SEE ALSO: SARBANES-OXLEY ACT OF 2002
An independent audit is an examination of the financial records, accounts, business transactions, accounting practices, and internal controls of a charitable nonprofit by an "independent" auditor. "Independent" refers to the fact that the auditor/CPA is not an employee of the nonprofits but instead is retained through a contract for services, and hence is "independent.
During the independent audit, the auditor will review the organization’s financial statements to determine whether they adhere to “ generally accepted accounting principles” (commonly referred to as “ GAAP”). These accounting principles are created by the "Financial Accounting Standards Board," known as "FASB." While not law, these standards carry weight - when they are not followed, the auditors are required to include these findings in their report. 
The objective of a financial "review" conducted by an independent auditor is to examine the nonprofit's financial statements and determine whether the financial statements are consistent with generally accepted accounting principles. A review shares the goals of an audit, however, a review is not conducted with the same level of investigation or analysis as an independent audit.
During a review, the auditor examines the financial statements but does not conduct an examination of the nonprofit’s internal controls (which is normally included in the scope of an independent audit). Instead the review provides a limited level of assurance that the financial statements are free of misrepresentations. The auditor’s report after a review will note whether the auditor is aware of any “material modifications” that should be made to the financial statements. The report after a review is not considered to provide a professional opinion about the nonprofit’s financial statements as a whole.
The key difference between an audit and a review is that conducting an audit requires the auditor to obtain independent confirmation or verification of the financial information examined. Here is how the accounting professionals at Jitasa describe the distinction between a financial review and an audit: "The CPA doesn't perform in-depth 'testing' as they do in an audit. They review for material issues and obvious deviations from GAAP. But they won't go in and test unique individual transactions in the same way as in an audit. A review provides some assurance, but does not independently validate transactions."
A compilation differs signiﬁcantly from a review or an independent audit of ﬁnancial statements. A compilation is literally a compilation of financial records into a format required by accounting standards. When this work is performed by an auditor it is referred to as a “compilation” and accounting standards require the auditor to assess whether the records are free from obvious errors.
Differences Between an Audit, Review & Compilation
Here are the major differences between a compilation and a financial review or an audit:
- During a compilation the auditor does not examine the internal controls that are used to manage the risks of embezzlement or fraud (which is part of an independent audit);
- During a compilation the auditor will not collect and examine source documents (i.e. canceled checks or bank statements) to test the accuracy of the nonprofit’s accounting records (which would be part of the "testing" during an audit);
- When conducting a compilation the auditor reformats the financial statements but does not make any determination of whether the account balances are reasonable by comparing them to his or her expectations (which is part of a review).
- In the report after conducting a compilation, the auditor will not provide any opinion or assurance that the financial statements accurately reflect the financial position of the organization - which is a normal outcome of an independent audit.
There are complicated regulations that govern federally mandated independent audits for charitable nonprofits (as well as states and local governments) that expend $500,000 in federal funds in a single year. Failing to follow the regulations can result in significant adverse consequences for the nonprofit.
Nebraska State Law
No state law requirement: Neb. Rev. Stat.§ 21-1903
Iowa State Law
No state law requirement: Iowa Code § 504.1613
Resources & Sample Documents
National Council of Nonprofits:Audit Guide for Charitable Nonprofits
White House Office of Management and Budget (OMB): OMB Circular A-133 Compliance Supplement 2012
IRS.gov: Charity and Nonprofit Audits
Keating et al. (2003):The Single Audit Act: How Compliant Are Nonprofit Organizations?
Independent Sector: The Sarbanes-Oxely Act and Implications for the Nonprofit Sector
BlueAvocado: Is It Time For An Audit?
National Council of Nonprofits: Absent the Audit: How Small Nonprofits Can Demonstrate Accountability Without One - See more at: http://www.councilofnonprofits.org/nonprofit-audit-guide/need-independent-audit#sthash.ajO5QLPB.dpuf