Many nonprofit leaders hear the term audited financial statements but are not always sure what it means or why their organization might need them. Audits are often associated with grant funding, regulatory requirements, or board governance policies, yet the process itself can feel unclear to organizations that have never gone through one before.
In reality, nonprofit audited financial statements play an important role in strengthening transparency and financial credibility. They provide independent verification that an organization’s financial reporting is accurate and reliable. Understanding the purpose of a nonprofit financial statement audit can help nonprofit leaders prepare for the process and better appreciate the value that audited reporting provides to donors, funders, and governing boards.
What Are Audited Financial Statements?
To understand what is an audited financial statement, it helps to look at the role of an independent auditor.
In a financial statement audit nonprofit engagement, an independent certified public accountant (CPA) reviews the organization’s financial records, accounting systems, and supporting documentation. The goal of the audit is to provide reasonable assurance that the nonprofit’s financial statements are presented fairly and in accordance with applicable accounting standards.
This process involves examining financial transactions, evaluating internal controls, and testing selected account balances. Based on this work, the auditor issues a formal report expressing an opinion on whether the financial statements are fairly presented.
It is important to note that the auditor does not prepare the financial statements. Instead, nonprofit management is responsible for preparing the financial reports, while the auditor independently evaluates them to provide assurance about their accuracy.
The result of this process is a set of audited financial statements for nonprofits, accompanied by the auditor’s report.
What Financial Statements Are Included in a Nonprofit Audit?
A nonprofit financial statement audit typically includes a full set of financial statements that together provide a comprehensive view of the organization’s financial health and activities.
These statements generally include:
Statement of Financial Position
Often referred to as the nonprofit balance sheet, this statement reports the organization’s assets, liabilities, and net assets at a specific point in time.
Statement of Activities
This statement shows revenue and expenses during the year and explains how the organization’s net assets changed during the reporting period.
Statement of Functional Expenses
This statement categorizes expenses by both function and natural classification, showing how resources were allocated among program services, management and general, and fundraising.
Statement of Cash Flows
This statement explains how cash moved through the organization during the year, including operating, investing, and financing activities.
Notes to the Financial Statements
The notes provide important context and disclosures about accounting policies, commitments, significant transactions, and other financial matters.
Together, these financial reports provide a detailed picture of the nonprofit’s financial position and operations.
Why Audited Financial Statements Matter for Nonprofits
For nonprofit organizations, nonprofit audited financial statements serve as an important tool for transparency and accountability.
One of the most significant benefits is the trust they help build with donors, foundations, and grantmakers. Funders often want assurance that the organizations they support are managing financial resources responsibly. An independent audit provides an additional level of confidence in the organization’s financial reporting.
Audited financial statements also support effective board governance. Board members have a fiduciary responsibility to oversee the organization’s financial health, and the audit provides an independent review that helps them fulfill this responsibility.
In addition, the audit process may identify opportunities to strengthen financial processes or internal controls. While the primary purpose of the audit is to express an opinion on the financial statements, auditors often provide recommendations that can improve financial management practices.
Ultimately, audited financial statements help reinforce an organization’s credibility and demonstrate its commitment to responsible stewardship.
When Are Audited Financial Statements Required?
Not every nonprofit organization is required to have a financial statement audit. However, several common situations may trigger nonprofit audit requirements.
Many foundations and grantmakers require audited financial statements for nonprofits as part of their funding requirements, particularly for larger grants. Funders often rely on audited financial reports to assess financial stability and accountability.
State regulatory requirements may also apply. Some states require nonprofits above certain revenue thresholds to obtain an annual audit as part of charitable registration rules.
Organizations that receive significant federal funding may be subject to additional requirements. In some cases, federal grant funding can trigger a Single Audit, which involves additional compliance testing beyond a standard financial statement audit.
Board governance policies can also drive audit requirements. Some nonprofit boards establish internal policies requiring regular financial statement audits as part of their oversight responsibilities.
In other situations, lenders or financing agreements may require audited financial statements before providing credit or financing.
Because these requirements vary widely depending on funding sources and regulatory environments, nonprofit leaders should review their organization’s specific obligations.
What Nonprofit Leaders Should Expect During an Audit
For organizations preparing for their first audit, understanding the nonprofit audit process can make the experience much less intimidating.
The process typically begins with planning and scheduling between the nonprofit and the audit firm. During this stage, the auditors discuss timelines, request preliminary information, and outline the overall approach to the audit.
Next, the nonprofit prepares financial records and supporting documentation. This may include accounting reports, reconciliations, grant agreements, and other relevant materials.
During audit fieldwork, auditors review transactions, examine documentation, and perform testing of financial accounts. Throughout this phase, the audit team may communicate regularly with finance staff and leadership to clarify questions or request additional information.
Once the testing is complete, the auditors prepare their report and finalize the audited financial statements. The results are typically presented to organizational leadership and often shared with the board.
With clear communication and good preparation, the audit process can be structured, collaborative, and manageable.
How Audited Financial Statements Support Strong Nonprofit Leadership
For nonprofit organizations, audited financial statements provide an important layer of credibility and financial transparency.
They allow donors, grantmakers, and stakeholders to see that the organization’s financial reporting has been independently reviewed and confirmed to be reliable. For boards and leadership teams, the audit offers reassurance that financial oversight practices are working effectively.
Working with experienced nonprofit auditors can also help organizations navigate regulatory expectations and strengthen financial processes over time.
When nonprofit leaders understand the purpose and value of nonprofit audited financial statements, they are better positioned to support responsible financial management and maintain the trust that is essential to advancing their mission.
Audited financial statements are reviewed by an independent CPA who provides an opinion on their accuracy and compliance with accounting standards. Unaudited statements are prepared by management alone and do not include this independent verification.
No, not all nonprofits are required to undergo an audit. Requirements vary based on factors such as state regulations, grant funding, federal awards, and internal board policies. Organizations should review their specific obligations to determine if an audit is necessary.
The timeline can vary depending on the organization’s size and complexity, but most audits take several weeks to a few months from initial planning through final report issuance. Proper preparation can help streamline the process.
Audit preparation includes organizing financial records, reconciling accounts, gathering supporting documentation, and ensuring internal processes are clearly documented. Early communication with the audit firm can also help to set your expectations and timelines.
Beyond compliance, an audit can strengthen internal controls, improve financial processes, and enhance credibility with donors, funders, and board members. It provides valuable insights that support stronger financial management and governance.