Nonprofit Financial Audits: What Organizations Should Prepare For

Nonprofit leaders are responsible for more than keeping the books balanced. Donors, boards, grantors, lenders, and regulators may all rely on the organization’s financial information for different reasons, and in some circumstances an independent audit becomes part of that accountability.

An audit can place greater scrutiny on the financial statements and the records supporting them, but the requirement to obtain one depends on the organization’s funding, location, agreements, and regulatory circumstances.

This guide explains where nonprofit audits fit, what organizations should have ready before the engagement begins, and how stronger accounting practices can make audit preparation less disruptive.

What Happens During a Nonprofit Financial Audit?

When a nonprofit undergoes an independent financial audit, an outside accounting firm examines the organization’s financial statements and selected evidence behind the reported amounts. The work may include testing transactions, reviewing account support, considering financial controls, and examining areas where significant reporting problems could arise.

The independent auditor ultimately communicates a professional conclusion through an audit report. Management, meanwhile, remains responsible for the organization’s accounting records and financial statements.

What Can Put a Nonprofit on the Audit Path?

For one nonprofit, an independent audit may be tied to a grant agreement; for another, it may arise from state filing rules, federal funding, financing terms, or a board decision. Audit planning should therefore begin with the organization’s actual obligations rather than an assumption that every nonprofit follows the same requirement.

Greater Confidence in Financial Reporting

Independent scrutiny can give boards, funders, lenders, and other users additional confidence when they rely on the organization’s financial statements.

Accountability for Resources

Nonprofits often manage restricted contributions, grants, program spending, and other funds that carry specific expectations. An audit adds an independent layer of examination to the financial reporting surrounding those resources.

Requirements Attached to Funding or Operations

An audit may become necessary because of state charity rules, federal award requirements, grant terms, financing arrangements, or another obligation affecting the organization.

Stronger Board Visibility

The audit process can also give the board or audit committee a clearer view of significant financial-reporting matters identified during the engagement.

Financial Information Commonly Included in Nonprofit Reporting

Nonprofit financial reporting uses several statements and disclosures to show what the organization controls, how resources changed during the period, and where money was spent.

Statement of Financial Position

This statement lays out what the nonprofit owns and owes at the reporting date, together with the remaining net resources available to support its mission.

Statement of Activities

This report follows the financial activity of the nonprofit across the reporting period, showing how incoming resources and spending affected its net assets.

Statement of Cash Flows

This statement traces the organization’s actual movement of cash and separates those movements according to the activities that generated or used the funds.

Analysis of Expenses by Nature and Function

Nonprofits report expenses in a way that connects the type of cost—such as salaries, occupancy, or professional fees—with the activity it supports, such as programs, management, or fundraising. This analysis may be presented within the financial statements or related notes rather than necessarily as a separate statement.

Notes to the Financial Statements

The notes provide context that the primary statements cannot show on their own, including accounting policies, restrictions, commitments, estimates, and other relevant financial information.

Gathering necessary documentation for the audit

Audit preparation is much easier when the accounting records can be traced back to organized support. Depending on the organization, this may include bank records, reconciliations, payroll information, grant agreements, contribution records, board documentation, tax filings, fixed-asset records, debt agreements, and schedules supporting significant account balances.

QMK Consulting can assist management with the accounting side of that preparation by organizing financial records, completing reconciliations, improving supporting schedules, and identifying documentation gaps before information is provided to the independent auditor.

When a Full Audit Is Not the Required Engagement

An independent audit is not the only type of CPA engagement involving financial statements. Depending on what a regulator, lender, funder, or other party requires, a nonprofit may encounter alternatives such as a review or compilation. Choosing a compilation, review, or audit changes both the work expected from the CPA and the degree of confidence the resulting financial information is intended to provide.

The appropriate option should be determined from the organization’s actual reporting requirement rather than selected only because one engagement costs less than another. If a review, compilation, or audit is required, the organization should engage an appropriately qualified accounting professional for that work.

What Can Trigger an Audit Requirement for a Nonprofit?

A nonprofit’s audit obligation can arise from several different sources, including state filing rules, federal awards, grant agreements, financing terms, and contractual commitments. The organization’s location, funding structure, and operating circumstances ultimately determine which requirements deserve closer review.

Federal funding can create an additional requirement. Under current uniform guidance rules, a non-federal entity that reaches the applicable annual federal award expenditure threshold may be required to obtain a single audit or program-specific audit for that fiscal year. State requirements can operate separately and should be checked in each jurisdiction relevant to the organization.

QMK Consulting can support the accounting and reporting preparation surrounding an audit, while the organization and its legal or audit professionals should confirm which audit requirement applies to its specific circumstances.

The audit process for nonprofits

The audit process for nonprofits generally involves three main stages:

1. Determine the Requirement and Select the Auditor

Management should first understand why the audit is being requested and what type of engagement is required. The organization can then select an independent accounting firm with the qualifications and nonprofit experience appropriate for the work.

2. Prepare Records and Respond to Audit Requests

The independent auditor will request financial records and supporting evidence based on the scope of the engagement. Management may need to provide account schedules, transaction support, agreements, reconciliations, explanations, and access to other relevant information.

3. Close the Audit and Address the Results

Once the fieldwork is finished, the independent auditor finalizes the engagement and communicates the outcome to the organization. Management and the board should then review any significant reporting or control matters that require follow-up.

Tips for nonprofits during the audit process

Keep Financial Records Current

Reconciliations and supporting schedules should be maintained throughout the year rather than reconstructed immediately before the audit begins.

Establish One Point of Coordination

Assigning responsibility for auditor requests helps prevent duplicated responses, missing documents, and unnecessary delays.

Resolve Known Accounting Issues Early

Unexplained balances, incomplete reconciliations, unsupported transactions, and inconsistent grant records are easier to address before the audit team begins requesting information.

QMK Consulting can support management with year-round accounting, reconciliations, reporting, and audit-readiness preparation.

When Audited Financial Statements Become Important

For organizations that are required—or choose—to obtain an independent audit, the resulting financial statements and audit report can serve several important audiences.

• Boards and Governance Leaders: Additional outside scrutiny can support financial oversight.

• Grantors and Funders: Certain funding arrangements may require audited information.

• Lenders: Financing agreements may specify financial reporting or audit requirements.

• Donors and Stakeholders: Some organizations use audited statements to provide additional financial transparency.

• Regulators: State or federal rules may require audit-related filings in defined circumstances.

How Better Preparation Can Reduce Audit Disruption

Disorganized records can create extra work once an audit is underway. Keeping reconciliations current, maintaining supporting documentation, resolving unusual balances promptly, and preparing requested schedules before fieldwork begins can make the process more efficient.

QMK Consulting can assist management with the accounting preparation behind the engagement, helping create cleaner records and more organized financial support for the independent auditor.

FAQs

What usually makes an independent audit necessary for a nonprofit?

The trigger may come from state charity rules, federal awards, a grant agreement, financing, a contract, or another requirement affecting the organization. Because the rules differ by circumstance and jurisdiction, nonprofit leaders should confirm the requirement that applies to their organization rather than assume every nonprofit follows the same audit schedule.

Does a nonprofit have to publish its audit report on its own website?

Not necessarily. Some organizations voluntarily publish audited statements for donors or other stakeholders, while certain filings may also be available through regulators or other public sources. Form 990 is generally subject to public-disclosure rules, but it is a tax information return and should not be confused with an independent financial-statement audit.

What financial information should be organized before the auditor arrives?

Management should have current financial statements, reconciliations, supporting schedules, bank and investment records, payroll information, grant and contribution documentation, debt records, significant agreements, and other support connected with material account balances. The exact request list will depend on the auditor and the engagement.