Does My Nonprofit Need an Audit? A Complete Guide

If you serve on a nonprofit board or manage a nonprofit organization, understanding your financial audit requirements is critical. The rules vary by state, by the amount of revenue your organization receives, and by the terms of your grants and contracts. Getting this wrong can jeopardize your funding, your tax-exempt status, and the trust of your donors.

When Is a Nonprofit Audit Required?

There is no single federal law that requires all nonprofits to have an audit. However, several triggers can create an audit requirement. The most common triggers are state charitable solicitation laws, federal funding thresholds, and grant or contract terms.

Under the Uniform Guidance (2 CFR Part 200), any nonprofit that expends $1,000,000 (raised from $750,000 effective for fiscal years beginning on or after October 1, 2024) or more in federal awards during a fiscal year must undergo a Single Audit (also called an A-133 audit). This is an extensive audit that examines both your financial statements and your compliance with the terms of each federal grant.

State Requirements in DC, Maryland, and Virginia

In Washington DC, nonprofits registered as charitable organizations with annual revenues over $500,000 are required to submit audited financial statements. In Maryland, the threshold for a full audit is $750,000 in total revenue. Maryland also requires organizations with revenue between $200,000 and $750,000 to submit reviewed financial statements. Virginia does not impose a blanket state audit requirement on nonprofits, but organizations receiving state grants may have audit requirements written into their grant agreements.

These thresholds change periodically, so it is important to verify the current requirements with your state regulator or your CPA.

Audit vs Review vs Compilation

Understanding the differences between these three levels of CPA engagement is essential for nonprofits. A compilation is the most basic level. The CPA organizes your financial data into standard financial statement format but provides no assurance about accuracy. Compilations are the least expensive and are often sufficient for internal use or for organizations well below audit thresholds.

A review engagement provides limited assurance. The CPA performs analytical procedures and inquiries to determine whether the financial statements appear reasonable. A review costs less than an audit and is often acceptable to state regulators and some funders when a full audit is not required.

An audit provides the highest level of assurance. The CPA examines your financial records, tests transactions, confirms balances with third parties, evaluates internal controls, and issues an opinion on whether your financial statements are presented fairly in accordance with GAAP. Audits are the most expensive and time-consuming but are required in many situations.

How to Prepare for Your First Nonprofit Audit

Preparation is the key to a smooth and cost-effective audit. Start by organizing your chart of accounts to align with nonprofit-specific categories: unrestricted, temporarily restricted, and permanently restricted net assets. Under ASU 2016-14, these are now classified as net assets without donor restrictions and net assets with donor restrictions.

Maintain proper documentation for all revenue, especially grants. Each grant should have its own tracking system showing the award amount, allowable costs, reporting deadlines, and expenditures to date. Keep copies of all grant agreements, award letters, and correspondence with funders.

Reconcile all bank accounts and credit card statements monthly, not quarterly or annually. The cleaner your books are throughout the year, the less time your auditor will spend (and the lower your audit fee will be). Most nonprofit audits for organizations in the $1 million to $5 million revenue range cost between $8,000 and $25,000.

The Single Audit: What You Need to Know

If your nonprofit expends $1,000,000 or more in federal awards in a single fiscal year, you need a Single Audit. This is significantly more complex and expensive than a standard financial statement audit. The auditor must test your compliance with federal regulations for each major program, evaluate your internal controls over compliance, and report findings to the Federal Audit Clearinghouse.

Single Audit findings can range from minor reporting issues to material noncompliance that could require you to return grant funds. Common findings include inadequate time-and-effort reporting, failure to follow procurement standards, and missing or incomplete subrecipient monitoring documentation.

Choosing the Right Audit Firm

Not every CPA firm is qualified to perform nonprofit audits. Look for a firm with specific experience in nonprofit accounting and auditing. Ask how many nonprofit audits they complete each year, whether they have experience with your type of organization (arts, social services, education), and whether they have performed Single Audits if that applies to you.

Ask for references from other nonprofit clients, and check whether the firm has undergone peer review (a quality review required of all CPA firms that perform audits). The firm should issue its peer review report to you upon request.

Timeline and Planning

Most nonprofit audits begin within two to four months after your fiscal year-end. If your fiscal year ends June 30, plan to have your audit completed by October or November. If your fiscal year ends December 31, target March or April for completion. The Single Audit report must be submitted to the Federal Audit Clearinghouse within the earlier of 30 days after receipt of the report or nine months after the end of the audit period.

Start the audit firm selection process at least three to four months before your fiscal year-end. Good nonprofit audit firms book up quickly, especially during the busy season from January through April.