An audit is an independent examination of your activities which concludes whether they are in good order or not.
Audits can seem threatening. But they bring two important benefits:
- Firstly, audits allow an NGO to provide evidence that it is being honest in its financial statements, or that it is following procedures properly.
- Secondly, audits provide useful learning opportunities. Auditors can provide advice on financial controls or systems - or investigate specific issues.
There are four types of financial audit:
- An external audit checks whether financial statements
are true and fair
- An internal audit checks whether policies and procedures
are being followed
- A donor audit checks whether grant terms and conditions
have been followed
- An investigative audit looks for evidence relating to a specific suspected wrong-doing
An external audit is carried out by independent auditors. They give a professional opinion as to whether financial statements are true and fair, based on carefully checking a sample of the records. Their opinion is important because it provides evidence that financial reports are reliable - which means a lot to stakeholders like trustees and donors.
An internal audit may be carried out by an organisation's own staff or by experts specially hired for the job. It involves checking whether the organisation's policies and procedures are being followed in practice. This gives trustees up to date information about how risks are being properly managed in practice.
A donor audit may be carried out by the organisation’s normal external auditors (on a separate or additional engagement to the standard year end audit) or sometimes by donors themselves. This gives donors confidence that their funds have been properly used and the grant conditions are being complied with. A successful audit is often a requirement for further funding.
An investigative audit may be carried out when an organisation suspects a specific problem (usually fraud), and auditors are brought in to establish the facts. The auditors may provide evidence for further action that the organisation may choose to take.
Mango's Training Course handbook - has a full chapter on audit.