Audits are expensive, even for small charities!

Update for 2022: Our State of New Jersey recently raised the minimum size requirement for nonprofit audits to $1,000,000 gross receipts.

These bullet point comments are meant to introduce the topic of costs associated with financial statement audits of small charities.

  • Financial statement audits are not the only type of audit undertaken by small charities but are the only type of audit addressed in this blog post.
  • The price of an audit is effective what a charity pays for the legal right to solicit citizens for tax free donations.
  • Audits are completed by independent CPAs who are not in charge of the charity’s accounting.
  • The independent CPA reports to the charity’s audit committee, not the CEO, Executive Director or the Boad of Directors per se.
  • Those most likely to ask about the price of an audit are nonprofit directors who are inexperienced in this subject.
  • A charity is required to submit its first independent financial audit shortly after reaching the level of revenue specified under its state charities law.
  • A charity must firm an Audit Committee before engaging an auditor.
  • The charity’s accountant is typically consulted in the selection of an independent auditor, but this is not a requirement.
  • Audits are expensive, even for small nonprofits.
  • We used to use a general guideline that a small charity’s first audit cost was about 4% of the charity’s annual gross revenue. It could be more or less, depending on the other details.
  • One of the largest but most easily managed variables in pricing an initial audit is the level of comfort the auditor has with the company’s management and/or accountant prior to the engagement.
  • Extension of the charity’s audit engagement beyond the financial statements can affect the cost. For example, an audits that include reporting on environmental impact, social justice results and corporate governance practices (known collectively as “ESG”) is becoming increasingly important.
  • Most auditors maintain liability insurance. The cost of this insurance can contribute significantly to the cost of the audit.
  • After the audit is completed, the auditor must have their work reviewed by another CPA in a process called peer review. This process of peer review can contribute significantly to the cost of the audit.

  • This bullet point list is intended for nonprofit directors and others who have little or no exposure to the topic of charity financial audits. It is meant as an introduction of general concepts, not as a complete and accurate discussion of the topic. This post does not consider the specifics or variances in any state laws.