Nonprofit Audit: A Complete Guide

Nonprofit audits might sound intimidating, but they are far less scary than you think. For starters, the Internal Revenue Service (IRS) rarely has a reason to audit your organization—since you’re a nonprofit and don’t pay taxes. If you need dedicated assistance for your audit, we invite you to book a discovery call with our consulting team. We can provide the expertise and staff augmentation required to ensure your audit is a success.

• The audit process is also rife with challenges, often referred to as ‘nonprofit math,’ where organizations navigate the complexities of funding, staffing, and reporting.
• Understanding nonprofit accounting, such as the matching principle where revenue is recognized over the duration of a multi-year grant program, is essential.
• In the past, you may have seen the terms “reportable condition” and “material weakness” in your audit reports.
• Preparation involves maintaining accurate and organized financial records, implementing strong internal controls, conducting regular internal reviews, and ensuring all documentation is readily available.

Conduct the audit

Thirty-nine states (plus the District of Columbia) require charitable nonprofits to register with the state in order to fundraise in that state. Consequently, the laws that require a charitable nonprofit to submit audited financial statements also vary state-by-state. If the organization does business with other taxpayers and entities, the IRS audit of the latter might spill over to the former. Meanwhile, should the federal government discover discord between the organization’s financial records and the documentation submitted by employees or vendors, the audit process could very well kick in. Beyond these contingencies, any time nonprofit organizations seek abatement or money back from the IRS, an IRS agent may count these as red flags and invoke the audit process.

• State and local government as well as for-profit companies do not have this option available to them.
• To clear up this confusion, let’s begin by answering some common questions about nonprofit audits.
• The federal government is not the only one that requires regular audits by nonprofits.
• Nonprofit audits are more than just a statutory requirement; they serve as a powerful tool for organizations to enhance credibility, identify improvement opportunities, and maintain legal and regulatory compliance.
• Audits must be performed by a CPA (Certified Public Accountant) or an auditing firm.
• For nonprofit executives, a successful financial audit is both a compliance milestone and a strategic advantage.

Are You Ready To Outsource Your Accounting?

These improvements may involve fundraising opportunities you weren’t aware of and expenses you no longer need. An independent auditor can give your organization an outside perspective when you feel stuck. The IRS will audit your nonprofit if there are discrepancies in your tax reports, but instances of this are few and far between. See Examination Procedures for an overview of IRS procedures for conducting examinations of exempt organizations. This step-by-step guide helps you avoid costly mistakes, ensuring your events are well-planned, impactful, and deliver a strong return on investment while celebrating your organization’s community impact. This isn’t a complete glossary of auditing and accounting terms, but it’s a good place to start.

Disclosure statement

Get support at every stage of the nonprofit audit process by partnering with Jitasa. Also, the federal Office of Management and Budget says that if your nonprofit spends $500,000 or more in federal funds in a year, you’ll have to get a single audit. For example, if your nonprofit is based in California and you have a gross income of $2 million or more, you will be required to get annual audits. Audits must be performed by a CPA (Certified Public Accountant) or an auditing firm.

When confronted, Villalobos claimed she accidentally used the association’s credit card instead of her own and would reimburse the organization for the error. Hilton received the check Feb. 5, 2024, but it was rejected for insufficient funds, and the hotel notified the association on Feb. 10. Villalobos said she would arrange payments made on a credit card in $5,000 increments. Working with Dimov Audit ensures that you’re not navigating these steps alone—we’ll guide you at every phase.

• For nonprofit executives, preparing for and managing an audit successfully requires foresight, transparency, and alignment across departments.
• You need to get started early (up to a year ahead of time, if you don’t already have a relationship with a CPA for your audits) to ensure everything runs smoothly.
• Our free courses provide in-depth knowledge on key accounting principles, budgeting strategies, and reporting requirements to help your organization thrive.
• Our firm is a Certified Third-Party Assessor Organization (C3PAO) successfully meeting the Cybersecurity Maturity Model Certification (CCMC).
• An auditing committee is optional if you have a finance committee, but it may help your organization keep up to date with internal and external audit requirements.

Nonprofits must embrace collaboration, as it plays a pivotal role in preparing for audits. By involving every level of the organization, from board members to volunteers, a nonprofit can establish robust internal controls that ensure ongoing regulatory https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ compliance and financial integrity. Regular monitoring and evaluation are also critical, as they provide a framework for continuous improvement and accountability. This approach not only strengthens the organization’s financial health but also enhances its ability to demonstrate impact and success, which is vital for securing future funding. Additionally, understanding and implementing the matching principle, where revenue is recognized in alignment with program performance, can lead to more accurate and transparent financial reporting.