Preparing for a single audit for not-for-profit organizations

If you're unfamiliar with single audits for not-for-profit organizations (NFPs), it's likely that your organization has not historically received a significant amount of federal funding that is subject to Uniform Guidance. However, due to continued increases in federal support in response to federal spending priorities, more NFPs are now required to undergo a single audit. When involved with federal awards, understanding the single audit requirements and preparation are key.

The objective of a single audit is to evaluate your organization's compliance with specific terms and conditions of a federal award program(s) in accordance with 2 Code of Federal Regulations (CFR) Part 200 Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards (Uniform Guidance). In addition to the audit of compliance, if a single audit is required, it must also accompany an audit of the organization’s financial statements covering the same period. Thus, when you trigger the audit threshold for a single audit, your organization must also engage an auditor to conduct an audit of the organization’s full set of financial statements. Both audits comprise the ultimate reporting package that is submitted to the federal government through an electronic filing in the Federal Audit Clearinghouse.

How to determine if your organization is subject to a single audit

A single audit becomes necessary when your organization expends $750,000 or more in applicable federal awards within its fiscal year. It’s important to emphasize that the audit threshold is measured based on the total expenditures incurred during the fiscal year, not the total award amount(s) received. Further, understanding what awards are subject to the Uniform Guidance will be crucial in understanding whether you are required to undergo a single audit.

Additionally, it is important to engage with your funding agency to ensure that an understanding of the applicability of the Uniform Guidance is obtained. Often, the award will explicitly state within the award agreement, terms and conditions or notice of funding opportunity about the requirements associated with the funding. Further, the award agreement should include a reference to a five-digit number referred to as an “Assistance Listing Number” (ALN), which indicates that the award has been cataloged by the federal government and signifies that it could be subject to audit.

Once the population of applicable awards is determined, an organization must measure the total amount of eligible expenditures that were incurred during the fiscal year under each federal program. This can prove challenging for certain types of awards and expenditures, such as amounts that have been provided for loan or loan guarantee programs, amounts paid to beneficiaries or subrecipients, indirect cost allowances, matching funds and various other types of costs. For this reason, a clear understanding of your terms and conditions must be obtained and detailed records accounting for the expenditures, by award, must be maintained. It is recommended that you reach out to your auditor early with questions to assist with navigating the complexities of the program while ensuring the full population of expenditures is acquired.

Responsibilities of the organization being audited

When accepting federal awards, your organization takes on responsibilities tied to compliance. Establishing internal control systems for each federal award is required, ensuring year-round adherence to compliance requirements. These systems include written policies and procedures. For instance, a written procurement policy adhering to the Uniform Guidance is crucial. Written policies clarify steps for compliance across programs. Other areas that require formal policies include cash management and allowable costs. When designing internal controls, it is important to remember that auditors require auditable evidence of control implementation. This emphasizes the importance of documenting your internal control activities and maintaining that documentation for audit.

Effective cost accounting for each award is essential. Using distinct account numbers to track expenditures for each federal award aids proper identification throughout the year. Aligning internal budgets with federal award allocations helps manage expenditures within funding limits. This also ensures compliance with award agreements. During major program audits, auditors request detailed ledger information on federal award expenditures.

Auditors typically seek reimbursement claims, grant agreements, budgets, amendments and agency communications. Organizing this information by award in a readily accessible manner simplifies the audit process.

How to select an auditor and set expectations

Choosing a qualified auditor is pivotal for a successful single audit. Procurement should align with Uniform Guidance (2 CFR §200.318 to §200.327) and may require a formal request for proposal (RFP) process. Evaluating proposals entails considering responsiveness, experience, staff availability, peer review results, external quality control and cost. The American Institute of Certified Public Accountants (AICPA) Governmental Audit Quality Center’s resource titled “Selecting an Auditor: Importance of audit quality to organization receiving governmental funding1” identifies five factors that affect audit quality when selecting an independent auditing firm:

• Demonstration of the firm’s qualifications
• Experienced, qualified staff with the appropriate technical knowledge, particularly in Government Auditing Standards and single audits
• Extent of the firm’s practice with organizations like yours
• Results of the firm’s external peer review
• Participation in the firm in quality improvement programs (for example, the AICPA Governmental Audit Quality Center).

Do all federal awards receive the same level of audit scrutiny? The answer is no. Auditors utilize a risk-based approach to determine which federal programs are subject to audit as outlined in Uniform Guidance. If a federal program is subject to audit, the auditor will perform procedures over internal controls and tests of compliance with the terms and conditions of the federal award. The auditor follows the requirements outlined in the United States Office of Management and Budget (OMB) annual Compliance Supplement.

There are many factors that can influence the scope of testing required. It’s important to consult with your auditor to understand the specific circumstances that surround the award(s) your organization receives to ensure you are prepared when it comes time for audit.

With increasing federally funded programs and evolving single audit regulations, NFPs face higher chances of requiring single audits. While federal funding brings opportunities, it also adds administrative demands for internal control and compliance. Effective planning, tailored internal controls and compliance strategies help mitigate audit risks. These practices enable organizations to manage funding, ensuring it benefits beneficiaries and communities.

For more information, or to learn how Baker Tilly's not-for-profit industry specialists can help your organization with a single audit, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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