Compliance audits investigate your organization’s obedience to federal, state, and local laws. It’s less of a financial audit (though, it normally includes that to some extent) and more of a check on compliance requirements and adherence to established bylaws. There are a few situations where your nonprofit organization may be required to conduct an audit.

Are there different types of nonprofit audits?

A nonprofit audit is an independent examination of a nonprofit organization’s financial records, conducted by an audit firm or an independent auditor. The primary purpose of the audit is to verify that the organization’s financial statements are accurate and compliant with generally accepted accounting principles (GAAP). If the organization does business with other taxpayers and entities, the IRS audit of the latter might spill over to the former. 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.

• Other items (e.g., material contributions, voting memberships, expensive lead sponsorships, below-market or no-fee audits) concerning relationships with board members or employees are problematic on their own merit.
• This blog post delves into the intricacies of audited financial statements, exploring their importance, the challenges involved, and the best practices for preparing them.
• Moreover, understanding how nonprofits make money can also illuminate why an audit is necessary.
• Based on Form 990 data, of the 135,000 nonprofits with revenues over $1 million in the most recently filed tax year, nearly 88,000 (65%) indicated on the Form 990 that they had an audit.
• This enables us to craft customized strategies that align with your corporate objectives.

Our Clients

You may want to go over your organization’s budget and financial policies to check for adherence to these policies. You’ll also want to verify that donor restrictions are properly documented and adhered to when using funds. Remember, to keep copies of all documentation received with your gifts (donor acknowledgement letter, cancelled check, grant agreements, etc.).

• This results in an audit opinion that can enhance credibility with donors, grantors and other stakeholders, bringing trustworthiness to your donation appeals.
• When the IRS receives responses, it generally reviews them to determine whether and how those organizations are complying with applicable tax-exempt law and then decides what, if any, further action is appropriate to be taken.
• They may also assess the internal audit process to ensure it is functioning properly.
• They are unusually responsive to all of our needs and we look forward to many years of working with them.
• Request proposals from multiple firms before making your final decision to guarantee an informed and strategic choice.
• Off-the-shelf accounting software does not have the proper internal controls to meet this SAS requirement.

Our Mission

Examining successful nonprofit audits can provide valuable insights into best practices and effective strategies. These real-life examples https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ illustrate how different organizations have navigated challenges to produce accurate and reliable audited financial statements. A third-party auditor or firm certified in single audits conducts this type of audit to ensure the nonprofit has used federal funds for their intended purpose. The auditor also evaluates the effectiveness of the entity’s internal controls over compliance with federal program requirements.

The reporting phase ensures transparency and provides actionable insights for enhancing financial accountability within the organization, reinforcing donor trust and regulatory compliance. This phase is critical for pinpointing discrepancies and ensuring transparency within the organization’s financial practices. It demonstrates to donors, members, directors, and regulators that the firm does its work transparently, comprehensively, and above board, and thus, the public has more confidence in the non-profit. Once the initial contact letter from the agency arrives, nonprofit executives should respond and move promptly.

Understanding Nonprofit Audits: A Beginner’s Guide

• From planning and compliance to strategic advisory services, our solutions offer a full suite of financial statement audit services.
• By following these steps, you can ensure that your organization is well-prepared for an audit, minimizing stress and maximizing the opportunity for improvement.
• The most common type of audit is the financial statement audit, which is conducted by an independent certified public accountant (CPA).
• Read more detailed information about the staff's role and preparing for the auditor's fieldwork.
• 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.

The IRS will indicate a time and date for the field audit but will nevertheless work with the organization to establish a mutually optimal day for the audit. In preparation, the financial compilation of pertinent documents is crucial as is the brevity and honesty of answers. Once you’ve gathered all the necessary documents for your audit, you can start organizing them for the auditor’s review.

Increase Organizational Efficiency

Adding an audit requirement to your organization’s bylaws may seem redundant for many nonprofits. The additional cost to perform these audits may even feel improbable, but there are several benefits for nonprofits that perform regular internal audits. If your nonprofit relies on grant funding, you’ve probably noticed that these organizations want financial reports that have been audited. Every CPA firm has a couple of nonprofit clients they handle, but this does not make them experts. This can be a problem because these auditors likely aren't aware of all the rules for nonprofits and are not able to provide truly useful or beneficial advice that will help you improve your overhead spending and maximize your impact.

These requirements underscore the necessity for nonprofits to stay vigilant about their financial practices and ensure adherence to legal mandates. Regular audits help in identifying discrepancies and improving financial management, thus fostering trust among donors and stakeholders. Your first step in preparing for a nonprofit audit is to look at the financial statements of your organizaiton. Financial statements form the foundation of an audit, so your records must be accurate and complete. Take the time to carefully examine each financial statement, ensuring that all income, expenses, assets, and liabilities are properly recorded and classified.