Nonprofit Audit Guide©

With the right amount of information and preparation, you can come out of a nonprofit financial audit successfully. Non-profits often have complex funding arrangements involving multiple donors, grants, and sponsorships. Auditors must carefully assess these arrangements to ensure compliance and proper reporting.

Select the Right Auditor

It simplifies the preparation process and supports the generation of audit-ready financial statements. Common challenges include limited financial resources, complex fund accounting services for nonprofit organizations accounting, diverse revenue streams, volunteer-driven operations, and keeping up with changing regulations. Addressing these challenges is essential for accurate and reliable audited financial statements. In the past, you may have seen the terms “reportable condition” and “material weakness” in your audit reports. The term “material weakness” will still be used, but its definition has changed. Firstly, auditors must reach a complete understanding about reviewing specific financial statements during the audit process.

Reporting and Outcomes

Not-for-profit organizations (NPOs) have different legal obligations than for-profit organizations regarding financial statements and reporting. Not-for-profit organizations have been incorporated under the Canada Not-for-profit Corporations Act. This means the NPO has received over $10,000 in a single financial year through donations, gifts, legacies or government grants.

Respond to Management Letters

In the District of Columbia, as well as 39 of the 50 states, nonprofit charities must be formally registered before fundraising. As mentioned, nonprofit rules vary from state to state, so you must review the rules in https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ your state if you want nonprofit status for your organization. It’s getting harder to find CPA firms that conduct nonprofit audits, and their schedules fill up quickly.

The Sarbanes-Oxley Act requires publicly traded companies to rotate lead auditors — not necessarily audit firms — every five years. While this provision of the Sarbanes-Oxley Act of does not apply directly to nonprofits, it is still a wise practice for a nonprofit to consider how to rotate its lead auditor. Auditor independence may also be compromised if the audit firm provides consulting services to a client nonprofit.

• Off-the-shelf accounting software does not have the proper internal controls to meet this SAS requirement.
• Nonprofit audits are more than just a statutory requirement; they serve as a powerful tool for organizations to enhance credibility, identify improvement opportunities, and maintain legal and regulatory compliance.
• Use them to reaffirm your organization’s commitment to integrity, transparency, and fiscal responsibility.
• An audit is not required for small nonprofits but it is highly recommended because it provides a third-party assessment of the organization’s financial records and practices.
• Sound financial practices demand that the enterprise works from a sufficient base of capital, a reality that an independent audit will confirm or question.

Revenue Recognition in Nonprofits

Regular audits help non-profit organizations comply with legal and regulatory requirements, minimizing the risk of penalties and loss of tax-exempt status. If an audit is required by law, or if a third party has strict requirements that the nonprofit conduct an audit, a review or compilation will not satisfy that requirement. Nevertheless, nonprofits trying to manage costs should not be shy about asking whether the third party will accept a review in place of a full audit. The third party (usually a funder) may understand the goal of cost savings and accept a review instead.

Meanwhile, should the federal government discover discord between the organization’s financial records and the documentation submitted by employees or vendors, the audit process could very well kick in. Beyond these contingencies, any time nonprofit organizations seek abatement or money back from the IRS, an IRS agent may count these as red flags and invoke the audit process. So, while IRS audits are not frequent occurrences due to federal tax law requirements for a nonprofit organization, the modest possibility remains.

But at some point, newer or smaller nonprofits also need to address the question of whether to get an audit. Our robust donation management software protects donor data and streamlines donation reporting and analytics to ensure accuracy and time-savings for everyone involved. Internal audits are better than nothing but don’t necessarily increase public transparency and accountability—since an internal team could be the root of the problem. Nonprofit audits might sound intimidating, but they are far less scary than you think. For starters, the Internal Revenue Service (IRS) rarely has a reason to audit your organization—since you’re a nonprofit and don’t pay taxes.