Purpose of an Independent Audit for Not-for-Profits

An independent audit of a not-for-profit entity provides integrity to information provided in an entity’s financial statement. A financial statement audit is the examination of the organization’s financial statements and disclosures performed by an independent auditor. Upon conclusion of the audit, the independent auditor will provide an opinion in a report as to whether they feel the financial statements are fairly presented in accordance with accounting standards.

Independent audits can be required according to state laws based on the amount of annual contributions received or total annual revenue in addition to other factors.  It’s important to note that a state’s laws requiring an audit can change at any time so it is up to the not-for-profit to check the audit requirements for their state each year to ensure they are compliant.  Even if state laws do not require an audit, private foundations and banks might require audited financial statements before granting or loaning funds to a not-for-profit entity.

The National Council of NonProfits provides a list outlining each state’s nonprofit audit requirements.   Following is a sample of states and their audit requirements for not-for-profits. 

Every not-for-profit entity has its own goals and needs, so it is important for management to consider whether its organization needs an independent audit. Even if an audit is not required, there are other reasons why a not-for-profit entity would benefit from having audited financial statements. The board of directors may want audited financial statements so they can have some comfort or assurance that the financial results that management is presenting are sound. Also, current and potential donors may request to see audited financial statements so they know that the organization is financially stable and accountable. People are more likely to donate money to an organization they trust, and having a financial statement audit is one way not-for-profit organizations can build trust.