Audits for Not-For-Profit Organizations

This is the time of year audits are conducted  in full force, but not all audits involve the IRS. Most audits are a review of procedures, internal and external management reviews, etc. Many time federal and state governments require a yearly audit for all businesses, whether for profit or not-for-profit. The federal government requires organizations receiving federal funds of more than $500,000 a year to go through a single audit, which is a yearly audit covering and entire year of the program in question.

If it is determined that your business needs an audit, then it is important that a licensed independent certified public accountant prepares it. The accountant will know that proper forms and procedures that the audit will need, and the requirements for the federal and state government.

Once the auditors determine what is required and beneficial then they can prepare to look into you organization. Auditors will examine many procedures during an audit, but you can expect them to look at:

  • Bank reconciliations
  • Selected restricted donations (To ensure that they are handled properly)
  • Grant letters
  • Physical assets
  • Journals
  • Ledgers
  • Board Minutes

Once they have examined everything then they will formulate a report on the accuracy of the financial reports.

If your company undergoes an audit, the board of directors should establish an audit committee that is responsible for selecting the auditor, reviewing the auditor’s outputs, and meeting with the auditor for the pre- and post-audit to address any issues or questions. This committee typically has ongoing responsibilities for the organization that includes the overall financial over-sight and internal financial controls.

Audits do not have to be a scary thing for companies to go through. It is important to review the internal controls and procedures that run the day-to-day part of the organization. It is important that everything runs smoothly, and audit will help with this process.

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Chance of Audits: Lower Than Normal

Now that the tax deadline has come and gone, the time for audits is here. But what are your chances of having an audit this year? The chances are the lowest they have been in years. Last year the IRS only audited 1% of the individual returns, and this year they are expecting the numbers to go down.

Several things are causing this decline in audits. The biggest factor is budget. The IRS’s budget has declined from $12.1 billion in 2010 to $11.3 billion. This decrease in finances is attributed to overall budget made by Congress to help balance the budget. According to the IRS Commissioner, John Koskinen, there are three areas that can be cut, enforcement, taxpayer services and technology. Since technology upgrades can only be put off for so long, so to ensure the upgrades are made, enforcement and services are taking a hit.

With the decline in the budget for the IRS this leads to fewer agents employed to be able to conduct audits. With fewer agents, the IRS will be more selective on who they choose to audit. The IRS will still be looking at red flags that put someone at risk of an audit. Some of the red flags are:

  • Reporting less than actually earned
  • Earning more than $200,000
  • Making excessive deductions
  • Having extensive losses in stocks
  • Owning  your own business
  • Having accounts in foreign countries
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Top 5 Myths About Business Audits You Believe

Business audits are a type of service that can answer questions and provide clarity to any business owner. No matter the size, type, or structure of your business, without a third party investigation of your finances and assets, there is no clear way for you to know what to expect. You should never be okay with assuming information you have on hand is accurate.

Take a look at some of the most common myths that small business owners believe about business audits. Some of these are costing you money if you believe them.

#1 – Business audits are too expensive to have done. Not only can this be a business expense you write off (check with your accountant for clarification on this in your situation) but it is also nearly always the best method for understanding the financial strength of your organization. That’s more valuable.

#2 – It’s too time consuming. Yes, it will take some time to go through your documents and accounting records. However, this does not get in your way of doing business. It does not limit your resources and cause your business to be held back during the process. So, there’s really no time hindrance here.

#3 – Your records are accurate. It is rare that, during a business audit, that the auditor will find no errors. In some cases, companies have continued operations with massive errors and inaccuracies only to learn about these when the financial implication were severe. There are likely errors but they can be fixed now.

#4 – You don’t have to. Not all businesses are required to use business audits. However, just because you do not have a federal law requiring this does not mean you should put it off. In fact, as a business owner, you need the reassurance of knowing your business is financially sound.

#5 – Tax time is enough. Many businesses put off business audits until tax time. They find that the reporting requirements then and the work their business accountant does at tax time is enough. However, a business audit now will give you the best indication of the steps you can take now to ensure that tax time goes well.

Business audits are a valuable tool not to be overlooked. Bring in an external auditor to give you a clear picture of where your business stands. Doing so could be the difference in financial success and financial risk. As a business owner, the information given to you in a business audit is invaluable to making management decisions.

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