Do We Need an Audit?

man using calculator

Audits are expensive. They take a lot of time to do and can range anywhere from $6,000 to upwards of $50k and then some, depending on the size of the CPA firm and the organization being audited. In fact, our OMG AFS (Accounting & Finance Solutions) group has been retained to conduct searches for auditors and since OMG does not conducts audits, but rather facilitates them, our team knows where to go.

We’re often asked whether the IRS requires an audit of a non-profit, and the answer is a definite “no.” But there are other reasons you might want an audit conducted. If you are a charitable organization or have a charitable foundation, many foundations, lenders, and donors will require an independent audit before giving money to your nonprofit. (Organizations that receive more than $750,000 in federal funding may be required to complete an audit.)

Whether charitable or not, sometimes you want an audit when your staff leadership changes, or if you’re a larger organization, you probably will want to have an annual audit conducted. (The Office of Management and Budget requires an audit when a nonprofit spends more than $500,000 in federal funds in a year.) Some financial institutions require an audit for loan covenants.

But there are less expensive alternatives to consider if you’re a smaller non-profit:

A financial review or a financial compilation are the two alternatives to an audit. What’s the difference?  It comes down to something called “assurance, which is an opinion given by a CPA on the accuracy of an organization’s financial statements. It shows whether or not your accounting records are accurate per generally accepted accounting principles (GAAP) in the auditor’s professional judgment.

An audit provides reasonable assurance, a review offers limited assurance (but not a professional opinion), and a compilation offers zero assurance. 

If you’re looking for a grant, you need AT LEAST a financial review. If not, and you’re a fairly small organization, a compilation may suffice – it does not offer assurance as to the accuracy of your books, but it will get your financial books organized and ready if you choose to do a review or audit later on.

Sometimes people gravitate toward the “middle” – and in this case, it’s a financial review. What happens here?  It’s all about the GAAP: an independent auditor will review your financial statements to determine if they’re consistent with generally accepted accounting principles (GAAP). A review evaluates the accuracy of your financial records, but no professional opinion is given on that accuracy. But here’s the good news: a financial review typically costs 40-60% less than an audit. 

At the end of the day, you need to decide WHY you’re interested in an audit, what you’re going to do with it, and if it’s a requirement of your organizational documents (bylaws). If you’re looking for a great auditor, let us know. The AFS team knows who to call, and we can help!