Nonprofit Audit Requirements: When You Need One and How to Prepare

Federal grant requirements create one set of audit triggers. If your organization spends $750,000 or more in federal awards in a fiscal year, you must undergo a single audit under 2 CFR 200 (Uniform Guidance). This includes both a financial statement audit and a compliance audit examining your federal awards. The compliance audit tests whether you followed grant requirements for allowable costs, procurement, and reporting.

State requirements create another set of triggers. Most states require audits for nonprofit organizations above certain revenue thresholds—commonly $500,000 to $1,000,000. Some states have lower thresholds or additional requirements. Check your state's specific requirements.

Funder requirements may also mandate audits. Some foundation grants and corporate donors require audited financial statements as a condition of funding. Read grant agreements carefully to understand any audit requirements.

A financial statement audit examines your organization's financial statements—Statement of Financial Position, Statement of Activities, Statement of Cash Flows, and related notes. The auditor expresses an opinion on whether these statements are fairly presented. This is what most people mean when they say 'audit.'

A single audit (formerly known as A-133 audit) is specifically required for organizations receiving federal awards. It includes the financial statement audit plus a compliance audit. The compliance audit examines your internal controls over federal programs and tests your compliance with federal award requirements. The auditor issues a report on compliance for each major federal program.

If you're subject to single audit requirements, you cannot skip it even if you also have a financial statement audit. The single audit satisfies the financial statement audit requirement when conducted by the same auditor.

Organizations below the $750,000 threshold need only a financial statement audit—but may choose to have one anyway for credibility.

Nonprofit expertise matters. Look for auditors with specific experience in the nonprofit sector. They understand fund accounting, grant compliance, and nonprofit financial reporting. They'll ask better questions and provide more relevant recommendations.

Size matters too. Large CPA firms may have nonprofit practices but may treat your engagement as small potatoes. Boutique firms focused on nonprofits may provide more personalized service. Consider the fit for your organization's size and complexity.

Independence is non-negotiable. Your auditor cannot have financial relationships with your organization beyond the audit engagement. They cannot have audit committee members on staff, for example. Ensure independence standards are met.

Consider the relationship. You'll work closely with your auditor for several months each year. Choose a firm you can communicate with effectively and whose style works for your organization.

Request proposals from multiple firms. Compare experience, approach, timing, and fees. Check references—speak with other nonprofits they serve.

Maintain organized records throughout the year. Don't wait until audit time to organize files. Keep grant documentation, board meeting minutes, contracts, and supporting records in logical order. Use consistent filing systems.

Reconcile accounts monthly. Bank reconciliations, credit card reconciliations, and account reconciliations should be completed monthly—not at year-end. Year-end reconciliations take much longer and may miss errors.

Address prior-year findings. If the prior audit identified control weaknesses or recommendations, address them. Document what you did. Auditors note when prior issues persist.

Communicate proactively. Tell the auditor about significant transactions, unusual events, or changes in operations before the audit. Don't surprise the auditor with issues they should have known about.

Prepare staff. Ensure finance staff understand what's needed and are available during the audit. Brief program staff on grant documentation requests.