Audits for not-for-profits can feel formal, technical and sometimes stressful, especially for board members who are not involved in finance day to day.
But an audit is not just a compliance task. It is an important part of financial accountability.
For many not-for-profits, an audit helps provide confidence that the financial statements present a reliable view of the organisation’s financial position and performance. It can also help identify weaknesses in reporting, controls or record keeping before they become bigger issues.
Some organisations are required to have an audit because of their size, charity reporting obligations, governing rules, funding agreements or regulator requirements. Others choose to have an audit voluntarily to support transparency and stakeholder confidence.
For boards, the key question is not only, “Do we need an audit?”
It is also, “Do we understand what the audit tells us, what it does not tell us, and what we need to do with the findings?”
This article explains what an audit is, why not-for-profits may need one, what boards should understand before, during and after the audit process, and how audits support trust and accountability.
What is an audit?
An audit is an independent examination of an organisation’s financial report.
The auditor reviews the financial statements, supporting records and relevant processes to form an opinion about whether the financial report is prepared in accordance with the required reporting framework.
In plain English, an audit helps answer the question:
“Can users of these financial statements have reasonable confidence in the financial information being presented?”
An audit usually includes reviewing evidence such as:
- bank statements and reconciliations
- income records
- expense records
- payroll reports
- grant agreements
- restricted funding records
- invoices and receipts
- board minutes and approvals
- asset records
- liability balances
- accounting policies and disclosures
The auditor does not review every transaction. Instead, they use audit procedures, testing, judgement and evidence to form an opinion on the financial report.
Audit versus review: What is the difference?
An audit provides a higher level of assurance than a review.
A review is also performed by an independent reviewer or auditor, but it is generally more limited in scope. A review may involve enquiries, analytical procedures and review of selected information.
An audit involves more detailed testing and evidence gathering.
For not-for-profit boards, the important point is that both an audit and a review provide independent assurance, but they are not the same.
Some organisations may be required to have a review. Others may be required to have an audit. Some may choose one voluntarily depending on their size, risk and stakeholder expectations.
For registered charities, annual reporting obligations depend on charity size. Medium charities must have their financial report reviewed or audited. Large charities must have their financial report audited.
Why might a not-for-profit need an audit?
A not-for-profit may need an audit for several reasons.
Charity reporting obligations
If the organisation is registered with the ACNC, its reporting obligations depend on its size.
All registered charities must submit an Annual Information Statement unless a specific exception applies. Medium and large charities must also submit an annual financial report. Medium charities must have that financial report reviewed or audited, while large charities must have it audited.
Small charities are generally not required by the ACNC to submit an annual financial report, but they may still choose to do so or be required to by their governing document, funding agreement or another regulator.
This is why boards should check current obligations each year and not rely only on past practice.
Governing document requirements
A not-for-profit’s constitution, rules of association, trust deed or other governing document may require an audit.
This can apply even if the organisation is not required to have an audit under ACNC reporting rules.
For example, a small incorporated association may have rules stating that annual financial statements must be audited before the annual general meeting.
Boards should check the organisation’s governing document before assuming an audit is or is not required.
Funding agreements
Grant agreements, government contracts and philanthropic funding agreements may require audited financial statements or audited acquittals.
This is common where funding is significant, restricted or tied to specific outcomes.
A funder may require:
- audited annual financial statements
- audited project acquittals
- independent certification of grant expenditure
- specific reporting formats
- evidence that funds were used for the approved purpose
For organisations managing grants, audit requirements should be checked before funding is accepted, not discovered at the acquittal deadline.
This connects closely with restricted funds explained for charities and not-for-profits, because grant conditions often affect reporting, evidence and audit requirements.
State, territory or other regulator requirements
Some not-for-profits may have obligations under state or territory laws, fundraising rules, incorporated association legislation, company requirements or sector-specific regulation.
The board should understand which regulators apply to the organisation and whether any separate audit or reporting obligations exist.
Where obligations overlap, it is important to plan reporting early so the organisation is not preparing similar information multiple times under pressure.
Stakeholder expectations
Some organisations choose to have an audit even when not strictly required.
This may be useful where the organisation wants to demonstrate transparency to:
- members
- donors
- funders
- grant makers
- government agencies
- service users
- community stakeholders
- partner organisations
An audit can help strengthen confidence, especially where the organisation handles significant funds or public donations.
What an audit does and does not do
Boards should understand the purpose and limits of an audit.
An audit provides assurance over the financial report. It does not guarantee that the organisation has no problems, no fraud, no governance issues or no operational risks.
Although an audit can help identify issues, but it is not a substitute for board oversight, internal controls or good financial management throughout the year.
An audit can help with:
- independent assurance over financial statements
- testing selected financial records and balances
- identifying accounting or disclosure issues
- highlighting control weaknesses
- supporting stakeholder confidence
- meeting regulator or funder requirements
- improving financial reporting discipline
An audit does not usually:
- check every transaction
- guarantee fraud will be detected
- replace internal controls
- approve management decisions
- confirm every grant condition has been met unless specifically required
- replace board financial oversight
- manage risk on behalf of the board
This distinction matters. A clean audit opinion is positive, but it does not mean the board can stop asking questions about financial reporting, cash flow, risk or controls.
Board responsibilities before the audit
The audit process is smoother when the board and management prepare early.
Audit preparation should not begin after year-end. Good preparation happens throughout the year through clear records, reconciliations, board approvals and organised documentation.
Confirm whether an audit is required
The board should confirm whether the organisation needs an audit, review or other form of assurance.
This may involve checking:
- ACNC reporting obligations
- charity size classification
- constitution or governing rules
- funding agreements
- state or territory regulator requirements
- member expectations
- board policy or past commitments
If an audit is required, the board should know the deadline and who is responsible for coordinating the process.
Appoint an appropriate independent auditor
The auditor must be suitably qualified and independent.
Independence matters because the audit opinion needs to be objective. If the auditor is too closely connected to the organisation, management or board, confidence in the audit may be weakened.
The board should consider:
- auditor qualifications
- experience with not-for-profits or charities
- understanding of grant funding and restricted funds
- independence requirements
- fees and scope
- timing and availability
- communication style
Where an Audit and Risk Committee exists, it may lead the auditor appointment process and make a recommendation to the board. For more detail, see Audit and Risk Committees: Do you need one?.
Prepare financial records throughout the year
Audit readiness depends on good records.
Management or the finance team should keep records current throughout the year, including:
- bank reconciliations
- payroll records
- supplier invoices
- grant agreements
- funding acquittal records
- asset registers
- lease and contract documents
- loan or liability records
- board approvals
- policy documents
- supporting schedules for major balances
If these records are incomplete, the audit may take longer, cost more or result in findings that need board attention.
Review financial reporting before year-end
Boards should avoid waiting until the audit to discover accounting or reporting issues.
Before year-end, the board or finance committee should review:
- budget versus actual results
- cash flow
- restricted funds
- grant balances
- major assets and liabilities
- unusual transactions
- debtor and creditor balances
- reserves
- internal control issues
- potential going concern risks
This review supports stronger board reporting and reduces the likelihood of surprises during audit.
Board responsibilities during the audit
During the audit, management usually handles most day-to-day communication with the auditor. But the board still has an oversight role.
The board should understand the audit timeline, any major issues that arise and whether management is responding promptly to auditor requests.
Monitor progress
The board, Treasurer or Audit and Risk Committee should know whether the audit is on track.
Useful questions include:
- Has the auditor received the information requested?
- Are there delays or missing records?
- Have any significant issues been identified?
- Are draft financial statements ready for review?
- Will the audit be completed before reporting deadlines?
The board does not need to manage every audit request, but it should be aware of significant delays or concerns.
Support independence
The auditor should be able to ask questions and access information without inappropriate influence.
Board members should avoid pressuring the auditor to overlook issues or minimise findings.
If the auditor raises concerns, the board should consider them carefully.
A constructive audit process supports transparency and accountability.
Understand significant issues
If the auditor identifies significant issues, the board should understand what they mean.
These may relate to:
- accounting treatment
- missing evidence
- restricted funds
- grant revenue recognition
- asset valuations
- liabilities
- going concern considerations
- internal control weaknesses
- financial statement disclosures
Board members should ask for plain-English explanations if needed. Audit issues should not be ignored because they sound technical.
What is an audit opinion?
The audit opinion is the auditor’s formal conclusion about the financial report.
A clean or unmodified opinion means the auditor has not identified material issues that prevent them from concluding that the financial report is prepared in accordance with the required framework.
Other types of opinions or modifications may indicate concerns, limitations or disagreements.
For example, an auditor may modify the opinion if they could not obtain enough evidence, or if they believe there is a material issue with the financial statements.
If the audit opinion is modified, the board should understand why and what action is required.
What is a management letter?
A management letter is a communication from the auditor that highlights issues found during the audit.
It may include observations and recommendations about:
- internal controls
- record keeping
- approval processes
- bank reconciliations
- segregation of duties
- grant tracking
- documentation gaps
- financial reporting processes
- system access
- policy compliance
A management letter is not something to file away and forget.
The board should review it, understand the recommendations and agree on actions to address the findings.
For practical control improvements, see internal controls for charities.
Board responsibilities after the audit
The most important part of the audit process is what happens next.
A board that receives audit findings but does not act on them may miss a valuable opportunity to improve financial governance.
Review the audited financial statements
The board should review the audited financial statements carefully before approving or submitting them.
Board members should ask:
- Do the statements reflect what we understood during the year?
- Are there any unexpected results?
- Are restricted funds shown appropriately?
- Are liabilities understood?
- Are reserves and cash position clear?
- Are there any going concern concerns?
- Have significant accounting judgements been explained?
Financial statements should not be approved simply because the auditor has completed their work. Board members still need to understand what they are approving.
Discuss the audit findings
The board should discuss the audit findings, including any management letter points.
For each finding, the board should understand:
- what the issue is
- why it matters
- how serious it is
- what action management recommends
- who is responsible for follow-up
- when action will be completed
If findings relate to governance controls, approval limits or reporting quality, the board should make sure the response is not left only to the finance team.
Track actions to completion
Audit recommendations should be tracked.
A simple action table may include:
- audit finding
- agreed action
- responsible person
- due date
- status
- board or committee update
This helps the board monitor whether improvements are being made.
If the same finding appears year after year, the board should ask why it has not been resolved.
Update policies and controls
Audit findings may point to the need for stronger policies or controls.
This may include updating:
- financial delegations
- payment approval processes
- credit card procedures
- grant tracking processes
- reconciliation review processes
- restricted funds reporting
- asset registers
- system access controls
- board reporting processes
For organisations that have outgrown informal approval practices, financial delegations policies can help clarify who can approve spending, contracts and financial commitments.
How audits support trust and accountability
Not-for-profits rely on trust.
Members, donors, funders, volunteers, staff and service users want confidence that money is being managed responsibly and used for the organisation’s purpose.
An audit can support that confidence by providing independent assurance over the financial report.
It can also support accountability by:
- encouraging better record keeping
- highlighting control weaknesses
- strengthening financial reporting
- supporting grant and funder confidence
- helping boards identify governance improvements
- showing stakeholders that financial reporting is taken seriously
An audit should not be viewed as a pass-or-fail exercise. It is part of a broader governance system.
Good financial governance means using audit insights to improve reporting, controls and board oversight.
Common audit mistakes boards should avoid
Audit issues often come from poor preparation, unclear records or treating the audit as a finance team task only.
Mistake 1: Thinking the audit belongs only to the accountant
The finance team or accountant may prepare information, but the board is responsible for governance and approval of the financial report.
Board members should understand the audit outcome and any findings.
Mistake 2: Preparing too late
Audit preparation should happen throughout the year.
Late reconciliations, missing invoices, unclear grant records and incomplete approvals can slow the process and create avoidable stress.
Mistake 3: Ignoring the management letter
A management letter can provide valuable recommendations.
If the board does not track actions, the same issues may continue.
Mistake 4: Assuming a clean audit means no risk
A clean audit opinion is positive, but it does not mean the organisation has no financial, operational or governance risks.
The board should continue reviewing cash flow, controls, restricted funds and financial sustainability.
Mistake 5: Not understanding restricted funds
Restricted funds can create audit and reporting issues if they are not tracked properly.
Boards should make sure grant income, restricted expenditure and acquittal obligations are visible throughout the year.
Mistake 6: Not allowing enough time for board review
The board should have enough time to review draft financial statements, audit findings and management responses before approval deadlines.
Rushed approval increases the risk that board members do not understand what they are signing off.
A practical audit checklist for NFP boards
Use this checklist to support better audit preparation and oversight.
Before the audit:
- Confirm whether an audit or review is required.
- Check ACNC, governing document, funder and regulator requirements.
- Confirm the audit timeline and reporting deadlines.
- Appoint an appropriate independent auditor.
- Review year-to-date financial reports before year-end.
- Check that bank reconciliations are up to date.
- Review restricted funds and grant balances.
- Confirm major approvals are recorded in minutes.
- Prepare supporting schedules and documents.
During the audit:
- Monitor whether audit requests are being addressed.
- Ask management to report significant audit issues early.
- Support auditor independence.
- Ask for plain-English explanations of technical issues.
- Review draft financial statements carefully.
After the audit:
- Review the audit opinion.
- Review the management letter.
- Discuss audit findings at board or committee level.
- Agree management actions, responsibilities and due dates.
- Track actions to completion.
- Update policies, controls or reporting processes where needed.
- Use audit findings to improve next year’s reporting rhythm.
How to make audits easier next year
The best way to make next year’s audit easier is to improve financial processes throughout the year.
Practical steps include:
- complete bank reconciliations monthly
- keep invoices and receipts attached to transactions
- record board approvals clearly in minutes
- track restricted funds using project or tracking codes
- review grant balances regularly
- maintain an asset register
- review aged receivables and payables
- keep payroll records organised
- document accounting policies
- review financial reports before year-end
- address prior audit findings before the next audit begins
Audit readiness is not a year-end task. It is a monthly discipline.
For organisations that need a stronger finance rhythm, outsourced finance team support can help keep records, reporting and audit preparation on track throughout the year.
How Hopscotch can support audit readiness
Audits are easier when financial reporting is clear, records are organised and the board understands the story behind the numbers.
Hopscotch helps not-for-profits prepare for audits by strengthening reporting, reconciliations, grant tracking, board packs, internal controls and year-end processes.
For charities and NFPs that want audit readiness to become part of normal finance practice, our not-for-profit accounting and NFP compliance and reporting support can help create a clearer, more reliable reporting rhythm.
Final thoughts
Audits for not-for-profits are about more than meeting a requirement. They support trust, accountability and better financial governance.
An audit provides independent assurance over the financial report. It can also help identify weaknesses in records, controls or reporting processes that the board should address.
Boards should understand why the audit is required, what the auditor is reviewing, what the audit opinion means and how to respond to findings.
The best audit process is not rushed at year-end. It is supported by good records, regular reporting, clear controls and active board oversight throughout the year.
If your organisation wants to make audit preparation more organised, reduce year-end pressure or give the board clearer financial information, Hopscotch can help build the systems and reporting rhythm needed for confident audit readiness.
