Executives often discuss types of audits for nonprofits, reviews, and compilations as if they are interchangeable, but each serves a distinct purpose. While all three provide insight into an organization’s financial information, they vary significantly in terms of the level of assurance they offer and the procedures involved. Not every nonprofit needs a full audit to maintain transparency and accountability; sometimes a review or compilation can be both appropriate and cost-effective.
In this article, we’ll clearly define the differences between compilations, reviews, and types of audits for nonprofits. We’ll explain what each process entails, when one might be more suitable than another, and debunk common myths about audits. By the end, you’ll be better equipped to select the right financial evaluation for your nonprofit’s unique needs.
Why Nonprofit Financial Reporting Matters
Financial reporting isn’t just about records—it’s about trust. Donors, grantors, and regulatory agencies want nonprofits to manage funds wisely and show exactly how money is being used. Without clear and accurate financial statements organizations will lose funding, damage their reputation, or face compliance problems.
Nonprofits have several options for financial review depending on their size, funding sources, and reporting requirements. Some may only need a basic compilation, others may need a full audit to meet grant or regulatory requirements. Understanding these different processes helps organizations avoid unnecessary expenses and choose the right level of financial oversight. When done right financial reporting builds credibility, improves decision making, and ensures long-term sustainability.
Choosing the Right Financial Review: Compilation, Review, or Audit?
Not every nonprofit needs an audit, but they must ensure that their organization’s financial records are accurate and trustworthy. Knowing the difference between compilations, reviews, and audits can help nonprofits choose the right level of financial oversight without extra cost or effort.
Compilations: A Quick Financial Snapshot
A compilation is the simplest and cheapest type of review. An accountant gathers financial data and presents it in financial statements without any assurance of accuracy. Nonprofits often use a compilation when they need financial statements for internal use or to meet funder requirements without going through a full review.
But a compilation doesn’t check the numbers. Since no analysis or testing is done, it doesn’t provide assurance to external stakeholders like grantors or regulatory agencies. If you need more accountability, a review or audit might be the way to go.
Reviews: A Level Above a Compilation
A review provides limited assurance that financial statements are free of material misstatements. Unlike a compilation, a CPA performs analytical procedures and inquiries to ensure financial data looks reasonable. This makes a review a middle-of-the-road option for nonprofits that need more credibility in their reporting but don’t need a full audit.
Compared to an audit, a review is faster, less intrusive, and less expensive. While it doesn’t involve deep testing of financial records, it provides more assurance than a compilation. Many nonprofits choose a review when a lender or funder wants some level of confidence in financial accuracy but doesn’t require an audit.
Audits: The Highest Level of Scrutiny
An audit is the highest level of financial review a nonprofit can get. It’s a deep dive into financial records, internal controls, and accounting standards. Auditors test everything, verify transactions and give an opinion on whether the financial statements are fairly presented.
For nonprofits getting federal funding, a single audit is often required. This special type of audit ensures compliance with federal grant requirements and looks at how federal funds are being managed. Because audits are so thorough, they take longer and cost more, but they provide the highest level of assurance.
The Audit Process: Why It Takes So Long and Costs So Much
Nonprofits required to have a full audit find the process is long and expensive. A financial review is not the same as an audit. An audit involves analysis, verification, and compliance checks to ensure financial statements are accurate and meet accounting standards. Each step is important so it’s time-consuming and resource intensive.
The Audit Process
A full audit has several stages to ensure accuracy and compliance.
Planning: The Setup
The process begins with auditors reviewing the nonprofit’s financial structure and identifying risk areas. They look at past financials, funding sources, and internal controls. This stage also involves outlining the scope of the audit, timeline, and key areas of focus for the audit.
Fieldwork: The Dig
In this phase, auditors do a deep dive into the financial records. They verify transactions, review supporting docs, and see if internal controls are working as intended. Compliance with accounting standards and regulations is closely looked at. Any discrepancies, errors or fraud risks are highlighted for further investigation. Since this phase requires gathering and analyzing a lot of financial data it’s often the most time-consuming part of the audit.
Reporting: The Report
Once fieldwork is complete auditors put all the findings into an audit report. This stage involves analyzing the financials, summarizing the key points, and issuing an audit opinion as to whether the financials are fairly presented. Auditors may also provide recommendations for improving financial processes and internal controls. The final report is a tool for stakeholders, funders, and regulatory agencies to use to ensure transparency and accountability within the nonprofit.
Why Audits Come with a High Price Tag
Audits are expensive because they require a lot of work from highly trained professionals. The complexity of a nonprofit’s financial structure, regulatory requirements, and volume of transactions all impact the total cost. If an organization receives federal funds or has multiple revenue streams auditors have to dig deeper which increases the work and cost.
Another big factor is time. Unlike a compilation or review where financials are presented with minimal verification, an audit involves testing, document requests, and follow-up inquiries. Auditors have to verify the accuracy by cross-referencing records, confirming compliance, and evaluating internal controls – all of which take a lot of time.
It may be expensive and time-consuming but an audit provides the highest level of financial assurance. For nonprofits that rely on grants, government funding, or large donor contributions an audit is often required to maintain credibility and compliance. Knowing the process helps organizations plan ahead, budget smarter, and meet their financial reporting requirements.
Avoiding Common Misconceptions: Does Your Nonprofit Really Need an Audit?
Many nonprofit organizations assume they must have a nonprofit audit, even when a simpler and more affordable option would do. While audits are the highest level of financial scrutiny, they’re not always required. Knowing the difference between a financial audit, operational audit, and internal audit will help you avoid unnecessary expenses.
For example, if you only need to present your nonprofit organization’s financial statements to your donors or internal stakeholders, a compilation will do. A review is better when funders require limited assurance that your financial records are accurate. A full independent audit is required when you receive federal funds or meet strict regulatory requirements. Choosing the right financial review depends on your organization’s financial health and external obligations.
How to Determine the Right Financial Review
Choosing the right level of financial oversight starts with asking yourself: Nonprofits should ask:
- Are there funders, lenders, or regulatory agencies that require a specific type of nonprofit audit?
- Do you receive federal or state funding that mandates an independent audit?
- What’s your nonprofit audit cost and does it fit your needs?
- How complex are your financials? Do they justify a full financial audit?
- Are your nonprofit’s financial statements prepared in accordance with generally accepted accounting principles (GAAP)?
If you don’t have the answers, consulting with an auditing firm or certified public accountant can help you determine the best approach. Nonprofit auditing firms specialize in guiding you through compliance requirements while being cost-effective.
We can simplify the process for you. We offer a free consultation to help you evaluate your financial health and choose the right type of review. With our expertise, you’ll be transparent, and compliant and avoid unnecessary expenses.
Choosing the Right Financial Review for Your Nonprofit
Knowing the difference between compilations, reviews, and audits is key to making informed financial decisions. Compilations give a basic overview of your financials without assurance, reviews offer limited assurance with some verification and audits give the highest level of scrutiny and compliance. Each has a purpose and choosing the right one can save you time, and money and be financially transparent.
Nonprofits that choose the right financial review will maintain credibility with funders, comply with regulatory requirements, and allocate resources more effectively. Some organizations may need a full audit, others may find a compilation or review meets their needs without the extra cost.
Not sure which financial review is right for your organization? We can help. Contact us today for a free consultation to review your nonprofit’s financial reporting requirements and determine the best way to comply and be financially stable.
