Top Strategies for Effective Year-End Audit Preparation

TL;DR: The Income Tax Act does not require a registered charity to be audited, but every charity must file its T3010 return, with financial statements, within six months of its fiscal year-end (ITA s. 149.1(14)). Whether you need an audit, a review engagement, or neither depends on your incorporating statute and revenue. For example, an Ontario public benefit corporation with more than $500,000 in annual revenue must be audited under ONCA s. 76. Treasurers who close the books, reconcile donation receipts and confirm the audit plan early get faster, cheaper audits.

Who is this guide for?

This guide is for treasurers, finance committee chairs and executive directors of Ontario and federally incorporated charities. If your charity's fiscal year is ending and you are asking "does my charity need an audit?" or "what goes on our year-end checklist?", start here. Corporations in other provinces follow their own statute's thresholds.

What do the key terms mean?

Audit engagement: A licensed public accountant examines your records and gives an opinion on whether your financial statements present fairly, in all material respects, under the applicable accounting framework. It is the highest level of assurance.

Review engagement: The accountant relies mainly on questions and analysis, not detailed testing. It gives limited assurance and costs less than an audit. See how audits differ from review engagements under ONCA.

Compilation engagement: The accountant compiles your statements without giving any assurance. Under CSRS 4200, it replaced the old "Notice to Reader" for periods ending on or after December 14, 2021.

ASNPO: Accounting Standards for Not-for-Profit Organizations, the framework most Canadian charities use for their statements.

Public benefit corporation (ONCA) / soliciting corporation (CNCA): Broadly, a charity, or a corporation that receives more than $10,000 a year in donations, government grants or other public funds. These corporations face stricter audit rules. Ontario's rules for not-for-profit and charitable corporations explain the public benefit test, and our guide to soliciting vs non-soliciting corporations covers the federal test.

Management letter: The auditor's letter to the board describing weaknesses in internal controls and recommended fixes.

Does CRA require my charity to have an audit?

No. CRA requires your charity to keep adequate books and records in Canada (ITA s. 230(2)) and to file the T3010 with financial statements within six months of year-end. CRA does not require those statements to be audited. Audit requirements come from your incorporating statute and from any funder or grant agreement.

Do not confuse a year-end audit with a CRA compliance audit. A CRA audit is an examination of whether your charity follows the Income Tax Act. Your year-end audit is performed by your own public accountant on your financial statements. Good year-end records make both go more smoothly. If CRA has contacted you, read our guide on how to prepare for and respond to a CRA charity audit.

Which charities must be audited?

Your revenue and your corporation type decide. The table below sets out the default rules under ONCA and the Canada Not-for-profit Corporations Act (CNCA).

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Member resolutions that waive or downgrade an audit under ONCA last only until the next annual meeting. Renew them every year. A funder's grant agreement can still require an audit even where the statute does not. For the federal rules in more depth, see our CNCA guide.

What should we do before the auditor arrives?

Close the books on a fixed date and give your auditor a clean, reconciled file. Late or messy records are the main cause of extra audit fees. Work through this checklist in order:

1. Set a year-end close date and assign each task to a named person.
2. Reconcile every bank, investment and credit card account to statements.
3. Reconcile donation revenue to official receipts issued. Receipts must contain the information required by Income Tax Regulations s. 3501. Our charitable receipting guidelines list each required element.
4. Gather grant agreements and confirm any restricted funds are tracked separately.
5. Update the fixed-asset, payroll and accounts-payable records.
6. Confirm with your accountant which engagement applies this year: audit, review or compilation.
7. Hold a pre-audit meeting to agree on the audit plan, deadlines and the list of documents requested.
8. Ask your accountant which new accounting standards apply to this fiscal year.
9. Document your financial policies and internal controls.
10. Tell staff and volunteers what the auditors will ask them for, and when.

What happens during and after the audit?

The auditor tests your records, asks questions and then issues an opinion. During fieldwork, answer requests quickly and keep the finance committee informed of any significant issue. Auditors expect the records you hand over to be final, so avoid changing entries once fieldwork begins.

After the audit, the auditor issues the opinion and a management letter. The finance committee should review both, then present the draft audited statements to the board. Under both ONCA and CNCA, the financial statements and the accountant's report go before members at the annual meeting. Record the board's response to each management-letter recommendation in the minutes.

Which reports should the board see at year-end?

The board needs the information to fulfil its oversight duty. Our charity governance and compliance team can help directors set up this reporting. At minimum, give directors:

• Draft and final annual financial statements
• The auditor's plan, report and management letter
• Budget-to-actual report for the year
• Cash flow forecast
• Next year's budget and financial forecast

How does year-end feed into our T3010?

Your audited or reviewed statements become the basis of your T3010 Registered Charity Information Return. File it within six months of year-end, and attach financial statements with the same fiscal year-end. Complete Schedule 6 if your revenue exceeds $100,000, you hold more than $25,000 of property not used in charitable activities, or you have CRA permission to accumulate funds. For the full list of filings, see our guide to annual reporting requirements for Canadian charities.

Year-end figures also drive your disbursement quota: 3.5% of property not used in charitable activities, plus 5% on the portion over $1 million (ITA s. 149.1(1)). Read what happens if a charity misses its disbursement quota. CRA can revoke a charity's registration for failing to file (ITA s. 168(1)(c)). If that has already happened, here is how to handle a revocation for not filing a T3010.

Not-for-profits that are not registered charities do not file a T3010. They may need to file the T1044 Non-Profit Organization Information Return instead. See T1044 vs T3010 for the differences.

Frequently Asked Questions

Does CRA require my charity's financial statements to be audited?

No. CRA requires financial statements with the T3010, but not audited ones. Your incorporating statute and funders decide whether an audit is required.

Can our members vote to skip the audit?

Sometimes. Under ONCA s. 76, members of a public benefit corporation with revenue of $100,000 or less can waive both audit and review by extraordinary resolution. Above $500,000, an audit is mandatory.

What is the difference between an audit and a review engagement?

An audit gives reasonable assurance through detailed testing. A review gives limited assurance through inquiry and analysis, and usually costs less.

When is our T3010 due, and what happens if we file late?

The T3010 is due six months after your fiscal year-end. If you do not file, CRA can revoke your charity's registration under ITA s. 168(1)(c).

What will the auditor ask us for first?

Expect requests for bank reconciliations, donation records and receipts, grant agreements, payroll records and board minutes. Agree on the full list at the pre-audit meeting.

What is a management letter, and what should the board do with it?

It is the auditor's letter listing internal-control weaknesses. The board should review it, assign each fix to a person and record its response in the minutes.

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