Nonprofit boards often discover during audit planning that they've missed critical compliance thresholds, created documentation gaps, or haven't established the right audit scope for their funding sources. Understanding audit requirements early—before your fiscal year ends—saves thousands in rework and protects your organization's credibility with donors and grantmakers.
Who Actually Needs an Audit
Not all nonprofits require a full audit, and understanding which do is your first step. The IRS doesn't mandate audits federally, but your state, major donors, or grant agreements might. Most states require audits when nonprofit revenue exceeds $250,000 to $500,000 annually—check your specific state's nonprofit regulations.
Federal funding adds another layer. If your organization received federal grants totaling $750,000 or more in a fiscal year, you must undergo a Single Audit (also called OMB Uniform Guidance audit). This isn't just a regular nonprofit audit—it's more rigorous, focuses on federal fund compliance, and typically costs $8,000–$25,000 depending on your complexity and the number of federal programs you manage.
Audit vs. Review vs. Compilation
These three engagement levels exist on a spectrum of assurance and cost. Understanding which your stakeholders actually require prevents paying for unnecessary services.
A full audit provides the highest assurance—an independent auditor tests transactions, verifies assets, and issues an opinion on whether financial statements are fairly presented. Cost range: $5,000–$50,000+ annually, depending on organizational size and complexity. Timeline: 3–4 months post-fiscal-year-end.
A review is mid-level assurance without the depth of testing. The auditor performs analytical procedures and inquiries but doesn't examine transactions as thoroughly. Cost: typically 40–60% less than an audit. Timeline: 2–3 months.
A compilation is the minimum engagement—the accountant organizes your financial data into statements without providing any assurance. Cost: often $2,000–$8,000. Timeline: 4–8 weeks. Many smaller nonprofits with strong internal controls and no major donor or grant requirements choose this.
Before hiring, verify what your largest funders, board, or state actually require in writing. Don't pay audit prices for review-level needs.
Form 990 and Audit Scope Alignment
Your IRS Form 990 filing (due by November 15th of the year following your fiscal year-end) must align with audited financials if you've undergone an audit. This means your auditor needs to understand your Form 990 preparation process and any required schedules early.
Nonprofits often file Form 990-N (e-postcard for organizations under $50,000), Form 990-EZ, or the full Form 990. If you're audited, the full Form 990 becomes more complex—auditors may flag discrepancies between your internal records and what you've disclosed publicly. Budget for your service provider to address these connections; some accountants bundle Form 990 preparation into audit fees, others charge separately ($1,500–$5,000).
Key Requirements to Verify Before Hiring
When evaluating an audit firm or Form 990 service provider, confirm these specifics:
- Nonprofit experience: Ask how many similar-sized nonprofits they've audited in your sector in the past two years.
- Federal fund compliance: If you receive federal grants, confirm they're experienced with OMB Uniform Guidance single audits—this isn't standard for all firms.
- State-specific knowledge: Nonprofit regulations vary. Your auditor should know your state's filing deadlines and disclosure rules.
- Data management: How do they want to receive your records? Digital uploads, cloud access, or spreadsheets? Clarify upfront to avoid delays.
- Timeline alignment: Confirm they can deliver a draft report by your Form 990 filing deadline, not after.
- Independence: Ensure they haven't provided bookkeeping or tax preparation services that could compromise their audit independence (yes, auditors have rules about this).
Many organizations use Mercoly to compare and vet trusted Audit & Form 990 Services providers, which simplifies evaluating multiple firms against your specific requirements.
Frequently Asked Questions
Q: Can the same firm that does our bookkeeping also perform our audit? No—auditor independence rules prohibit this in most cases. Your bookkeeper and auditor must be separate to maintain the integrity of the audit opinion.
Q: How far in advance should we schedule an audit? Contact auditors 2–3 months before your fiscal year-end to secure a spot, especially if you're in a busy season (January–March for calendar-year nonprofits). Last-minute audits are expensive and rushed.
Q: What happens if we fail to file Form 990 or skip our required audit? You risk losing tax-exempt status, losing donor trust, and facing penalties. The IRS can revoke 501(c)(3) status after two consecutive years of non-filing.
Start conversations with audit providers now—don't wait until Form 990 deadlines loom.