Can Charities Choose Their Auditor: A Complete Guide – Aurora Financials

Many charity leaders ask: can charities choose their auditor, or are they restricted by regulations? The answer depends on your organization’s operating expenditure and specific requirements. Charities with operating expenditure over $1 million must have their financial statements audited by a qualified auditor. Those with expenditure between $500,000 and $1 million need either an audit or review[-3]. Charities with expenditure below $500,000 aren’t required to undergo an audit, but their constitution or funding agreements may mandate one.

Understanding your options at the time of auditing charitable organizations is everything in compliance and good governance. This piece will clarify when nonprofits can be audited and how to select the right auditor. We’ll also cover whether auditors can give advice beyond compliance and how to prepare for the audit process.

Understanding your charity’s audit requirements

Legal requirements based on operating expenditure

Your charity’s audit obligations stem from its operating expenditure over the previous two financial years. Registered charities with total operating expenditure exceeding NZD 1.71 million in each of the last two years must have their financial statements audited by a qualified auditor. This threshold exists because larger charities receive substantial tax exemptions and must be accountable to taxpayers and the general public.

Medium-sized charities face different requirements. Organizations with operating expenditure between NZD 852.81k and NZD 1.71 million must have at minimum a review of their financial statements, though they can opt for a full audit if they choose. Charities with operating expenditure below NZD 852.81k face no statutory audit or review requirements.

These thresholds adjust for inflation from time to time. Note that the expenditure in both of the previous two years determines your requirement, not just the current year’s spending. This two-year approach prevents charities from moving in and out of compliance tiers due to temporary fluctuations.

The performance report must also be covered when your charity is required by law to have an audit or review. This includes non-financial information such as your Entity Information and Statement of Service Performance.

When your constitution requires an audit

Your governing documents may create audit obligations independent of statutory requirements. Many older trust deeds and constitutions specify the need for an audit, even where the law doesn’t mandate one for smaller organizations.

Some constitutions go further by specifying particular qualifications the auditor must hold or requiring membership in specific professional accounting bodies. Others define the scope of work, whether it covers financial statements and receipts or payments to other parties. Process requirements around appointment timelines and reporting deadlines may also appear in your governing documents.

Review your constitution because these requirements carry legal force. Your organization must comply with all constitutional provisions at all times, whatever the statutory thresholds.

Funder-mandated audit requirements

Funding organizations need confidence in the credibility of information supplied by charities when awarding grants. Many funders request audited financial statements from organizations, including smaller charities without statutory audit requirements.

Grant agreements contain specific audit clauses tied to the dollar value of funding received. Different funders maintain varying accountability requirements, and ambiguity often exists around the term “audit.” Funders may accept something more specific than a full audit in some cases, such as agreed-upon procedures.

Organizations should clarify audit requirements during the original grant discussions to avoid complications later in the application process.

Your options for selecting an auditor

Can nonprofits be audited by any accountant?

No, charities cannot choose just any accountant to conduct statutory audits or reviews. Qualified auditors must meet specific requirements under sections 35 and 36 of the Financial Reporting Act 2013. This qualification exists to protect the integrity of charitable financial reporting.

Your auditor needs recognition from accredited professional bodies. The two organizations that certify qualified auditors are Chartered Accountants Australia and New Zealand (CAANZ) and CPA Australia. Verify their credentials through the Companies Office auditors register before you engage an auditor.

Finding a qualified auditor for your charity

Start by researching firms that specialize in nonprofit auditing. You can access lists of qualified auditors through CAANZ and CPA Australia. Ask other charities in your network to recommend auditors, as peer organizations often give valuable explanations of auditor performance.

Issue a request for proposals (RFP) to compare candidates side by side [113]. Your RFP should define the audit scope, timeline expectations and any specific compliance requirements. Narrow your list to two or three firms to interview.

Check whether prospective auditors have experience with organizations as with yours in size and sector [112]. Request client references from other tax-exempt charitable organizations, not just the hand-picked references firms provide.

Switching auditors if you’re not satisfied

Changing auditors is a common practice in the nonprofit sector. Organizations reassess their audit partners to arrange with evolving needs. You’re within your rights to seek alternatives if your current auditor provides poor communication, misses deadlines or lacks understanding of your mission.

Questions to ask potential auditors

Ask about their experience with nonprofits as with yours when you interview auditors. Ask about their audit approach and methodology. Request information about staff continuity and which team members will handle your engagement. Discuss their availability throughout the year beyond the audit period [112].

What makes a good charity auditor?

Experience with charitable organizations

The right auditor understands nonprofit accounting fundamentals. The charitable sector has unique financial reporting needs that differ from commercial entities. Look for auditors who have worked with charitable organizations and know how to handle donation accounting, restricted funds, and grant compliance.

Auditors experienced with government agency requirements for specific sectors like education or health provide valuable input. This expertise becomes vital because most small charities don’t have their own financial reporting specialists. Smaller accounting firms with reasonable rates are often more experienced in nonprofit accounting than larger ones.

Understanding of your charity’s sector

General nonprofit experience is not enough. Sector-specific knowledge matters. Auditors assess governance structures and decision-making processes more in charity audits than business audits, as strong governance maintains public trust. They assess whether your activities line up with registered charitable purposes and deliver public benefit. Organizations serving vulnerable clients or operating residential facilities need auditors who understand sensitivity and discretion requirements.

Can auditors give advice among auditing services?

Independence rules affect whether auditors can provide consulting services. Auditor independence may be compromised if the firm provides consulting services to a client nonprofit. Best practice suggests refraining from engaging the same individual or firm for both auditing and non-auditing services. Audit and advisory roles should remain separate to avoid compromising independence.

Communication and reporting style

Clear communication between your organization and the auditor improves audit effectiveness. Choose auditors who write clear, simple reports that trustees and board members understand, share findings in a helpful rather than critical manner, and discuss issues throughout the process.

Fee structures and transparency

Audit fees depend on your financial system’s size and complexity, management oversight quality, and accounting control environment strength. Audits cost more than reviews because they require more skill and expertise.

Preparing for your audit and working with your auditor

Documents and records your auditor will need

Gather your complete financial records before the audit begins. Your auditor requires bank statements for all accounts covering the entire financial year and investment statements. You also need documentation for any money held by other entities on your behalf. Grant letters and funding agreements need to be available, along with details of all income sources. Payroll records showing total earnings and deductions are necessary if you have employees. These records should include leave liabilities.

Board meeting minutes and your governing document are the governance documentation your auditor will review, along with fiscal policies. When it comes to audits, prepare detailed breakdowns of cash deposits and withdrawals. You should have working papers that show how you calculated accounts payable and receivable. Records for petty cash expenditure are also needed. Asset registers with depreciation schedules and stocktake records round out the typical requirements.

How to make the audit process smoother

Agree on a realistic timetable early with your auditor. Maintain clear records throughout the year rather than scrambling at year-end. Address any findings from previous audits before the current one starts. Keep relevant finance team members available during fieldwork so they can answer questions right away.

Getting value beyond compliance

Audits uncover internal control weaknesses and give you a chance to learn about where you can improve financial management processes. Strong preparation throughout the year helps identify issues early, before they appear in year-end statements.

Conclusion

Yes, charities can definitely choose their auditor, provided the auditor meets statutory qualifications. Your selection should prioritize nonprofit experience and clear communication over price alone. Verify credentials through the Companies Office auditors register before making your decision. Proper preparation throughout the year changes audits from compliance obligations into valuable opportunities that strengthen your financial management. The right auditor becomes a trusted partner in your mission, so choose carefully.

FAQs

Q1. Who is qualified to audit a charity?

Not just any accountant can audit a charity. Qualified auditors must meet specific requirements under the Financial Reporting Act 2013 and be recognized by accredited professional bodies like Chartered Accountants Australia and New Zealand (CAANZ) or CPA Australia. You can verify an auditor’s credentials through the Companies Office auditors register before engaging them.

Q2. Who decides which auditor a charity uses?

Charities have the freedom to choose their own auditor, as long as the auditor meets statutory qualifications. The selection process typically involves the board or trustees researching qualified auditors, issuing requests for proposals, conducting interviews, and making the final appointment decision based on factors like nonprofit experience, sector knowledge, and communication style.

Q3. Can a charity switch to a different auditor if they’re unhappy?

Yes, changing auditors is a common and accepted practice in the nonprofit sector. If your current auditor provides poor communication, misses deadlines, or lacks understanding of your organization’s needs, you have every right to seek alternatives. Organizations routinely reassess their audit partners to ensure they align with evolving requirements.

Q4. Can the same firm that audits a charity also provide consulting services?

Generally, this is not recommended. Auditor independence may be compromised if the same firm provides both auditing and consulting services to a nonprofit. Best practice suggests keeping audit and advisory roles separate to maintain the integrity and independence of the audit process.