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Nonprofit Tips: How to Ensure a Smooth Annual Audit

08/10/2018 Lauren Kreutzinger, Jeff Babiak

Nobody likes taking tests, and unfortunately that’s what independent audits sometimes feel like. Even if you have no reason to be nervous about what your nonprofit’s auditor will find, accommodating and preparing for an audit can be stressful for you and your staff. But if you understand what the process entails and ensure that the right records are available, you’re more likely to be comfortable with the audit — and its results.  Who knows, you might end up starting to look forward to your annual audit.

What is an audit?

CPAs conduct audits to verify the information contained in nonprofits’ financial statements. After performing their examination, an auditor will issue a report — generally to your board of directors — as to whether your organization’s statements present a fair picture of its finances.  The auditor will also discuss if deficiencies exist or limitations were placed during testing.

Because external auditors are required to be “independent,” they don’t perform accounting duties during the audit engagement, such as making routine year end journal entries. Instead, the focus is on risk assessment and internal control policies and the auditor will likely test various transactions and balances.

How you can prepare

Your auditor will provide you with a list of required records when the audit is scheduled. But it’s not a bad idea to get a head start, particularly if you need to supply an analysis of balance sheet items and revenue and expense accounts.

Items on your auditor’s list may include your nonprofit’s current operating budget; interim financial statements; bank statements and reconciliations, records of deposits, and issued checks; annual investment account statements; payroll records; accounts receivable and payable documentation; board meeting minutes; and Form 990 information.

Some organizations may need to produce material related to:

  • Loans and mortgages,
  • Leases and other legal contracts,
  • Grants and contributions, including restrictions on their use, and
  • Financial or accounting policies and procedures.

Also ensure that you have a policies and procedures manual, because your auditor will want to see that you follow well-established processes. If you don’t already have a manual or follow your processes, talk to your CPA.

Why you should ask questions

In general, audits are less stressful if you keep good accounting records. Specifically, make sure that subsidiary ledgers are reconciled and ending balances have been reviewed before field work begins. And be sure to use the standard preaudit meeting with your auditor to ask questions. The more time spent resolving issues before the audit, the fewer issues your auditor will need to address during the audit.

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