Navigating Not for Profit Audits and Finding an Auditor

Before exploring what a not for profit audit is, and how to find a reliable auditor, let’s start by explaining what not for profit organisations are.

Not-for-Profit organisations are built, and operate, for the common good, and can take many forms.

Be they charities, schools, or members-only organisations – even some sports clubs can qualify as Not-for-Profits.

As a result, Not-for-Profits can have greatly varying goals. Some common threads, however, will apply.

Whatever the goal, it’s always tied to improving the lives of community members either within the organisation or the community in which it is operating.

These goals require funding. Not-for-Profit audits ensure that that funding is being used appropriately and in line with the goals of the organisation.

Not-for-Profits (NFP) audits were designed with three overarching goals:

1. To ensure NFPs are adhering to laws and regulations pertaining to the acquisition and use of their funds.

2. To ensure NFPs are meeting the goals as outlined in the organisation’s bylaws and using funds as promised for the benefit of the community they serve.

3. To create a culture of financial transparency, when the above 2 goals are achieved.

NFP audits contribute to a culture of financial transparency that is vital to the continued efficacy of the NFP community and public funding at large.

When organisations are transparent, trust is built both internally amongst the employees and benefactors of the NFP itself, and to the world outside – the funders.

Additionally, financial transparency and the confidence it creates in a specific NFP has long-reaching implications for future funding.

Organisations which have consistently opened their books and come out with reasonable assurance judgements, as one hopes they will, lends confidence to future donors that their donations and grants will be used as promised.

This article will explain:

– Not-for-Profit audits and reviews (and how to know which one an organisation is required to perform)

– The benefits of finding a reliable Not-for-Profit auditor

– How to find a reliable Not-for-Profit auditor

– How to prepare for a Not-for-Profit audit, including what to ask of your auditor

– And, the NFP audit process itself

By the end of this article, you will have a confident understanding of the above concepts, and be prepared to operate through your organisation’s Not-for-Profit audit with ease alongside your chosen auditor.

Understanding Not-for-Profit Audits and Reviews

Within the NFP space, two types of oversight exist: reviews, and audits.

While both serve the purpose of creating transparency and gaining deeper understanding of how a NFP organisation operates, one goes far deeper than the other to creating financial transparency and true understanding of how the organisation is utilising funding to meet its stated goals or mission.

Not-for-profit reviews can be compared to obtaining a primary-school education, in their depth.

Using a generalised approach, reviewers will learn about the inner workings of their assigned NFP.

Reviewers can make statements of limited assurance about the Not-for-Profit organisation in question.

This is typically done through interviews of management and staff. Having obtained all the requested information, the reviewer will analyse and evaluate the information gathered.

The results of that evaluation, while valuable in many ways, are not substantial enough to make a professional opinion of reasonable assurance of an organisation.

Audits, in contrast, can be likened to a master’s degree in the organisation’s goings-on. 

Deeply thorough investigations of policies, financial statements, finding sources, and gaining a holistic understanding of the organisation’s motives and use of public funds.

Using third-party information to verify a Not-for-Profit’s funding sources and the use of that funding, creates a far deeper understanding – one which allows the auditor to make professional opinions as to how well the organisation is adhering to laws and regulations around their operations.

Throughout the audit, the auditor must display healthy scepticism to the information being obtained, to evaluate it objectively.

Following the audit, reasonable assurance will be made (if the results are favourable) that the organisation is operating free from fraud or material misstatement.

Do not mistake reasonable assurance for a guarantee, though.

If malfeasance has occurred, whether intentionally or not, it is possible for an organisation to receive a favourable audit result. However, through proper certification and experience, auditors are adept at uncovering mistakes or intentional misdirection.

You’ll learn a little later what education to look for, and what questions to ask of a potential auditor.

You want to be certain you’ve contracted an auditor with the skills required to discern any mistreatment or misstatement of funds and make recommendations based on those findings.

How to Know Whether an Audit or Review is Required

New Zealand and Australia have some of the strictest oversight of Not-for-Profit funding in the world.

In addition to stringent financial reporting requirements, community and funder expectations are high in terms of what is expected from Not-for-Profit organisations.

There’s a vast difference in the scope of an NFP review and audit, so organisations should always be clear on which is required.

In New Zealand, this is determined first by an organisation’s operating expenses as follows:

If between $500K to $1M: The organisation may have their financial statements reviewed OR audited by a qualified auditor.

If over $1M per year: The organisation must have their financial statements audited by a qualified auditor.

In Australia, NFP audit thresholds are determined first by an organisation’s revenue.

Registered charities under the Australian Charities and Not-for-profits Commission Act 2012 are categorised as:

Large, if they have revenue of $1M or above: They must prepare financial reports which must be audited by a Registered Company Auditor.

Medium, if they have revenue over $250K and lower than $1M: They must prepare financial reports which must be audited or reviewed. The auditor must be a Registered Company Auditor.

Small, if they have revenue under $250K: They don’t need a financial report and no audit or review is required.

State-level requirements: These may also apply to associations which are not registered charities, and can impact whether an audit or review is required for an NFP.

In addition to these legal requirements, Not-for-Profits may have additional reasons to undergo an audit.

The organisation may have its own rules in place which require it, or certain funding sources may require audits over reviews for their own assurance.

Funder Requirements and Reporting

Funding a Not-for-Profit can be done through various methods.

Public grants are often available where the mission is benefitting the entire community. Private funding and grants are also an option.

In the case of public funding, there are 2 types: Unconditional and Conditional Grants.

With the first, the recipient is not required to prove they’ve accomplished their stated purpose in using the funds – just to use the funds toward that purpose.

Conditional grants do require the recipient to prove they’re working towards and accomplishing a stated goal.

There are additional rules and regulations attached to this kind of funding, which the organisation should be prepared to follow and adhere to.

If not all of the conditions are met, a Not-for-Profit organisation may be required to return some or all of the funding received.

Funders Prefer Audited Not-for-Profits

Following reasonable assurance judgments by an auditor, the Not-for-Profit in question can often find itself in a better position than before.

Because an organisation has opened its books and proven itself to use funding in good faith to its mission and purpose, future funders are more likely to select that organisation.

Similar to a recommendation you might receive about a contractor doing work on your home, having reasonable assurance acts as a recommendation that the organisation will continue to operate without fraud or misstatement.

This funder preference for audited Not-for-Profits should be a consideration for those not required to complete an audit.

While there is a greater financial burden to complete an audit than there is for a review, Not-for-Profit organisations who are below the $1M operating expenses threshold should strongly consider undergoing an audit because it creates more value for readers of financial statements such as funders, regulators, stakeholders, and the community.

What to Expect During an NFP Audit

During a Not-for-Profit audit, the auditor will evaluate financial records relating to the funding sources and use of that funding in the operation of the NFP organisation.

The presentation and content of those financial statements and disclosures, will be judged on whether or not they represent the organisation’s claims of use fairly.

The auditor will communicate with the NFP’s management and board, and any other interested parties, the scope and timing of the audit.

They will deliver any significant findings, including any deficiencies that could be affected by internal controls.

Based on those communications, the financial statements and disclosures examined, the auditor will determine what is significant to report upon and what is not.

These are the key audit matters upon which a reasonable assurance will be made or not made.

The auditor will describe these matters in their report and deliver said report to all interested parties as required.

Laws or other regulations may preclude a public disclosure, but the auditor will disclose anything which is in the public service to disclose.

In some cases, information may not be reported upon if the potential consequences of doing so outweigh the benefit.

An experienced auditor will know how to discern whether certain information should be made public or kept out of the report.

The Benefits of Finding a Reliable Not-for-Profit Auditor

Becoming an NFP auditor takes years of study, and finding a reliable Not-for-Profit auditor requires the organisation to conduct some research.

Educational Requirements

Not-for-Profit auditors must have an educational background to lend them the expertise required to do the job well.

At a minimum, a Bachelor’s degree from an accredited university in Accounting or a related field is required.

A Master’s degree is not required but is often preferred by employers looking for highly-qualified auditors and accountants to join their ranks. Typically, this will be a Masters in Professional Accounting.

You should also look for professional accreditations. CPA Australia grants accreditation to auditors to perform audits and other regulatory reviews.

Once educated and licensed, all auditors must complete regular education to stay abreast of changing laws and regulations.

This is known as Continuing Professional Development, and it is a yearly requirement. CPA Australia auditors must complete at least 40 hours of ongoing training each year.

Beyond being educated and licensed by the proper regulatory bodies, look for an auditor with experience in your Not-for-Profit niche.

By finding a more specialised auditor, you can move forward with confidence that they will have the right knowledge to understand your organisation’s inner workings.

Tier 1, 2 and 3 New Zealand Charities have additional regulations, and will require a specialised auditor with experience in this field to conduct thorough, acceptable audits.

How to Find a Reliable Auditor

In searching for a reliable not-for-profit auditor, the size and fit of the firm should be top of mind.

The auditor should look to create a cost-effective and pragmatic process for the NFP, while ensuring they can provide good service and be attentive to the needs of the NFP.

If the Not-for-Profit is mission- or values-driven, this is another consideration to make when searching for an auditor.

Does the audit firm give back to the community, and in what ways? Do their values reflect those of the organisation?

Look for an overlap in values but be mindful of conflicts of interest that arise if the two groups have become intertwined in any way.

This is important because an auditor must remain independent and objective during an audit.

Organisations have additional tools to look to for judging their potential auditor.

Beyond basic education and accreditation required to do this work, professional organisations call out exceptional performance with awards and recognition.

As an auditor, these awards lend themselves to a reputation that precedes you. As a potential client, they create additional credibility and trust that an auditor will be fair and reliable while performing and reporting an audit.

Among these professional recognitions, Aurora Financials has accumulated several that have given new and continuing clients great confidence in its ability to complete fair and thorough audits.

In 2017, Aurora Financials was named the New Zealand Charities Services Tier 3 Reporting Award Winner for one of its client’s financial statements.

In 2022, Aurora Financials was granted two additional awards: that of Xero Silver Champion Partner, and the CPA Australia Murray Wyatt Award.

When searching for a Not-for-Profit auditor, you should also take care to find one who can serve your needs from wherever you are.

By implementing a hybrid business model, Aurora Financials has been able to meet clients’ needs both locally and globally.

The firm offers on-site visits for local clients, with virtual audits and reviews for those not in the immediate vicinity.

Operating a hybrid model has also allowed Aurora Financials to find top-tier auditors, not limited by location. This enables clients to have high quality services from the best global talent.

Qualities of a Reliable Not-for-Profit Auditor

A good NFP auditor will need to possess excellent time management skills in order to meet various deadlines.

Certain reports and financial disclosures must be delivered over the course of the audit, as well as the final report and reasonable assurance.

Throughout the audit process, an auditor must remain sceptical and neutral.

These qualities should be evident in their history of judgments and in their day-to-day interactions with clients.

Look at testimonials from previous clients to discern the experience of working with a particular auditor before making any final decisions.

You should interview an auditor just as you would a potential employee.

Ask about their experience, education, and audit process.

Reach out to previous clients and ask about their communication style, attention to detail, and fairness and neutrality.

An auditor can become an excellent business partner, when chosen correctly.

Beyond their reasonable assurance reports, an auditor can make recommendations for better budgetary oversight, and identify blind spots in your accounting and management structures.

Selecting an auditor who’s skilled in this sort of detailed examination of NFPs can be a great asset to their long-term success.

How to Prepare for a Not-for-Profit Audit

To prepare for a smooth audit where all deadlines will be met, the auditor should furnish the organisation with a preparatory audit checklist.

The checklist should outline what records will be requested and what timeline they should be delivered in.

Aurora Financials sends clients a Client Assistance Schedule with simple and clear instructions on what is required before the audit can commence.

When preparing documents, also review payments coming in and out of the organisation.

If there’s anything unaccounted for or pending, these needs to be reviewed internally before the audit commences.

For an NFP, financial, governance, and operational records should always be kept in good condition.

Keeping organised, thorough records will allow annual audits to come and go with little friction.

Further, it prepares any managers, staff, and Board members who may be interviewed by the auditor.

Being caught off guard during an audit interview can be unsettling, and the better prepared a team, the better for the audit.

Be thorough and transparent when preparing documents for the auditor. As staff and managers change, documents tend to change hands.

If anything is unaccounted for, it is best practice to communicate ahead of time, rather than waiting to be asked why something is missing.

Additionally, a pre-audit meeting may be held to ensure all parties agree about the scope of the audit.

Anyone who might be asked to assist the auditor in their work should be present, and the Committee or Board Chairperson may be required, as well.

What to Ask of Your Not-for-Profit Auditor

When preparing for an audit, or working with a new auditor for the first time, ask the right questions during the planning phase.

Here is a non-exhaustive list of questions that Aurora Financials recommends you ask your auditor:

1. How are you going to communicate with the previous auditor?

There should be a plan to make the transition process as smooth as possible.

A good auditor can help to make this a seamless experience for a new client.

2. How does your plan for this year differ from last years’ audit?

If you are working with the same auditor, ask how they might need to approach this year differently.

There could have been a change in circumstances between the last audit and this one.

3. Are there any major rules or regulations that will affect this years’ audit?

New laws could impact the process or documents required of an organisation.

A reliable auditor will be ready to handle those changes.

4. What is the scope of the audit?

An organisation should be actively involved in the audit process.

A large part of this is knowing exactly what to prepare and what will be required of their managers and Board members.

5. How can we help?

It’s good to ask the auditor specifically how your team can make the audit process efficient and smooth.

This will open a strong line of communication and set the tone for the audit.

6. How will you determine materiality?

The auditor should be prepared to tell you what factors they’ll consider when determining materiality.

Errors or documents could be material to their evaluation process.

7. Do you have any conflicts of interest?

In the spirit of neutrality, the auditor should not have any potential conflicts of interest that could create an ethical dilemma.

A family member working for the organisation, or some other real or perceived benefit should be explored before the audit.

This will enable all parties to determine if continuing the relationship is in good faith. The auditor must be independent in fact and appearance.

8. How long does the audit take?

The nature, scope and complexity of a Not-for-Profit organisation determines the length of time an audit takes.

Smaller audits usually can be completed in less than one month. Larger audits may take a few months.

The better an organisation prepares for the audit, and the quicker they provide records to the auditor, the faster the audit can progress towards completion.

The Not-for-Profit Audit Process

There are 8 steps to the Not-for-Profit Process. Each plays a distinct role in the review process.

An experienced Not-for-Profit auditor will be thorough in each and may request clarification if documents aren’t clear or are missing.

1. Review Accounting Practices.

An organisation’s accounting practices offer the first glimpse into if the organisation is operating with integrity.

It’s important to have strong checks and balances in place to prevent misuse of funds.

This is because even high-level managers and Board members can act in misalignment with an NFPs goals

2. Evaluate Financial Reports.

During this step, the auditor will look for material errors and miscalculations in the various financial documents and disclosures requested.

Throughout this process, the involved parties will be updated so that any errors can be examined and explained.

3. Examine Funding Sources.

The auditor gains a deeper understanding of the motives of the organisation by examining funding sources.

They also check that legal disclosures required were made in a timely fashion.

Unutilised funds will also be discovered and may require additional explanation by the organisation’s Board or management team.

4. Analyse Internal Controls.

Every organisation should have strong controls around how and when funding is acquired, allocated, and spent.

By examining these controls, the auditor may find blind spots. Or they could identify process improvements to help the organisation become more efficient.

Lack of controls could mean that not enough oversight is in place to prevent misuse of funds.

5. Evaluate Risks.

Taking the sum findings of the first four steps – reviewing accounting practices, evaluating financial reports, examining funding sources, and analysing internal controls, the auditor will then evaluate the overall risk of the NFP organisation.

Risks may exist from any of the following: funders, organisation leadership, managers, employees, technology, internal processes, regulatory compliance, or policies.

6. Examine Future Financial Projections.

The auditor will inspect the future projections of the organisation.

If large sums exist but aren’t being utilised and the organisation predicts a need for more funding, this would be unusual.

The auditor may consider this to indicate a lack of internal control that protects current and future funding.

7. Review of Policies and Procedures.

In reviewing the policies and procedures of the organisation being audited.

An experienced auditor will look for loopholes or overly complex policies that might create an opportunity for misuse.

This is another reason a seasoned auditor is preferable.

Not only will they be more adept at finding potential problems, but these loopholes will be part of the final report.

Bringing them to light will allow the organisation to amend those policies and procedures. There could be negative outcomes if exploited.

8. Results and Reporting.

The auditor reviews all of the requested documentation and examines all of the above.

Then, the auditor will evaluate the overall risks and form their professional opinion on the non profit organisation’s financial statements.

The final report is a public document that is filed with the NFP organisation’s regulator.

This report is where a judgement of reasonable assurance will be made, or not.

The former is, of course, the goal. A reliable auditor will be pragmatic in approach and will make their judgement based on the findings.

Expectations of the Not-for-Profit and the Auditor Throughout the Audit Process

NFPs can expect their auditor to conduct themselves according to professional standards.

They will maintain a healthy level of scepticism throughout the process, seeking information to analyse, not judge for judgement’s sake.

The Not-for-Profit organisation, its teams, and managers and Board members, should be expected to do the same.

By acting in good faith, both parties can assist the audit’s speedy completion and (hopefully) favourable return.

A thorough audit can sometimes be a lengthy process.

Therefore, all parties should manage their expectations and communicate as needed, lest it take longer than it needs to.

How to Communicate Throughout the Audit Process

NFPs have a great opportunity to help the audit process be completed as quickly as possible.

Communicating early and often, will let your auditor know you’re well-intentioned.

Being transparent and thorough when producing documents, lends itself to even greater confidence that the organisation is operating well.

By acting with good intention, responding to all requests and enquiries in a timely fashion, the NFP avoids unnecessary delays.

The auditor is likely to become suspicious if documents are repeatedly missing or not produced when asked for.

Outside the audit period, Not-for-Profits should remember that their auditor is a trusted advisor.

Certain situations may warrant meeting with an auditor – if two organisations decide to merge, for example.

Audit implications and risks may arise due to the merger, and your auditor can help you navigate the process unscathed.

Closing Thoughts

In conclusion, a reliable Not-for-Profit auditor can be a great asset to an NFP.

Choose a well-educated, accredited, and experienced auditor.

This gives Not-for-Profit organisations confidence that they’ve selected a high-quality person to aid in their mission.

Furthermore, professional accounting organisations and associations take the time to recognise when peers excel in their fields.

This could be in relation to professional standards and ethics, or in results.

Looking for a heavily awarded auditor or firm will give peace of mind to a non profit organisation.

The relationship between auditor and Not-for-Profit can be highly beneficial to the organisation.

Consider the auditor as a strategic advisor. This will create a stronger long-term partnership, where each side feels respected and valued.

An auditor checks financial statements and makes reasonable assurance judgments.

They also make recommendations which will increases efficiency, reduces risks, and increases the likelihood of success of the organisation.

If each party supports the audit process, communicates early and often, and acts transparently, they will have a beneficial relationship.

Experience the Aurora Financials Advantage

Aurora Financials is an award-winning accounting and business consultancy, with years of expertise in Not-for-Profit audits and financial reporting.

We’re licensed by CPA Australia as a registered statutory auditor.

Contact Us Today for the confidence of an experienced, award-winning team of Auditors.

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This article was written by Tiffany Jones for AuroraFinancials.com