What Is a Nonprofit Audit?

Nonprofit organizations play a critical role in their communities, often relying on donations, grants, and public support to carry out their missions. However, financial transparency and accountability are essential for maintaining trust and ensuring that funds are used effectively. This is where a nonprofit audit comes into play.

In this article, we’ll provide a clear and comprehensive explanation of what a nonprofit audit is, when it’s required, what the process involves, and how it differs from a financial review. Whether you’re a nonprofit executive director, a CFO, a grant writer, or a donor looking for transparency, this guide will help demystify the nonprofit audit process.

Introduction: What Is a Nonprofit Audit?

A nonprofit audit is a formal, independent examination of an organization’s financial statements, accounting practices, and internal controls. Conducted by an external Certified Public Accountant (CPA), the audit aims to assess the accuracy and completeness of financial reporting and ensure that the nonprofit is complying with regulations.

The primary purpose of a nonprofit audit is to:

• Enhance financial transparency
• Build donor and stakeholder trust
• Ensure compliance with grant requirements and legal regulations

It’s important to differentiate a nonprofit audit from other types of audits:

• IRS Audit: A review conducted by the Internal Revenue Service (IRS) to ensure compliance with tax laws, including the proper use of 501(c)(3) tax-exempt status.
• Internal Review: An internal process where an organization evaluates its own financial health but without the level of scrutiny of an external audit.

What Does a Nonprofit Audit Consist Of?

A nonprofit audit, typically conducted by an independent CPA firm, involves several key components:

• Examination of Financial Statements: This includes reviewing the balance sheet, income statement, and cash flow statements to ensure accuracy.
• Review of Internal Controls and Accounting Procedures: The auditors will evaluate the organization’s internal control systems and accounting practices to identify any weaknesses.
• Testing of Transactions: Auditors will test random transactions to confirm their accuracy and verify compliance with the organization’s policies.
• Confirmation of Donor-Restricted Fund Use: Auditors will ensure that any donations made with restrictions are used according to the donor’s wishes.
• Evaluation of Grant and Contract Compliance: If the nonprofit has received grants or contracts, auditors will verify that funds are being used in compliance with grantor agreements.
• Final Report: The auditor will issue a final report with an opinion on the financial statements, which could be an unqualified opinion (clean), a qualified opinion, an adverse opinion, or a disclaimer of opinion.

How Much Should a Nonprofit Audit Cost?

The cost of a nonprofit audit can vary widely depending on the size, complexity, and location of the organization. Here’s a rough breakdown of typical audit costs:

• Small Nonprofits (under $1M budget): $5,000–$10,000
• Medium Nonprofits ($1M–$5M): $10,000–$20,000
• Large Nonprofits (over $5M): $20,000–$50,000+

Factors influencing the cost include:

• The number of funding sources and restricted grants
• The volume of transactions the organization processes
• The strength of internal controls and the quality of bookkeeping

How Far Back Can the IRS Audit a 501(c)(3)?

The IRS generally has a “look-back” period of 3 years from the filing date of your tax returns to audit a nonprofit organization. However, in cases of substantial underreporting or fraud, the IRS can extend this period to 6 years or more.

For this reason, nonprofits should retain financial records and supporting documentation for at least 7 years. Key IRS audit areas include:

• Form 990 Filings: Ensuring accurate and complete reporting.
• Executive Compensation: Verifying that compensation aligns with nonprofit regulations.
• Public Support Tests: Ensuring that the nonprofit meets the required public support percentage.
• Unrelated Business Income (UBI): Ensuring that income generated from unrelated business activities is appropriately reported.

What’s the Difference Between a Nonprofit Audit and a Review?

While both audits and reviews are conducted by licensed CPAs, they differ in the depth of their procedures and the level of assurance provided. Here's a quick comparison:

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An audit offers the highest level of assurance, while a review is generally suitable for smaller nonprofits or less complex financial oversight.

Are Nonprofit Audits Public Record?

While nonprofit audit reports are not automatically made public, many organizations choose to publish them to demonstrate transparency and foster trust. For nonprofits seeking funding, having an accessible audit report can be crucial.

IRS Form 990, which includes a summary of the nonprofit’s financials and whether an audit was performed, is public record. It is available upon request and on platforms like Guidestar or directly from the IRS website.

When Is a Nonprofit Audit Required?

Nonprofit audits may be required in the following cases:

• State law: Some states (e.g., NY, CA, IL) require audits for nonprofits over certain revenue thresholds.
• Federal or state grants: If a nonprofit spends $750,000 or more in federal funds, an audit is generally required.
• Foundations or major donors: Some funders, particularly large foundations, require audited financials before awarding grants.
• Board policy or bylaws: Some nonprofit boards require audits regardless of revenue.

How to Prepare for a Nonprofit Audit

Preparing for a nonprofit audit is crucial for a smooth and efficient process. Here are key steps to follow:

1. Close and reconcile all accounts: Ensure that all accounts are up to date and reconciled.
2. Organize supporting documents: Gather invoices, grants, donations, contracts, and any other relevant documents.
3. Update governance policies: Make sure that Board minutes and policies are up to date.
4. Prepare a SEFA: If applicable, prepare the Schedule of Expenditures of Federal Awards (SEFA).
5. Conduct an internal pre-audit review: Address any potential issues before the auditor begins their work.

Conclusion

Nonprofit audits are vital tools for ensuring accountability, financial health, and organizational transparency. Whether required by law or voluntarily pursued, audits help build donor confidence and demonstrate fiscal responsibility. They are essential for long-term sustainability and success.

Download our Nonprofit Audit Preparation Guide or contact our team to schedule a pre-audit consultation to ensure your organization is audit-ready.

FAQs

What does a nonprofit audit consist of?

‍A nonprofit audit involves a comprehensive review of financial statements, internal controls, and compliance with relevant laws, often conducted by an external CPA.

How much should a nonprofit audit cost?

‍Costs vary based on size and complexity, ranging from $5,000 for small organizations to $50,000+ for large ones.

How far back can the IRS audit a 501(c)(3)?

‍The IRS can audit up to 3 years back, with exceptions for fraud or substantial underreporting.

What is the difference between a nonprofit audit and a review?

‍An audit offers in-depth testing and higher assurance, while a review is a more limited process with lower assurance.

Are nonprofit audits public record?

‍While audit reports themselves aren’t required to be public, many nonprofits share them for transparency. Form 990, which summarizes financials, is public record.