Do I Need an Audit? A Simple Guide for Small Businesses & Nonprofits

Q: Do I need an audit as a small business or nonprofit?

You need an audit when a requirement triggers it—most commonly a lender covenant, investor request, regulator/licensing rule, grant requirement, or nonprofit state/federal compliance rule. For nonprofits, audits may be required by state charitable registration thresholds or by federal Single Audit rules when federal spending crosses a set threshold. For small businesses, audits are often required for larger financing, certain regulated industries, complex ownership structures, or transactions like M&A. If no stakeholder requires an audit, a review (limited assurance) or compilation (no assurance) may be sufficient and more cost-effective. The right answer is driven by who needs the financial statements and what level of assurance they require.

1. Overview

An independent audit is the highest level of financial statement assurance provided by a CPA. While many small businesses and nonprofits worry that an audit sounds intimidating or "only for large companies," the truth is more practical: you usually only need an audit when a bank, investor, regulator, grantor, or governing law requires it.

This article explains, in plain English, when an audit is actually needed, who requires it, what the CPA does during an audit, what documents are typically reviewed, timelines, fee ranges, common mistakes to avoid, and how Jedidiah CPA can support you through the process.

2. Who Needs an Audit and When

You typically need an audit in the following situations:

Banking & Lending

• Bank loans or lines of credit over certain thresholds

• Covenant monitoring for existing loans

• When lenders require audited financial statements to confirm accuracy and reduce fraud risk

Nonprofits

• State-mandated audit thresholds based on annual revenue or contributions

• Large grants requiring audited statements

• Federal Single Audit requirements (if expending $750,000+ in federal funds)

Investors & Shareholders

• Venture capital or private equity due diligence

• Investor reporting for high-growth companies

• Governance requirements in shareholder agreements

Regulatory Requirements

• Certain state agencies and licensing boards

• Healthcare, education, or financial services compliance regulations

Internal or Governance Needs

• Audit committees or boards mandating it

• Organizational transparency initiatives

3. State-by-State Requirements (Summary)

Audits are mandatory for certain entity types such as:

• Public Companies – Required under SEC/SOX

• Certain Nonprofits ($750k+ federal funds and when thresholds reached),

• Regulated Entities (e.g banks, insurance)

• Employee Benefit Plans (at certain thresholds)
  

When a nonprofit reaches a certain revenue/contributions threshold, then it triggers the need for an audit. These thresholds vary by state. Here are typical examples (not exhaustive):

• California: Audit required at $2 million+ in contributions

• New York: Tiered requirements beginning at $750,000+

• Illinois: $300,000+ in contributions

• Florida: $500,000+ revenue triggers an audit

• Texas: No statewide requirement, but grantors often require one
  

Important: Each state has its own rules and thresholds which frequently change. Always verify for your specific case.

4. Industries Where Audits Are Most Relevant

• Nonprofits and foundations

• Schools, private academies, and charter institutions

• Construction & real estate investment groups

• Healthcare providers

• Startups with outside investors

• Manufacturing and logistics companies

• Professional service firms

• Financial services and fintech (where often there are 3^rd party investors).

5. Why a CPA Is Typically Involved

Audits must be performed by a CPA who is independent of the organization and trained in professional auditing standards (GAAS).

An audit enhances credibility with:

• Lenders

• Donors

• Grantors

• Regulators

• Investors
  

It also provides valuable insight into internal controls and financial processes.

6. What the CPA Does (Process Breakdown)

A typical audit includes:

Planning & Risk Assessment

• Understanding the business

• Identifying high‑risk areas (called “significant risks”)

• Reviewing prior reports and internal controls

Fieldwork

• Testing transactions on a sample basis

• Reviewing bank reconciliations

• Inspecting invoices, contracts, and supporting documents

• Confirming balances with banks, vendors, and customers

• Evaluating internal controls

• Analytical procedures across revenue, expenses, assets, liabilities

Closing & Reporting

• Discussing audit findings

• Reviewing adjusting entries

• Issuing the auditor’s report

• Providing management letter comments (where applicable)

7. Deliverables & Illustrative Excerpt

What you receive from a typical audit:

• Audited financial statements (Balance Sheet, Income Statement, Cash Flow, Footnotes)

• Independent Auditor’s Report

• Management Letter (optional, depending on engagement)

Illustrative excerpt:

"In our opinion, the financial statements present fairly, in all material respects, the financial position of ABC Organization as of December 31, 20XX, in accordance with accounting principles generally accepted in the United States of America."

(This is an illustrative sample paragraph only—actual report language varies based on circumstances.)

8. Timeline & Fees

Typical timeline:

• 3–8 weeks depending on record quality, complexity, and responsiveness
  

Typical fee ranges:

• Small nonprofits or businesses: $7,500–$20,000+

• Medium organizations: $20,000–$75,000+

• Larger or complex audits: $75,000–$250,000+
  

Actual fees depend on:

• Number of entities or locations

• Volume of transactions

• Condition of accounting records

• Regulatory requirements

• Internal control environment
  

9. Common Mistakes to Avoid

• Waiting until the last minute to begin audit preparation

• Poor or incomplete bookkeeping

• Missing reconciliations (bank, credit card, loans)

• Incomplete documentation for revenue or donations

• Lack of segregation of duties

• Not closing the books monthly

• Not communicating major transactions to the auditor (early notification)

• Not having a centralized audit ready document management system and so documents are disorganized.

• Not taking sufficient time to consider what the accounting policies, foot notes and other disclosures will be.

• Providing documents without knowing how they relate to the financial statements – which is the primary opinion on which the auditor reports.
  

10. How Jedidiah CPA Can Help

We can help you (subject to independence requirements):

• Advice you on preparing for your audit and ensuring organized records

• Produce GAAP‑compliant financial statements

• Support communication with predecessor auditors

• Recommend how to strengthen internal controls

• Provide guidance on how to best implement audit recommendations

Our goal is to make your audit process smooth, predictable, and stress-free.

Whenever an engagement requires independence under professional standards, Jedidiah CPA cannot perform bookkeeping, financial statement preparation, or management functions for the same client during the period of that engagement.

Important independence requirement:

Under the AICPA Code of Professional Conduct, a CPA firm performing an audit must be independent of the client in both fact and appearance. This means the CPA cannot also perform bookkeeping, prepare the financial statements, act as management, or serve as a controller or CFO for the same client during the audit period. The auditor must remain an external, objective party and may not audit records that they helped create, approve, or manage. If your current CPA firm handles your day-to-day accounting, a separate, independent firm must perform the audit.

11. Disclaimers

This article is for general informational purposes only. It is not accounting, tax, or legal advice. Requirements vary by state, regulator, lender, and individual circumstances. State laws and agency regulations change frequently. Always consult a qualified professional about your specific situation.

FAQs

Who typically requires an audit?

Banks/lenders for larger loans, investors during fundraising, regulators/licensing bodies in some industries, grantors, boards, and nonprofit compliance frameworks (state rules or Single Audit requirements).

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

An audit provides the highest assurance with deeper testing and evidence. A review provides limited assurance mainly through inquiries and analytical procedures.

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

A compilation provides no assurance and involves presenting financial statements based on management-provided information. An audit tests and opines on the statements.

When do nonprofits need audits for compliance?

Often when they exceed state charitable reporting thresholds, when a grant agreement requires it, or when they meet federal Single Audit spending requirements.

How can I tell what level of report I need?

Start with the exact written requirement from the lender/investor/grantor/state filing. If it says “audited financial statements,” you need an audit. If it allows “reviewed” or “compiled,” you may be able to choose a lower level.

Other FAQs

1. When is an audit mandatory? When required by lenders, regulators, grantors, boards, or state laws.

2. What’s the difference between an audit and a review? Audits provide high assurance; reviews provide limited assurance.

3. How long does an audit take? Typically 3–8 weeks depending on complexity.

4. How much does an audit cost? Fees vary based on size, complexity, and readiness.

5. What documents do CPAs request? Bank statements, reconciliations, GL detail, contracts, invoices, payroll records, and supporting schedules.