Non-Profit Organization Audit: Requirements, Process, and How to Prepare

A non-profit organization audit is an independent examination of a nonprofit’s financial statements, internal controls, and compliance with applicable regulations. It provides credibility to donors, grantors, regulators, and board members—assuring them that the organization’s funds are being managed responsibly and in accordance with its stated mission.

This guide covers everything your executive director, CFO, or audit committee needs to know: when an audit is legally required, what the process involves, how to prepare your team, and how to work with an external auditor efficiently.

When Is a Non-Profit Organization Audit Required?

Whether your nonprofit is legally required to have an audit depends on several factors:

Federal Single Audit (Uniform Guidance / 2 CFR Part 200)

Nonprofits that expend $750,000 or more in federal awards in a fiscal year are required to undergo a Single Audit (formerly known as an A-133 audit). A Single Audit examines both the nonprofit’s financial statements and its compliance with the terms and conditions of its federal grants. It is conducted under Government Auditing Standards (Yellow Book) and the Uniform Guidance.

State Requirements

Many US states require charities registered to solicit donations to have an audit above certain revenue thresholds. These thresholds vary by state — for example:

• California: Audit required if gross revenues exceed $2 million.
• New York: Audit required if gross revenues exceed $750,000.
• Texas: Audit required if annual contributions exceed $500,000.

Always check your state’s charitable solicitation registration requirements. Most states’ Attorney General websites publish current thresholds.

Grantor and Donor Requirements

Private foundations, government grantors, and major institutional donors frequently require audited financials as a condition of a grant award, regardless of whether a statutory audit is mandated. Some grantors require a full audit; others accept a review engagement. Review the terms of each grant agreement carefully.

Voluntary Best Practice

Even if not legally required, organizations with annual revenues of $500,000 or more are generally encouraged to commission an annual audit. The Better Business Bureau Wise Giving Alliance and other charity watchdogs consider an independent audit a hallmark of organizational accountability.

Types of Non-Profit Financial Engagements

Not every external engagement is a full audit. Here’s how the three most common engagement levels differ:

• Audit: The highest level. Provides an opinion on whether financial statements are presented fairly in accordance with GAAP. Requires extensive testing of transactions, balances, and controls. Required for Single Audit and most large grant agreements.
• Review: A limited assurance engagement. The CPA performs analytical procedures and inquiry but does not test transactions. Provides limited (negative) assurance: “nothing came to our attention indicating the financials are materially misstated.” Less expensive than an audit; accepted by some grantors.
• Compilation: The lowest level. The CPA compiles financial statements from management’s data but provides no assurance. Not acceptable for most grant or compliance purposes.

The Non-Profit Audit Process: Step by Step

1. Engagement planning: The auditor issues an engagement letter outlining scope, fees, timeline, and responsibilities. Management reviews and signs. A pre-audit meeting establishes the audit schedule and key contact points.
2. Fieldwork — interim: The auditor may visit the organization months before year-end to test internal controls, review processes, and identify any issues that can be addressed before year-end.
3. Year-end close: Your team completes the fiscal year-end close and prepares a trial balance and supporting schedules. The earlier and more accurately this is done, the smoother the audit.
4. Fieldwork — year-end: The auditor performs substantive testing of financial statement line items, verifies revenue recognition and fund accounting, confirms receivables and payables, tests payroll, and reviews grant compliance.
5. Draft financial statements: Management prepares draft GAAP financial statements (Statement of Financial Position, Statement of Activities, Statement of Cash Flows, Statement of Functional Expenses). The auditor reviews and provides comments.
6. Audit findings communication: The auditor communicates findings to the audit committee — including any internal control deficiencies or compliance issues — before issuing the final report.
7. Audit report issuance: The auditor issues the opinion letter and the audited financial statements. For Single Audits, this also includes the Schedule of Expenditures of Federal Awards (SEFA) and findings reports.
8. Management letter: The auditor issues a management letter with recommendations for improving internal controls and accounting practices. While not legally required, it is a valuable tool for strengthening the organization.

Non-Profit Fund Accounting: What the Auditor Reviews

Non-profit accounting is governed by ASC 958, which requires organizations to classify net assets based on donor-imposed restrictions:

• Net assets without donor restrictions: Funds available for general use at board discretion.
• Net assets with donor restrictions: Funds restricted by the donor for a specific purpose (purpose restrictions) or to be used after a specified date (time restrictions). These cannot be used for general operating purposes until the restriction is met.

The auditor will specifically test that restricted funds are being tracked, segregated, and released from restriction appropriately. Misclassification of restricted funds is one of the most common audit findings in the non-profit sector.

How to Prepare Your Non-Profit for an Audit

Before fieldwork begins:

• Reconcile all balance sheet accounts and resolve any unexplained differences.
• Prepare a complete and accurate trial balance.
• Organize all grant agreements, award letters, and reporting requirements in one place.
• Document the basis for revenue recognition on all grants and contracts (conditional vs. unconditional).
• Ensure payroll records are complete and reconcile to W-2s and 941s.
• Compile board and committee meeting minutes for the full fiscal year.
• Prepare a schedule of all related-party transactions (transactions with board members, officers, or their affiliates).
• Confirm your fixed asset listing is current, including acquisitions and disposals.
• Prepare a functional expense allocation schedule (how expenses are split between program services, management, and fundraising).

During fieldwork:

• Assign a dedicated staff member to respond to auditor requests promptly (target: within 24–48 hours).
• Provide the auditor with a quiet workspace and access to systems and files.
• Communicate proactively if any requested documents will be delayed.
• Don’t wait to be asked — if you know of an error or unusual item, disclose it to the auditor upfront.

Audit Committee Responsibilities in Non-Profit Audits

The audit committee (or the full board in organizations without a dedicated committee) plays a critical governance role in the audit process:

• Selects and oversees the independent auditor — reviews qualifications, independence, and audit plan.
• Reviews and approves the audit engagement letter before management signs.
• Receives and reviews audit findings — meets with the auditor privately, without management present, to ensure open communication.
• Reviews the management letter and ensures management develops a remediation plan for any deficiencies.
• Evaluates auditor performance annually and considers rotation every 5–7 years as a best practice.

How to Choose the Right Auditor for Your Non-Profit

When selecting an audit firm for your non-profit, look for:

• Non-profit sector experience: The firm should have significant non-profit clients and understand ASC 958, fund accounting, and functional expense allocation.
• Single Audit experience (if you receive federal awards): Single Audits require proficiency in Government Auditing Standards and Uniform Guidance compliance testing. This is a specialty — not all firms can perform it.
• References from similar organizations: Ask for references from non-profits of similar size, revenue profile, and mission area.
• Reasonable fees: Non-profit audit fees vary widely. Get at least two proposals for comparison. Be cautious of unusually low bids — they may indicate insufficient audit procedures.
• Communication and responsiveness: Your audit firm should be a partner, not just a compliance vendor. Look for proactive communication and willingness to provide guidance year-round.

GuzmanGray’s audit practice includes experienced non-profit auditors who understand the unique demands of ASC 958 compliance, grant management, and Single Audit requirements. Contact us to learn how we can support your organization →