Audit, Review, or Compilation? Understanding Your Nonprofit’s Options

If your nonprofit organization relies internally on financial statement reporting or is required to provide them to third parties, you may encounter three common types of assurance services: audits, reviews, and compilations. While each involves an independent external accountant, they differ significantly in the level of assurance provided, work performed, and cost.

Why Nonprofits Need Assurance Services

Financial statements are used by stakeholders—such as boards, donors, lenders, and regulators—to make decisions. These users want confidence that the information is reliable and accurate. An independent external accountant can be engaged to help provide that confidence at various levels.

How Audit, Review, and Compilation Services Differ

Audit — Highest Level of Assurance

An audit is the most thorough examination of a nonprofit organization’s financial statements. Here, the accountant performs extensive testing to determine whether the statements are fairly presented and free of material misstatements. A formal opinion on the financial statements is provided at the conclusion of the engagement along with the audited financial statements. Procedures a nonprofit can expect to be performed include:

• Extensive communication with management regarding policies and processes
• Inquiries of personnel regarding fraud, theft, and litigation
• Establishing an understanding of the organization and the industry it operates in
• Observing and testing internal control processes
• Confirmation with third parties for items like cash, pledges, or debt
• Understanding related party relationships and transactions
• Reviewing source documentation including contracts, leases, and invoices
• Comparing and analyzing financial trends and relationships

Best for: Audits are generally regarded as the gold standard from grantors, donors, and watchdog agencies, however there can be budgetary limitations for smaller or recently established non-profits. An audit may also be required under federal or state regulations, grant, or debt agreements regardless of size. It is important for nonprofit organizations to understand these requirements and the potential cost implications when entering into these agreements or accepting certain funding.

How to prepare: Make sure proper policies and procedures are in place including employee handbooks, documented accounting policies and internal controls, as well as governance items like board conflict of interest forms and whistleblower policies. Maintain a year-end financial close checklist and supporting schedules and ensure transactions are supported by proper documentation like agreements, invoices, deposit slips, and check copies.

Review — Moderate Level of Assurance

A review is less in-depth than an audit. The accountant performs analytical procedures and inquiries to identify anything unusual but does not verify details. Procedures you can expect to be performed include:

• Understanding of the nonprofit organization and its operations
• Analytical review and identification of financial trends and relationships
• Limited review of supporting documentation
• Management inquiries on general operations
• Discussions regarding significant grant and donor agreements

Best for: Reviews can be a great tool for growing or newly established nonprofits as a stepping stone to an audit that may eventually be required. It can be seen as a sound financial practice and more practical from a budgetary standpoint than an audit. It is also disclosed on Form 990 that the nonprofit organization obtained reviewed financial statements.

How to prepare: Keep open communication with your independent external accountant throughout the year and identify unusual transactions or significant new agreements such as grants or leases. Maintain a year-end close checklist to ensure your books are complete and accurate.

Compilation — No Assurance

A compilation involves preparing financial statements and required footnotes using information provided by management. The accountant does not verify accuracy, perform analysis, or attest to anything. A compilation can also assist with preparation of Form 990 by making the financial information more understandable and presentable.

Best for: Compilations are often a good fit for smaller nonprofits that do not require an audit or review but want professionally prepared financial statements. They can be useful for internal reporting, board reporting, and Form 990 preparation, providing financial statements in a clear and organized format.

How to prepare: Maintain accurate and complete accounting records throughout the year and ensure your books are up to date before the engagement begins. Be prepared to provide your trial balance and supporting financial information to your independent external accountant so the financial statements and related footnotes can be prepared efficiently.

Summary and Next Steps

The type of assurance services required may be dictated by a third party, whether it’s a bank, grantor, government, or board member. The state of Florida, for example, requires nonprofits that solicit donors in the state to obtain a review in years when gross receipts exceed $500,000 and an audit in years when gross receipts exceed $1 million. If there are no outside requirements, these services may be obtained simply as best practice.

It is important to understand which level of assurance best meets your nonprofit organization’s needs and prepare accordingly. It is also important for nonprofit organizations to understand the time commitment required on their end to respond to requests associated with an audit, review, or compilation as well as the fees for these services. Engaging a competent external independent accountant that is knowledgeable about the nonprofit industry can ensure that your organization is headed in the right direction.

If you’re unsure whether your nonprofit needs an audit, review, or compilation, Rivero, Gordimer & Company’s nonprofit team can help you evaluate your requirements and determine the right approach.

Additional Resources

• https://www.councilofnonprofits.org/running-nonprofit/nonprofit-audit-guidec/state-law-nonprofit-audit-requirements
• https://www.rgcocpa.com/audit-review-and-compilation-overview-and-how-to-produce-audit-ready-financials/

Frequently Asked Questions

What’s the difference between an audit, a review, and a compilation?

The primary difference is the level of assurance provided. An audit provides the highest level of assurance and includes extensive testing. A review provides moderate assurance through analytical procedures and inquiries, while a compilation provides no assurance but presents financial statements using information provided by management.

Does every nonprofit need an audit?

No. While some nonprofits are required to obtain an audit because of state regulations or funding requirements, others may only need a review or compilation. The right option depends on your organization’s specific circumstances and any requirements imposed by third parties.

Why would a nonprofit get an audit if it isn’t required?

Some nonprofits choose to obtain an audit as a best practice to strengthen confidence among donors, grantors, lenders, board members, and other stakeholders. An audit may also help prepare an organization for future funding opportunities or growth.

Does Florida require nonprofits to have an audit?

It depends on the organization’s gross receipts and whether it solicits contributions in Florida. As discussed in this article, Florida requires certain nonprofits to obtain a review or audit once they exceed specific gross receipt thresholds. Nonprofits should also consider whether grant agreements, lenders, or other third parties impose additional requirements.

Can my nonprofit move from a compilation to a review or audit later?

Yes. As nonprofits grow, receive new funding, or face additional reporting requirements, their assurance needs often change. Many organizations begin with a compilation or review and later transition to an audit as their operations expand.