Do Nonprofits Get Audited? A Review of the Requirements

Nonprofit organizations focus on charitable, educational, religious, or scientific missions, relying on public donations, grants, and government funding. Transparency and accountability in managing funds are paramount. This article explores nonprofit audit requirements and processes.

Audit Requirements for Nonprofits

Nonprofits face various requirements for financial audits. These mandates stem from multiple sources, ensuring proper stewardship of funds and compliance. Triggers for an audit depend on an organization’s revenue, funding source, and internal governance.

Many states impose audit requirements on nonprofits, typically based on annual revenue thresholds. States often require an independent audit if a nonprofit’s gross revenue exceeds a certain amount, such as $500,000 or $1 million. These mandates protect public interest and ensure charitable assets are managed responsibly.

Federal funding significantly impacts nonprofit audit requirements. Organizations expending federal financial assistance, including grants, are subject to the Single Audit Act. For fiscal periods beginning October 1, 2024, a Single Audit is required if a non-federal entity expends $1,000,000 or more in federal awards. This review, outlined in 2 CFR Part 200, assesses compliance with federal program requirements and internal controls over federal funds.

Private funders often mandate audits as a condition for significant grants. Foundations, corporate donors, and philanthropists require audited financial statements to ensure contributions are used as intended. This provides funders assurance of strong financial management and accountability.

Internal governance can also lead to audit requirements. A nonprofit’s board may decide to undergo regular audits, even if not legally mandated, to enhance transparency and stakeholder confidence. Bylaws might also stipulate periodic audits as a measure of good governance. These requirements foster financial transparency, accountability, and compliance with laws and grant terms.

The Independent Audit Process

Engaging an independent auditor is the initial step. The nonprofit selects a qualified firm, and both parties sign an engagement letter. This document outlines the audit’s scope, responsibilities, and fees.

Preparation is a significant responsibility before fieldwork. This involves organizing financial records like bank statements, invoices, and board minutes. Key staff must be available to answer questions and provide documentation. Strong internal controls, such as segregation of duties, facilitate a smoother audit.

During fieldwork, auditors examine the nonprofit’s financial information. This involves examining transactions, testing internal controls, and interviewing key personnel. Auditors may also confirm balances directly with third parties to corroborate records.

The audit culminates in the auditor’s report. This report provides an independent opinion on whether financial statements are presented fairly, in accordance with accounting principles. The opinion can be unqualified, qualified, adverse, or a disclaimer. Auditors may also issue a management letter with recommendations for improving internal controls.

Distinguishing Audit Types

A full financial statement audit offers the highest assurance from an independent accountant. The auditor performs extensive procedures, including testing transactions and evaluating internal controls. The outcome is a formal opinion on whether financial statements are presented fairly and accurately, providing high confidence to stakeholders.

A review engagement offers more limited assurance than a full audit. The accountant primarily performs inquiries of management and applies analytical procedures. These procedures provide limited assurance that no material modifications are needed for financial statements, but do not involve detailed testing of internal controls or corroboration of balances. This service is less extensive than an audit but provides more assurance than a compilation.

A compilation engagement provides the lowest level of service. The accountant assists management in presenting financial information in financial statements without providing assurance. The accountant takes provided data and presents it in a standard format. No auditing or review procedures are performed, and no opinion or assurance is expressed on accuracy or completeness.

The Single Audit is a specialized audit focused on compliance with federal award requirements. While it includes a financial statement audit component, its primary purpose is to determine compliance with federal award terms. This involves specific compliance testing related to federal program expenditures and internal controls, making it unique for federal grant recipients.