For Nonprofits

A Yellow Book audit is generally required when an organization receives certain government funding or when an audit is required by a grantor, lender, state agency, or local government. Unlike a standard financial statement audit, it also evaluates independence, internal controls, compliance, and reporting under Government Auditing Standards.

When a Yellow Book Audit May Be Needed

Your organization may need a Yellow Book audit if it receives federal, state, or local government funding, operates under a grant agreement requiring an audit under Government Auditing Standards, participates in housing, education, healthcare, or community development programs, receives funding through a government agency or pass-through entity, or wants to strengthen financial accountability for board members and funders.

A Yellow Book audit is different from a Single Audit (SEFA). While a Single Audit includes additional testing of federal program compliance, a Yellow Book financial statement audit focuses on the financial statements and related internal controls. It is often appropriate for organizations with government funding that are not subject to Single Audit requirements.
 

Why It Matters

Government-funded organizations are expected to demonstrate financial accountability. A Yellow Book audit provides assurance to funders, board members, and management by increasing confidence in financial reporting while evaluating internal controls and compliance. It can also identify opportunities to improve grant tracking, financial reporting, internal controls, board oversight, documentation practices, and expense approval procedures.
 

Common Issues Found During Yellow Book Audits

Yellow Book audits frequently identify areas for improvement, including weak segregation of duties, incomplete grant documentation, missing approval records, delayed reconciliations, limited board financial review, and policies that do not align with actual procedures. These findings do not necessarily indicate mismanagement and often reflect organizational growth, staffing limitations, or outdated processes.
 

How to Prepare

Preparing early helps create a smoother audit experience. Before the audit begins, organizations should organize key financial and governance records, including the trial balance, general ledger, bank reconciliations, grant agreements, board minutes, internal control policies, expense approvals, payroll records, restricted fund schedules, and prior-year audit reports.

A Final Thought

A Yellow Book audit should be viewed as more than a compliance requirement. When approached strategically, it helps strengthen financial systems, improve operational practices, increase funder confidence, and reduce the likelihood of future audit findings.

A Schedule of Expenditures of Federal Awards (more commonly called a SEFA) is one of the most important schedules for organizations that receive federal funding. Even when an organization is not trying to perform a Single Audit internally, management is still responsible for maintaining accurate federal award records.
 

When a SEFA Audit may be needed
A well-prepared SEFA helps management, auditors, grantors, and board members understand how much federal funding was expended during the year and which programs were involved.

A SEFA summarizes all federal expenditures for the reporting period and provides key information about each award. This includes the federal awarding agency, the pass-through entity when applicable, the Assistance Listing number, the grant or program name, and the federal award identification number when available. The schedule also reports total federal expenditures by program, identifies amounts passed through to subrecipients when applicable, includes notes describing the basis of presentation, and reconciles reported expenditures to the organization's general ledger to ensure completeness and accuracy.

Why SEFA Preparation Matters

Preparing an accurate SEFA is essential to an efficient audit and reliable financial reporting. Errors or omissions can delay the audit process, create reporting issues, and raise questions about whether the organization is subject to additional audit requirements under the Uniform Guidance. Careful preparation helps minimize these risks while demonstrating strong financial stewardship and compliance.

SEFA Preparation Checklist

Successful SEFA preparation begins with gathering complete and accurate documentation. Assemble all grant agreements, award letters, communications from pass-through entities, general ledger detail by grant, drawdown reports, reimbursement requests, payroll allocation records, subrecipient agreements, and the prior year's SEFA, if applicable.
Management should then identify every award received during the fiscal year and determine which awards represent federal funding distinguished from state, local, and private funding sources. Federal awards should be  before confirming the appropriate Assistance Listing numbers for each program. Federal expenditures should then be calculated by grant and reconciled to the general ledger to ensure consistency with the organization's accounting records. As part of the review process, organizations should verify grant periods and allowable cost requirements, identify any amounts passed through to subrecipients, prepare the required SEFA notes, and complete a final management review before the audit begins.

When to Get Help

Many nonprofit organizations benefit from professional assistance when preparing a SEFA,. A proactive approach streamlines the audit process, improves reporting accuracy, and helps ensure ongoing compliance with federal requirements.