The National Council of Nonprofits defines an audit as:

"the examination of the financial statements by an accounting professional to determine whether they conform to accounting standards. An "independent audit" is performed by a public accounting firm or an individual who is a certified public accountant ("CPA") who is engaged to provide an independent opinion to the management whether or not the nonprofit's financial statements/records comply with accounting standards known as "GAAP" (generally accepted accounting principles.) In an independent audit the person conducting the audit is not a board member or an employee of the organization being audited, therefore the review is thought to be more objective than if the reviewer were under the control of, or controlled the nonprofit."

Does my organization need an independent audit?

In certain circumstances, Federal funding agencies, state regulatory agencies, and/or grantmaking foundations may require nonprofit organizations to provide audited financial statements. A charity also may undergo the audit process voluntarily in an effort to ensure their constituents, board members, and other stakeholders that their financial management system is sound.

The National Council of Nonprofits has created a Nonprofit Audit Guide to provide charitable nonprofits with the tools they need to make informed decisions about independent audits. Because state laws vary in the scope of their regulation of charitable nonprofits, this Guide includes a 50-state chart that shows whether there is an audit requirement in each state, and if so, under what conditions.

Also check directly with the Attorney General or Secretary of State in the state(s) where your nonprofit is registered to determine if any audit requirements apply to your organization. Find your state's charity office

Some foundations may request audited financial statements during the grant application process. For smaller organizations that can't afford a full audit, a financial review is often a viable alternative, but confirm this with the funder before applying.