When Is an Audit Required for a Nonprofit?

Nonprofit organizations operate under a unique set of financial oversight rules. A financial audit for a nonprofit is an independent examination of its financial records and statements, conducted by a certified public accountant (CPA) firm. This process helps ensure an organization’s accurate financial reporting and compliance with established accounting principles. It demonstrates accountability and transparency to donors, grantors, and the public, building confidence in fund management.

Federal Funding Thresholds

Nonprofit organizations that receive and expend federal financial assistance are subject to specific audit requirements. The primary regulation governing these audits is the Uniform Guidance (2 CFR Part 200), which sets forth administrative requirements, cost principles, and audit requirements for federal awards. A Single Audit is triggered when a nonprofit expends $750,000 or more in federal awards within its fiscal year.

This threshold applies to the total amount of federal awards expended, regardless of whether the funds come directly from a federal agency or indirectly through another pass-through entity. The term “expended” refers to the financial activity of using federal funds, not merely receiving them. A Single Audit ensures federal funds are used appropriately and that the nonprofit complies with the specific terms and conditions of the federal programs. As of October 1, 2024, the Single Audit threshold is increasing to $1,000,000 for fiscal years beginning on or after this date.

A Single Audit encompasses both an audit of the organization’s financial statements and a review of its compliance with federal award requirements. This includes evaluating internal controls and testing adherence to specific program rules. The audit results in a report submitted to the Federal Audit Clearinghouse.

State Law and Revenue Thresholds

Beyond federal requirements, individual states often impose their own audit or financial review requirements on nonprofits. These state mandates typically depend on a nonprofit’s annual gross revenue, total assets, or a combination. State charity oversight agencies, such as the Attorney General’s office, enforce these regulations.

Thresholds for required audits or reviews vary by state. For instance, some states may require an audit for nonprofits with annual gross revenue exceeding $1 million, while others might set the threshold lower, such as $200,000 or $500,000, or higher, like $2 million. Some states also consider the amount of public or government funding received, regardless of total revenue, as a trigger for an audit. Nonprofits must consult their state’s regulations, especially if they solicit funds or operate in multiple states, to ensure compliance.

These state requirements ensure financial transparency and accountability to state regulators and the public. For example, some states require audited financial statements with annual filings to state agencies. Some states also specify different assurance levels, such as a review, for organizations below the full audit threshold.

Grantor and Lender Requirements

Even if a nonprofit does not meet federal or state audit thresholds, external entities like private foundations, corporate funders, or financial institutions can mandate an audit. These requirements are stipulated as contractual obligations within grant agreements, corporate sponsorships, or loan covenants. Funders often require audited financial statements as a condition for receiving funding, demonstrating credibility and responsible financial management.

These stipulations ensure funds are used for their intended purposes and that the organization adheres to grantor restrictions or conditions. A clean audit report enhances credibility, making a nonprofit more attractive to funders. Lenders, such as banks, may also require audited financial statements to assess financial health and stability before approving loans or lines of credit. The scope of such audits might be tailored to the grantor or lender’s specific needs, focusing on particular programs or financial aspects.

Understanding Different Assurance Levels

There are distinct types of independent financial examinations that offer varying levels of assurance: a compilation, a review, and a full financial statement audit. Each involves different procedures and provides a different degree of confidence in the financial statements.

A compilation is the least extensive engagement, where an accountant assists management in presenting financial information without providing assurance on accuracy or completeness. The accountant does not verify the information provided by management. A review engagement provides limited assurance that there are no material modifications needed for the financial statements to conform with accounting standards. This involves inquiries and analytical procedures to identify unusual items or trends, but not detailed testing of transactions or internal controls.

A full financial statement audit provides the highest level of assurance (though not absolute) that financial statements are free from material misstatement, whether due to error or fraud. During an audit, a CPA understands internal controls, assesses risks, and performs detailed procedures like inspecting records, observing processes, and confirming information with third parties. The specific level of assurance required for a nonprofit is determined by the relevant federal, state, or grantor requirements.