Financial Statement Audit Services
Nonprofit financial statement audits for California organizations: what an independent CPA audit covers, when one is required, and how to prepare.
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Independent Audits of Nonprofit Financial Statements
Nonprofit financial statement audits give boards, donors, grantmakers, lenders and regulators an independent CPA's opinion on whether an organization's financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework, usually U.S. generally accepted accounting principles (GAAP). For a nonprofit, those statements also report donor-restricted resources, program spending, liquidity and obligations.
RTN CPA performs independent financial statement audits as part of its assurance practice. This page explains what an independent CPA audit of financial statements covers, when one may be required and how to prepare for it. For an overview of all of our nonprofit audit work, visit our Nonprofit Auditing page.
What a Financial Statement Audit Provides
A financial statement audit of a nonprofit is performed under generally accepted auditing standards (GAAS) issued by the AICPA's Auditing Standards Board. The auditor identifies and assesses the risks of material misstatement, designs procedures that respond to those risks, obtains sufficient appropriate evidence, and evaluates accounting policies, estimates and disclosures. The result is an auditor's report expressing an opinion on the financial statements as a whole.
That opinion rests on reasonable assurance, which is a high level of assurance but not absolute assurance. An audit is not a guarantee that the statements are free of every error, and it cannot ensure that all fraud has been detected. A financial statement audit also does not ordinarily result in an opinion on the effectiveness of internal control.
Responsibilities are divided. Management is responsible for the financial statements, accounting records and internal control, and confirms this in a written representation letter. The auditor's role is independent examination and reporting, and any assistance beyond the audit is permitted only within professional independence rules.
When Are Nonprofit Financial Statement Audits Required?
No single rule requires every nonprofit to be audited. The requirement for audited financial statements usually comes from one or more of these sources:
- California law for registered charities that meet the Attorney General's audit threshold, described below
- Grant agreements and contracts with foundations, counties, cities, state agencies and other funders
- Federal awards: an organization that expends $1,000,000 or more in federal awards in a fiscal year beginning on or after October 1, 2024 ($750,000 for earlier fiscal years) generally needs a Uniform Guidance Single Audit, which includes a financial statement audit
- Lenders that require audited statements as a loan or bond covenant
- Bylaws, board policy or major gift agreements that call for audited reporting
The California requirement. Under Government Code section 12586(e), charitable corporations, unincorporated associations and trustees that must register and report to the Attorney General need annual financial statements audited by an independent CPA under GAAS once they receive or accrue $2,000,000 or more in gross revenue in a fiscal year. Grants from, and contracts for services with, governmental entities are excluded from that amount when the government requires an accounting of the funds. Audited statements must be available to the Attorney General and the public within nine months after year-end, and charitable corporations over the threshold must also have an audit committee.
This state test is separate from the federal Single Audit test and from the annual renewal filed with the Attorney General's Registry of Charities and Fundraisers (Form RRF-1). Because a financial statement audit in California can be triggered by several overlapping rules, review your revenue sources, funding agreements and registration status before concluding that one is or is not required.
Audit, Review or Compilation: Which Engagement Do You Need?
Boards and funders sometimes use these terms interchangeably, but they describe different levels of service performed under different AICPA standards. Confirm which one your funder, lender or bylaws require before engaging a CPA.
A review or compilation does not satisfy California's statutory audit requirement or a Single Audit. Some funders ask instead for an engagement focused on compliance with specific grant terms, which is covered on our Compliance Audits page. For a side-by-side summary, download our Audit vs. Review vs. Compilation guide.
- Audit (Statements on Auditing Standards): the CPA obtains reasonable assurance and expresses an opinion on whether the statements are fairly presented. Procedures can include confirmations, inspection of records, observation, recalculation and analytical procedures.
- Review (SSARS, AR-C section 90): the CPA, who must be independent, performs primarily inquiry and analytical procedures to obtain limited assurance. A review does not include the testing and confirmation procedures of an audit, and no opinion is expressed.
- Compilation (SSARS, AR-C section 80): the CPA assists in presenting financial information in the form of financial statements without obtaining or providing any assurance. The CPA need not be independent but must disclose a lack of independence in the report.
Reading the Auditor's Report
The auditor's report presents the opinion first, followed by the basis for the opinion and descriptions of management's and the auditor's responsibilities.
An opinion covers the financial statements, not the merit of every program or spending decision. Board members should read it with the notes on donor restrictions, liquidity and estimates, and with any separate auditor communications. Audits under Government Auditing Standards add reports on internal control and compliance; learn more about Yellow Book audits.
- Unmodified opinion: the financial statements are presented fairly, in all material respects, in accordance with the applicable framework.
- Qualified opinion: misstatements are material but not pervasive, or the auditor could not obtain sufficient evidence about a matter whose possible effects are material but not pervasive.
- Adverse opinion: misstatements are both material and pervasive.
- Disclaimer of opinion: the auditor could not obtain sufficient appropriate evidence and the possible effects could be both material and pervasive, so no opinion is expressed.
Nonprofit Audit Preparation: Records to Have Ready
Preparation is the factor most within management's control for reducing audit disruption. Before fieldwork, close the books for the year, resolve reconciling items and assign an owner for each schedule.
If your organization changed accounting systems, lost finance staff or received a large new grant, raise it early so the audit plan can address it. Bookkeeping and close support are available through our nonprofit accounting services; when RTN CPA is also the auditor, any nonattest service is first evaluated under independence rules.
Why Organizations Work With RTN CPA
Our assurance practice specializes in nonprofit and governmental organizations, including grant-funded and mission-driven entities. The issues on this page, from donor restrictions to functional expense allocations, are the everyday substance of nonprofit financial audits.
Clients can expect responsive, year-round communication, clear explanations for finance staff and board members alike, and practical recommendations for strengthening records and controls. Every engagement is subject to independence and engagement-acceptance requirements. We serve organizations across California; see our pages for nonprofits in Sacramento and San Francisco.
- Bank, investment and credit card reconciliations that agree to the general ledger
- A grant and contract schedule showing award terms, revenue recognized, receivables and refundable advances
- A roll-forward of net assets with donor restrictions, with gift agreements and support for releases
- A pledge listing with payment terms and collection history
- Fixed asset and depreciation schedules, leases and debt agreements
- Payroll records, the functional expense allocation method and its supporting data
- Board and committee minutes, significant contracts and support for accounting estimates
Nonprofit Reporting Areas That Shape the Audit
Not-for-profit financial statements follow FASB Accounting Standards Codification Topic 958. These areas often call for the most judgment and documentation.
- Net Assets and Donor Restrictions: Nonprofits report net assets with and without donor restrictions. Auditors test whether restrictions are identified from gift documents, tracked, and released when the purpose or time restriction is met.
- Contributions or Exchange Transactions: FASB's ASU 2018-08 clarifies when a grant or contract is a contribution and when it is an exchange in which the resource provider receives commensurate value. The answer drives revenue timing.
- Conditional Contributions: A contribution is conditional when the agreement includes both a barrier and a right of return or release. Revenue waits until the barrier is overcome; earlier receipts are often refundable advances.
- Functional Expenses: Expenses are presented by both nature and function in one location, with disclosure of how costs are allocated among program, management and general, and fundraising activities.
- Liquidity and Availability: The statements explain how the organization manages liquid resources and which financial assets are available for general expenditures within one year, after donor, contractual and board limits.
- Pledges and Receivables: Promises to give, grant receivables and program fees are tested for existence, collectibility and timing. Multi-year pledges may require discounting and an allowance based on management's estimates.
- Contributed Nonfinancial Assets: Donated goods, facilities and qualifying services are presented separately from cash gifts, with disclosures about use and valuation. Most volunteer time does not meet the criteria for recognition.
- Estimates and Going Concern: Management evaluates whether conditions raise substantial doubt about the organization's ability to continue as a going concern and supports its key estimates. The auditor evaluates those judgments.
What to Expect During a Financial Statement Audit
Every engagement is planned around the organization's own risks, so procedures and timing vary. Most audits move through these stages.
- 1. Engagement acceptance and terms: The firm evaluates its independence and ability to perform the work. An engagement letter sets out the audit objective, the reporting framework, management's and the auditor's responsibilities, and any permitted nonattest services.
- 2. Planning and risk assessment: The auditor gains an understanding of the organization, its funding sources and its internal control, then assesses risks of material misstatement under the AICPA's current risk-assessment standard, SAS No. 145.
- 3. Audit procedures: Procedures respond to assessed risks and may include testing controls, confirming balances with banks or grantors, inspecting agreements and invoices, and recalculating allocations. Areas of focus and sample sizes involve professional judgment.
- 4. Financial statements and disclosures: The statements and notes are evaluated against GAAP, including Topic 958 presentation and disclosure requirements. Management approves the statements and provides written representations before the report is released.
- 5. Communication with the board: The auditor communicates with those charged with governance, such as the board or audit committee, about the auditor's responsibilities, the planned scope and timing, and significant findings from the audit.
- 6. The auditor's report: The engagement concludes with the auditor's report. A separate letter may share observations on records and controls; whether and how to act on recommendations remains the decision of management and the board.
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Discuss Your Financial Statement Audit
Whether your organization is facing its first audit, has crossed a funding or revenue threshold, or wants a more organized audit process, RTN CPA can talk through your reporting framework, deadlines, records and the level of assurance your stakeholders require.
Frequently Asked Questions
Does every nonprofit need audited financial statements?
No. Many smaller nonprofits are never required to have an audit. A requirement usually comes from California law for registered charities above the state threshold, a grant or contract, federal award spending that triggers a Single Audit, a lender, or the organization's bylaws or board policy.
What is the California audit threshold for charities?
Government Code section 12586(e) requires an independent CPA audit for charities that must register with the Attorney General and receive or accrue $2,000,000 or more in gross revenue in a fiscal year. Grants from, and contracts for services with, governmental entities that require an accounting of the funds are excluded. The audited statements must be available to the Attorney General and the public within nine months after year-end.
Can an audit guarantee that no fraud or error occurred?
No. An audit provides reasonable assurance, a high but not absolute level of assurance, that the financial statements as a whole are free of material misstatement, whether caused by fraud or error. Because audits rely on judgment and testing, and fraud may involve concealment or collusion, an audit cannot detect every misstatement.
Who is responsible for preparing the financial statements?
Management. The organization is responsible for its accounting records, internal control and financial statements, including the notes. An auditor may help draft statements or propose adjusting entries only as a nonattest service permitted under independence rules, with management overseeing and accepting responsibility for that work.
How is a financial statement audit different from a Single Audit?
A financial statement audit reports on the financial statements. A Single Audit under the Uniform Guidance includes that audit, performed under Government Auditing Standards, plus an audit of compliance for major federal programs. It generally applies when federal awards expended reach $1,000,000 in a fiscal year beginning on or after October 1, 2024.
What will our board receive at the end of the audit?
The board receives the audited financial statements with the auditor's report. Auditing standards also require communications with those charged with governance about significant findings, such as difficult accounting judgments, uncorrected misstatements and any disagreements with management. Significant deficiencies and material weaknesses in internal control identified during the audit are communicated in writing.
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