Nonprofit Accounting Basics

Interepreting an Audit

Note: Articles published before January 1, 2017 may be out of date. We are in the process of updating this content.


After the audit is completed, the auditor will issue the organization an audit report. The audit report is addressed to the board of directors. The report includes:

  • The auditor’s letter, signed by the auditor, stating the opinion
  • The financial statements including the statement of financial position (balance sheet), statement of activities (income statement), statement of cash flows, and statement of functional expenses (this statement is mandatory for health and social service organizations)
  • Notes regarding the financial statements which may include information about contributions, functional expenses, loan and debt information, and other pertinent information

The auditor is required to express an opinion as to whether the financial statements, taken as a whole, give a fair representation of the organization’s financial picture. The auditor states either an unqualified opinion or a qualified opinion.

An unqualified opinion includes wording such as, “In our opinion, the accompanying financial statements present fairly the financial position of XYZ at the fiscal year ending June 30, 20XX … in conformity with generally accepted accounting principles.”

A qualified opinion is issued when the auditor believes the financial statements are, in a limited way, not in accordance with generally accepted accounting principles. A qualified opinion might include wording such as, “In our opinion, except for the omission of … the accompanying financial statements present fairly…”

In addition to the audit report, the auditor usually prepares a management letter citing areas in the organization’s internal control system that are evaluated to be weak and suggest how these areas can be improved.