Nonprofit Audit: When You Need One and What It Costs

No. The IRS requires an annual return from the 990 series, not an audit, and the return is prepared from your books.

Audit requirements come from three other places: state law, usually tied to charitable solicitation registration above a revenue threshold; a funder or lender writing it into an agreement; and federal award rules, where organizations expending federal money above the Single Audit threshold must have a Single Audit.

Your own bylaws may also require one, which is worth checking since organizations sometimes discover the requirement years after adopting the document.

Separately, the IRS can examine an exempt organization. That is an examination rather than an audit in the accounting sense, and it is not something you commission.

There is no single national threshold, which is why figures quoted online contradict each other.

Many states require an audit above a revenue level, commonly tied to charitable solicitation registration, and those thresholds vary substantially between states. Several states have changed theirs in recent years. Some measure gross revenue and others measure contributions received, which produces different answers for the same organization.

Check with your state's charity regulator, usually within the Attorney General's office, and check every state where you are registered to solicit, since the strictest requirement governs.

Federal awards are separate, with a Single Audit required above a specified level of federal spending in a year.

It varies enough by region and complexity that a single figure would mislead. What is dependable is what drives it.

Complexity matters more than size. An organization with many restricted funds, a federal award or disorganised records costs more to audit than a larger one with simple funding and clean books.

Preparedness is the lever you control. An auditor reconstructing your bank reconciliations bills for it, and that work is avoidable.

First-year engagements cost more, because opening balances and systems have to be established.

Get three quotes from firms with real nonprofit experience, ask each what would reduce the fee, and ask whether a review would satisfy whoever is requiring this.

The level of assurance and the amount of work behind it.

In an audit, the accountant tests transactions, confirms balances with third parties such as banks, assesses your internal controls, and issues an opinion on whether the statements are fairly presented.

In a review, they perform analytical procedures and make inquiries, without testing transactions, and provide limited assurance, essentially that nothing came to their attention suggesting material misstatement.

A review typically costs somewhere between a third and a half of an audit, and many funders accept one. Ask before commissioning the more expensive service, because organizations frequently buy an audit for a requirement a review would have met.

Have the documents ready before the auditor arrives, because most of the fee is them doing work you could have done.

Twelve completed bank reconciliations. A schedule of restricted funds with balances and the underlying grant agreements. Board minutes for the year. Payroll records and contractor 1099s. A fixed asset register with depreciation. Signed conflict of interest statements.

The restricted funds schedule is usually the hardest, because in general accounting software restrictions are tags rather than fund balances, so what each fund holds has to be reconstructed.

Ask the auditor for their document request list in advance and work through it before fieldwork starts. Organizations that do this finish faster and pay less.

A specific audit required of organizations that expend federal award money above a threshold in a fiscal year, conducted under federal requirements rather than ordinary audit standards.

It covers more than your financial statements. It examines compliance with the requirements attached to each federal programme: allowable costs, eligibility, reporting, procurement and cash management among them.

It is more demanding and more expensive than a standard audit, and it requires an auditor experienced in the framework. Not every firm does them well.

The threshold is set federally and has been revised, so confirm the current figure before assuming you are below it. Note that it turns on federal money expended in the year, not received, and that federal money passed through a state or another nonprofit still counts.

The board, not management, and the distinction matters.

The auditor's role is to provide independent assurance, including to the board about the financial statements management prepared. An auditor selected and directed solely by the person whose work they are examining is not independent in substance, whatever the engagement letter says.

Larger organizations use an audit committee of the board for selection and to receive the results, and to meet the auditor without management present at least once. That last practice is worth adopting even at small scale, because it is where an auditor will raise a concern they would not put in writing.

Consider rotating firms periodically. There is no fixed rule for nonprofits, and long unbroken relationships can dull independence.

Usually not, if nothing requires one. It is a purchase, and it should compete with other uses of the same money.

Good reasons to buy one anyway: imminent applications to funders who require audited statements, taking on debt, approaching your state's threshold, or a board that genuinely cannot obtain assurance otherwise.

Weak reasons: it feels more professional, or a director from the corporate world assumes it is standard practice.

For an organization under a few hundred thousand dollars with straightforward funding, the same money spent on a competent bookkeeper and a disciplined monthly close buys far more actual financial control. An audit looks backwards once a year; a monthly close catches problems while they are still small.