Charities and not-for-profit organisations face unique accountability challenges that set them apart from commercial businesses. Whilst both need reliable financial reporting, the audit requirements for charities involve different priorities, stakeholders, and regulatory expectations.
Understanding these differences helps charity trustees and management navigate audit obligations effectively whilst maintaining donor confidence and regulatory compliance.
What is auditing like for not-for-profit organisations?
Not-for-profit audits focus on accountability rather than profitability. Where business audits primarily assess financial performance and position for shareholders and investors, charity audits examine how well an organisation has managed donated funds and fulfilled its charitable purposes.
This means auditors look closely at how money has been spent in relation to the charity’s stated objectives, whether restricted donations have been used appropriately, and how the organisation demonstrates value toits donors and beneficiaries.
Charity auditors also assess governance structures and decision-making processes more extensively than in business audits, as strong governance is fundamental to maintaining public trust in charitable organisations.
What is the purpose of auditing charity financial statements?
Charity audits serve multiple stakeholders with different information needs. Donors want assurance that their contributions are being used effectively for intended purposes. Grant providers need confidence that funding conditions are being met. Regulatory bodies require evidence ofcompliance with charitable obligations.
The audit provides independent verification that financial statements present a true and fair view of the charity’s financial position and how resources have been applied to charitable activities.
For many charities, the audit also creates an opportunity to strengthen internal controls, improve financial management practices, and identify operational efficiencies that allow more resources to flow directly to charitable purposes.
What is included in NFP audited financial statements?
Not-for-profit financial statements include similar core documents to business financials: a statement of financial position (balance sheet), statement of financial performance (income and expenditure), and cashflow statement.
However, charity statements also include specific disclosures about restricted funds, how donations have been applied, breakdown of charitable activities versus administrative costs, and information about significant grants or contracts.
Many charities must also report on non-financial performance measures that demonstrate their charitable impact, providing context beyond just the numbers about what the organisation has achieved during the reporting period.
The notes to the accounts often include more detailed explanations about the charity’s activities, funding sources, and how resources have been allocated across different programmes or services.
How do charity audits differ from business audits?
Several key differences distinguish charity audits from commercial business audits:
Focus on fund accountability: Charity audits pay particular attention to restricted funds and whether donations have been used in accordance with donor intentions. Business audits focus on overall financial performance and shareholder value.
Governance emphasis: Charity auditors assess whether trustees are fulfilling their governance responsibilities and making decisions in the charity’s best interests. This receives more scrutiny than typical board oversight in business audits.
Regulatory framework: Charities operate under the Charities Act 2005 and must comply with Charities Services requirements, creating different regulatory obligations than companies operating under the Companies Act.
Public benefit assessment: Auditors consider whether the charity’s activities align with its registered charitable purposes and deliver public benefit. This concept doesn’t exist in commercial audits.
Volunteer and donation complexities: Charities often deal with volunteer services, donated goods, and in-kind contributions that require different accounting treatment than standard business transactions.
What regulatory requirements apply to charity audits?
Charities Services sets out which charities require audits based on their operating expenditure. Charities with operating expenditure over$1 million must have their financial statements audited by a qualified auditor. Those with expenditure between $550,000 and $1 million need either an audit or review.
These thresholds can change, and additional audit requirements may apply depending on the charity’s constitution, funding agreements, or incorporation status.
Some charities choose to have audits even when not legally required, recognising that independent verification strengthens donor confidence and can support funding applications to grant providers and major donors.
How can charities prepare effectively for audits?
Strong preparation makes the audit process smoother and more valuable. This includes maintaining clear records throughout the year of how restricted funds are managed, ensuring board minutes document key decisions and financial approvals, keeping detailed supporting documentation for grants and significant transactions, and having systems that can demonstrate how donated funds flow through to charitable activities.
Regular financial reporting to the board throughout the year also helps identify any issues early, before they appear in year-end financial statements.
Working with your auditor between annual audits can provide guidance on improving systems and addressing regulatory changes that affect reporting requirements.
What value does a charity audit provide beyond compliance?
Beyond meeting regulatory obligations, charity audits provide independent assurance that strengthens relationships with all stakeholders. Donors gain confidence that their contributions are being managed responsibly. Grant providers have the evidence they need to justify funding decisions. Board members receive independent verification of management’s financial reporting.
The audit process also often identifies opportunities to strengthen controls, improve efficiency, and enhance reporting that makes the charity more effective at achieving its purposes.
Call us and connect to possibility.
Does your charity need audit support or guidance on strengthening financial accountability? We work with not-for-profit organisations to ensure audit requirements are met efficiently whilst improving governance and financial management. Give us a call or drop us an email, and we’ll set up a time to discuss how we can support your charitable mission through reliable financial reporting. You can also reach out to the author, Bhavin Sanghavi via email at bhavins@uhyhn.co.nz for more information.
