Audit vs. Review: Which Does Your Nonprofit Need?

Nonprofit organizations play a vital role in our world: advancing important causes, providing services to vulnerable individuals and generally making our communities better places. To sustain their work, nonprofits typically rely on donations, grants and other sources of funding.

Maintaining financial transparency and credibility with these stakeholders is vital to a nonprofit’s long-term success. To achieve that, many nonprofits undergo some level of financial examination from an independent auditor. However, nonprofit leaders are often uncertain about whether they need a full audit or if a review would suffice.

Many nonprofit boards immediately assume that an audit is necessary without fully considering a review — which in many cases will provide the appropriate level of assurance. Understanding the differences between these two financial examinations, their respective benefits and the circumstances under which each is appropriate can help nonprofits make informed decisions.

At James Moore, our nonprofit assurance professionals provide both reviews and audits of various types of nonprofit entities. Here’s a rundown of what each entails and what might be best for your organization.

Key Differences Between an Audit and a Review

At their core, both audits and reviews provide stakeholders with confidence in a nonprofit’s financial statements. But they differ significantly in scope, cost, and level of assurance.

From a cost perspective, audits are more expensive and time intensive due to the depth of examination involved. Reviews, on the other hand, are generally more affordable and faster to complete. The trade-off is that audits offer the highest level of assurance, while reviews provide only a limited amount.

Let’s break down some more of the key distinctions between an audit and a review.

What is a Nonprofit Audit?

A financial statement audit provides the highest level of assurance on the accuracy of a nonprofit’s financial statements. It involves an in-depth analysis conducted by an independent CPA who verifies financial records, tests internal controls and assesses compliance with accounting standards. The goal of an audit is to provide reasonable assurance that the financial statements are free from material misstatements and conform to Generally Accepted Accounting Principles (GAAP).

Distinct from financial statement audits are single audits. This is a special type of audit nonprofit organizations are required to obtain in addition to a financial statement audit if they expense more than $1,000,000 of federal funds in a single year (for fiscal years beginning after Oct. 1, 2024).

Read More: How to Prepare for An Audit: Financial Statement Audit vs. Single Audit

What is a Nonprofit Review?

A review is a step below an audit in terms of rigor. While it still involves an independent CPA examining the organization’s financial statements, the level of analysis is significantly less detailed. Rather than performing extensive testing, the CPA primarily conducts analytical procedures and inquiries to determine whether the financial statements appear reasonable.

Compared to a financial statement audit, which provides reasonable assurance that the financial statements are free from material misstatement, a review only provides limited assurance. This lesser level of assurance may not be enough for some stakeholders, who instead require an audit.

Below reviews are compilations. A compilation for a nonprofit is a basic financial statement preparation service in which an accountant presents financial information without providing any assurances that the information is free from material financial misstatement. Compilations do not involve verification or analysis. Instead, they are brief reports printed on your assurance firm’s letterhead that inform stakeholders that your financial statements have been prepared by a CPA firm, although management is ultimately responsible for them.

Explore Our Services: Audits, Reviews, and Compilations

Common Misconceptions About Audits and Reviews

Despite the availability of financial reviews as an option, many nonprofit boards immediately assume they need an audit. This assumption often stems from a lack of understanding of what a review entails or an ingrained belief that audits are inherently more credible. And while it’s certainly true that audits do offer a higher level of scrutiny, it’s not always necessary for organizations to obtain one.

One major misconception is that a financial review is insufficient for nonprofit transparency. In reality, reviews can provide valuable insight into an organization’s financial health. This is particularly true for smaller nonprofits that do not have compliance requirements that require them to seek an audit.

Another misconception is that donors and grant makers always require an audit. While this may be the case for some major funders, many are satisfied with financial reviews as long as they are conducted by a qualified CPA.

When Does a Nonprofit Need an Audit?

Of course, certain circumstances do make it necessary for a nonprofit to obtain a full financial statement audit. These include:

1. Compliance requirements: Some nonprofits are legally required to undergo audits based on state regulations or federal grant requirements. Many states have revenue thresholds that dictate when an audit is necessary. For example, in Florida, for financial years starting 2025 onward, nonprofits with annual revenues exceeding $1,000,000 are required to have an independent audit. Those with revenues between $500,000 and $1,000,000 must undergo a financial review or an independent audit. Organizations with revenue below $500,000 can choose to have an audit, review or compilation, but this is optional. Other states may have different thresholds, so it is essential for nonprofits to check their specific state regulations.
2. Grantor and funder expectations: Large grantmaking institutions and government programs may require organizations to share their most recent audits before disbursing funds. As of October 2024, nonprofits that expense over $1,000,000 in federal funding in a fiscal year must obtain a single audit (a comprehensive examination of a nonprofit’s financial statements and compliance with federal grant requirements).
3. Stakeholder trust and transparency: Nonprofits that rely on major donors or have a large membership base may find that an audit increases financial credibility and donor confidence. Nonprofit oversight organizations such as GuideStar use a nonprofit’s audited financial statements to determine nonprofit ratings, which can enhance an organization’s reputation and appeal to potential donors.
4. Preparing for growth: Organizations experiencing rapid expansion may benefit from an audit to establish strong financial oversight and internal controls as they scale operations.

If a nonprofit is required to obtain a financial statement audit by law, they have no option but to do so. But for many smaller nonprofit organizations, the choice to obtain an audit is exactly that: a choice. In many instances, nonprofit organizations still choose to move forward with an audit even if they’re not legally required to do so. But in other cases, a nonprofit might opt for a review instead.

When Does a Nonprofit Need a Review?

While audits provide the highest level of assurance, many smaller nonprofits can meet their financial oversight needs with a review. A nonprofit might choose a financial review in the following situations:

1. Cost considerations: If an audit is not required, a review may be a more cost-effective way to provide stakeholders with financial assurance. Reviews typically cost about half as much as an audit and place fewer demands on board members’ and employees’ time.
2. Grant and donor requirements: Some funders are satisfied with reviewed financial statements, especially for smaller grant amounts or first-time grantees.
3. Building credibility over time: A review can serve as a stepping stone for nonprofits that anticipate requiring audits in the future but are not currently mandated to undergo one. If your organization isn’t prepared for an audit, it won’t be an easy process. A review can put your organization on a path to being better equipped for an audit in future fiscal years.
4. Internal financial oversight: If a board of directors wants an external CPA’s perspective on financial health without the expense of a full audit, a review can be a reasonable alternative.

If you’re unsure about which assurance product is the right fit for your needs, your CPA firm can help you determine the best approach for your organization.

James Moore: Specialized Assurance Services for Nonprofits

Choosing between an audit and a financial review is an important decision for any nonprofit. While audits provide the highest level of financial assurance, reviews can be a viable and cost-effective alternative for organizations that don’t have regulatory requirements for an audit.

Nonprofit leaders should carefully assess their compliance obligations, stakeholder expectations and long-term financial strategy before making a decision. Consulting with a CPA who specializes in nonprofit financial reporting can provide additional guidance and clarity in selecting the right financial examination for your organization.

At James Moore, our dedicated nonprofit assurance professionals support the audit and review needs of a wide variety of nonprofit organizations — from small, fast-growing nonprofits to well-established institutions that are cornerstones of their communities. We partner closely with the organizations we work with, taking a responsive, diligent approach that ensures our clients’ assurance needs are well met.

To learn more about James Moore’s audit and review services for nonprofit organizations, contact a James Moore professional today.

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