An independent audit is an examination of your financial statements by an outside CPA firm that issues a formal opinion on whether those statements are presented fairly, in all material respects, under U.S. GAAP. Not every nonprofit needs one. You are most likely required to have an audit if (a) you expend $1,000,000 or more in federal awards in a fiscal year (the federal Single Audit threshold, as of 2026 — verify), (b) your state charity regulator requires one above a revenue or contributions threshold, or (c) a major funder, lender, or your own bylaws require it.
If no rule forces an audit, a less expensive review or compilation may satisfy your stakeholders. When an audit is required, the single biggest lever on cost and stress is preparation: a clean trial balance, reconciled accounts, and a complete Prepared-By-Client (PBC) package. This page explains the triggers, the three assurance levels, how to choose an auditor, and gives you a worked PBC list you can hand to your bookkeeper.
This is general operational guidance, not legal, tax, or accounting advice. Audit requirements vary by state and funder and change over time — confirm your specific obligations with a CPA and your state charity regulator.
Audit vs. review vs. compilation: three levels of assurance
CPAs offer three engagement types that differ in how much assurance they provide and how much they cost. Picking the right one — and not over-buying — matters.
| Engagement | Assurance | What the CPA does | Relative cost |
|---|---|---|---|
| Compilation | None | Helps management present data in proper financial-statement format; reads for obvious errors; no opinion | $ |
| Review | Limited ("negative") assurance | Performs analytics and inquiries; states it is not aware of material modifications needed | $$ |
| Audit | Reasonable (highest available) | Tests transactions, confirms balances, evaluates controls; issues a formal opinion | $$$ |
Compilations and reviews are performed under the AICPA's Statements on Standards for Accounting and Review Services (SSARS); audits follow Generally Accepted Auditing Standards. A review is often a sensible middle ground when a funder wants third-party assurance but does not specifically require an audit, and the cost of an audit would be a meaningful share of your budget (per the AICPA, as of 2026 — verify).
Key point
Only an audit produces an opinion. If a contract or law says "audited financial statements," a review or compilation will not satisfy it. Read the exact wording before you buy the cheaper service.
What triggers a required audit
There is no single rule. An audit can be mandated by any of four independent sources, and you must satisfy whichever applies:
- Federal funding. Expending $1,000,000 or more in federal awards in a fiscal year triggers a federal Single Audit (covered in the next section).
- State charity law. Most states require an independent audit once a charitable nonprofit crosses a revenue or contributions threshold. According to the National Council of Nonprofits, the trigger is usually total annual revenue or total contributions, and the rule typically applies based on where you solicit donations, not only where you are incorporated (as of 2026 — verify).
- Funder or lender requirements. Foundations, government grantors, and banks frequently require audited statements as a grant or loan condition regardless of your size.
- Your own bylaws. Some organizations require an annual audit in their governing documents — check before assuming you are exempt.
State thresholds vary widely and change. Illustrative examples (confirm current figures with each state regulator — as of 2026, verify): California requires an audit at roughly $2,000,000 in gross revenue; New York's threshold sits above $1,000,000 of annual revenue and support; Washington uses a multi-year average above about $3,000,000; and some states use tiered rules (for example, a review at a lower band and an audit at a higher one). Because you may solicit in multiple states, you can be subject to the strictest applicable rule.
Watch the multi-state trap
If you fundraise nationally or online, your audit obligation may be set by the toughest state in which you actively solicit — not your home state. Map where you solicit before you conclude you do not need an audit.
If none of the four triggers apply, an audit is optional. Many small nonprofits choose a review or compilation instead, then move up to an audit as funding grows. Tie this decision to your annual budget and your stage of grant readiness.
The federal Single Audit and the $1,000,000 threshold
A Single Audit (formerly the "OMB A-133" audit, now governed by the Uniform Guidance, 2 CFR Part 200) is a special, broader audit required of organizations that spend a lot of federal money. It covers your financial statements and compliance with federal program rules.
The trigger is federal funds expended, not received. As of 2026, the threshold is $1,000,000 or more in a single fiscal year — up from the long-standing $750,000 (verify). OMB raised it in the 2024 revisions to the Uniform Guidance, effective for federal awards issued on or after October 1, 2024, which generally means fiscal years ending on or after September 30, 2025 (as of 2026 — verify).
- Count all federal sources. Direct federal grants, federal money passed through a state or local agency (you are a "subrecipient"), cooperative agreements, and cost-reimbursement contracts all count toward the $1,000,000.
- Mind the mixed-threshold transition. Awards issued before October 1, 2024 may still carry the old $750,000 trigger, so an organization spending, say, $900,000 could still owe a Single Audit on older awards. Have your CPA sort awards by issue date.
- It is more than a financial audit. The auditor tests compliance requirements (allowable costs, eligibility, reporting, procurement) for your major programs, so clean grant records matter as much as clean books.
Single Audit readiness check
- Tally total federal expenditures for the year (direct + pass-through)
- Confirm which awards carry the $750k vs. $1M threshold by issue date
- Maintain a Schedule of Expenditures of Federal Awards (SEFA) all year, not at year-end
- Keep grant agreements, approved budgets, and drawdown records organized by award
- Track your indirect-cost basis (the de minimis rate rose to up to 15%, as of 2026 — verify)
If you are approaching this level of federal funding, read grant management and reporting and indirect costs and NICRA before year-end.
Choosing an auditor
The audit firm must be independent of your organization — it cannot also keep your books and then audit them. The board (often through an audit committee) selects and oversees the auditor; per the National Council of Nonprofits, selecting and evaluating the auditor is a core board responsibility, kept structurally separate from the staff who prepare the financials.
- Issue an RFP. Ask three to five firms for proposals. Describe your size, funding mix, accounting system, and whether you need a Single Audit.
- Screen for nonprofit and Single Audit experience. Nonprofit GAAP (net asset classes, functional expenses, restricted contributions) is specialized. If you need a Single Audit, confirm the firm performs them regularly and is enrolled in peer review.
- Compare scope, not just price. Clarify what is included, the assurance level, the timeline, and who does the fieldwork.
- Check references and capacity. Ask other similar-sized nonprofits about responsiveness and whether the firm hit its deadlines.
- Consider rotation, not constant switching. Many boards rotate the lead audit partner periodically for fresh perspective while keeping the firm; constant firm changes raise cost because each new auditor re-learns you.
For governance structure around the audit relationship, see governance and compliance. The Council of Nonprofits' Step 1: Selecting an Audit Firm offers a free walkthrough (as of 2026 — verify).
The Prepared-By-Client (PBC) list
The PBC list (Prepared-By-Client, sometimes called the "requested items" or "pull" list) is the set of documents and schedules the auditor asks you to provide. It is the engine of the audit: the more complete and accurate your PBC package, the fewer hours the auditor bills and the fewer follow-up questions you field.
A typical PBC list spans several categories:
- Financial close package: year-end trial balance, general ledger, adjusted journal entries, and draft financial statements.
- Account reconciliations: bank and investment reconciliations for every account, plus the year-end statements that support them.
- Revenue support: contribution and grant listings, major-gift and pledge documentation, and grant agreements showing restrictions.
- Payroll and benefits: payroll registers, Forms 941/W-2/W-3, and the retirement-plan reconciliation.
- Net assets: a roll-forward of net assets with and without donor restrictions, plus the release-from-restriction schedule.
- Governance: board and committee minutes, the conflict-of-interest policy and disclosures, and the prior-year Form 990.
- Single Audit add-ons (if applicable): the SEFA, grant compliance files, and procurement documentation.
Solid financial management basics and a clean chart of accounts make the PBC list far easier to assemble. If your statements are not yet structured by net asset class and function, fix that first — see fund accounting and financial statements and functional expense allocation.
Worked example: a filled PBC tracker
Here is how a small nonprofit ("Riverside Youth Programs," ~$1.4M budget) might track its PBC list in the four weeks before fieldwork. Owner and status columns are filled so nothing slips. This is illustrative — your auditor's actual list governs.
| # | Requested item | Owner | Due | Status |
|---|---|---|---|---|
| 1 | Year-end trial balance (final, adjusted) | Bookkeeper | Wk 1 | Done |
| 2 | Bank recs + statements (4 accounts) | Bookkeeper | Wk 1 | Done |
| 3 | Investment statements + recs | Finance Mgr | Wk 1 | In progress |
| 4 | Grant/contribution listing w/ restrictions | Dev Director | Wk 2 | In progress |
| 5 | Net asset roll-forward (w/ & w/o restriction) | Finance Mgr | Wk 2 | Not started |
| 6 | Payroll registers + 941s + W-3 | HR/Payroll | Wk 2 | Done |
| 7 | Functional expense allocation schedule | Finance Mgr | Wk 3 | Not started |
| 8 | Board + audit committee minutes (FY) | Exec Assistant | Wk 3 | In progress |
| 9 | Conflict-of-interest disclosures | Board Secretary | Wk 3 | Not started |
| 10 | SEFA + federal grant compliance files | Grants Mgr | Wk 4 | In progress |
Sample status note the team would attach to item 5: "Net asset roll-forward: beginning without-restriction $612,400; revenue without restriction $1,180,000; net assets released from restriction $245,000; expenses $1,305,000; ending without restriction $732,400. With-restriction beginning $290,000; new restricted gifts $210,000; releases ($245,000); ending $255,000. Ties to trial balance (item 1)."
Why the tracker pays off
Auditors bill by the hour. Every item marked "Done" before fieldwork is an item they do not have to chase. Assigning an owner and due date — and reconciling each schedule back to the trial balance — is the difference between a quoted fee and a fee plus overruns.
How to make the audit cheaper and cleaner
Audit cost is driven mostly by auditor hours, and auditor hours are driven by how clean and complete your records are. You control most of that.
Cost-and-stress reduction checklist
- Reconcile every bank and investment account monthly, all year — never just at year-end
- Close the books promptly and deliver a final, adjusted trial balance before fieldwork starts
- Use a bookkeeper to assemble the full PBC package; reserve staff time for judgment items
- Keep the audit firm independent — do not have them also do your bookkeeping
- Maintain the SEFA and grant compliance files year-round if you near the $1M federal threshold
- Reconcile each PBC schedule (net assets, functional expense, revenue) back to the trial balance
- Resolve prior-year audit adjustments and management-letter comments before the new audit
- Give the auditor read-only access to your accounting system to cut back-and-forth
Two structural moves lower cost over time. First, accrual-basis books that are audit-ready year-round reduce conversion work — compare approaches in cash vs. accrual accounting. Second, strong internal controls and a healthy operating reserve reduce the risk findings and going-concern questions that lengthen an audit. Benchmark your numbers against peers using nonprofit financial benchmarks.
Finally, treat the audit as recurring, not one-off. Keep a rolling PBC folder, log every adjustment, and start next year's package the day this year's opinion is issued. For the full lifecycle, the free Nonprofit Audit Guide from the National Council of Nonprofits is the best starting reference (as of 2026 — verify).
Turn everyday local spending into recurring, unrestricted funding
Good Circles lets supporters pick your cause once, then a share of their everyday local spending funds you automatically — about $72 per active supporter per year, or roughly $36,000 a year from 500 supporters. It is recurring, unrestricted, and free to your nonprofit. That is an estimate, but unrestricted dollars are exactly what makes an audit (and an operating reserve) affordable.
Claim a Founding Nonprofit spot →Sources & tools
Free first
- National Council of Nonprofits — Nonprofit Audit Guide — Free, comprehensive guide to the audit process: board's role, selecting a firm, preparing, and evaluating the work.
- AICPA — Standards body for audits, reviews, and compilations (SSARS); reference for what each assurance level means.
- State Attorney General / charity regulator audit thresholds — State-by-state summary of when state law requires an independent audit, by revenue or contributions trigger.
Paid — optional labor-savers
- Independent CPA audit firm — Performs the required audit, review, or Single Audit and issues the report or opinion. Worth it when Required when a federal, state, funder, or bylaw trigger mandates an audit; choose a firm with nonprofit and (if needed) Single Audit experience.
- Bookkeeper or fractional finance support — Assembles the PBC package, reconciles accounts, and prepares supporting schedules before fieldwork. Worth it when Worth it whenever staff time is scarce or books fall behind — clean prep directly lowers auditor hours and fees.
Last verified 2026-06-16. Figures and rules change — verify at the source before you act.
FAQ
Does every nonprofit need an annual audit?
No. An audit is required only when a trigger applies: expending $1,000,000 or more in federal awards (the Single Audit threshold, as of 2026 — verify), a state charity-law threshold based on revenue or contributions, a funder or lender requirement, or your own bylaws. If none apply, a less costly review or compilation may be enough. Confirm your specific obligations with a CPA and your state regulator.
What is the difference between an audit, a review, and a compilation?
They differ by assurance level. A compilation provides no assurance — the CPA just helps format the statements. A review provides limited (negative) assurance through inquiries and analytics. An audit provides the highest level of assurance and ends in a formal opinion on whether the statements are fairly presented under GAAP. Only an audit produces an opinion, so if a contract says 'audited financial statements,' a review or compilation will not satisfy it.
How is the $1,000,000 Single Audit threshold measured?
It is based on federal funds expended in a fiscal year, not received, and it includes direct federal grants plus federal money passed through a state or local agency. As of 2026 the threshold is $1,000,000, raised from $750,000 in the 2024 Uniform Guidance revisions, effective for awards issued on or after October 1, 2024 (verify). Awards issued before that date may still carry the old threshold, so have your CPA sort awards by issue date.
What is a PBC list and why does it affect cost?
PBC stands for Prepared-By-Client — the documents and schedules the auditor asks you to provide, such as the trial balance, bank reconciliations, grant listings, payroll filings, a net-asset roll-forward, and board minutes. Auditors bill by the hour, so a complete, accurate PBC package that ties back to the trial balance reduces follow-up questions and lowers the fee. A bookkeeper can assemble most of it.