Key Takeaways

  • A nonprofit audit verifies compliance with tax-exempt requirements, evaluates financial health, and reassures donors and regulators.
  • Federal law requires an audit if a nonprofit spends more than $750,000 in federal funds annually; states and funders may impose additional requirements.
  • Independent audits examine records, accounting practices, and internal controls, and help identify weaknesses in financial systems.
  • Some states and private foundations require audited financial statements as a condition for fundraising or grant funding.
  • Audit costs can range widely—from $5,000 to $20,000+—depending on organization size, revenue, and complexity of funding sources.
  • Alternatives like financial reviews or compilations may suffice when audits aren’t legally required, offering lower-cost compliance options.
  • Best practices for nonprofits include preparing documentation early, maintaining strong internal controls, and engaging the board in oversight.

An audit for nonprofit organization involves examining the organization's financial records to make sure they are complying with the requirements of a tax-exempt entity. If the auditor finds that these requirements are not being met, the organization will most likely lose its nonprofit status.

Nonprofit Audit Guide

The Nonprofit Audit guide is a tool designed to help nonprofit organizations fully understand the process of an independent audit. The National Council of Nonprofits created and provides this guide.

Regulations for charitable nonprofit organizations can vary from state to state. Because of this, the Nonprofit Audit Guide includes a chart that details the audit requirements for all 50 states. Using this chart, you can determine if your state requires independent audits of nonprofit organizations and under what conditions these audits will take place.

You can also use the Nonprofit Audit Guide to better understand what role your organization's board of directors will serve during your audit. In the Guide, there are also several tips that will help your organization successfully progress through your independent audit:

  • Finding and hiring an independent auditor.
  • Preparing your documents for evaluation.
  • Reviewing the auditor's work.

If your nonprofit receives any federal funding, and this funding comes with special auditing requirements, you can find these requirements in the Guide.

Why Nonprofit Audits Matter

Beyond compliance, a nonprofit audit plays an important role in strengthening credibility with donors, board members, and regulators. Funders often view audited statements as a sign of transparency and accountability. Audits can also identify weaknesses in financial reporting, allowing leadership to correct issues before they become larger problems. For organizations seeking major grants or partnerships, a nonprofit audit can be the factor that reassures funders that resources will be properly managed.

Facts About Independent Audits

During an independent audit, virtually every aspect of your charitable nonprofit organization gets examined by an independent auditor, including:

  • Your financial records.
  • Your organization's accounts and business-related transactions.
  • Your nonprofit's accounting practices.
  • Nonprofit internal controls.

It's important to understand that an independent audit is not required of every nonprofit organization, so you should decide if you actually need to audit your organization before undertaking this process. Generally, the funding source of a nonprofit and its yearly budget will determine whether it is required by the federal or state government to schedule an independent audit. In certain circumstances, you may be able to choose whether you will conduct an audit.

The federal government has several requirements for when a nonprofit must arrange an independent audit. For instance, if your organization receives federal funding, you will likely need to schedule an audit, even if your state does not require one. This is true whether you receive the federal funding directly or the funding is passed to you by another entity. Managing an audit is a very involved project. In the Guide, you can get information about what will happen at every stage of your independent audit.

Nonprofit Audit Costs and Alternatives

The cost of a nonprofit audit varies significantly based on the organization’s size, revenue, and funding sources. Smaller nonprofits may pay around $5,000 to $10,000, while larger organizations with complex financial structures may face costs of $20,000 or more.

When an audit isn’t required, nonprofits may choose a less expensive alternative, such as:

  • Financial Review – A CPA performs limited procedures to provide limited assurance on financial statements.
  • Compilation – Financial data is compiled into standard statements without assurance.

These options still provide some level of oversight but at a lower cost, making them attractive for smaller nonprofits or those not legally required to undergo an audit.

Independent Audit State Requirements

Nonprofit organizations routinely receive donations from private foundations, and these foundations will likely expect the nonprofit to undergo an independent audit at some point.

In some states, nonprofits must conduct an audit if they receive state funding. The organization must submit proof of the audit to the agency from which the funding originated. If any of your nonprofit's funding comes from the government, you should be sure to determine whether you are legally required to conduct an independent audit.

If you receive a contract from the state government, your organization may also require an audit. Nonprofits that spend more than $750,000 in federal funds in a year also must undergo an audit. If you are registering a nonprofit charitable organization in one of 26 states, you have to file audited financial statements before your organization will be legally allowed to fundraise.

Federal Audit Thresholds and Grant Compliance

Federal law requires a nonprofit that expends $750,000 or more in federal funds in a single fiscal year to undergo an audit, often called a "Single Audit." This requirement applies whether the nonprofit receives the funds directly from a federal agency or indirectly through a state or local entity.

In addition, many grantmaking foundations and government agencies mandate an audit as a condition of receiving funds, regardless of whether the nonprofit meets the federal threshold. Nonprofits planning to apply for significant grants should prepare for this requirement and budget for audit costs accordingly.

Other State Audit Regulations

Filing an audit report is just one requirement you must fulfill to register your charitable organization. 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 your state if you want nonprofit status for your organization.

Almost every state where you register your nonprofit will require an independent audit under some circumstances. In most cases, you have to conduct an audit once your organization has reached a certain amount of revenue. In some states, this revenue threshold is very low, and in others it is very high. Most states also require that you submit audited financial statements on a yearly basis. Generally, you need to file these statements when you renew your nonprofit's registration.

Preparing for a Successful Nonprofit Audit

Preparation is essential for keeping the audit process efficient and cost-effective. Steps nonprofits can take include:

  • Organize financial records – Ensure ledgers, invoices, and receipts are accurate and accessible.
  • Strengthen internal controls – Implement clear policies for cash handling, expense approvals, and financial reporting.
  • Engage the board – The audit committee or finance committee should review statements and oversee auditor selection.
  • Communicate early with the auditor – Providing requested documents in advance reduces delays and costs.

Nonprofits that prepare well often complete audits more quickly and with fewer unexpected expenses, while also reinforcing financial accountability to their stakeholders.

Frequently Asked Questions

  1. Is a nonprofit audit always required?
    No. Federal law only requires an audit if a nonprofit spends $750,000+ in federal funds annually, but states or funders may impose their own requirements.
  2. How much does a nonprofit audit cost?
    Audit costs typically range from $5,000 to $20,000+, depending on the nonprofit’s size, revenue, and complexity
  3. What’s the difference between an audit, review, and compilation?
    An audit provides the highest level of assurance. A review offers limited assurance, while a compilation only organizes financial data without assurance.
  4. Who performs nonprofit audits?
    Audits must be conducted by an independent Certified Public Accountant (CPA) with no ties to the organization.
  5. How can nonprofits prepare for an audit?
    By organizing records, strengthening internal controls, engaging the board, and communicating with the auditor early to streamline the process.

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