# Nonprofit Cash Audit: Restricted Gifts and Grants

- Author: PreciseBankFlow (https://www.precisebankflow.com)
- Published: 2024-10-31
- Updated: 2024-10-31
- Category: Bank statements in an audit
- Canonical: https://www.precisebankflow.com/blog/nonprofit-cash-audit

> A nonprofit cash audit: donor-restricted funds, grant drawdowns, volunteer handling of receipts and testing the bank accounts board members opened.
A nonprofit cash audit covers the usual bank reconciliation and confirmation work, then adds four tests: that donor-restricted cash is tracked and used as the donor required, that grant drawdowns match spending, that receipts handled by volunteers reach the bank whole, and that accounts opened by board members or chapters are on the books.

## What makes a nonprofit cash audit different from a commercial one?

A nonprofit cash audit differs because much of the money arrives with conditions and passes through people who are not employees. Donors restrict gifts, grantors set rules for how and when funds are drawn, and volunteers count and carry cash. Each of those adds a question that a commercial cash audit never asks.

The balance itself is tested the same way as anywhere else. You reconcile each account, confirm it with the bank, and test the reconciling items. The matching of each of those steps to an assertion is set out in [test bank reconciliation assertions](/blog/test-bank-reconciliation-assertions), and none of it changes for a charity.

What changes is the meaning of the balance. In a business, a dollar of cash is a dollar the company may spend. In a nonprofit, part of the balance may belong, in effect, to a donor's purpose or a grant's budget. The financial statements report net assets with and without donor restrictions, and cash is where a misused restriction first becomes visible.

The control environment also differs. Small nonprofits often have one paid bookkeeper, a volunteer treasurer and a board that meets monthly. Segregation of duties is thin by design, so the audit leans more on substantive tests of the bank activity than on testing controls.

## Testing donor-restricted cash in a nonprofit cash audit

Testing donor-restricted cash means proving three things: each restricted gift was recorded as restricted when received, the restricted balance at year end is supported by gift records, and spending released from restriction matched the donor's purpose. Cash need not sit in a separate bank account, but the books must track it.

Start with the gift records. Pull the largest gifts of the year and any gift with a written agreement, and read the terms. Agree each to the deposit on the bank statement and to its recording as restricted. A gift recorded as unrestricted when the letter says "for the scholarship fund" is a classification error, and it can hide later misuse.

Then roll the restricted balance forward. For each fund, take the opening balance, add new restricted gifts, subtract amounts released, and compare the result to the year-end figure. Read the releases. A release should point to spending that fits the purpose: scholarship payments for a scholarship fund, building costs for a capital campaign.

Compare restricted net assets to cash and investments available. Take out restricted amounts still held as pledges or other noncash assets first. If what remains totals $400,000 and the organization holds $250,000 in cash and investments, it has spent restricted money on something else. That is a liquidity and stewardship finding the board needs to hear about, even if each entry was recorded correctly.

Receipts for gifts are a separate check on completeness. The [IRS page on charitable contribution written acknowledgments](https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contributions-written-acknowledgments) lists what an acknowledgment for a gift of $250 or more must contain, including the amount of a cash gift and whether goods or services were provided. Comparing the acknowledgment log to the deposits on the bank statements can reveal gifts acknowledged but never deposited.

## Grant drawdowns and federal advance payments in the bank records

Grant drawdowns are requests for cash from a grantor, and testing them means comparing when money arrived in the bank with when it was spent. Federal awards have explicit rules. The test reads the drawdown dates on the bank statement against the disbursements they funded, and looks for idle balances and unreturned interest.

For federal funds, [2 CFR 200.305 on federal payment, as published by Cornell's Legal Information Institute](https://www.law.cornell.edu/cfr/text/2/200.305), sets the rules for recipients other than states. Payment methods must minimize the time between the transfer of funds and their disbursement. Advance payments must be limited to the minimum needed and timed with actual, immediate cash needs. Each of those rules leaves a trace in the bank records.

### A worked drawdown test

The table below is a worked example for one federal grant. The dates, amounts and conclusions are invented for illustration, and the gap that counts as acceptable depends on the award's terms and the grantor's guidance.

| Drawdown | Received in bank | Amount | Disbursed for grant costs | Days idle | Conclusion |
| --- | --- | --- | --- | --- | --- |
| 1 | Feb 3 | 42,000 | Feb 4 to Feb 6 | 1 to 3 | Timed with need |
| 2 | Mar 2 | 38,500 | Mar 3 | 1 | Timed with need |
| 3 | Apr 1 | 95,000 | Apr 2 to May 20 | Up to 49 | Excess cash on hand; ask why |
| 4 | Jun 2 | 41,200 | May 28 to May 30 | Reimbursement | Drawn after spending; fine |
| 5 | Jul 1 | 40,000 | Not traced | Unknown | Find the disbursements |
| 6 | Sep 2 | 44,750 | Sep 3 to Sep 5 | 1 to 3 | Timed with need |

Drawdown 3 is the kind of item to discuss. Cash sat in the account for weeks, which is the pattern the timing rule exists to prevent.

### Interest and account type

The same regulation says advance payments should be kept in insured accounts whenever possible, and in interest-bearing accounts unless an exception applies, such as receiving less than $250,000 in federal funding a year. It allows a recipient to keep up to $500 a year of interest on federal funds for administrative costs and requires the rest to be returned. Read the interest lines on the grant account's statements, total them, and check that any excess went back.

## How should an auditor test receipts that volunteers counted?

An auditor tests volunteer-counted receipts by tying each count to an independent record and to the bank deposit. Count sheets, event ticket logs, pledge records and mail logs are the starting points. The test asks whether every recorded receipt was deposited whole and promptly, and whether the deposit pattern suggests cash went missing before the count.

Pick a sample of events and collection days. For each, gather the count sheet signed by the counters, the deposit slip and the bank statement line. The three amounts should match. A deposit smaller than the count sheet means money left between the counting table and the bank. A count sheet with one signature, or with the same two names every week, weakens the evidence.

Look at what the count sheet cannot tell you. If cash is taken before counting, the sheet and the deposit will agree and both will be short. Compare event income to attendance, ticket sales or prior years. A gala that drew more guests than last year but deposited less cash is worth a question.

Patterns across the year help here. Running every deposit through a simple analysis of date, amount and day of week can show an event series that dropped after a volunteer changed roles, or round-number deposits where coins and small bills should appear. [Audit data analytics for bank transactions](/blog/audit-data-analytics-for-bank-transactions) covers the tests that suit that kind of review.

## Bank accounts board members opened: finding and testing them

Bank accounts opened by board members, chapters or program staff often sit outside the finance office, under the organization's name and tax number but without the bookkeeper knowing. Finding them means asking the bank, not only the client, for every account under the organization's tax number, then reading each account's activity and signers.

These accounts open for ordinary reasons. A chapter wants its own account for local fundraising. A board member opens one for a capital campaign so gifts can be tracked. A program manager needs a card for supplies. Years later, nobody in the finance office remembers it, and its statements go to a home address.

To find them, use several sources:

- Ask the bank confirmation to list every account under the organization's name and taxpayer number.
- Read board and committee minutes for mentions of a new account, chapter or fund.
- Ask each board member and chapter lead in writing whether they hold or sign on any account for the organization.
- Scan the main statements for transfers to account numbers that are not on the account list.

The methods auditors use more widely are covered in [unrecorded bank accounts, how auditors find them](/blog/unrecorded-bank-accounts).

Once found, test the account like any other. Obtain every statement for the year, reconcile it, and read who signs. An account where the only signer is the person who opened it, with no second review, is a control finding. Read the payees. Payments from a chapter account to a board member's business need a related-party look.

### A nonprofit cash audit checklist

The list below is an example of nonprofit-specific steps to add to a standard cash program:

1. Agree large and restricted gifts to deposits and to their restriction.
2. Roll forward each restricted fund and compare restricted net assets with available cash and investments.
3. Compare the gift acknowledgment log to deposits.
4. Test grant drawdown timing and interest on federal advance accounts.
5. Tie sampled count sheets to deposit slips and bank lines.
6. Confirm all accounts under the organization's taxpayer number and reconcile any newly found ones.

## Nonprofit cash audit findings that need a prior period correction

Some nonprofit cash audit findings belong to an earlier year: a gift misclassified two years ago, a chapter account older than the last audit, or grant interest owed over several periods. A material error that began in a prior year is corrected by restating the earlier figures, not by booking it all this year.

Decide which period the error belongs to before proposing an entry. Trace the item to its source. A chapter account with five years of activity has a balance at the start of the current year that was missed from last year's statements, as well as this year's activity. The opening net assets need adjusting for the former, and the current year's statements for the latter.

Small, immaterial prior-period amounts are often corrected in the current year with a clear note in the workpapers. Larger ones change the comparatives. Either way, the cash reconciliation for the earlier period needs care so that the fix does not break a reconciliation that already balanced. [How to correct a prior period reconciliation error safely](/blog/correct-a-prior-period-reconciliation-error) walks through that from the books side.

Tell the board what you found and why it was missed. In a nonprofit, the people who opened the account or recorded the gift are often still on the board, and the fix to the process is as important as the entry.

Statements from chapter accounts often arrive as old scans or photos. [PreciseBankFlow](/) reads scanned statements, gives every field a confidence score and lists gaps and duplicates, which helps when you are reconstructing years of activity in an account nobody reconciled.