Audits, reviews and compilations

This guide is for small charities that have been told they "need an audit," or are wondering whether they do. The words audit, review and compilation get mixed up all the time, and the difference matters for your budget. After reading, you'll know what each one is, when a state or federal rule may require one, and how to prepare so the process goes smoothly and costs less.

Three levels of outside accountant work

All three involve an independent certified public accountant (CPA) looking at your financial statements. Financial statements are the formal reports of your finances: mainly a statement of financial position (what you own and owe), a statement of activities (income and expenses) and notes. The three levels differ in how deeply the accountant checks and how much comfort they give readers.

Exact standards are set by the accounting profession, and your CPA will explain what their report covers. The key idea: an audit is the deepest check, a review is lighter, and a compilation is formatting help with no check at all.

When a state requires one

Many states require charities that ask the public for donations to register and file a yearly financial report. Some states also require a CPA review or audit once your revenue passes a certain level. The thresholds and rules vary by state, so check with your state's charity regulator, often in the Attorney General's office.

Example: New York

Under New York Executive Law section 172-b, a charity registered with the Attorney General's Charities Bureau must include:

• an audit report from an independent CPA if its gross revenue and support is more than $1,000,000, or
• a review report from an independent CPA if its gross revenue and support is at least $250,000 but not more than $1,000,000.

The Charities Bureau's form instructions (for Form CHAR500-C) show no accountant's report required up to $250,000 for that filing. New York charities required to file an audit with the Charities Bureau must also have the audit overseen by an audit committee of independent directors, or by the independent members of the board, according to the Attorney General's internal controls guidance.

Other states set their own amounts and rules. Always check your own state and every state where you're registered.

When federal money requires one

If your charity spends federal grant money, including federal money that reaches you through a state, county or city, you need to know about the Single Audit.

Under the federal Uniform Guidance, 2 CFR 200.501, a non-federal entity that spends $1,000,000 or more in federal awards during its fiscal year must have a single audit (or, in limited cases, a program-specific audit) for that year. A single audit is a special audit that covers both your financial statements and your compliance with federal grant rules. It costs more than a normal audit.

If you spend less than $1,000,000 in federal awards, you're exempt from the federal audit requirement for that year. But your records must still be available for review by the funding agency, the pass-through entity and the Government Accountability Office.

Note that the test is money spent in the year, not awarded.

When a funder or lender requires one

Grant agreements, loans and contracts sometimes require an audit or review, whatever your state's rules. Read your agreements and list every reporting requirement. Your board may also decide that an audit is good practice even when not required.

Choosing an accountant

• Independence. The New York Attorney General's guidance explains that an independent CPA can't have a financial or other relationship with the charity beyond being paid for the accounting work. For example, the CPA can't be a board member, an employee or a relative of an employee. Your volunteer treasurer can't audit you, even if they're a CPA.
• Nonprofit experience. Ask how many nonprofit audits or reviews they do, and whether they do single audits if you need one.
• Get quotes. Ask two or three firms. Ask what's included and what would cost extra.
• Engagement letter. The CPA will send a letter setting out the work, timeline and fee. Your board or audit committee should approve it.

Getting ready

Most of the cost of an audit or review is the accountant's time. The more organized you are, the less time they need.

About two to three months before your year ends:

• Agree on dates with your CPA.
• Ask for their list of documents they'll want (often called a "PBC list," short for "provided by client").

After your year ends, have these ready:

• bank statements and monthly reconciliations for every account
• your general ledger and trial balance (the full list of account balances)
• grant agreements and records showing how restricted gifts were spent
• donor records for large gifts and pledges
• payroll records and tax filings
• invoices for big expenses and fixed assets (equipment you own)
• board minutes for the year
• contracts, leases and loan papers
• your previous year's financial statements and Form 990

Good monthly habits make this easy. Our guide on financial controls covers them.

After the report

• The CPA may give you a letter about weaknesses they found in your controls. Take it seriously and fix what you can.
• Your board or audit committee should meet with the CPA to go over the results.
• File the report with your state and give copies to funders who asked for it.
• Thank the volunteers who helped. Audit season is hard work.

Audit and review checklist

• We checked our state's review and audit thresholds
• We know whether any of our grants are federal money
• We know how much federal money we expect to spend this year
• We listed every funder or lender that requires an audit or review
• We chose an independent CPA with nonprofit experience
• Bank reconciliations are done for every month
• Our board or audit committee approved the engagement and will review the results

If you want help preparing for your first audit, ask a member charity for help through the Exchange.