An audit is a checkup. It’s when an outside professional reviews an organization’s financial records, accounting practices, and internal controls to confirm everything is in order. Done well, the audit process strengthens credibility with funders and boards and boosts their confidence in the nonprofit financials they’re reviewing. Audits can even reveal opportunities to tighten operations.

This guide explains what nonprofit audits involve and when they’re required. It also gives practical advice on how to make the audit easier, including a checklist of materials to gather before the auditors arrive.

What Is a Nonprofit Audit?

A nonprofit audit is a process that demonstrates the nonprofit’s transparency and accountability by examining its financial records, accounts, business transactions, accounting practices, and internal controls. While several types of audits exist, most people think first of an independent audit, in which a licensed certified public accountant (CPA) from outside the organization conducts the examination and issues a formal report to the board of directors.

The purpose of an independent audit is to assess whether the nonprofit’s financial statements are fairly represented in all material respects, in accordance with the Generally Accepted Accounting Principles (GAAP). The result is the audit opinion letter. Nonprofits audits apply American Institute of Certified Public Accountants standards, where the best outcome is an “unqualified” or “unmodified” opinion, which means the financial statements are fairly presented without reservations. A “modified opinion” refers to any of three less favorable outcomes: a “qualified opinion” (some issues, but not severe), an “adverse opinion” (material misstatements found), or a “disclaimer of opinion” (the auditor couldn’t form an opinion at all). Qualified opinions are relatively common and manageable; adverse opinions and disclaimers are rare.

Key Takeaways

  • A nonprofit audit is an engagement by a licensed CPA who issues an opinion on whether financial statements are fairly presented. It provides reasonable assurance, not absolute certainty.
  • Beyond verifying financial statements, audits test internal controls and check compliance, strengthening credibility with donors and funders and improving grant eligibility.
  • Not all audits are the same. Whether a nonprofit needs an independent financial audit, Single Audit, or another type depends on funding sources, state requirements, and organizational bylaws.
  • Choose an auditor with nonprofit experience and start preparing early. Use the 10-item checklist (provided below) to gather documentation. Designate one person to coordinate.
  • Nonprofit-specific accounting software keeps financial records organized and audit-ready, so staff will spend less time scrambling when auditors arrive.

Nonprofit Audits Explained

The term “audit” covers several different types of assessments. An independent financial audit examines whether the organization’s financial statements are materially correct and GAAP-compliant. “Materiality” is key: Auditors provide reasonable assurance that the statements are free of significant errors, not absolute certainty that every number is correct. Along the same lines, a financial statement audit is also not designed to detect all fraud, though it may uncover control weaknesses that increase fraud risk. This differs from an IRS audit, which is a compliance check by federal tax authorities, or an internal audit, which is conducted by a nonprofit’s own employees.

Audits are only one level of assurance that a CPA can provide, and they can be more involved than what some nonprofits need. It’s worth understanding where audits fit among other assurance options:

  • Compilation: A CPA assembles financial statements from information provided by the nonprofit. There is no testing, no opinion, and no assurance that the statements are accurate.
  • Review: The CPA performs a more modest investigation and provides limited assurance. Testing is done primarily through analytical review and inquiry. Reviews are less rigorous than an audit and generally cost less.

Compilations and reviews may satisfy some funders, but many state laws specifically require audited financial statements. Independent audits are the most costly, but fees vary by geography and market. Typical costs begin at $10,000 and can rise to more than $50,000 for larger nonprofits with complex funding streams, multiple programs, or international operations. These costs don’t cover internal staff time and effort.

The audit process typically begins with planning and preliminary fieldwork, conducted several months before the end of the nonprofit’s fiscal year. The bulk of audit fieldwork—including transaction testing, reviewing year-end balances, and examining the financial statements—occurs after the fiscal year closes. The auditor sends an engagement letter outlining scope, timeline, and fees. From there, the internal accounting team gathers documentation, the auditor tests transactions and controls, and a final report goes to the board.

Key Features of a Nonprofit Audit

Independent audits share several defining characteristics that distinguish them from other financial reviews:

  • Conducted independently: The auditor is not an employee of the organization. This independence gives the audit its credibility. The CPA is contracted specifically to provide an objective assessment, and professional standards require maintaining that objectivity throughout the engagement.
  • Internal control validation: Auditors evaluate the policies and procedures in place to prevent or detect errors, fraud, and misuse of funds. Weak controls are flagged as risks. For example, if one individual handles both incoming payments and bank reconciliations, that would be identified as poor segregation of duties. Control testing extends to automated controls built into accounting systems—for instance, to AI-powered anomaly detection that continuously scans transactions and identifies unusual patterns for human review.
  • Review of financial statements: The auditor examines the statement of financial position, statement of activities, statement of cash flows, and (for many nonprofits) statement of functional expenses. Under GAAP, the statement of functional expenses is required for voluntary health and welfare organizations; other nonprofits often include it voluntarily or because funders expect it.
  • Confirmation that the nonprofit is abiding by state and federal law: Compliance requirements vary, depending on the nonprofit’s funding sources and where it operates. The auditor checks that it meets applicable regulations, especially for organizations receiving federal funds.
  • Recommendations for improvement: Auditors typically issue a management letter and a formal audit report. The audit report is a public-facing document expressing an opinion on the financial statements. The management letter is a separate, usually confidential document that identifies areas for improvement and suggests fixes. Many organizations find these recommendations valuable for strengthening operations, even when nothing is seriously wrong.

Benefits of an Independent Nonprofit Audit

Many nonprofits conduct audits because it’s required. But even when an audit is optional, the process offers several benefits:

  1. Enhances internal controls and accountability: The audit process forces the organization to document and review its financial procedures. Auditors test whether staff actually follow stated policies. Weaknesses can be identified before they cause problems.
  2. Improves donor trust and organizational credibility: An unmodified audit opinion signals to all stakeholders that an objective third party has verified your financial statements. This assurance matters to major donors and institutional funders. Related IRS Form 990 filings are public documents available through databases like ProPublica’s Nonprofit Explorer. Having audited financials that align with your 990 reinforces your credibility.
  3. Increases eligibility for grants and fundraising: Many foundations and government agencies require audited financial statements as a condition of funding. Without a recent audit, your organization may be ineligible for grants that could otherwise support your mission. Some charity-rating organizations also factor audit status into their assessments.

Types of Nonprofit Audits

Not every audit is the same. Here are the main types a nonprofit might encounter:

  • Independent financial audits: An outside CPA examines financial statements, internal controls, and accounting practices, then issues a formal opinion to the board.
  • IRS audits: Compliance with federal tax rules are among nonprofits’ leading challenges. IRS audits are relatively rare but can be triggered by missing Form 990 filings, reporting discrepancies, unusual compensation arrangements, or tips from third parties. Errors can cause fines and—in extreme cases—may be grounds to revoke the nonprofit’s tax-exempt status.
  • Internal audits: Conducted by a nonprofit’s own staff or a dedicated internal audit function. In addition to reviewing accounting processes and general ledger data, internal audits can cover any aspect of operations, such as employee onboarding procedures or procurement. They’re useful for ongoing oversight but don’t produce an independent opinion and won’t satisfy external audit requirements.
  • Single Audit: A Single Audit is substantially more detailed than a standard financial audit because it aims to confirm compliance with federal cost principles and the specific requirements of a given federal funding program or grant. Single Audits are required for nonprofits that expend $1 million or more in federal funds during a fiscal year.
  • Compliance audit: Focuses on whether the organization is following particular rules, such as federal, state, or local regulations; grant terms; or internal policies. For example, a state agency funding a mental health program might require a compliance audit to verify that grant dollars were spent according to the award agreement. Financial review is part of the process, but the primary focus is adherence to the identified rules.
  • Operational audit: Examines internal systems, staffing, and management practices to identify inefficiencies. The focus is organizational effectiveness, not financial statement accuracy. An operational audit may seek to uncover bottlenecks in the grants management process or determine whether program delivery needs restructuring. It can be conducted internally or by an outside consultant.

When Does a Nonprofit Need a Financial Audit?

Audit requirements are contingent upon a nonprofit’s funding sources, location, and organizational bylaws. Here are the most common justifications:

  1. As a part of federal funding requirements: The revised Office of Management and Budget Uniform Guidance raised the Single Audit threshold from $750,000 to $1 million, effective for federal awards issued on or after October 1, 2024. Organizations with awards issued before that date may still be subject to the $750,000 threshold for those specific grants, so nonprofits managing a mix of older and newer federal funding need to track each award’s requirements separately. Federal funds include direct grants from federal agencies plus pass-through funds from state or local governments.
  2. As mandated by state law: Some states require audits for organizations that fundraise in the state. Others require audits if the charity receives state funding, with some including financial thresholds based on revenue or contributions. Requirements vary widely; the National Council of Nonprofits maintains a 50-state chart of these rules.
  3. As outlined by donor or grant requirements: Private foundations often demand audited financial statements from grantees, and some major donors expect them as well. These requirements play an important role in grant accounting because being unable to provide a required audit could disqualify a nonprofit’s application.
  4. As required by board mandates or bylaws: A nonprofit’s own governing documents may require periodic audits, regardless of external rules. Bylaws commonly specify that audits be conducted annually or every two or three years.
  5. In scenarios where an audit is optional but recommended: Even when not required, an audit may make sense whenever demonstrating accountability is important. For example, audits make sense during leadership transitions, to protect incoming board members from liability for past issues—likewise, when a nonprofit is pursuing major new funding sources, or when internal concerns arise about financial management.

Tips for Selecting an Independent Nonprofit Auditor

Choosing an auditor should be approached with the same care as hiring a key staff member. Not all CPAs have nonprofit experience, so look for firms that specialize in nonprofits. If federal funds are part of the revenue mix, consider whether the organization needs a firm that handles Single Audits—not all firms do. State CPA societies maintain lists of practitioners experienced in tax-exempt organizations; state associations of nonprofits also may offer referrals. Alternatively, ask other nonprofits who they use and whether they’d recommend them.

Evaluate independence requirements carefully. Under professional standards, a CPA firm that prepares a nonprofit’s financial statements or handles its bookkeeping cannot also serve as an independent auditor.

Request proposals from at least two or three firms. Ask about their nonprofit client base, their approach to working with similar-sized organizations, and how they’ll collaborate with your accounting team to prepare for the audit. Check references carefully and consider selecting references from a client list, rather than from the firm’s own suggestions. Understand fees before signing the engagement letter, which should outline the audit’s scope, timeline, and responsibilities, as well as the fees.

Once the auditor is engaged, the board—not only staff—should maintain contact with them. Best practice is for an audit committee to serve as the auditor’s primary point of contact, with the committee reviewing the audit report and management letter and helping the full board understand the findings. For smaller boards, where a separate committee isn’t practical, the executive committee or the full board can take on this oversight role.

Nonprofit Audit Checklist

Smoother audits happen when clients are prepared—plus, superior preparation tends to lower audit fees. Auditors typically bill by the hour, so time spent chasing down missing records or clarifying incomplete information drives up fees. Once engaged, the auditor will give you a “Provided by Client” (PBC) list outlining exactly what they need. The categories are predictable, so you can start gathering materials before fieldwork begins—ideally, as part of your year-end close process. Consider organizing requests in a shared-folder structure that mirrors the PBC categories. Designate one person, often the controller or finance director, to be responsible for reviewing and approving each PBC item before it goes to the auditors. This creates accountability, reduces back-and-forth communications, and helps make sure all the items given to the audit team are complete and consistent.

The list below covers the major types of materials auditors tend to request. Not every item applies to every nonprofit, but organizations that keep these records organized throughout the year spend less time on audit prep and may benefit from lower fees.

  1. Financial Statements and Records

    Run the financial statements for the fiscal year being audited: the statement of financial position, statement of activities, statement of cash flows, and statement of functional expenses (if applicable). Include the trial balance, general ledger reports, and any subsidiary ledgers, such as those for accounts receivable, accounts payable, and fixed assets. Auditors will trace transactions from the general ledger to supporting records, so having clean, reconciled records speeds the process. If there are any known discrepancies or unresolved items, flag them up front—don’t wait for the auditor to find them.

  2. Tax Documentation

    Provide the most recent Form 990 along with W-2s, 1099s, payroll tax filings, and any correspondence with the IRS. The audit team will likely want to see the prior year Form 990, as well. Dig up all documentation related to the organization’s tax-exempt status determination letter. Auditors compare Form 990 data to the audited financial statements to establish consistency, so discrepancies between the two will need explanation. Keep in mind that Form 990 is a public document, so accuracy is important for both compliance and public perception.

  3. Compliance Reports and Records

    Gather documentation related to state-level regulatory requirements. This includes charitable registration renewals, annual reports required by the attorney general or secretary of state, and sales tax exemption certificates. Include any licenses or permits required for the nonprofit to operate. Some states require specific certifications for organizations providing certain services. Auditors will verify that the nonprofit is current on its registration and reporting obligations in every state where it operates or solicits donations.

  4. Governance Documentation

    Auditors review governance documentation to assess the control environment and verify that major decisions were properly authorized. Assemble all board-meeting minutes for the fiscal year, along with a current list of board members and officers. Add the organizational bylaws, articles of incorporation, and any board-adopted policies. Auditors will be looking for board approval of things like executive compensation, significant contracts, or related-party transactions. Other standard requests include policies that cover conflicts of interest, whistleblowers, document retention, and gift acceptance.

  5. Internal Control Documentation

    Provide the organization’s written policies and procedures for financial operations. Examples include how cash and checks are handled, how expenses are approved, who has authority to sign checks or authorize transactions, and how duties are distributed among team members. Include user access lists for accounting software, showing who can enter, approve, and post transactions. If the organization uses AI-powered monitoring tools—such as anomaly detection that flags unusual transactions or expense audit agents that review submissions for policy violations—document these automated controls, as well. If any controls exist in practice but aren’t documented, the audit is a good occasion to formalize them. Auditors test whether stated controls are actually followed, so be prepared to walk them through the process.

  6. Expense and Revenue Confirmation

    Auditors verify revenue and expenses by testing a sample of transactions against third-party records, so have supporting documentation ready for items they select. On the expense side, auditors are apt to select major purchases, contracts, and unusual or large transactions, in addition to random sampling, so have invoices and backup organized. On the revenue side, compile evidence of donor restrictions on contributions, pledge agreements, and documentation supporting significant receivables. Bank statements, monthly reconciliations, and investment statements should be organized and accessible for all accounts. Auditors often send confirmation requests directly to banks, donors, and vendors, so have contact information available for key accounts.

  7. Grant Documentation

    For each grant the nonprofit holds, assemble the award letter, approved budget, any amendments, and records of expenditures against the grant. Include documentation showing how costs were allocated if staff or expenses are divided among multiple funding sources. AI tools can assist here, too, by automatically scanning grant documents for conditional language that affects revenue recognition, or suggesting fund codes based on transaction patterns—which cuts down on miscoding that often surfaces during audits. Auditors need this information to verify that grant revenue is properly recorded and that restricted funds are tracked correctly. If the nonprofit is subject to a Single Audit, be ready to show additional compliance documentation, such as program reports submitted to funders and time-and-effort records for grant-funded staff.

  8. Payroll and Personnel Details

    Payroll is generally one of the largest expenses on a nonprofit’s books, so expect auditors to examine it carefully. Start with payroll registers and personnel files that show salary authorizations and any pay rate changes during the year. Timekeeping records are important, particularly for grant-funded positions where wages must be allocated to specific programs. Auditors may test whether employees charged to grants actually worked on those programs. If the organization uses contractors, gather 1099 forms and contracts, along with documentation supporting why each worker was classified as a contractor, rather than as an employee. For executive compensation, be ready to show board approval.

  9. Year-End Closing Documentation

    Provide records of all year-end adjustments, accruals, and journal entries made to close the books. Include reconciliations of major balance sheet accounts, such as cash, receivables, payables, fixed assets, and deferred revenue. Be ready to explain any material adjustments to revenue or expense accounts. Organizations that use AI-assisted close tools may find this documentation already compiled by continuous monitoring agents that process transactions and highlight discrepancies throughout the year. For restricted funds, have documentation showing how net assets were classified, plus any releases from restrictions during the year. Document the rationale for estimates, such as allowances for doubtful accounts or useful lives assigned to fixed assets. Auditors will want to understand not just what adjustments were made, but why.

  10. Any Prior Audit Materials

    Auditors review prior-year findings to see whether recommendations were addressed, so it’s a good idea to revisit previous audit documents. Unresolved issues from prior years often receive extra scrutiny. If you’ve recently changed auditors, be prepared to authorize communication between the new and preceding audit firms. For first-time audits, gather any reviews or compilations previously performed, along with documentation supporting opening balances.

How Does Software Help Prep for an Audit?

In the past, much audit prep stress came from hunting down documents, reconciling accounts, and pulling reports from disconnected systems. Today’s purpose-built nonprofit accounting software can alleviate much of this burden.

When it’s time to prepare for an audit, accounting software can let the team generate trial balances, grant reports, and supporting schedules quickly. Integrated document management means invoices, contracts, and approvals can be linked to the transactions they support. When auditors ask for documentation, staff can pull it directly, instead of searching through file cabinets. And because the records are digital, they can be shared electronically, which is increasingly common as remote audits become the norm. Automated bank reconciliations reduce the manual work that often creates bottlenecks at year-end. Fund accounting software tracks restricted and unrestricted funds separately, which simplifies net asset classification and makes it easier to demonstrate compliance with donor restrictions.

AI features can also help automate audit prep. Anomaly detection can identify unusual transactions throughout the year, so potential control issues are addressed before auditors arrive, instead of surfacing as findings. AI-assisted reconciliation matches transactions across bank feeds and subsidiary systems, accelerating close and reducing manual effort. Some systems can even summarize program data into narrative form for grant reports or answer on-demand questions about budget-to-actuals.

The goal is accurate, organized records that make the auditor’s job straightforward. With good nonprofit accounting software, the internal team should have a big head start on addressing issues by the time the auditors arrive.

How NetSuite Helps Nonprofits Manage Their Financial Statements

Manual processes and disconnected systems make audit prep slow and error-prone. NetSuite ERP for Nonprofits brings daily operations together in a single database and includes NetSuite Nonprofit Accounting Software to handle nonprofit-specific complexities. NetSuite tracks donations, grants, and pledges so staff can see restrictions and fund balances at any time. The accounting team can generate audit-ready financial statements and reports, including statements of financial position, statements of activities, and statements of functional expenses, without resorting to manual consolidation. Real-time dashboards show budget-to-actual performance by program, grant, or funding source, with AI highlighting variances or spending trends that warrant a closer look.

Built-in controls strengthen the audit trail. AI-assisted bank reconciliations match transactions and flag discrepancies before they compound. Continuous monitoring agents track restricted fund balances and identify anomalies, such as unusual spending patterns or expiring restrictions, before they become audit findings. Role-based permissions and approval workflows create built-in separation of duties, which auditors look for when evaluating internal controls, and every action is logged with time stamps and user IDs. Integrated document management attaches supporting documentation to transactions, and, because NetSuite is cloud-based, staff and auditors can access records from anywhere.

A nonprofit audit is an opportunity to validate financial practices, strengthen internal controls, and build credibility with funders, donors, and the public. The key is knowing which type of audit applies to your organization and preparing accordingly. Whether an audit is required by law, mandated by grantors, or undertaken voluntarily, preparation is what separates a smooth process from a stressful one. The checklist presented above and the right accounting software can help keep the process on track and on budget.

Nonprofit Audits FAQs

How long does a nonprofit audit typically take?

The timeline depends on the nonprofit’s size, the complexity of its finances, and how prepared the accounting team is with regard to documentation. The entire process—from initial planning to the delivery of the final audit report—can take anywhere from six weeks to several months. In general, organizations that reconcile accounts monthly and maintain organized records experience shorter, smoother audits.

Does a nonprofit need an audit?

Not all nonprofits are legally required to conduct audits. Requirements depend on the level of federal funding, state laws (which vary widely), grant terms, and the nonprofit’s own bylaws. As a practical matter, even when not required, audits can be valuable for demonstrating accountability to donors and funders.

What happens if a nonprofit fails an audit?

Auditors don’t issue pass/fail grades. For an independent financial audit, the auditor issues an opinion on whether the financial statements are fairly presented. A qualified or adverse opinion signals material issues that the organization will need to address, which can affect funder confidence and future funding. An IRS audit is different—if the IRS finds significant compliance problems, the nonprofit could face fines or, in serious cases, lose its tax-exempt status.

How do you prepare for a nonprofit audit?

Start by gathering the documentation your auditor requests, often called a “Provided by Client” or PBC list. This typically includes financial statements, tax filings, governance records, grant files, and internal control policies. Reconcile all bank accounts, resolve outstanding transactions, and make sure internal controls are documented. Consider assigning one person to coordinate requests and review materials before they go to the auditors.

What triggers an audit for a nonprofit?

Common triggers for independent audits include federal funding above the Single Audit threshold, state law requirements, grant or donor requirements, and board mandates in the nonprofit’s bylaws. Some organizations also conduct audits voluntarily to strengthen credibility. IRS audits are triggered differently. Common red flags include incomplete or inaccurate Form 990 filings, unusual compensation arrangements, fundraising expense discrepancies, large foreign activities, and whistleblower complaints or tips from third parties.