Your First Nonprofit Audit: What to Expect and How to Prepare

An audit is an independent CPA’s review of your financial statements and underlying accounting records. The goal is to give an opinion on whether those statements fairly show your nonprofit’s financial position.

That’s it. It isn’t an investigation, and it doesn’t assume anything is wrong. Your auditor tests a sample of your transactions, confirms balances with outside sources like your bank, and looks at how money moves through your organization.

At the end, you get:

• Audited financial statements with financial disclosures that add more context to the statements themselves.
• An auditor’s opinion, which is the formal conclusion about those statements.
• Often, a letter with recommendations, which lists practical suggestions for tightening up your processes.

One important note: the person who keeps your books can’t also audit them. Independence rules require a separate firm. So if you work with an outsourced bookkeeper or controller, they’ll be your partner in the process, not your auditor.

Most states give you several months after your fiscal year ends to file audited statements. That sounds like plenty of time, but the work stacks up fast. Your books have to be closed, your auditor needs a spot on their calendar, and there’s usually some back and forth before the report is final.

Here’s a simple timeline to work from:

• Before your fiscal year ends: Choose your auditor and agree on the timing.
• One to two months after year end: Close and reconcile your books.
• Two to four months after year end: Your auditor does the fieldwork.
• Then: Review the draft, answer final questions, and receive your report.

If you also receive federal funding, check whether you’ll need a single audit. That applies when you spend $1 million or more in federal awards in a year, and it has its own deadline.

You don’t need perfect books. You do need books that are organized and reconciled with supporting information. A little cleanup before the audit saves a lot of time during it.

Focus on these first:

• • Reconcile every account. Bank accounts, credit cards, and loans should all match their statements through year end.
  • Clear out the clutter. Look for old uncleared transactions, deposits that were never matched, and expenses sitting in catchall accounts.
  • Track restricted gifts. Know which donations came with donor restrictions and how much of each has been used.
  • File documents carefully.  An auditor will compare transactions to the supporting documentation.
  • Gather your agreements. Grant agreements, leases, loan documents, and major contracts will all come up.
  • Pull together governance records. Board minutes, bylaws, and key policies help your auditor understand how decisions get made.
  • Sort expenses by function. Nonprofits report spending as program, management, and fundraising. If you haven’t been tracking that, talk with your bookkeeper now.

Your auditor will send a client request list that spells out exactly what they need. Treat it like a checklist, and don’t hesitate to ask what any item means.

Not every “audit required” answer is quite that simple. Some states offer a middle tier where a review satisfies the requirement at certain revenue levels. A review is lighter than an audit and usually costs less.

The State Reporting Navigator shows you which tier applies in each state you select, so it’s worth running your numbers again if you’re close to a threshold. Some states also exclude certain revenue, like government grants, from the calculation, which can move you into a lower tier.

Before you commit, double check:

• Your state’s rule. Does it require a full audit at your revenue level, or would a review work?
• Your funders. Do any grant agreements specifically ask for audited statements?
• Your lenders and bylaws. Do any loans or governing documents require a certain level of assurance?

If any of these call for an audit, the audit wins. If none do, a review might be the smarter fit for this year.

Your first audit is almost always the heaviest lift. Your auditor has to understand your organization from scratch and confirm the balances you started the year with, not just the ones you ended with.

That’s normal, and it gets easier. Year two is usually faster and smoother. Your auditor already knows your systems, your team knows what to expect, and many of the questions from year one don’t come up again.