An audit is a process for testing the accuracy and completeness of information presented in an organization's financial statements. Following an audit, the auditor will prepare a signed statement giving his or her opinion about the accuracy and honesty of the financial records. Funders often require that grant recipients undergo independent financial audits to ensure that an entity's financial statements are fairly stated according to generally accepted accounting principles and that the entity complied with laws.
Generally Accepted Accounting Principles
Every day, accountants make judgments about how to record business transactions. They often base their decisions on the financial objectives of the companies for which they work. Other times they turn to generally accepted accounting principles (GAAP) to steer their decisions.
GAAP are not a fixed set of rules. They are guidelines or, more precisely, a group of objectives and conventions that have evolved over time to govern how financial statements are prepared and presented. The Financial Accounting Standards Board, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission provide guidance about acceptable accounting practices.
CPAs routinely audit companies to determine if their financial statements are prepared according to GAAP. These audit findings are typically included with companies' financial statements.
Banks and finance companies often require that their clients use GAAP or have audited financial statements. Investors who are accustomed to using financial information prepared according to GAAP might balk if your statements don't meet their expectations.
Some nonprofits are legally required to obtain audits. Many states require an audit for nonprofits that receive contributions over a specified amount (the amount varies from state to state) or nonprofits that hire a paid fundraiser. Contact the secretary of state or office of the attorney general for regulations in those states where you raise money. In addition, nonprofits that receive $25,000 or more in direct or pass-through federal funding during a single fiscal year are usually required to have an audit.
Single audit reports determine whether federal monies were spent properly and describe significant audit findings. For information about federal audit requirements, see Federal Law Audit Requirements from the National Council of Nonprofits.