A Practical Guide to the Audit Process for Nonprofits

If you work with a nonprofit, you might be wondering:

When do we need an audit?

How is an audit different from a review or compilation?

What happens during an audit?

What can we actually learn from it?

Let’s break down the audit process in simple terms and gives you practical steps to help your organization navigate it smoothly.

When Does Your Nonprofit Need an Audit?

Not every nonprofit needs an audit every year. But you’ll likely need one if:

• You receive funding that requires audited financial statements, like government grants or large foundation gifts.
• Your state law or nonprofit regulations mandate audits once you hit a certain revenue or asset level.
• Your board, major donors, or lenders ask for an audit to feel confident about your finances.

If you’re not sure, check your grant contracts, state nonprofit regulations, or talk with your accountant.

Quick Overview: Audit vs. Review vs. Compilation

 Audit: The most thorough. An independent CPA reviews your records and internal controls, tests transactions, and gives an opinion that your financials are fair. This is what funders usually want.

• Review: Less detailed. The accountant looks for anything unusual but doesn’t dig as deep. Gives limited assurance and costs less.
• Compilation: The accountant organizes your financial data into statements but doesn’t check accuracy. It’s mostly for internal use or very small nonprofits.

If your funders require an audit, don’t try to substitute it with a review or compilation without asking them first.  They usually won’t accept it.

What to Expect During the Audit

 Here’s what your nonprofit will actually do and see during an audit:

1. Kickoff Meeting
   • The auditor will ask for key documents (internal financial statements, grant agreements, financial policies).
   • They’ll want to understand how your nonprofit operates and who handles money and approvals.
2. Prepare Your Documents
   • Organize your financial records: bank reconciliations, check registers, invoices, payroll info, prepaid expense schedules, deposits, etc.
   • If you don’t have something ready, like a prepaid schedule, the auditor might ask you to create it.
3. Understanding Your Internal Controls
4. • Auditors will review your internal control processes to understand how your nonprofit manages financial operations (e.g., how expenses are approved, how funds are safeguarded).
   • This understanding helps auditors plan where to focus their testing but does not involve formally testing the controls themselves.
5. Transaction Testing
   • Auditors will examine various transactions such as expenses, donations, grants, and payroll.
   • They review the supporting documents, such as  receipts, contracts, and payroll records, to make sure the transactions are legitimate, properly recorded, and comply with any restrictions or rules.
   • This step helps confirm that your financial records are accurate and complete
6. Draft Financial Statements
   • The auditor prepares your nonprofit’s financial statements along with footnotes explaining key info.
   • They draft their audit opinion stating if the financials are fair and accurate.
7. Exit Meeting
   • The auditor will meet with your finance team and board to discuss results.  This is an opportunity for the board to ask the auditor any questions that they have.
   • You will receive a management letter,  if the auditor has any recommendations for improving controls or processes.  Use this as an opportunity to improve your organization.

What Your Nonprofit Gains From an Audit

• Confidence with funders and donors: A clean audit report means they can trust your financials.
• Better financial controls: The auditor’s recommendations help you prevent mistakes or fraud.
• Clear financial reporting: You’ll have solid financial statements ready for your board and stakeholders.

How to Prepare Your Nonprofit for an Audit

• Start early: Don’t wait until the last minute to gather documents.
• Keep good records: Track invoices, contracts, grants, and bank reconciliations regularly.
• Have a prepaid expense schedule: Know what expenses you paid in advance and show it clearly.
• Assign a point person: Have one staff member or volunteer coordinate with the auditor.
• Review your internal controls: Even simple steps like two signatures on checks can make a difference.
• Communicate with your board: Keep them informed and involve your finance committee.

An audit might sound scary, but it’s really an opportunity to show your nonprofit is trustworthy, transparent, and well-run. With some preparation and clear communication, the process will be much smoother, and you’ll come out stronger on the other side.