Money Matters

Nonprofit audits: Checklist, tips, and tools

Stressed out about your nonprofit audit preparations? Learn how a good checklist and the right software tools can relieve the strain, supporting a smooth audit that helps you gain trust, build compliance, and plan for growth.

Published July 17, 202613 min read Share

This article was originally published on April 11, 2025, but has been refreshed and re-published with new content in July 2026.

As a nonprofit, your relationship with donors and government entities is vital, and has to be built on trust. That is best achieved with accurate and transparent documentation.

A well-run nonprofit audit is one of the most effective ways to demonstrate your organization’s financial stewardship.

The challenge is that audits can be expensive and preparation-heavy—unless you have the right technology.

The use of nonprofit accounting software can reduce that complexity significantly, making a fully paperless audit not just possible, but practical.

In this article, we walk you through everything you need to know, from understanding the audit process to the practical steps that make paperless auditing a reality.

Key takeaways

• A nonprofit audit is not a single thing. Understanding the six distinct audit types – and the difference between audits you commission and a mandated IRS examination – helps your organization prepare appropriately for each.
• Audit readiness is a year-round practice, not a last-minute scramble. Organizations that embed clean recordkeeping, consistent documentation, and transparent reporting into their everyday workflows arrive at audit time already prepared.
• A cloud-based nonprofit accounting system does more than organize your finances – features like audit trails, automated controls, dimensional reporting, and embedded communications directly reduce the time and cost of your audit.
• Giving your auditor controlled, read-only access to your financial system and purpose-built dashboards reduces back-and-forth requests, speeds up the process, and can meaningfully lower your overall audit costs.
• Going paperless transforms the audit from a reactive compliance exercise into a proactive demonstration of financial stewardship – one that strengthens donor confidence, supports grant applications, and positions your nonprofit for long-term growth.

Here’s what we’ll cover:

What is a nonprofit audit?

A nonprofit audit is a review of your nonprofit’s financial records to verify their accuracy, compliance with laws, and adherence to accounting standards.

If you have qualified staff, an internal audit can be a cost-effective way to ensure your organizational controls are working. 

External auditors, in contrast, give your organization credibility and are often required for compliance with funders and regulators.

For example, some US jurisdictions demand an external audit from nonprofits whose annual revenue exceeds a certain threshold—a threshold that varies between the different jurisdictions.

Unlike standard audits, nonprofit audits must check for compliance with specific regulations and requirements, including restrictions imposed by donors. 

The concept of restricted and unrestricted funds is unique to charitable organizations, with restricted funds allocated for specific purposes, while unrestricted funds can be used for general operations. 

6 types of audits for nonprofit organizations

1. Financial audit 

The financial audit is one of the most common types of nonprofit audits.

It focuses on the accuracy of financial statements and providing stakeholders with an objective overview of your organization’s financial health and practices.s.  

2. Compliance audit

This examines whether your operation adheres to applicable laws, regulations, and funding requirements.

It is especially relevant if your nonprofit receives government grants or public funding, as the audit will check if you’re following the specific spending guidelines set by the grant providers.

These guidelines might include restrictions on how funds can be used, such as prohibiting the use of grant money for lobbying activities, requiring detailed financial reporting, and ensuring that funds are spent within the grant period.

Additionally, the audit might verify that your administrative costs do not exceed a certain percentage of the total grant amount and that all expenditures are directly related to the grant’s objectives. 

3. Operational audit 

This reviews your internal processes and efficiency.

It evaluates how effectively you use the available resources to achieve your mission, identifying areas where internal practices could be optimized.

Although internal, it shouldn’t be confused with an internal audit, which includes financial aspects.

For instance, an operational audit might assess the efficiency of your volunteer management system, ensuring resources are used effectively.

4. Internal audit  

This is your proactive check-up, often done by in-house staff or independent auditors.

It looks at your control procedures, risk management, and adherence to policies.

Imagine reviewing how you handle cash donations to ensure everything is secure and properly documented, catching any issues before they become big problems. 

5. Program-specific audits  

Some grants or funding sources require audits focused solely on a specific program. Your funders would want to know exactly how their money is being used.

If you received a health grant, a program-specific audit would ensure that those funds are used exclusively for health-related activities and outcomes.

These audits verify that your donors’ stipulations have been followed and that program outcomes align with the funders’ expectations.

6. The IRS audit 

Of the six audit types covered here, the IRS audit is the only one initiated externally—meaning it’s not something your organization chooses or commissions, but rather a regulatory examination imposed upon you.

This happens when the IRS identifies discrepancies in your tax filings, or when your nonprofit is randomly selected for review.

Unlike the other audit types, you have limited control over the timing or scope of an IRS audit.

It assesses your tax-exempt status, unrelated business income, and proper handling of donations and expenses—areas where errors or inconsistencies can put your nonprofit’s standing at risk.

A common trigger is the misreporting of income from major fundraising events, such as annual galas or charity auctions, where significant donations, ticket sales, and auction proceeds must be accurately documented to satisfy tax regulations.

The best defense against an IRS audit is the same discipline that underpins the other five audit types: accurate recordkeeping, transparent financial reporting, and a well-maintained audit trail.

Organizations that conduct regular financial audits are generally better positioned to respond if an IRS examination does occur. 

When does your nonprofit need an audit?

Your nonprofit needs an audit when required by law, requested by funders, or when your organization’s growth and complexity demand a higher level of financial accountability.

While not every nonprofit is legally obligated to undergo an audit, the circumstances that trigger it are more common than many organizations expect.

Here are some situations in which your nonprofit may be required to perform this kind of review: 

Legal or state requirements

Some states mandate annual audits for nonprofits, especially those that meet a certain revenue threshold, or solicit donations from the public.

Check your state’s nonprofit audit requirements to determine if you fall into this category. 

Grant or funding requirements

Certain grants, particularly those from government agencies or large foundations, require audited financial statements as part of their awarding criteria.

This assures them that your nonprofit has what it takes to manage funds responsibly and can be trusted to respect their guidelines.

Those guidelines could include reporting requirements, performance metrics, or legal observations.  

Internal policies and best practices

Many nonprofits choose to conduct regular audits as best practices, even if it’s not legally required.

Regular audits reinforce your nonprofit’s transparency, strengthen donor trust, and help you stay on a good footing financially. 

Significant growth or operational changes

Rapid growth, major changes in campaign programming, or the arrival of a new leadership team may warrant a fresh audit.

This helps ensure that your organization’s financial framework can support new demands or changes in strategy. 

What are the benefits of a nonprofit financial audit?

Nonprofit audited financial statements provide your organization with financial validation and allow you to detect internal inefficiencies. They help keep your financial affairs on track, enhancing overall accountability and donor confidence.

By showing your commitment to fiscal and legal responsibility, audits can help you retain contributors, increasing the chance that they will step up donations. 

A financial audit may also be an official prerequisite as part of the application process when you seek a grant, particularly when the funders are government agencies or corporations. 

Finally, solid financial information is essential for long-term planning and the ongoing development of your organization and its mission.

A clear game plan is another factor that works in your favor when pitching to potential supporters, especially if you have a trustworthy reputation supported by verified information. 

Advice for choosing an auditor

Look for a qualified auditor or firm with nonprofit-specific experience, relevant certifications, and a collaborative approach that goes beyond the numbers to understand your organization’s mission and operational needs.

There are individual auditors or entire audit firms that specialize in the nonprofit sector.

They will have the appropriate qualifications, such as the Certified Nonprofit Accounting Professional (CNAP) or Certified Public Accountant (CPA) with nonprofit specialization.

Many such professionals will be listed in directories maintained by entities like the American Institute of Certified Public Accountants (AICPA) or the National Council of Nonprofits. 

References from other organizations in your field will help you identify firms with experience in different types of audits for nonprofits.

Ideally, you will find an auditor who has a greater emphasis on mission alignment and sector-specific challenges compared to those working purely in the business or financial sectors.

That kind of vision generally goes hand in hand with a more collaborative approach, addressing the organization’s operational needs rather than simply crunching the numbers.

However, this does not mean that nonprofit auditors are any less business-like than commercially oriented auditors, and you can be sure their experience brings a good understanding of the regulations surrounding nonprofit operations. 

Tips for preparing your nonprofit audit report

Specialist nonprofit accounting software with audit automation capabilities can make sense of this entire operation by organizing documents, ensuring secure access, and tracking internal review processes.

Audit readiness is the byproduct of sound financial management practiced consistently throughout the year. It’s not something you deal with in the weeks before an auditor arrives.

Use accounting systems that embed audit-ready habits into your everyday workflows, so that when the time comes, your records, reports, and documentation are already in order.

The following tips double as an audit checklist for nonprofit organizations:

1. Implement internal controls and best practices

A cloud nonprofit accounting system, such as Sage Intacct, can help your organization set up roles, permissions, and rights for users that serve as critical internal controls your auditor will examine.

Here are five features of cloud nonprofit accounting solutions that can infuse best practices and shore up internal controls:

Audit logs and audit trails

Track the who, what, and when for every transaction that is entered or modified. See when user rights or permissions were altered and by whom.

If these records already exist when audit time arrives, you avoid the need to reconstruct transaction histories under pressure.

Secure access

Define user access restrictions by role or department to retain internal controls and secure sensitive financial information.

Security features like data encryption protect sensitive donor, financial, and organizational information, restricting access to only the people you have authorized.

This gives auditors confidence that your records are trustworthy.

Automated internal controls

Maintain consistent, transparent processes for internal workflows such as purchase requisitions and approvals.

Smart rules specify documentation requirements and block or warn accountants about transactions that don’t meet the standards.

Because these controls are enforced automatically, your documentation is consistent and complete long before an auditor requests it.

Dimensional database

Some accounting systems, including Sage Intacct, use a table-driven database architecture.

This allows you to tag and describe transactions with multiple dimensions, enabling easy, robust slice-and-dice reporting that helps create audit-ready financials and answer auditor questions.

Embedded communications

Document all team communications inside the accounting system so your auditor can see how your team resolved any questions about journal entries, accounts, projects, invoices, purchases, and other transactions.

This removes the need to search through emails or recreate decision trails when auditors ask how a particular entry was handled.

Grant and donation tracking

Record and monitor the receipt and allocation of grants and donations, including restrictions, spending deadlines, and reporting requirements, ensuring funds are managed in compliance with donor stipulations.

Having this information centralized and up to date means you can demonstrate fund compliance instantly, rather than assembling evidence after the fact.

2. Engage and empower your auditor

Consider giving your auditor access to your nonprofit financial system.

This will help the auditor work more efficiently and reduce the auditor’s requests to your staff for additional reports and questions.

Allow your auditor to log on and see what you see during the audit process.

A modern nonprofit financial system should allow you to limit an auditor’s access to read-only, so they cannot make any journal entries or change anything in the system.

You can also limit what areas of the system the auditor role can access.

The auditor can pull items needed without your accounting team’s intervention.

With Sage Intacct, the auditor can ask questions or request additional information through the Collaborate feature. This efficiency not only makes your audit less time-consuming but can also decrease its overall cost.

3. Create dashboards that facilitate your paperless audit

When you give your auditor access to your financial management system, you can create role-based auditor dashboards to help them find the information they need quickly and easily.

Here are three types of dashboards that will help facilitate an audit:

Compliance dashboard

This dashboard should display real-time audit and tax reporting information, including your Statement of Activities and Statement of Operations.

Include workpapers that replicate portions of your Form 990 like your Statement of Revenue and Statement of Functional Expenses.

A good system matches your account entries to nonprofit-specific regulatory requirements, such as IRS, GAAP, and state reporting standards.

It generates alerts for upcoming deadlines and monitors adherence to donor restrictions.

Quantitative and qualitative transparency dashboard

This dashboard should include disclosures, footnotes, other narratives, and backup support demonstrating and explaining quantitative reporting.

Prepared by Client (PBC) checklist dashboard

Auditors appreciate the convenience of having a one-stop checklist for PBC.

This pulls together all the information auditors require in a checklist, allowing you to assign items, track due dates, and track completion progress.

As you work through your PBC checklist, you can assemble and include collaborative attachments such as board minutes, bank statements, annual reports, and org charts.

You can include trial balance, bank reconciliations, aging, and check registers.

Auditors can review system records, including approval queues and allocations.

You can even link to internal applications such as accounts payable, cash management, fixed assets, and more.

4. Support remote audits

Thanks to current technology advancements in auditing, supporting partially or fully remote nonprofit audits has never been more convenient.

By eliminating the need for the auditor to physically travel to your location, both time and travel expenses can be saved.

By conducting the audit remotely, you won’t need to set up space in your office for the auditor.

Your team will be able to continue working uninterruptedly.

Your team members across different locations can enhance their collaboration with a remote auditor.

Utilizing cloud-based remote audits also grants added versatility in scheduling meetings outside of traditional work hours.

With access to your accounting software system and chat features within the application, auditors can effectively work remotely and communicate with your team whenever needed.

In-person discussions with the auditors can be facilitated through various web conferencing platforms such as Microsoft Teams and Zoom, regardless of geographical constraints for team members.

Even organizations in remote or underserved areas can undergo effective audits and choose an auditor who specializes in the nonprofit sector with a remote audit.

Eliminating auditor travel costs will be especially beneficial for nonprofits with international entities or multiple locations.

Give your nonprofit a financial makeover

Transitioning to a paperless nonprofit audit is a statement of intent.

It signals to donors, funders, and regulators that your organization takes financial stewardship seriously.

With the right cloud-based accounting system in place, the audit process becomes less of a burden and more of an opportunity to demonstrate the transparency and integrity that sets your nonprofit apart.

FAQs about nonprofit audit readiness