use the U.S. generally accepted auditing
standards as the auditing framework.