Nonprofits often wonder if they need an audit, especially if they consider themselves too small or have never been audited. This post breaks down the reasons why your organization might require an audit and the benefits of audits, even when not mandated by law.

What is a financial statement audit?

A financial statement audit is an independent examination of your organization’s financial statements to ensure they fairly represent your financial position and performance in accordance with Generally Accepted Accounting Principles (GAAP). The audit is conducted by an independent CPA who examines your financial statements and issues one of the following four opinions:

1. Unqualified Opinion – This is the “clean” opinion, meaning that everything is in good shape.

2. Qualified Opinion – Financial statements are fair, with some exceptions.

3. Adverse Opinion – Financial statements are materially incorrect.

4. Disclaimer of Opinion – The auditor cannot express an opinion, usually due to insufficient information.

When does a nonprofit need an audit?

There are several circumstances where a nonprofit might need an audit:

1. Legal and Regulatory Requirements

• State laws – In many states, nonprofits must have an independent audit once they surpass certain revenue thresholds. These requirements vary but typically apply to organizations with annual revenues starting around $500,000 to $1 million. In some states, nonprofits that solicit public donations may also be required to undergo an audit. The National Council of Nonprofits created an Audit Guide that includes a 50-state chart that shows whether there is an audit requirement in that state, and if so, under what circumstances.

• IRS Requirements – While the IRS doesn’t mandate annual audits for most nonprofits, certain organizations—especially those managing significant government funds—may be subject to federal audit regulations to ensure compliance.

2. Grantor or Funder Requirements

• Government Grants – Nonprofits that receive federal, state, or local government grants may need to undergo a Single Audit (formerly known as an A-133 audit). This is typically required when an organization spends $1 million or more in federal funds in a fiscal year.

• Private Foundations – Some private foundations may request audited financial statements as a prerequisite for receiving grant funds. This allows funders to ensure that their contributions are being managed responsibly.

• Corporate Donors – Larger corporate donors may also require an audit as part of their due diligence process to assess the organization’s financial health and transparency before committing to a partnership.

3. Organizational Growth and Complexity

• Revenue Growth – As nonprofits grow in both revenue and operational complexity, an audit becomes increasingly important to verify that their financial systems and internal controls are functioning effectively. Organizations with annual budgets of $1 million or more may choose to schedule regular audits as a best practice for ensuring sound financial oversight.

• Grant and Donor Management – Nonprofits managing multiple grants or significant donations from various sources may benefit from an audit to ensure financial reports are accurate and funds are being used as intended.

4. Board of Directors or Governance Requirements

• Board Policy – Some Boards of Directors may require an audit as part of their fiduciary responsibilities, even if it is not mandated by law. This ensures that the organization’s financial records are accurate and that funds are being managed in alignment with its mission.

5. Preparation for Future Growth or Strategic Initiatives

• Seeking New Funding – If a nonprofit plans to apply for larger grants or pursue major funding opportunities, an audit can demonstrate financial stability and credibility to potential funders.

• Strategic Expansion – As a nonprofit looks to expand its programs or services, an audit can provide assurance that its financial management practices are robust enough to support future growth.

6. Correcting Financial Issues or Addressing Concerns

• Addressing Financial Discrepancies – If a nonprofit encounters discrepancies in its financial records, internal control weaknesses, or potential fraud, an audit can help identify these issues and provide recommendations for corrective action.

• Modified Audit Opinion – If a nonprofit previously received a modified audit opinion, a follow-up audit may be necessary to confirm that corrective measures have been implemented and that financial practices are now in compliance.

7. Voluntary Audits for Credibility and Trust Building

• Demonstrating Accountability – Even when an audit isn’t required, some nonprofits choose to undergo a voluntary audit as a way to build trust with donors, partners, and the community. A clean audit (i.e., an unmodified opinion) enhances the organization’s reputation for responsible financial management and can attract additional funding.

Whether legally required or voluntary, audits are crucial in strengthening your nonprofit’s financial oversight and credibility. Preparing for an audit before it’s needed ensures your organization is well-positioned to meet regulatory, funder, and/or governance expectations.

If your nonprofit is unsure about its audit needs or wants to ensure you’re fully prepared, don’t wait until the last minute. Reach out for expert nonprofit accounting services that can help streamline your financial processes, address any discrepancies, and ensure you’re audit-ready. With the proper guidance, your organization can confidently focus on its mission, knowing its financials are in good hands.

Need help getting audit-ready? Contact us today to learn how we can support your nonprofit’s accounting needs and prepare you for a successful audit.