The Financial Accounting Standards Board defines nonprofit organizations as entities that posses the following characteristics not typically found in business enterprises:
- They receive contributions of significant resources from resource providers who do not expect a commensurate or proportionate monetary return.
- They operate for purposes other than to make a profit.
- There is an absence of ownership interests like those of business enterprises.
The Internal Revenue Service (IRS) defines a tax-exempt (nonprofit) organization as an organization exempt from income taxes, primarily under Section 501 of the Internal Revenue Code.
Because nonprofit organizations are established for reasons other than to generate a profit, they have different goals, funding sources, uses of resources, accounting requirements, controls, performance measurements, management styles and constraints on activities. Nonprofit organizations even have different financial statement requirements.
Nonprofit organizations expending more than $500,000 in a year of federal awards are required to have either a single or program specific audit performed in accordance with OMB Circular A-133 and the Single Audit Act Amendments of 1996.
Auditors of nonprofit organizations need to understand the differences between businesses and nonprofit organizations and determine how those differences will affect their audits. For example, the auditor must be concerned with items such as identifying restrictions imposed by funding sources and the organization’s compliance with and disclosure of the restrictions, the organizations use of a volunteer governing board and personnel and the affect on accounting and control procedures, and audit requirements imposed by funding sources that are different than GAAS.