Most nonprofits don’t plan for an audit. They get a letter from a funder, a lender, or a new board chair, and suddenly they have a few weeks to produce a year of documentation. Organizations that handle this well did most of the work months earlier. Being audit-ready isn’t about having perfect books. It means your records can be explained, supported, and produced quickly.
An audit is an independent CPA’s opinion on whether your financial statements are fairly presented. For many nonprofits, that opinion decides whether a grant gets renewed, a loan gets approved, or a major donor stays confident. The earlier you know whether one is coming, the more control you have over the process.
Who Actually Needs an Audit?
Requirements vary, so it’s worth knowing which apply to you.
- Federal funding: Organizations that spend $1,000,000 or more in federal awards in a fiscal year generally need a Single Audit.
- State requirements: Some states require audited financials once revenue crosses a certain threshold, and the amount differs by state.
- Funders and lenders: Many foundations, government agencies, and banks require audited statements in their agreements, even when the law doesn’t.
- Board policy: Some boards require periodic audits as a governance practice, even when no one else does.
If you’re not sure which category you fall into, read your grant agreements and loan documents. The requirement is often buried in the reporting section.
Audit, Review, or Compilation?
These three levels of service are often confused, and they provide different assurance. An audit offers the highest level of assurance and involves testing your records and internal controls. A review is limited assurance, mostly analytical procedures and inquiry. A compilation is the lowest level: your numbers are put into financial statement format without any assurance. Your funder’s requirements determine which you need, so confirm that before paying for more than necessary or less than required.
What Auditors Will Ask For
Auditors start with a request list, often called a “provided by client” list. You can get ahead of it by keeping these items current throughout the year:
- Reconciled bank and credit card statements for every month
- A trial balance that ties to your general ledger
- Support for revenue, including grant agreements, pledge records, and donor acknowledgments
- Support for expenses, including invoices, receipts, and approvals
- Payroll reports and tax filings
- A fixed asset schedule and depreciation records
- Tracking of restricted funds and how they were released
- Board and committee minutes, especially approvals of budgets, major contracts, and policies
- Your most recent Form 990 and any prior audit reports
- Written financial policies and procedures
Where Organizations Get Stuck
Audits rarely go sideways because of fraud. They go sideways because of small, avoidable gaps: bank reconciliations that are months behind, grants recorded without the agreement on file, expenses with no documented approval, or one person handling cash receipts, deposits, and bookkeeping alone. Each gap costs hours of back-and-forth, and auditor hours are billable. A clean, organized file is often the single biggest way to keep audit fees down.
A Simple Readiness Check
Ask yourself five questions:
- Are all bank accounts reconciled within 30 days of month-end?
- Can I locate the supporting document for any transaction within a few minutes?
- Is revenue with donor restrictions tracked separately from the rest?
- Does more than one person touch the money, with someone reviewing the work?
- Does the board see financial statements regularly and document its review?
If you answered “no” or “not sure” to more than one, you have room to improve, and the best time to fix it is before anyone asks.
The Bottom Line
An audit request is much less stressful when your books are already in order. Reconciled accounts, documented approvals, organized support, and regular board review let you hand over what’s asked for in days instead of scrambling for weeks. Whether an audit is a year away or a surprise waiting in your inbox, readiness is an ongoing habit, not a one-time project.
