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What Is a Nonprofit Audit? Ultimate Guide & Checklist.

What Is a Nonprofit Audit? Ultimate Guide + Checklist

Wednesday, March 5, 2025

In Depth Accounting Nonprofit Tax For Executive Directors For Nonprofit Accountants

If your nonprofit has valid 501(c)(3) status, it’s exempt from federal income tax, as well as many state taxes. So, you might be wondering, “If my organization is tax-exempt, does that also mean it’s exempt from financial audits?”

The short answer is no—but this isn’t a reason to panic! Nonprofit audits are usually conducted by independent auditors whose goal is to provide an objective perspective on your nonprofit’s financial management practices and help you improve as needed.

In this guide, you’ll learn all you need to know about nonprofit financial audits, including:

By exploring these basics and best practices, you’ll see that nonprofit audits aren’t something to fear, but instead a useful tool for improving your organization’s financial health. Let’s dive in!

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Nonprofit Audits: Frequently Asked Questions

There are many misconceptions about audits, and the process can be challenging to understand at first. To clear up this confusion, let’s begin by answering some common questions about nonprofit audits.

What is a nonprofit audit?

A nonprofit audit is a comprehensive review of an organization’s records, reports, transactions, policies, and procedures. When a nonprofit audit is conducted by an independent auditor, its goal is to assess the organization’s overall health and ensure compliance with federal, state, and general financial regulations.

Are there different types of nonprofit audits?

Yes! While the term “audit” is mostly used in a financial sense, there are several different types of audits your nonprofit could conduct. Here is an overview of the most common audit categories:

Five major types of nonprofit audits.
  • Independent financial audit. This type of nonprofit audit occurs when a third-party auditor or auditing firm examines your organization’s financial statements, transactions, accounting practices, and internal controls. Then, the auditor creates a report that provides an objective, comprehensive perspective on your organization’s financial health and compliance.
  • IRS financial audit. Although the IRS doesn’t audit exempt organizations often, that doesn’t mean a federal audit or compliance check is out of the question for your nonprofit. In most cases, the IRS will select nonprofits for review if they don’t file required forms or a reporting discrepancy is discovered, which is why it’s critical to complete your organization’s annual tax return and employer tax forms carefully and on time.
  • Internal financial audit. Your nonprofit’s management team conducts these audits. Although the results can’t be completely objective, they allow your organization to take a step back from everyday tasks and consider opportunities for large-scale improvement in your financial strategy.
  • Compliance audit. Compliance audits assess adherence to federal, state, and local government regulations, as well as your organization’s bylaws and other policies. Reviewing financial management activities is usually part of the audit, but the process isn't as focused on health and stability as a typical independent financial audit. They also involve auditing other areas of compliance at your nonprofit, such as charitable solicitation practices and data security.
  • Operational audit. This type of audit assesses your nonprofit’s internal systems, productivity, staffing, and management practices to determine strengths and areas for improvement. They can be holistic or specific to one area of your organization’s operations, such as technology or human resources.

For the purposes of this article, we’ll primarily focus on independent financial audits—just don’t be surprised if your nonprofit undergoes one of the other types at some point.

Does my nonprofit need to conduct a financial audit?

It depends. There are four main situations in which your nonprofit may be required to undergo an independent financial audit for compliance purposes, which are as follows:

Four reasons your nonprofit may have to conduct a financial audit.
  1. Audits are written into your organization’s bylaws. Upon establishing your nonprofit, the founders may have specified a need to conduct recurring audits to promote financial security and transparency.
  2. Your nonprofit receives more than $750,000 in federal funding per year. This includes federal funding passed through the state in which your organization operates.
  3. State laws require your organization to conduct an audit. Most states stipulate that if your nonprofit’s total annual funding exceeds a certain threshold (often $500,000), you have to conduct an independent audit.
  4. A grant application asks for an audit report. Before they invest in your organization, most grantmakers want to see financial proof that you’ll manage the grant well. Some funders will accept copies of past tax returns or financial statements, but others will specifically request an independent audit report.

If any of these requirements apply to your nonprofit, that doesn’t necessarily mean you’ll need to conduct an independent audit every year going forward. For example, some nonprofit bylaws require annual audits, but others state that they should occur every two, four, or five years. Or, if your organization doesn’t plan to apply for any grants that request audit reports this year, even though you did so in the past, you may be able to skip this year.

However, even if your nonprofit isn’t required to undergo an audit, it can still be worthwhile to conduct one to get a better understanding of your organization’s financial situation.

How can independent audits benefit my nonprofit?

Maintaining compliance isn’t the only reason to conduct an independent financial audit, which is why your nonprofit might consider undergoing an optional one. Some other key benefits include:

  • Regular accountability. If you conduct recurring audits every year or every few years, your nonprofit will be held accountable to the same high financial reporting and compliance standards. Even as your organization changes and expands, you can be confident that your finances are always secure and properly allocated.
  • Clear opportunities for improvement. Audits can help your organization identify places where you could adjust your policies and procedures, leading to more efficient processes and sound management. Plus, establishing a review schedule will help protect your nonprofit from common risks like fraud and theft.
  • Increased transparency. You may decide to communicate that your nonprofit conducted an audit and the recommended improvements you’re implementing to your supporters. This way, they’ll know that you take financial management seriously and trust that you’ll use their contributions as promised to further your mission.
  • Potential reputation boost. There are a number of charity watchdogs that provide information about charities to potential donors, and they may rank your organization higher if you’ve conducted an audit. This also promotes transparency with supporters who do their research before contributing.

Although you’ll need to put in effort to prepare beforehand and apply the auditor’s recommendations afterward, the benefits of financial auditing typically outweigh these costs.

How long does the nonprofit audit process take?

If your nonprofit is required to submit your audit results to a government agency or grantmaker, you should, of course, complete the audit well in advance of the deadline. If your audit is optional, you can simply consider when your team will have adequate time to prepare for it and implement the recommendations.

To help you plan more effectively, here is an estimated timeline of the independent financial audit process:

Timeline showing how long it typically takes to complete each phase of a nonprofit audit.
  • Select an auditor: 4-12 weeks
  • Prepare for your audit: 2-4 weeks
  • Auditor conducts the audit: 2-4 weeks
  • Implement recommendations from the audit report: No specified time limit—but the sooner, the better!

Regardless of your nonprofit’s reporting deadline (or lack thereof), we recommend completing your financial audit before completing your annual tax return so you can include the changes you’ve made as a result of the audit in it.

Your organization’s Form 990 filing deadline is the 15th day of the fifth month after your fiscal year ends (May 15 if your fiscal year follows the calendar year like most nonprofits). If you won’t have enough time to complete your audit, start incorporating the recommendations, and fill out the form by the deadline, you can file for an extension of up to six months via IRS Form 8868.

Steps to Choose a Nonprofit Auditor

In many cases, the most time-consuming part of the audit process is choosing an auditor. Your audit report will be most helpful to your nonprofit if you select an auditing firm with a strong track record that aligns with your needs and budget.

To find the right auditor for your organization, follow these steps:

  1. Begin your research online. A simple Google search is often the best place to start—just make sure your search terms include the word “nonprofit” (e.g., “best nonprofit auditing firms” or “nonprofit auditor near me”) to narrow down the list to firms that specialize in the sector. Browse each candidate’s website, note their fee structure and estimated audit timeline, and read reviews from past clients.
  2. Ask for recommendations. Reach out to other nonprofits in your network to see if they’ve conducted independent audits and, if so, what they thought of their auditors. Your organization’s accountant can also provide recommendations based on their knowledge of the nonprofit finance space, although they typically won’t conduct your audit themselves to avoid a conflict of interest.
  3. Issue a request for proposals (RFP). Once you’ve narrowed down your list of potential auditors, an RFP allows you to compare your top candidates side by side. In addition to confirming the fees and timeline, ask for a detailed statement of the work the auditor will provide and several references.
  4. Make your final decision. After reviewing the proposals you receive and checking each auditing firm’s references, you’re ready to approach your top choice and hammer out the final details of your contract for working together.

Once you’ve selected an auditor, they should provide information about preparing for the audit. This will usually come in the form of a Provided by Client (PBC) list, which ensures you give them access to all of the documentation they’ll need to effectively assess your nonprofit’s finances.

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Nonprofit Audit Preparation Checklist

Naturally, the first step in preparing for your nonprofit audit is compiling all of the items on your auditor’s PBC list. These often include your organization’s:

  • Bank statements
  • Investment statements
  • Unpaid invoices
  • Details of grants received
  • Information on major and planned gifts
  • Payroll and staff compensation details
  • Board member names and meeting minutes
  • Recent tax documents (Form 990s, W-2s, 1099s, etc.)
  • Fiscal policies and procedures handbook

There are also some other steps you should take to prepare for your audit, which we’ve compiled into a handy checklist for reference:

A checklist of steps to prepare for a nonprofit audit.
  • Reconcile all bank accounts to see whether your statements match your internal financial records and your account balances are accurate.
  • Identify and address uncleared transactions to determine why they occurred and how they’ve affected your organization’s cash balance.
  • Review your nonprofit’s vendors and remove any inactive ones from your list.
  • Check for unpaid membership dues if your nonprofit has a membership program.
  • Deposit any undeposited funds to maximize cash availability.
  • Look for coding errors such as duplicate, missing, or incorrect data to keep your financial records clean.
  • Check your capitalization to ensure your nonprofit’s assets are properly categorized.
  • Review your accounts receivable and payable to confirm your outstanding cash obligations and resolve any discrepancies.

If your auditor requests access to your accounting system, make sure to grant them the correct level of user permissions (often view- or read-only) before the audit. Also, add all of the documents they’ll need to a centralized digital folder you can share with them.

After Your Audit

Once the auditor completes their work, they’ll compile their findings into a report and present it to your nonprofit. The first thing to know about this report is that if it isn’t clean, that is totally fine! What really matters isn’t how many recommendations the auditor made—it’s how promptly and thoroughly you act on them.

Shortly after receiving the report, schedule a leadership team meeting to review it in detail and create an action plan that addresses everything the auditor identified across all relevant areas of your organization. Some of these actions may be simple improvements that add up to make a significant difference in your operations, while others may be more complex changes that will take time and effort to implement.

Either way, if you need help with this or any stage of the audit process, don’t hesitate to reach out to financial professionals like the experts at Jitasa. Our years of experience working exclusively with nonprofits like yours will help you approach audits with confidence and make the most of them.

Dedicated audit preparation comes with our standard bookkeeping and accounting services for mid-sized to large nonprofits and is available as an add-on for small organizations. Plus, we can suggest potential auditors and work with you to develop and implement your post-audit action plan, customizing our approach based on your unique needs and goals.

An independent financial audit is, at its core, a learning opportunity. No matter why you’re conducting your audit or what the results look like, remember that your auditor has your organization’s best interests in mind, and they’ll give you a blueprint for how your nonprofit can improve its financial management processes for the future.

For more information on nonprofit audits and their applications, check out these resources:

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