When it comes to charitable organisations, public trust is everything. People donate their hard-earned money expecting it to be used responsibly. That’s why a charity audit plays a vital role. It’s not just about meeting legal requirements—it’s about showing accountability, protecting the charity’s reputation, and building long-term trust with donors, regulators, and the community.

In this article, we’ll break down the key aspects of a charity audit: what it is, why it matters, what it includes, and how to prepare. Whether you’re a small local trust or a large non-profit with international operations, this guide will help you understand how an audit strengthens your organisation from the inside out.

What Is a Charity Audit?

A charity audit is an independent review of a charity’s financial records, internal controls, and compliance with laws and donor expectations. It’s usually conducted by a professional auditor who is not involved in the charity’s daily financial management. Their job is to assess whether the financial statements give a true and fair view of the charity’s performance and position.

The audit doesn’t just look at income and expenses. It also examines how money is managed, how decisions are made, and whether internal policies are being followed. For example, if a donor gives funds for a specific cause—like disaster relief—the audit will check whether those funds were used correctly.

In many countries, audits are required by law once a charity reaches a certain size or income threshold. But even when not legally required, many charities choose to get audited to improve transparency and demonstrate good governance. An audit helps identify risks, improve controls, and reassure stakeholders that the charity is in safe hands.

Why Do Charities Need an Audit?

Trust is the foundation of charitable giving. People want to know their donations are being used for the right reasons. An audit gives them that confidence. It’s a signal that your charity is serious about accountability and financial health.

Regulators also rely on audits to keep the sector clean and transparent. For example, in New Zealand, registered charities must submit annual returns, and those with higher incomes must include audited financial statements. In the UK, similar requirements exist through the Charity Commission. Without an audit, it’s hard for authorities to verify whether a charity is managing its funds responsibly.

But beyond compliance, audits also help the charity itself. They can highlight errors, fraud risks, or weak financial practices before they cause real damage. For example, if your charity doesn’t have proper separation of duties in its finance team, an audit will point this out—giving you time to fix it before anything goes wrong.

Finally, some grant providers and major donors require audited accounts before releasing funds. In that sense, an audit can also unlock future funding opportunities. It’s a protective measure and a credibility boost all in one.

Legal Audit Requirements for Charities

Each country has its own rules about when a charity must be audited. These usually depend on income levels, assets, or the type of organisation.

For example:

  • In New Zealand, charities with operating expenses over $1.1 million must have their financial statements audited by a qualified auditor.
  • In the UK, charities with income over £1 million (or certain asset thresholds) must have a full audit under the Charity Commission.
  • In Australia, charities over the “medium” or “large” thresholds defined by the Australian Charities and Not-for-profits Commission (ACNC) require either a review or full audit.
  • In India, all registered charitable trusts must submit annual audited accounts to maintain compliance with tax exemption rules.

These thresholds help ensure that larger, more complex organisations are being independently reviewed, while smaller charities can focus on basic reporting. However, even smaller charities often choose to audit voluntarily for better transparency and donor trust.

Before planning your audit, it’s essential to understand your local regulatory obligations. Hiring an auditor familiar with charity law in your region is also highly recommended.

What Does a Charity Audit Include?

A charity audit typically involves several key steps. First, the auditor will meet with your board or finance team to understand how the charity operates, what programs it runs, and how financial management is handled. This initial stage helps the auditor assess risk and plan their approach.

Next comes the testing phase. This includes reviewing financial transactions, checking bank reconciliations, verifying income sources (such as donations, grants, or government funding), and ensuring expenses are properly documented. The auditor may select random samples to test whether internal controls are being followed.

They will also check how restricted funds are used—whether donations tagged for specific causes have been allocated appropriately. Payroll records, volunteer reimbursements, and asset purchases are also reviewed for accuracy and compliance.

Finally, the auditor prepares a report that includes their opinion on the financial statements and any concerns or recommendations. If everything is in order, it’s called a clean audit opinion. If there are serious problems, the report may highlight them or suggest improvements to controls and processes.

The Role of Internal Controls in a Charity Audit

Internal controls are policies and systems designed to prevent fraud, reduce errors, and ensure proper financial management. In a charity setting, they might include rules like requiring two people to approve payments, logging donations properly, or doing regular bank reconciliations.

During the audit, the auditor will review how strong and reliable these internal controls are. If your charity relies on just one person to handle all the finances, for example, that’s considered high-risk. The auditor might recommend changes to reduce that risk, such as splitting duties or improving documentation.

Strong internal controls aren’t just about passing the audit. They also protect your charity from mistakes and fraud in everyday operations. For example, a missing donation receipt might seem small, but if it goes unnoticed, it could create gaps in donor reporting and damage your credibility.

The best charities treat their audit as a tool to strengthen their systems—not just an obligation. A good set of internal controls makes the audit process smoother and shows stakeholders that your charity takes financial responsibility seriously.

How to Prepare for a Charity Audit

Preparation is key to a smooth audit. Start by organising your financial records—bank statements, invoices, payroll records, donor reports, and your general ledger. If your charity uses accounting software, ensure it’s up to date and reconciled.

Make sure your policies and procedures are documented and accessible. If you’ve received restricted funds (donations for specific purposes), keep clear records of how and when they were spent. Being able to trace each donation from receipt to use is one of the most important things an auditor will check.

It’s also helpful to assign a single point of contact in your team to manage communication with the auditor. This person can coordinate document requests, answer questions, and keep the audit on schedule.

Finally, take time to review past audit reports or financial reviews. Address any old issues or recommendations before the auditor returns. Preparation not only speeds up the audit process but also leaves a strong impression of professionalism and integrity.

Common Challenges in Charity Audits

Charities often face unique challenges during audits. Limited staffing, volunteer turnover, and informal financial systems can make it harder to maintain clean, consistent records. Unlike for-profit businesses, many charities rely on part-time bookkeepers or non-finance staff to handle money.

Another challenge is managing restricted funds. If your charity receives money specifically for a project, you need to show that every dollar was spent on that project. Failing to separate restricted and general funds can lead to audit issues.

Documentation is another weak point. Charities may accept cash donations or informal reimbursements without proper receipts. These gaps create red flags for auditors.

But challenges aren’t failures—they’re opportunities. Audits are meant to uncover risks and fix them. A good auditor will work with your charity to improve processes, not just point out problems. With the right attitude and preparation, your audit can turn challenges into long-term improvements.

Benefits of a Clean Audit Report

Receiving a clean audit report—also called an unmodified opinion—is a big win for any charity. It shows that your financial statements are accurate, your systems are well managed, and you’ve met your legal responsibilities.

This kind of report boosts your charity’s reputation. It tells the public, donors, and regulators that you’re running a transparent, trustworthy operation. In fact, some funding agencies and grant providers only work with organisations that can show audited financials with clean reports.

Internally, a clean report builds morale. It confirms that your staff and volunteers are doing things right. It also makes future audits easier because it shows a pattern of compliance and professionalism.

Even if your charity receives recommendations for improvement, that’s not a bad thing. It shows you’re committed to growing and improving. The real value of an audit isn’t just the final opinion—it’s the insights and lessons you gain along the way.

Conclusion

A charity audit is much more than a regulatory task—it’s a valuable opportunity to strengthen your operations, gain donor trust, and future-proof your organisation. Whether your charity is small or large, local or global, the principles are the same: transparency, accountability, and improvement.

With careful preparation, good internal controls, and the right mindset, your audit becomes a stepping stone—not a stumbling block. It proves that your charity not only does good work, but does it the right way.

Frequently Asked Questions (FAQ)

1. Is a charity audit the same as a financial review?

No, a charity audit is more in-depth than a financial review. An audit is conducted by a licensed auditor and includes thorough testing of financial transactions and controls. A review, on the other hand, is more limited and does not offer the same level of assurance. Some charities may only need a review based on size or regulation, but an audit offers stronger credibility.

2. What if a charity fails an audit?

Failing an audit doesn’t mean legal trouble—but it does mean there are issues to fix. The audit report will include recommendations for improvement. Regulators may follow up if the issues are serious, but many findings are fixable through better processes or training. Taking action on the report shows good governance and can restore confidence quickly.

3. Can volunteers help with audit preparation?

Yes, volunteers with accounting or admin skills can help gather records, organise files, and assist with documentation. However, the final responsibility should rest with senior staff or trustees to ensure accuracy. Volunteers can be a great support, especially for small charities, but it’s important to maintain oversight and quality control.