Nonprofit Audit Requirements: When You Need One and How to Prepare
Audits provide assurance that your financial statements are fairly presented and your organization is operating with appropriate controls. While audits cost time and money, they also build credibility with funders and demonstrate accountability. This guide covers when audits are required, what to expect, and how to prepare.
A financial statement audit is an independent examination of your books and records by a CPA firm. The auditor expresses an opinion on whether your financial statements are fairly presented in accordance with accounting standards. Unlike a tax return, an audit provides third-party validation.
Audit requirements vary based on your revenue, funding sources, and state registration. This guide helps you understand when you need an audit and how to make the process successful.
State Requirements
$500K-$2M revenue threshold varies by state
Federal Single Audit
Required for $750K+ federal awards
Funder Requirements
Foundations and corporations may require audits
When Is an Audit Required?
State Requirements
Most states require audits for nonprofits above certain revenue thresholds as part of charitable solicitation registration:
- Thresholds typically range from $500,000 to $2 million in revenue
- Some states accept reviews or compilations below audit threshold
- Requirements vary—check each state where you solicit donations
- Multi-state filers may need to meet the lowest threshold
Federal Single Audit (2 CFR 200)
Organizations spending $750,000 or more in federal awards annually must have a single audit—a financial statement audit plus additional procedures over federal programs.
- Threshold: $750,000 in federal expenditures (not receipts)
- Major programs: Auditor tests compliance for significant federal programs
- Due date: Within 9 months of fiscal year end; submitted to Federal Audit Clearinghouse
- Findings: Compliance issues reported and must be addressed
Funder Requirements
Many funders require audits regardless of your size:
- Foundation grantors may require audited financials with applications
- Government grants often require audits even below single audit threshold
- Corporate funders may have audit requirements
- Check grant agreements for specific audit requirements
Voluntary Audits
Even without requirements, audits may make sense for:
- Demonstrating accountability to donors and stakeholders
- Building credibility for major fundraising initiatives
- Preparing for growth that will trigger requirements
- Strengthening internal controls and processes
Alternatives to Audits
Below audit thresholds, you may be able to use a review (limited assurance, less testing) or compilation (no assurance, just formatting). Reviews cost less than audits while still involving a CPA. Check requirements to see what's acceptable.
Types of Audits
Financial Statement Audit
The standard audit that examines your financial statements:
- Auditor tests transactions, balances, and disclosures
- Opinion on whether statements are fairly presented in accordance with GAAP
- Results in audited financial statements
- May include management letter with recommendations
Single Audit
Financial statement audit plus testing of federal program compliance:
- Includes all financial statement audit procedures
- Plus: Testing of major federal programs
- Plus: Report on internal controls over federal programs
- Plus: Schedule of Expenditures of Federal Awards (SEFA)
- Findings reported to grantors and Federal Audit Clearinghouse
Program-Specific Audit
Sometimes funders require an audit of a specific grant or program rather than full financial statements. More limited in scope and cost.
Selecting an Auditor
What to Look For
- Nonprofit experience: Familiarity with fund accounting and nonprofit-specific issues
- Government audit experience: If you have federal funding, need single audit expertise
- Industry knowledge: Understanding of your specific sector (arts, social services, etc.)
- Size fit: Large enough for quality but small enough to prioritize you
- Communication style: Responsive, clear, willing to explain
Selection Process
- Request proposals from 3-4 firms
- Check references from similar organizations
- Interview the actual team who will do the work
- Compare fees (but don't choose solely on price)
- Board or audit committee should approve selection
Fee Considerations
| Organization Size | Typical Audit Fee Range |
|---|---|
| Under $1M revenue | $8,000 - $15,000 |
| $1M - $5M revenue | $15,000 - $30,000 |
| $5M - $20M revenue | $25,000 - $60,000 |
| Single audit (add-on) | $5,000 - $20,000+ |
Rotate Periodically
Consider changing auditors every 5-7 years to get fresh perspectives and maintain independence. At minimum, ensure the engagement partner rotates. A long relationship can become too comfortable—auditors may miss issues.
Preparing for the Audit
Good preparation makes audits faster, cheaper, and less disruptive. Start preparing well before the auditors arrive.
Pre-Audit Checklist
- Complete all month-end closes for the fiscal year
- Prepare year-end adjusting entries
- Reconcile all balance sheet accounts
- Prepare draft financial statements
- Organize supporting documentation
- Complete PBC (Prepared by Client) list items
Common PBC List Items
- General ledger and trial balance
- Bank reconciliations (all accounts, all months)
- Accounts receivable aging and confirmations
- Accounts payable listing and support
- Grant agreements and award letters
- Board minutes and significant contracts
- Payroll records and 941s
- Investment statements
- Debt agreements and amortization schedules
- Insurance policies
Timing
- Meet with auditors 1-2 months before year-end to plan
- Complete books within 4-6 weeks of year-end
- Have PBC items ready before fieldwork begins
- Respond promptly to auditor requests during fieldwork
Preparation Reduces Fees
Audit fees largely reflect hours worked. If auditors spend time waiting for documents, reconciling your records, or fixing errors, fees increase. Organizations with clean books and organized documentation pay less and finish faster.
During the Audit
Fieldwork
Auditors will spend time on-site (or remotely) testing transactions and balances:
- Make staff available to answer questions
- Provide requested documents promptly
- Keep a log of auditor requests and responses
- Escalate issues or disagreements early
Adjustments
Auditors may propose adjusting journal entries to correct errors:
- Review proposed adjustments carefully
- Understand why each adjustment is needed
- Ask questions if you disagree
- Some immaterial adjustments may be waived
Findings
Auditors may identify control weaknesses or compliance issues:
- Material weaknesses: Significant deficiencies requiring disclosure
- Significant deficiencies: Important but less severe issues
- Management letter comments: Recommendations for improvement
After the Audit
Deliverables
- Audited financial statements: Statements with auditor's opinion
- Auditor's opinion letter: Unmodified (clean), modified, or adverse
- Management letter: Recommendations and observations
- Governance communications: Required communications to those charged with governance
- Single audit reports: If applicable, additional federal compliance reports
Board/Committee Review
- Audit committee meets with auditors without management present
- Review management letter and discuss recommendations
- Accept audited financials
- Discuss auditor recommendations for next year
Follow-Up
- Develop corrective action plan for any findings
- Implement management letter recommendations
- Document improvements for next year's audit
- Submit single audit to Federal Audit Clearinghouse (if required)
Clean Opinion Is the Goal
An unmodified ("clean") opinion means the auditor found your statements to be fairly presented. Any modification raises red flags with funders and donors. If there are issues, work with your auditor to resolve them before the opinion is issued.
Related Resources
Need Help with Audit Preparation?
Eagle Rock CFO helps nonprofits prepare for successful audits. We ensure your books are audit-ready, help select the right auditor, and support you through the process so you get a clean opinion with minimal disruption.
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