Audits often get a bad rap, but in reality, when performed regularly and strategically, a nonprofit audit is a handy tool for future-proofing your operations.
An independent financial audit is an examination of your nonprofit’s accounting practices and reports. They aren’t tests your nonprofit needs to pass—they’re explorations that seek to strengthen procedures, identify and resolve issues and set your organization up for long-term financial success.
To help your nonprofit know what to expect and make the most of its next audit, this guide will walk through how audits are conducted and provide tips for getting your organization ready for one.
Nonprofit audit basics
To help your nonprofit better understand audits and not fall for popular misconceptions, review these common types of audits you might encounter and when you might need to conduct them.
Types of audits
Most nonprofit audits are financial, but this is just one type of audit. Jitasa's guide to nonprofit audits provides an overview of the most common types of audits, including:

- Independent financial audit: When a third-party auditing firm reviews your nonprofit’s finances, they’re performing an independent financial audit. The external auditor will follow standard procedures and create an objective report on your nonprofit’s financial health.
- IRS financial audit: The IRS audits nonprofits (after all, your organization is exempt from federal taxes) and primarily does so in the event that an organization fails to file a required form or submits a tax return with discrepancies.
- Internal financial audit: Your nonprofit always has the option to perform an internal audit at any time. While the results of these audits aren’t objective in the same way that an independent audit is, they can still be useful for assessing your finances and planning for the future.
- Compliance audit: While there often is a financial component to compliance audits, these primarily assess whether your organization is properly following federal, state, and local regulations. For instance, this audit might examine your data storage and collection practices to ensure compliance with data privacy laws.
- Operational audit: Determine how well your nonprofit’s staff and day-to-day processes are performing with an operational audit. For instance, your nonprofit’s HR team might conduct an operational audit by asking staff members about how they use your nonprofit’s technology and if they feel any new tools are needed.
While all of these audits can be useful, this guide will primarily focus on independent financial audits as they provide a thorough, objective perspective of your nonprofit’s finances.
Optional vs. required financial audits
Nonprofit financial audits are only mandatory in certain situations. These include:
- Bylaw stipulations: Some nonprofits’ bylaws may require the organization to perform routine audits.
- Receiving over $750,000 in federal funding annually: This includes funding that comes either directly from the federal government or is distributed through your state.
- State law requirements: Many states require nonprofits that raise above a certain amount each year (usually $500,000) to conduct an independent audit.
- Grant applications: Some grants require nonprofits to submit an audit report as part of the application. This is so that grant makers can be sure that your nonprofit will use their investment well.
Some of these requirements may cause your nonprofit to conduct an audit almost every year. Regular audits keep your nonprofit’s finances organized and help you maintain transparency.
How to prepare for a nonprofit audit
If you plan to conduct an independent audit, your auditor will do most of the work. However, that doesn’t mean you can just sit back. To help your audit run smoothly, get started by preparing the following resources.
Provided by client list
Before your audit begins, your auditor will provide a Provided By Client (PBC) list ahead of time. A PBC list includes all of the documents that your auditor needs to complete the audit, such as:
- Bank statements
- Investment statements
- Unpaid invoices
- Grant award details
- Major and planned gift details
- Payroll and staff compensation information
- Board member names
- Board meeting minutes and agendas
- Recent tax documents, such as Form 990s, W-2s and 1099s
- Fiscal policies handbook
PBC lists allow you to properly organize your data and track down anything that may be missing. Some of these items may be paper documents, whereas others might require you to give your auditor access to your accounting system. Be mindful about sharing data to ensure your auditor gets the information they need without compromising donor privacy.
Financial data management
The more organized your data is, the easier time your auditor will have analyzing it. Ahead of your audit, review your financial data and clean up your accounting system to make sure it paints an accurate picture of your nonprofit’s financial situation.
NPOInfo’s guide to nonprofit data hygiene advises taking these steps to clean your data:
- Audit your data. An audit is essentially an examination, and examining your data is the first step to determining whether your information and organizational practices are useful and working. Assess your data collection practices and identify any inconsistencies.
- Remove unnecessary data and resolve errors. This includes inaccurate, outdated, and duplicated data. For a financial audit, this might involve going through your nonprofit’s financial statements and resolving any discrepancies.
- Standardize data entry and maintenance practices. To ensure your database stays clean, establish processes for how financial information should be entered and assessed. In some cases, this might involve increasing automation to remove human error or designating a bookkeeper if your organization hasn’t already.
While cleaning your database regularly can help with all sorts of nonprofit operations, data clean-up ahead of an audit should prioritize financial information. For instance, you might go through financial information stored outside of your accounting system and resolve it, such as depositing checks that haven’t been entered and updating investment records.
When your audit is complete, put the information you get from the report to work to improve your nonprofit and set yourself up for long-term financial health.
For instance, maybe your audit pointed out areas of improvement related to your bookkeeping practices or discovered an unpaid invoice that slipped through the cracks. Or, your audit might find more room in your budget for technology improvements or the opportunity to grow your reserve funds to be better prepared for emergencies. Either way, your audit lets you know what actions you should take now and how to prepare for the future.
This is for general informational purposes only and is not intended as legal advice. You should consult your own legal counsel and relevant IRS guidance to determine what is most appropriate for your specific business needs and circumstances.
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