Nonprofit audit requirements: What you need to know

Whether you’re running a large organization or just getting started, audit rules can be tricky to navigate, and they’re different depending on where you are, how much money your nonprofit brings in, and even who gave you that money in the first place.

We wrote this guide because we’ve been there. We’ve worked with nonprofits at every stage, from brand new to decades old, and we know how confusing the audit process can be. That’s why we’re breaking it all down in plain English: what an audit is, when you might need one, how to prepare, and what happens afterward.

If you're worried about making a mistake or just want to feel more confident, you’re in the right place. We're going to walk through this step by step, no jargon, no guessing, just the info you need.

What is a nonprofit audit?

If you’re picturing a team of accountants digging through boxes of receipts, take a deep breath, it’s not quite like that. A nonprofit audit is just a way to check that your financials are accurate and your organization is following the rules. Think of it like a report card for your finances.

An audit is done by a licensed Certified Public Accountant (CPA) who’s not part of your team. That independence matters. It helps show donors, board members, and government agencies that everything checks out, and that you’re handling money responsibly.

There are a few types of audits, but the one most people talk about is called an independent financial audit. That’s when a CPA takes a close look at your nonprofit’s financial statements and gives an opinion on whether they’re correct and prepared according to generally accepted accounting principles (GAAP). Sounds fancy, but it really just means: “Does this look right, and are you following the rules?”

Sometimes people confuse audits with reviews or compilations. They’re not the same. A review gives limited assurance and is a little less in-depth. A compilation is even more basic, just putting your numbers together in one place, without checking them for accuracy.

But an audit? That’s the gold standard.

If your nonprofit is growing, applying for big grants, or wants to build trust with donors, having an audit, required or not, can be a smart move.

When is a nonprofit required to have an audit?

This is one of the most common questions we hear: “Do we actually have to get an audit?” And the answer is, it depends.

There’s no one-size-fits-all rule when it comes to nonprofit audits. Some groups are required to get one. Others choose to do it for peace of mind or to build trust. Let’s walk through the times when it’s not optional.

1. You receive a lot of federal funding

If your nonprofit gets $750,000 or more in federal funds in a single year, you’ll need what's called a Single Audit. This is a government rule, and it’s non-negotiable. It applies whether the money comes directly from a federal agency or gets passed down through another group.

2. Your state says you need one

Each state has its own laws. Some states require an audit once your revenue crosses a certain threshold. Others base it on whether you’re fundraising or registering as a charity. For example, New York requires an audit if you raise more than $1 million. In Florida, the line is $500,000. (We’ll include a chart later so you can check your state.)

3. A funder or contract requires it

Even if the law doesn’t require an audit, sometimes your grant agreements or contracts do. Many private foundations, corporate donors, or local governments want to see audited financials before they’ll give funding.

4. Your board recommends it

Some boards make audits part of their policy, especially as the nonprofit grows. It’s a way to stay transparent and accountable, and avoid surprises.

You might not be required to have an audit right now. But if you’re planning to grow or apply for larger funding, it’s good to be ready. And trust us, it’s a lot easier when you’re not scrambling at the last minute.

State law nonprofit audit requirements

We wish we could say there was one clear rule for all nonprofits across the U.S., but state laws don’t make it that easy. Each state has its own thresholds and requirements when it comes to audits, and they don’t all follow the same playbook.

In general, state audit laws depend on two main things:

• How much money your nonprofit raises in a year
• Whether you're required to register to solicit donations in that state

Some states kick in audit requirements once your nonprofit passes a certain revenue or contribution threshold. Others care about how much you're raising from the public. And in some places, reviews, or compilations are acceptable alternatives, at least until you hit a higher income level.

Here are a few examples:

• California requires an audit if your nonprofit receives over $2 million in contributions.
• New York mandates one at $1 million in revenue.
• Massachusetts expects an audit when revenue hits $500,000, and even reviewed financials once you're above $200,000.
• Alabama, on the other hand, doesn’t have a blanket audit rule at all.

And here’s the twist: if you're fundraising in multiple states, you might need to comply with each one’s rules. That means keeping a close eye on registration requirements and knowing what documents you’ll need to provide.

To make this easier, we’ll link to or provide a full 50-state chart so you can check your nonprofit’s specific requirements.

Staying on top of state rules not only keeps you compliant, it also builds trust with regulators, funders, and your community. It’s one of those things where being proactive can save a whole lot of stress later.

Federal audit requirements for exempt organizations

Not all nonprofits are watched by the federal government when it comes to audits, but if your organization receives federal funding, the rules change fast.

Here’s the big one:
If your nonprofit spends $750,000 or more in federal funds during a single fiscal year, you're required to go through a Single Audit. This rule comes from the Office of Management and Budget (OMB) and applies whether the money comes straight from the government or is passed through another group like a city or state agency.

This isn’t just a regular financial audit. A Single Audit also checks how well you followed the rules tied to that funding. That includes tracking spending, following program guidelines, and showing that funds were used for what they were meant for.

You’ll also report your results to something called the Federal Audit Clearinghouse, it’s like a big online hub where the government reviews your audit.

And here’s something many nonprofits miss:
Even if you don’t hit that $750K mark, you still might need to show audited financial statements to qualify for certain federal grants. Sometimes it’s listed right in the grant application. So even if it's not a technical requirement, it can still be a practical one.

Don’t forget:

• If you file a Form 990, it doesn’t count as an audit.
• The IRS doesn’t require audits, but they’ll expect you to follow state and funding rules.
• If you’re classified as a federally exempt organization, that doesn’t mean you’re exempt from audit rules.

The takeaway? If you’re touching federal dollars, even indirectly, it’s time to pay attention to audit rules.

Preparing for a nonprofit audit: Best practices and tools

Here’s the truth: an audit isn’t just about what happens when the auditor shows up, it’s about how organized you are before they get there. And the more prepared you are, the smoother it goes.

If you've never been through an audit, don’t worry. You don’t need to be an accounting expert. But there are a few things you’ll want to get in place.

Start with clean financials

Make sure your books are updated, accurate, and reconciled. That means all your transactions are recorded, your bank accounts match up, and everything lines up with your financial statements. If you're using a spreadsheet, it might be time to think about accounting software, or even better, a platform like Harness that helps you stay organized year-round.

Know your fiscal year

Audits look at a full 12-month period, your fiscal year, so be clear on when that starts and ends. Some nonprofits use the calendar year (January to December), but many choose a different cycle. Either way, everything needs to match that timeline.

Gather your documents early

You'll need things like:

• Annual budgets
• Bank statements and reconciliations
• Donation and grant records
• Payroll reports
• Board meeting minutes
• Your IRS Form 990
• Policies on things like spending, conflicts of interest, and internal controls

Start a shared folder and keep these docs handy, not just at audit time, but all year long.

Use GAAP

Auditors follow something called generally accepted accounting principles (GAAP). You don’t have to memorize all the rules, but it’s smart to set up your bookkeeping to match this standard. A CPA or accountant can help you do that, or if you use a nonprofit-friendly tool, GAAP is often built in.

Get your board involved

Your board’s job isn’t to do the audit, but they should understand it. Make sure they know the timing, what the audit covers, and how they can support the process. If you have a finance or audit committee, even better.

Choosing a nonprofit auditor

Choosing the right auditor is a big deal. This isn’t just someone you hire once and forget, they’ll be looking closely at your finances, asking questions, and helping you stay compliant. You want someone who gets nonprofits, works efficiently, and makes the process as stress-free as possible.

Here’s how to find the right fit:

Look for nonprofit experience

Not all Certified Public Accountants (CPAs) are the same. You want one who has experience with nonprofit audits, because nonprofit accounting is a different world than for-profits. Look for firms or individuals who have worked with other mission-driven organizations like yours.

Ask the right questions

When you’re interviewing auditors (yes, you should interview them), here are a few questions to ask:

• Have you worked with organizations our size?
• What’s your timeline and process?
• Will we have a dedicated point of contact?
• What does your fee include?
• Can you help us get audit-ready, or do we need to be 100% prepared before you begin?

Their answers will tell you a lot, not just about their skills, but about how well they’ll work with your team.

Understand the engagement letter

Once you pick your auditor, they’ll send you an engagement letter. This is your official agreement. It should clearly outline:

• What they’re doing (and not doing)
• The expected timeline
• Your responsibilities vs theirs
• Their fee structure

Read it carefully and make sure it aligns with what you discussed.

Keep independence in mind

Your auditor must be independent, that means they can’t be involved in your bookkeeping, financial decisions, or operations. If they helped you prepare your books, they shouldn’t be the one auditing them. It’s not just best practice, it’s a rule that protects your integrity.

Budget for the audit

Audit prices can vary depending on the size and complexity of your nonprofit. Some cost a few thousand dollars; others may be much more. Be sure to build this into your annual budget, and if you’re applying for a grant that requires an audit, ask if you can include that cost in your funding request.

The right auditor should feel like a partner, not just a requirement. Taking the time to choose well sets you up for a smoother audit and a better relationship long-term.

Cost of a nonprofit audit and funding strategies

Let’s talk money, because if there’s one thing that holds nonprofits back from getting an audit, it’s the price tag. And we get it. Audits aren’t cheap. But understanding what goes into the cost (and how to cover it) can make it easier to plan ahead.

What does a nonprofit audit cost?

There’s no flat fee, but here’s a general idea:

• Small nonprofits with clean books: $5,000–$10,000
• Mid-sized orgs with multiple programs: $10,000–$20,000
• Large or complex nonprofits: $20,000 and up

The more locations, funding sources, or restricted funds you have, the more time it takes to audit, and that usually means a higher price.

What affects the cost?

• Size of your budget and staff
• Number of transactions or bank accounts
• How organized your books are
• Whether you’ve been audited before
• Deadlines (rush jobs cost more)

Auditors often charge based on hours, not just a flat rate. So if they have to chase down missing documents, costs go up.

What if we can’t afford it?

If a full audit is out of reach right now, ask if a review or compilation would meet your funder’s needs. It’s not the same thing, but for some grants or board reports, it might be enough. Just double-check first.

Smart ways to fund your audit

• Include audit costs in your grant budgets, some funders expect it.
• Add it to your overhead, it’s part of running a healthy organization.
• Ask your board to help raise funds specifically for the audit.
• Plan ahead, budget a little each year instead of scrambling last minute.

Think of the audit as an investment. Yes, it costs money, but it can unlock bigger grants, make fundraising easier, and give your team (and your board) peace of mind.

Post-audit steps and communication

So, you made it through the audit. Congrats. Now what?

It’s tempting to check it off your list and move on, but what you do after the audit matters just as much as what you did to prepare. This is your chance to build trust, improve systems, and show your community that you're on solid ground.

Review the results with your team

Start by going through the audit report with your leadership and finance team. Your auditor will include a letter with their opinion, basically, whether your financials are in good shape or not. If everything looks clean, great. If they found something, don’t panic.

Look at:

• Any findings or recommendations
• Notes about internal controls
• Comments on missing or incomplete documentation

This is valuable feedback. It’s not about pointing fingers, it’s about making your systems stronger.

Share the results with your board

Your board should always see the final audit report. It’s part of their oversight role. A good practice? Set a meeting where your auditor can walk through the findings and answer questions. This helps everyone feel informed and aligned.

Communicate with funders (if needed)

If a grant requires an audit, send the report on time. And if there were findings, be transparent. Explain what you’re doing to fix the issue. Funders understand that mistakes happen, they’re more concerned with how you respond.

Make changes based on what you learn

This is where the real impact of the audit happens. Use the audit as a tool, not just a test. Tighten up your processes. Update your policies. Train your staff. You don’t have to fix everything overnight, but each small improvement helps your organization grow stronger.

An audit isn’t just about checking a box, it’s a chance to learn, improve, and build confidence in your mission. Take the time to close it out well.

How often should nonprofits conduct an audit?

This might surprise you: there’s no rule that says every nonprofit has to do an audit every year. Some do, but many don’t, especially smaller ones.

The real question is: How often does it make sense for your organization?

When audits are legally required

If you meet a state or federal requirement, like hitting a revenue threshold or receiving a certain amount of government funding, you’ll need to follow those rules. That usually means an audit once a year, covering your full fiscal year.

But if there’s no requirement? Then it’s up to you and your board.

When to consider doing one anyway

Even if you’re not required to do an audit, there are good reasons to schedule one every few years:

• You’re growing fast and want to show you’re financially solid
• You’re applying for larger grants or government contracts
• Your board wants more oversight and transparency
• You’ve never had one and want to establish a clean starting point

Think long term

Some nonprofits choose to do an audit every 2–3 years, especially if they’ve outgrown simple bookkeeping. Others keep it annual to stay competitive with funders or to maintain trust with donors.

What matters most is that you have a plan. Whether you audit every year or every few years, make it part of your financial strategy, not just a last-minute scramble.

Benefits of a nonprofit audit beyond compliance

It’s easy to think of an audit as something you have to do. But for many nonprofits, an audit is less about rules and more about opportunity.

Here’s what we mean:

Build trust with donors and funders

Audited financial statements send a clear message: We’re responsible with our money.
When major donors or grantmakers see a clean audit, it builds confidence, and can be the difference between getting funded or getting passed over.

Improve internal systems

Auditors don’t just check your numbers. They often spot weak points in your processes, things like missing policies, outdated systems, or gaps in internal controls. That feedback can help you make smarter decisions, reduce risk, and strengthen your operations.

Support board and leadership decision-making

A strong audit gives your board real insight into the health of your nonprofit. With better data and clear reporting, they can make better strategic calls, especially around budgeting, fundraising, or program growth.

Boost your reputation

Being able to say, “We get audited every year, and we’re proud of that,” tells your community that you’re serious about accountability. It’s a credibility boost that sticks.

Set the stage for growth

When you're ready to go after bigger grants, partnerships, or multi-year funding, having a solid audit history gives you a head start. It shows you’re ready to scale, not just in your mission, but in how you manage your resources.

What to expect

Nonprofit audits can seem overwhelming at first, but they don’t have to be. Whether you’re required to have one or simply want to show your community that you’re being responsible with your resources, an audit is a powerful step toward transparency and growth. 

By understanding when audits are needed, how to prepare, and what to expect, your organization can move forward with confidence. It’s not just about checking a box, it’s about building something strong, sustainable, and trusted.

At Harness, we’ve helped nonprofits at every stage get organized, stay compliant, and feel confident going into audits and beyond.