Nonprofit Audit

Audit, Review, or Compilation: What Does Your Nonprofit Need?

An audit, review, or compilation requirement can come from a federal or state funder, your state's charitable registration rules, a private grantmaker, a lender, or your own bylaws. Each source sets its own rules, so it helps to know what each level provides.

Audit. The highest level of assurance. We test balances and transactions, confirm amounts with third parties, evaluate internal controls, and issue an opinion on whether your financial statements are fairly presented. Audits are typically required by federal funders, by charitable registration rules in many states once revenue passes a threshold, and by larger grantmakers.

Review. Limited assurance at substantially lower cost. We perform analytical procedures and inquiry in place of detailed testing, and conclude whether we are aware of any material changes needed. A review satisfies many funders and most bylaws written before the organization grew.

Compilation. No assurance. We assemble your financial statements from your records in the proper format, without testing or an opinion. A compilation works well for smaller organizations, board reporting, or a funder that wants CPA-prepared statements. It rarely satisfies a requirement that calls for an audit or a review.

Send us the requirement language. We will read it and tell you what you need, and organizations often find they need less than they expected.

If your organization expends $1 million or more in federal awards in a fiscal year, you also need a single audit. 

What We Focus on in a Nonprofit Audit

These are the areas that consistently need the most attention in nonprofit engagements:

Net asset classification. Amounts must be correctly allocated between net assets with and without donor restrictions. Releases from restriction belong in the period the restriction is satisfied, which is not always when the cash moves.

Contribution versus exchange transactions. Whether a grant is a contribution or an exchange changes how and when you recognize revenue. Government grants are frequently misclassified. See our guide to exchange transactions in nonprofits.

Conditional grants. When a grant includes both a barrier and a right of return, revenue waits until the condition is met. Reimbursement-based grants cause the most confusion here. Our post on refundable advances walks through the accounting.

Multiyear pledges. Unconditional promises to give are recorded when made and discounted when collected over several years.

Functional expense allocation. Expenses have to be allocated across program, management and general, and fundraising, using a documented method. Donors and rating organizations examine this schedule closely. See how to allocate functional expenses.

In-kind or Non-financial contributions. Donated goods, services, and use of facilities need proper valuation and presentation, including the disclosures required under ASU 2020-07. Our post on in-kind donations explains the basics.

Endowments. This covers underwater endowment reporting, spending policy application, and compliance with state law under UPMIFA.