When is an audit required?
Not every nonprofit needs an annual audit. Requirements vary depending on your organization's size and funding sources.
- Federal funding: Organizations that spend $1,000,000 or more in federal awards in a fiscal year are generally required to have a Single Audit under the Uniform Guidance. This threshold applies to fiscal years beginning on or after October 1, 2024. For earlier years it was $750,000.
- State requirements: Many states have their own audit thresholds tied to gross revenue. These vary by state.
- Grant requirements: Many foundations require audited financial statements for larger grants. Check your grant agreements.
- Board policy: Some boards choose to commission an annual audit as a good governance practice even when it is not legally required.
What auditors are looking at
An independent auditor is examining your financial statements and expressing an opinion on whether they are presented fairly, in accordance with generally accepted accounting principles. An audit is not a fraud investigation, although auditors do consider the risk of fraud as part of their work, and they are not your bookkeeper. They are evaluating whether your financial picture is accurate and complete.
Auditors will review your revenue recognition, expense classification, internal controls, financial statement presentation, and whether your statements conform to nonprofit accounting standards, including ASC 958.
How to prepare your books
- Reconcile all bank and investment accounts through the end of the fiscal year
- Review and clear any unreconciled items or stale deposits
- Make sure all grants and contracts are tracked and recorded correctly, with revenue recognized in the right period
- Review restricted net asset balances and confirm they match your grant records
- Prepare a complete fixed asset schedule with depreciation calculations
- Confirm accounts payable and accrued liabilities are complete as of year end
- Run final financial statements and review them for reasonableness before the auditors arrive
Documentation to have ready
- Bank statements and reconciliations for all accounts
- Grant agreements and award letters for all active grants
- Board meeting minutes for the year
- A copy of your conflict of interest policy and signed disclosure forms
- 990 from the prior year
- Investment account statements
- Payroll reports and tax filings
- Contracts with significant vendors
Working with your auditor
A good audit relationship is a collaborative one. Be responsive to information requests. Provide documentation when asked, promptly. Ask questions when you do not understand what they are looking for. The more prepared you are going in, the faster and less expensive the audit will be.
If the auditors identify a material weakness or significant deficiency in your internal controls, take it seriously. These findings are not just audit technicalities. They point to real risks in your financial processes.
This guide shares general information, not tax, legal, or accounting advice for your specific situation. Rules change, so check current IRS and FASB guidance or ask me about your organization.