Have a Grant? Here's How You Can Prepare Your Nonprofit's Systems for a Grant Audit
If your nonprofit receives federal funding, an audit isn't a matter of if; it's a matter of when your spending crosses a set threshold. Knowing the rule ahead of time and building your systems around it turns an audit from a scramble into a routine check.
Know the threshold that triggers a full audit
Under federal Uniform Guidance, any nonprofit that spends $1,000,000 or more in federal awards during its fiscal year must undergo a single audit, an organization-wide review of both financial statements and compliance with federal program rules. If your organization spends less than that, you're not off the hook entirely: you're still required to keep your records available for review by the federal awarding agency or the Government Accountability Office. Many states also set their own, often lower, audit thresholds for nonprofits, so check your state's requirement in addition to the federal one.
Build internal controls before you're asked to prove them
Federal guidance requires nonprofits receiving federal awards to establish and maintain internal controls that provide reasonable assurance the funds are being managed properly. Rather than leaving nonprofits to guess what that means, federal guidance points directly to two established frameworks: the Government Accountability Office's Green Book and the COSO Internal Control–Integrated Framework. Both are built around the same core idea, organized around five components: a strong control environment, ongoing risk assessment, documented control activities, clear information and communication, and regular monitoring. Reviewing your systems against these five areas before an audit, rather than during one, is the single most effective way to prepare.
Fix the most common audit findings first
Federal auditors report the same weak points across nonprofit audits year after year. The most frequent are a lack of written financial policies, insufficient separation of duties, and no documented process for reviewing how grant funds were spent. None of these require a large team to fix. A small nonprofit can address separation of duties with compensating controls, such as requiring the executive director to review and sign off on transactions a bookkeeper enters, even if the same two people handle most of the work.
Keep documentation organized as you go, not after
Auditors expect records showing not just that a transaction happened, but that it was authorized, reviewed, and tied to the correct grant. Waiting until audit season to reconstruct this trail is where most nonprofits lose time and credibility. Build the habit of documenting approvals and grant allocations in real time, so the record already exists when it's requested.
Understand what a subrecipient relationship means for you
If your nonprofit passes federal funds through to another organization, you take on monitoring responsibilities for how that subrecipient spends the money. This is one of the most commonly cited issues in federal audits, and it's often overlooked by smaller organizations that don't realize passing funds downstream still makes them accountable upstream. If your nonprofit works with subrecipients, your systems need to document that oversight, not just your own spending.
Grant audit readiness
Preparing for a grant audit means knowing your threshold, building internal controls around an established framework rather than improvising one, fixing the specific gaps auditors flag most often, and documenting as you go instead of after the fact. None of this is complicated, but all of it depends on doing it consistently, well before the audit ever starts.
More information from the US government
Electronic Code of Federal Regulations (eCFR), 2 CFR Part 200, Subpart F — Audit Requirements, https://www.ecfr.gov/current/title-2/subtitle-A/chapter-II/part-200/subpart-F
U.S. Department of Labor, 2 CFR 200: Frequently Asked Questions, https://www.dol.gov/sites/dolgov/files/OASAM/legacy/files/20250115-2CFRPart200FAQs.pdf
U.S. Government Accountability Office (GAO), Standards for Internal Control in the Federal Government (The Green Book), https://www.gao.gov/greenbook
Charity Charge, 2 CFR 200 Uniform Guidance: What Nonprofits Must Know, https://www.charitycharge.com/nonprofit-resources/2-cfr-200-uniform/
Comments