From time to time, we share previous content that has enduring significance for nonprofit organizations. The following blog post was originally published on 9/25/19 and has been lightly refreshed.
Does your nonprofit need an audit? Or would you be better off with a review? The answer depends on the size and complexity of your organization, what kind of funding you receive, and the resources you have available. While both audits and reviews involve an independent CPA examining your financial statements, an audit is much more comprehensive – and more expensive. To decide which one is right for your organization, you’ll need to know what the difference is between an audit and a review.
COST
Reviews are less expensive, often ringing in at half the cost of a full audit. Audits may cost upwards of $10,000-$20,000 depending on the organization’s size. This is because audits are much more time-consuming and in-depth than reviews, which increases the overall cost.
ORGANIZATION SIZE & BUDGET
For organizations with gross revenues below $500,000, a review is usually the best course of action. Larger organization may also be able to get by with only a review, or by alternating audits and reviews in different years; but the larger and more complex your organization is, the more likely it is that you’ll need an audit at some point.
PURPOSE
An audit is often required as a condition of grants, federal funding, or state law. But you may be surprised to learn that some grantors and financial institutions are willing to accept a review instead. Both audits and reviews provide transparency and provide a third-party analysis of your organization’s finances, but audits are more detailed and reliable.
ASSURANCE
Audits provide the highest level of assurance, with the auditor formally stating their expert opinion on your financials. The auditor looks at many different documents and conducts extensive testing throughout the course of the audit. Reviews, on the other hand, only provide limited assurance, with no formal opinion one way or another from the reviewer. The reviewer only looks at a limited number of documents, and while they may be able to point out some red flags (if they happen to stumble across them), a review does not actively search for problem areas or test your financial controls.
ADDITIONAL SERVICES
Unlike reviews, audits often include a number of related services. These include developing an understanding of your nonprofit’s internal control environment by performing walk-throughs and conducting tests; confirming balances and transactions with outside parties; physical inspections and observations; and other tests of supporting documentation. Reviews do not include these additional services, and their price reflects that. While you might be able to add on a separate risk assessment to supplement your review, an audit is usually more comprehensive and cost-effective if you need these services.
Determining whether your nonprofit organization needs an audit or a review can be a tough decision. You will need to assess your unique accounting environment, the reason for the audit/review, and the limits of your budget. If an audit is required as a condition of funding, it doesn’t hurt to discuss your options and find out if a review would be an acceptable substitute. Some budget-conscious organizations alternate audits and reviews in different years to get the best of both worlds. If a review is on the table, don’t forget to ask accounting firms for a review quote as wells as an audit quote when you are requesting proposals.