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What is a Financial Audit and Does Your Organization Need One?

Updated: Feb 6, 2020

Financial Audit - just the words might be enough to break you into a cold sweat. But, this process doesn’t have to be scary. Dig in below and allow us to demystify the auditing process for your nonprofit organization. Below we cover the following:

  • What is a nonprofit financial audit?

  • Does my nonprofit need an independent financial audit?

  • What documents may we use instead of an independent financial audit?

So let’s get started!

What is a financial audit?

An independent audit is an examination of the financial records, accounts, business transactions, accounting practices, and internal controls of a charitable nonprofit by an "independent" auditor. "Independent" refers to the fact that the auditor/CPA is not an employee of the nonprofits but instead is retained through a contract for services, and hence is "independent."

(Source: National Council of Nonprofits)

Does our Organization need an independent financial audit?

Laws vary by state. Texas does not have a state law requiring an audit, per the Tex. Bus. & Org. Code § 22.352 State Statute, which states that "a charitable organization with annual contributions over $10,000 must have current and accurate financial records in accordance with generally accepted accounting principles (GAAP). Based on these records, the board should prepare or approve a financial report that conforms to American Institute Of Certified Public Accountants (AICPA) standards. The financial report must be made available to the public (§ 22.353(b)). Exemptions (§ 22.355).

(Source: National Council of Nonprofits)

From the Nolo website, "Independent audits are mandatory for some nonprofits. The IRS does not require nonprofits to obtain audits, but other government agencies do. For example, the federal Office of Management and Budget (OMB) requires any nonprofit that spends $500,000 or more in federal funds in a year (whether directly or by passing the money on to other nonprofits) to obtain what is termed a “single audit” to test for compliance with federal grants management standards."

What documents may we use when we do not have an independent financial audit?

An independent financial audit is expensive, and if your nonprofit organization has a small annual operating budget, it may not be feasible.

So what is the alternative?

You can obtain a certified financial statement from an independent accounting firm. From Investpedia, "A certified financial statement is a financial document, such as an income statement, cash flow statement or balance sheet, that has been audited and signed off on by an accountant. Once an auditor has fully reviewed the details of a financial statement following GAAP guidelines and is confident the numbers reported within it are accurate, they certify the documents. Certified financial statements are an important part of the checks and balances system of financial reporting."

Still not completely comfortable with Financial Audits? We got your back!

Reach out to us for a free consultation at

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