Nonprofit Audit Requirements: Do You Need An Audit?

These improvements may involve fundraising opportunities you weren’t aware of and expenses you no longer need. An independent auditor can give your organization an outside perspective when you feel stuck. Audits give your nonprofit an excellent overview of where you need improvements.

• For example, your state might impose audit requirements if your income and spending exceed a certain threshold.
• With proper planning, strong internal systems, and board involvement, audits can become opportunities for growth—not just obligations.
• Explore essential practices and insights for effectively auditing nonprofit organizations, focusing on unique financial and compliance aspects.
• Note that it may be helpful to request management letters over several years in order to evaluate whether the organization has taken steps to address past deficiencies.
• Since you’ll have plenty of time to plan for most audits, you can take time to research and prepare.
• As we mentioned earlier, operational audits look at how a nonprofit is run by examining its systems and processes in detail.
• If your nonprofit is not required to have an audit, you may still choose to have one conducted on a voluntary basis.

Best Practices for Long-Term Audit Success

Add audit requirements to the list and you may feel like there’s no way you can keep everything straight. Nonprofit audits are usually conducted by independent auditors whose goal is to provide an objective perspective on your nonprofit’s financial management practices and help you improve as needed. An external nonprofit audit is used when an organization or third-party agency agrees to review the internal controls and financial processes.

Other IRS-wide considerations

Internal control weaknesses often surface in smaller nonprofits where limited staff handle multiple financial functions without adequate oversight. And many federal and state agencies require audits, depending your organization’s fundraising, size, and spending. Running an impactful nonprofit that makes a tangible difference in the world relies heavily on ensuring its financial, legal, and operational areas are as compliant and efficient as possible. To achieve this level of understanding, nonprofit audits should conduct regular audits. Just as a nonprofit funding strategy must be aligned with an organization’s mission, audits help ensure that financial practices are in keeping with its purpose, goals, and vision.

Revenue and Donations

The National Council of Nonprofits has created this Nonprofit Audit Guide© to provide charitable nonprofits with the tools they need to make informed decisions about independent audits. Nonprofits must comply with specific reporting and disclosure requirements to maintain transparency and accountability to stakeholders. These requirements, governed by accounting standards and regulations, ensure financial information is presented accurately. Revenue recognition in nonprofit organizations requires careful consideration of donor intent, grant conditions, and the timing of resource inflows. Contributions can be classified as unrestricted, temporarily restricted, or permanently restricted under FASB ASC 958, which provides guidelines for recognizing and classifying these streams. The statement of activities captures the flow of resources and the fulfillment of the nonprofit’s mission.

Review Internal Controls

Some organizations undergo a compliance audit to confirm they are following the processes and guidelines set by the nonprofit’s board policies. Most organizations strive to avoid a nonprofit audit, but the fact is sometimes you can’t or shouldn’t avoid having a financial audit of your nonprofit organization done. In this article, we discuss nonprofit audit best practices and explain some helpful information to help you prepare for your next nonprofit audit. The IRS does not require nonprofit audits in most cases, however, they may periodically request an audit (examination) or a compliance check. The time required to complete an audit also depends on the availability of key personnel, the quality of the organization’s accounting records, and the extent to which the organization’s internal controls are effective. In addition, the auditor’s understanding of the organization’s industry and the regulatory environment in which it operates affects the time required to complete the audit.

In fact, one or more IRS agents may participate, depending on the size of the nonprofit organization. This article will cover when and why an independent auditor is necessary for a nonprofit organization as well as the generally accepted accounting principles that serve best when a financial audit is necessary. As an example, the state of California requires annual audits for all nonprofit organizations in the state that have a gross income of $2 million or more.

• For instance, states like New York and California mandate audits for nonprofits with gross annual revenue or contributions exceeding specific thresholds.
• The goal of the Exempt Organizations Examinations program is to promote voluntary compliance by analyzing operational and financial activities of exempt organizations.
• Consequently, the laws that require a charitable nonprofit to submit audited financial statements also vary state-by-state.
• Either way, retaining an independent auditor to perform a financial review of accounting records can only help your business.
• The duration of the independent audit can vary according to whom the audit is due, board members, for example.
• In many cases, the most time-consuming part of the audit process is choosing an auditor.

This results in an audit opinion that can enhance credibility with donors, grantors and other stakeholders, bringing trustworthiness to your donation appeals. By identifying and resolving these common issues before auditors arrive, organizations experience significantly smoother audit processes with fewer findings and reduced timelines. Effective audit preparation requires systematic organization of financial records and supporting documentation well before auditors arrive. The following checklist https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ addresses both standard financial requirements and nonprofit-specific compliance needs that auditors will examine during fieldwork.

• However, how often these audits are necessary will depend on factors like the size of your organization and the scope of your spending.
• As an example, the state of California requires annual audits for all nonprofit organizations in the state that have a gross income of $2 million or more.
• To prevent delays, you should make sure that your files are organized and easy to access.
• You will be asked to upload all requested items to our document portal and any questions or clarifications may be asked and answered electronically.
• Dedicated audit preparation comes with our standard bookkeeping and accounting services for mid-sized to large nonprofits and is available as an add-on for small organizations.
• The same legislation advanced consistent procedures to conduct an independent audit of a nonprofit organization.

As a whole, the audit process takes approximately, 8-15 weeks depending on the size and complexity of the organization. Also, allow for pre-audit time to accounting services for nonprofit organizations begin gathering the required documentation prior to the start of the audit which will help reduce the time needed to complete the audit. Here is some estimation of the order of magnitude cost of an audit based on the nonprofit organization’s financial size. In a compilation, the CPA assembles financial data without verification and presents it in the form of a report based on management’s representations.

Private Foundation and Grant Requirements

Shortly after receiving the report, schedule a leadership team meeting to review it in detail and create an action plan that addresses everything the auditor identified across all relevant areas of your organization. Some of these actions may be simple improvements that add up to make a significant difference in your operations, while others may be more complex changes that will take time and effort to implement. If your auditor requests access to your accounting system, make sure to grant them the correct level of user permissions (often view- or read-only) before the audit. Also, add all of the documents they’ll need to a centralized digital folder you can share with them. Although you’ll need to put in effort to prepare beforehand and apply the auditor’s recommendations afterward, the benefits of financial auditing typically outweigh these costs. Get support at every stage of the nonprofit audit process by partnering with Jitasa.