Running a nonprofit organization means managing mission-focused work while adhering to critical compliance and financial standards. At SSL Associates, we understand nonprofit organizations' unique challenges in meeting audit requirements and financial accountability. Our accounting firm specializes in nonprofit audits, and this guide outlines when and why a nonprofit might need an independent audit. Below, we offer insight into audit types, triggers, and considerations for achieving robust financial health and compliance.
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Understanding the Role of a Nonprofit Audit
An audit in the nonprofit sector is a thorough examination of an organization's financial statements by a certified public accountant (CPA). While IRS audits do occasionally affect nonprofits, most are independent audits initiated by the nonprofit itself, either to meet funding requirements, state regulations, or best practices for financial transparency. The audited financial statement prepared from this process is an essential tool that assures stakeholders and regulatory bodies that the nonprofit’s financial statements accurately represent its financial position and activities.
Nonprofit audits are guided by generally accepted accounting principles (GAAP) to guarantee that audited financial statements are reliable and consistent across the sector. Audits offer insights into financial practices and expose potential areas for improvement, which can enhance organizational efficiency and donor confidence. In addition, an independent audit from a certified public accountant provides an unbiased assessment, helping nonprofit leaders make informed financial decisions.
Types of Audits Relevant to Nonprofits
Each audit type serves a distinct purpose and empowers nonprofits to operate with confidence and integrity.

1. Independent Financial Audit
An independent financial audit is a comprehensive review conducted by an external, certified auditor. It covers an organization’s financial statements to ensure they accurately represent the organization’s activities. This type of audit is often required by federal funding agencies, private foundations, or local governments that mandate audited financials as part of their grant agreements. An independent audit is also essential for validating an organization’s adherence to GAAP and internal controls.
2. Single Audit
Under federal law, nonprofits that expend over $750,000 in federal funds within a fiscal year are required to undergo a single audit. This audit evaluates how federal funding is spent and helps ensure compliance with the Uniform Guidance issued by the Office of Management and Budget. Single audits are crucial for nonprofits receiving significant federal support, as they combine multiple audits into a single, focused examination.
3. IRS Audit and Compliance Checks
Unlike independent audits, IRS audits focus specifically on a nonprofit’s adherence to tax regulations and filing requirements. Although these are rare, IRS audits can occur if an organization’s Form 990 reveals discrepancies or other issues. The IRS may conduct either a field audit (on-site review) or a correspondence audit (conducted remotely), depending on the complexity of the issues under review. A nonprofit’s compliance with tax laws and reporting requirements is central to maintaining tax-exempt status and avoiding penalties.
Key Triggers for Audit Requirements

Let’s discuss the requirements and conditions that can prompt audit needs for nonprofits at the federal, state, private, and governance levels.
Federal Requirements
As mentioned above, nonprofits receiving federal funds are often subject to specific audit and compliance standards set by federal agencies. In addition to single audits for larger funding amounts, other federally required audits or reviews may apply, depending on the funding agency’s guidelines. These audits ensure that recipients use federal funds responsibly, adhere to grant conditions, and comply with relevant federal regulations. These may include maintaining strong internal controls and financial reporting practices.
State and Local Government Requirements
State law on nonprofit audit requirements varies significantly. For instance, states like New York and California mandate audits for nonprofits with gross annual revenue or contributions exceeding specific thresholds. In Illinois, nonprofit audit requirements mandate that charitable organizations with annual revenue over $300,000 file audited financial statements with the state’s Attorney General as part of their registration.
State and local governments might also require audits for charitable organizations involved in public fundraising, especially if a nonprofit’s annual revenue or contributions surpass set limits. West Virginia and Virginia are two states with specific audit requirements for nonprofits, especially those engaged in charitable solicitation or state-contracted services. Nonprofits should consult state guidelines to determine if an audit is needed based on their revenue levels or fundraising activities.
Private Foundation and Grant Requirements
Many private foundations, donors, and grant providers require nonprofit organizations to submit recent audited financial statements when applying for funds. These audits assure funders of the organization’s credibility and responsible financial management. Whether for a grant proposal or meeting a donor’s guidelines, maintaining an updated and audited financial statement can be critical for funding success.
Internal Governance and Policy Decisions
In some cases, a nonprofit’s board of directors may require an independent audit to fulfill fiduciary responsibilities and maintain transparency with stakeholders. An audit can serve as a financial health check as it demonstrates the nonprofit’s commitment to operating in a responsible manner. Regular audits can also offer valuable insights into internal controls and financial reporting, further reinforcing good governance practices.
Additional Considerations for Conducting Audits
We’ve outlined some additional considerations when planning and conducting audits:
Loan and Credit Requirements
Financial institutions may require audited financial statements before they approve loans or lines of credit for nonprofits. By providing accurate, independently verified financials, nonprofits can satisfy bank requirements and improve their eligibility for financial support.
Benefits of Voluntary Audits
Nonprofits often choose to conduct voluntary audits even when not legally required. This proactive approach can foster trust among donors and grant providers, demonstrating a commitment to transparency and fiscal responsibility. For charitable organizations with ambitious growth plans, a voluntary audit can also serve as a foundation for refining financial practices and preparing for future funding opportunities.
Choosing a Qualified Auditor
Working with an experienced independent auditor is essential for achieving an accurate and fair assessment. A certified public accountant familiar with nonprofit accounting practices can provide an objective view of your organization’s financial statements, policies, and internal controls. To guarantee that your organization meets relevant standards, select an auditor with experience in the nonprofit sector.

Alternatives to Independent Audits
Smaller organizations with gross annual revenue under $1 million may face challenges in budgeting for an audit due to high fees. Here are two main options:
Financial Statement Review
A financial review offers a lower level of assurance than an audit, with the auditor reviewing financial statements and performing limited analysis. Unlike an audit, a review doesn’t include in-depth testing of transactions or internal controls. It’s suitable for organizations that want basic validation but aren’t required to submit an audited financial statement.
Compilation of Financial Statements
In a compilation, the CPA assembles financial data without verification and presents it in the form of a report based on management's representations. This doesn’t assure the accuracy of the financial statements but can still offer transparency to stakeholders.

Achieve Financial Stability with Our Support
If you’re not sure about your nonprofit's audit needs, SSL Associates is here to help you find the best path forward. Call us today to schedule an initial consultation.
Ready for an Audit? Let SSL Associates Help You Prepare.
If your nonprofit organization is approaching audit season, SSL Associates is here to guide you every step of the way. From navigating state laws to understanding federal fund requirements, our team ensures that your audited financial statements are accurate, timely, and aligned with GAAP standards. With our seasoned staff, you can expect fast, straightforward assistance. Contact our team to learn how we can support your nonprofit audit needs. Let’s make sure your organization is prepared for a successful audit process so you can start building a stronger financial future for your organization.