Grant Audits

Many organizations receive grants and as expected, the federal government is concerned that the grants are spent properly, requiring audits of nonprofit recipients in addition to regular visits from the federal agency staff.

Instead of having a separate audit of each major grant, the Single Audit allows for one independent audit covering all federal grant contracts. It usually combines an audit of the organization and its grants. According to the National Council of Nonprofits, “a single audit covers the entire scope of the organization’s financial operations, ensuring that:

  • The financial statements are presented fairly;
  • The organization has an adequate internal control structure, and that
  • The organization is in compliance with any special government regulations/laws that apply to the specific type of federal funding the audit covers.”

These single audits are required if the nonprofit has spent $750,000 or more in federal funds (This threshold is likely to change in the future). Single audits are performed by independent CPA firms, which usually carry out both regular and single audits within the same engagement, releasing the results in two different reports—one for the regular portion and another for the grant audit.

During a single audit, a CPA firm evaluates the fairness of the financial statements and the schedule of federal financial assistance, which contains information about grants. To this end, auditors assess risk by reviewing prior findings, internal controls, and usage of contractors. Also, CPA personnel should consider the materiality of the funds, with major grants often getting most of the attention.

The Super Circular clarifies that auditors are responsible for following up on any deficiencies, also called “findings.” The nonprofit is supposed to respond with a corrective action plan. All of these documents are forwarded to the appropriate government agency.

Management should be aware of the cumulative grant spending because as the organization gets closer to the $750,000 in annual grant expenses, it should start budgeting for the single audit. It doesn’t come cheap, and grant funds may have to be adjusted to include this cost.

Note that nonprofits may need to have a regular, less detailed audit to comply with grantor or state rules. For example, the states of Connecticut and Hawaii require the filing of audited financial statements of charities with an annual gross income of $500,000 or more regardless of federal funding. This audit is less detailed and cheaper than the Single Audit, but it needs to be done.

 

Excerpted from Nonprofit Finance: A Practical Guide — Second edition –available at Amazon — https://goo.gl/M563u9

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