Glossary
Audit & Controls

Risk Assessment

By: Alec Hollingsworth
Updated:  
June 16, 2025

DEFINITION:

Risk assessment is the process of identifying and evaluating potential threats that could impact a nonprofit's financial health or compliance.
Risk assessment is a systematic process used by organizations to identify, evaluate, and prioritize potential threats or vulnerabilities that could negatively impact the achievement of objectives. In the context of nonprofit accounting and audits, risk assessment involves analyzing both internal and external factors—such as financial misstatements, regulatory compliance, or fraud—that may affect the integrity of financial reporting. This process helps organizations allocate resources more effectively, implement appropriate internal controls, and develop strategies to mitigate those risks. Regular risk assessments are a critical component of a robust internal control system and are often required as part of the audit process, ensuring that stakeholders can trust the organization’s financial statements and operational practices.

Key Takeaways

  • Risk assessment identifies potential threats to an organization.
  • It guides the implementation of strong internal controls.
  • Regular assessments support compliance and audit readiness.
  • It helps allocate resources to manage significant risks.

Why It Matters

Risk assessment helps nonprofits proactively manage threats and strengthen internal controls.

Real World Example

A nonprofit organization preparing for its annual audit undertakes a risk assessment to identify areas where financial misstatements or errors are most likely to occur. They review cash handling procedures, grant reporting, and compliance with donor restrictions. Through this process, they discover that only one staff member oversees both receiving and depositing donations, posing a risk of error or fraud. The organization decides to implement a segregation of duties policy to mitigate this risk. This proactive risk assessment not only prepares them for the audit but also strengthens their financial practices and reassures donors and stakeholders of their commitment to transparency.

How Aplos Helps

Aplos provides tools for tracking finances and managing internal controls, making it easier for nonprofits to conduct risk assessments. By using Aplos, organizations can regularly review financial transactions, monitor compliance, and document risk management efforts, supporting transparency and audit readiness.
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Frequently Asked Questions

What is the purpose of a risk assessment in nonprofits?

The purpose is to identify and evaluate potential risks that could impact financial reporting, compliance, or operations, allowing the organization to manage and mitigate those threats proactively.

How often should a nonprofit conduct a risk assessment?

Risk assessments should be conducted at least annually, and more frequently if significant changes occur within the organization or its environment.

How does Aplos help with risk assessment?

Aplos offers features for monitoring transactions, tracking compliance, and documenting controls, making it easier for nonprofits to identify and respond to potential risks.

What are common risks faced by nonprofits?

Common risks include financial misstatements, fraud, non-compliance with grant requirements, and inadequate internal controls.

How does risk assessment relate to internal controls?

Risk assessment informs the design and implementation of internal controls, helping ensure resources are focused on mitigating significant risks.

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Accrual Basis
Capital Campaign
Management & Discussion Analysis (MD&A)
Workers’ Compensation
Management Letter Response

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