Does Your Nonprofit Need an Audit? A Practical Guide to Audit Requirements, Costs, Grants, and State Rules
Does your nonprofit really need an audit?
It’s a question many nonprofit boards and executive directors eventually face and the answer isn't always “yes.”
For some organizations, an independent audit is required by law or because of federal funding. For others, a grantmaker, bank, board policy, or organizational growth makes an audit a practical necessity. And for smaller nonprofits, a financial review or compilation may provide what is needed without the cost and administrative burden of a full audit.
The important thing is to determine what your organization is actually required to have before paying for a service it may not need.
This guide walks through the major factors to consider: organizational size, revenue, grants, federal funding, state requirements, funder expectations, and cost.
First: An Audit Is Not the Same as a Financial Review
One of the biggest misconceptions among nonprofit leaders is that there are only two choices: do an audit or don't do an audit.
There are actually several levels of financial statement services.
Compilation
A compilation generally means a CPA helps prepare financial statements from the organization's accounting records but does not provide assurance that the statements are free of material misstatements.
This may be appropriate for a smaller organization that needs professionally formatted financial statements for internal purposes, a board, a lender, or certain grant applications.
Financial Review
A review provides a higher level of assurance than a compilation, but it is substantially less extensive than an audit.
The CPA performs inquiries and analytical procedures but does not perform the same level of transaction testing and internal-control work associated with an audit.
Financial Statement Audit
An independent audit provides the highest level of assurance of the three.
The auditor performs substantially more testing, including procedures involving transactions, account balances, internal controls, and supporting documentation, and issues an independent opinion on the financial statements.
So before you tell your board, “We need an audit,” first determine whether the requirement is actually for an audit, a review, a compilation, or a different type of compliance engagement.
Does the IRS Require Every Nonprofit to Have an Audit?
No.
Being a 501(c)(3) does not, by itself, mean that a nonprofit must have an annual independent financial statement audit. The IRS generally requires qualifying tax-exempt organizations to file an annual information return or notice, such as Form 990, 990-EZ, or 990-N, depending on the organization's circumstances. That filing requirement is different from an independent financial statement audit. However, federal funding can create a separate audit requirement. And that's where grants become particularly important.
Federal Grants: The $1 Million Question
If your nonprofit receives federal awards, don't look only at your organization's total revenue.
Look at how much in federal awards your organization actually expended during its fiscal year.
Under the current federal Uniform Guidance, a non-federal entity that expends $1,000,000 or more in federal awards during its fiscal year generally must have a Single Audit or, when permitted, a program-specific audit. The threshold was increased from $750,000 under the revised federal rules.
That distinction matters.
For example:
Nonprofit revenue: $2 million
Federal awards expended: $200,000
The nonprofit's $2 million revenue does not automatically mean it needs a federal Single Audit.
On the other hand:
Nonprofit revenue: $900,000
Federal awards expended: $1.05 million
The organization may have a federal Single Audit requirement because of the amount of federal awards expended.
And federal grant requirements can go beyond the basic Single Audit threshold. A particular award, agency, or pass-through entity may impose additional audit or financial reporting requirements. Federal agencies specifically advise recipients to review the terms and conditions of their awards.
Bottom line: Don't assume your grant requirements are satisfied simply because you are below the $1 million federal threshold.
Read the grant agreement.
What About State Requirements?
This is where nonprofit audit requirements can get complicated.
There isn't one universal nonprofit audit threshold that applies across the United States.
States can establish their own requirements for charitable organizations, particularly organizations that solicit contributions within the state.
And here's another important point:
The state where your nonprofit is incorporated isn't necessarily the only state you need to consider.
If your organization solicits contributions or conducts charitable activities in multiple states, you may have registration and reporting obligations in more than one jurisdiction.
Virginia provides a good example of why nonprofits need to look carefully at the actual rule.
Virginia's charitable solicitation law requires covered charitable organizations that solicit contributions in the Commonwealth to register and file required financial information. Certain organizations may satisfy the financial reporting requirement by providing information from their Form 990, while other organizations may need additional financial statements or accountant information.
Virginia also has a specific rule affecting nonprofit organizations seeking the state's sales and use tax exemption.
Under Virginia's current law, a qualifying nonprofit with $750,000 or more in gross annual revenue in the previous year must provide a financial review performed by an independent CPA. For an organization with $1.5 million or more in gross annual revenue, the Virginia Department of Taxation may require an independent CPA audit instead of the review.
Notice the difference:
$750,000 does not automatically mean “you need an audit.”
In this particular Virginia tax-exemption context, it means a financial review is required, with the possibility of an audit at the higher threshold if the Department requires one.
That's why nonprofit leaders should be careful when they hear statements like:
“Once you hit $750,000, you have to get an audit.”
The actual requirement may be more nuanced.
Does the Size of Your Nonprofit Matter?
Yes; but not necessarily in the way people think. There is no universal rule saying: “If your nonprofit has $X in revenue, you must have an audit.”
Instead, organizational size can influence several different requirements. As your nonprofit grows, you may encounter:
State financial reporting requirements
Grantmaker requirements
Bank or lender requirements
Federal Single Audit requirements
Board policies requiring independent audits
Increased internal-control expectations
More complicated accounting
Multiple programs and funding streams
Restricted grants and contributions
More employees and payroll activity
Multiple locations
Investments or significant assets
Government contracts
Increased donor expectations
Grants Can Change the Answer
One of the first questions I would ask a nonprofit considering an audit is:
“Who gives you money, and what do those agreements require?”
A nonprofit can be below every statutory audit threshold and still be required to provide audited financial statements to a funder.
For example, a foundation might say:
Audited financial statements required
Reviewed financial statements accepted
CPA-prepared financial statements required
Most recent Form 990 required
Audit required once organizational revenue reaches a particular amount
Audit required if the organization receives more than a certain amount of funding
There is no substitute for reading the actual grant agreement.
Federal agencies also make clear that recipients accepting federal funds agree to the applicable terms and conditions of the award, including applicable audit requirements.
Tip: Before applying for a major grant, ask yourself:
“Will accepting this award create an audit, Single Audit, or additional financial reporting requirement for our organization?”
That question can prevent an unpleasant surprise later.
How Much Does a Nonprofit Audit Cost?
This is where many boards understandably hesitate. An audit is not free and the cost can vary dramatically.
A nonprofit's audit fee can depend on:
Annual revenue
Number of transactions
Number of bank accounts
Number of programs
Number of grants
Number of funding sources
Federal funding
Multiple locations
Complexity of restricted funds
Investments and fixed assets
Payroll complexity
Quality of the bookkeeping
Internal controls
Whether it is the organization's first audit
Whether a Single Audit is required
The CPA firm's rates and specialization
Published 2026 estimates vary considerably, but examples of reported ranges put many smaller nonprofit financial statement audits somewhere around $5,000–$20,000, with larger or more complex organizations costing substantially more.
The National Council of Nonprofits emphasizes that audit fees are largely driven by the amount of time required, which means organizational size and financial complexity have a major effect on the final price.
Don't Budget for an Audit Without Getting Quotes
If you think an audit may be required, obtain proposals from multiple qualified CPA firms.
Ask each firm:
What exactly is included?
Is this a financial statement audit or a Single Audit?
Are there additional compliance procedures?
Are management letters included?
Are there additional fees for preparing schedules?
What will the organization need to provide?
How much staff time should we expect to spend?
What could cause the fee to increase?
Is the CPA experienced with nonprofits like ours?
Does the quoted price assume our books are reconciled and complete?
The cheapest proposal isn't necessarily the best proposal; but you also should not automatically assume the most expensive firm is the right choice.
A Review May Be the Better Option
If your nonprofit does not legally or contractually require an audit, ask whether a financial review would accomplish your goal.
A review costs less because the CPA performs substantially fewer procedures than an audit. It provides limited assurance rather than the higher level of assurance provided by an audit.
A review might make sense when:
Your state requires a review rather than an audit
A grantmaker accepts a review
Your board wants independent financial oversight
Your organization is growing
You want an outside CPA to look at the financial statements
A lender accepts reviewed financial statements
You aren't subject to a federal Single Audit
But remember: If a funder or law specifically requires an audit, a review is not a substitute.
What If Your Nonprofit Is Very Small?
Smaller nonprofits sometimes assume that an audit is simply “something bigger organizations do.” That isn't necessarily true. A small nonprofit may need an audit because of:
A grant agreement
A government contract
A lender
A state requirement
Its bylaws
A board policy
A particularly high-risk program
Significant restricted funding
Donor expectations
At the same time, a small nonprofit may not need an audit at all. For some organizations, a compilation or review may provide enough financial reporting for their circumstances. The goal shouldn't be to get the biggest financial engagement possible. The goal is to get the level of financial assurance your organization actually needs.
When Should Your Board Consider an Audit Even If It Isn't Required?
Sometimes the best reason for an audit isn't a law or a grant. It's good governance.
An independent audit can give the board another layer of confidence that financial statements are fairly presented and that important financial processes and controls are functioning appropriately.
The IRS has also noted that charities with substantial assets or revenue should consider obtaining an audit even when one isn't otherwise required.
An audit may be particularly worth considering when your nonprofit is:
Experiencing rapid growth
Taking on significant new funding
Adding employees
Expanding programs
Opening another location
Handling substantial restricted funds
Receiving government funding
Preparing for a major capital campaign
Applying for larger grants
Changing executive leadership
Transitioning bookkeeping or accounting staff
Experiencing significant turnover
Preparing for a merger or acquisition
Concerned about internal controls
Think of an audit as more than a compliance expense.
It can also be a financial management and governance tool.
A Simple Nonprofit Audit Decision Checklist
Before deciding whether your organization needs an audit, work through these questions:
Legal and regulatory
Does our state require an audit?
Does our state require a review or other financial statement?
Are we registered to solicit contributions in other states?
Do those states have additional requirements?
Federal funding
How much federal funding did we actually expend during the fiscal year?
Did we reach the current $1 million Single Audit threshold?
Do any federal awards impose additional audit requirements?
Are we a recipient or subrecipient?
Are we subject to a program-specific audit requirement?
Grants and contracts
Do our grant agreements require audited financial statements?
Do our government contracts contain audit provisions?
Do our funders accept reviews instead of audits?
Are there upcoming grant applications with financial statement requirements?
Organizational governance
Do our bylaws require an audit?
Has our board adopted an audit policy?
Does our board want independent assurance?
Is an audit appropriate given the organization's risk and complexity?
Cost
What will the audit cost?
What will a review cost?
What will a compilation cost?
How much staff time will each option require?
Is the cost included in an allowable grant budget or indirect cost structure where applicable?
The Bottom Line
Not every nonprofit needs an audit. But every nonprofit should know why it does, or does not, need one.
The answer usually comes down to five questions:
1. What does the law require?
Check federal and state requirements.
2. What do your grants and contracts require?
Read the actual agreements rather than relying on assumptions.
3. How much federal funding did you expend?
For organizations subject to the federal Uniform Guidance, $1 million in federal awards expended during the fiscal year is the current Single Audit threshold.
4. What does your board and governance structure require?
Your bylaws, policies, lenders, and board may impose requirements beyond the law.
5. What level of assurance does your organization actually need?
The answer may be an audit. It may be a review. It may be a compilation. Or it may simply be strong internal financial reporting and controls.
The important thing is to make the decision deliberately; not because someone told you that “all nonprofits have to be audited.”
One Last Tip
Don't wait until the end of your fiscal year to figure this out.
If your organization is approaching a revenue threshold, preparing a major grant application, accepting significant government funding, or expanding substantially, talk with your CPA early.
A little planning can help you choose the right engagement, budget for the cost, strengthen your financial systems, and avoid discovering an audit requirement after the money has already been spent.
For nonprofit leaders: If you're unsure whether your organization needs an audit, review, compilation, or Single Audit, start by gathering your annual revenue, federal awards expended, state(s) where you solicit, major grant agreements, bylaws, and current financial statements. Those documents will usually tell you where to start.
Important: This is general educational information, not legal or accounting advice. Requirements can vary based on your state, funding sources, legal structure, and specific grant agreements. Before making a final decision, confirm the applicable requirements with your CPA, attorney, grant administrator, or state agency.