Most nonprofit organizations require an annual audit by a CPA. Smaller organizations can get by with what is called a review – or an “audit light.” For personnel who work in the accounting department, it’s too often anxiety time but audits can be an event to look forward to as they affirm your worthiness. If, as an organization, your financial reporting falls short of five stars (i.e., a clean audit), don’t despair; you will know what has to be done to get there next year.
The purpose of your nonprofit’s audit
An audit is designed to ensure financial reports are “reasonably accurate,” while presenting the information in agreement with Generally Accepted Accounting Principles (GAAP). However, there are a few things to keep in mind.
First, auditors only review the financial statements that you create internally and conduct various tests and confirmations to reach an opinion on their fairness and accuracy. Also, there’s a common misconception that audits are designed to search out fraud. Auditors do perform special-purpose forensic audits designed for that purpose, but not as part of the regular audit. If they fortuitously find it, of course, they’re obligated to report it to management and the Board. An important part of the audit is to review the system of internal controls. A weak system puts the organization at risk of fraud and could result in a qualified opinion.
Preparing for your nonprofit’s audits
As with anything, preparation is key to a successful audit. To do so, ensure your records are complete, accurate, up to date and organized. This will significantly reduce the stress level of the staff during the audit. Another helpful tip is to place all documents, or links to documents, provided to the auditor in one location on your network drive. This organizational step will ensure you never have to search for what exactly you provided to the auditor (this year, last year, or next year). Lastly, ensure that bank accounts, asset, liability, and equity accounts have reconciled schedules as well as the appropriate backup. It is likely contracts, grants, Board meeting minutes as well as conflict of interest statements will need to be provided, so ensure you know the location of these records.
One important preliminary step is to open communications with your auditor. Request a list of documents they will need access. Also, what preference do they have for the presentation of those materials? Should items be electronic (original format or PDF) or hardcopy? Is there an electronic file system where documents can be shared with them?
It’s also important to make sure your nonprofit’s prior year trial balance matches the previous year’s audit so you are off to a balanced start. Lastly, ensure you know when they will be arriving in the office and how many people they will be bringing. This information allows you to prepare a space for them to work.
Don’t forget to provide internet access and a telephone. Often, the first day of an audit is spent finding a place for them to sit and ensuring they have the access they need. By preparing ahead of time you can avoid wasting your time as well as theirs.
The components of a nonprofit audit
The first stage of an audit is risk assessment and planning. This stage creates an environment where the auditor understands the entity’s political and social environment as well as its overall mission. During this phase, the auditor will make general inquiries of management, staff, and others. These questions will include general information and knowledge of any possibility of fraud.
The next stage of an audit is the procedural process. The objective of this to be able to draw reasonable conclusions through examination of portions of the data, systems, process, and documentation. Often, the procedural process will include sending letters of confirmation to various vendors, customers or banking associations. Additional aspects include document inspections, analytics, and recalculations. This portion of the audit strives to ensure there is a clear understanding of the processes and procedures in place and that these are being followed.
The final stage of an audit is statement preparation. These statements will be in accordance with GAAP and include a letter indicating any issues or concerns along with necessary footnotes.
What to do after a nonprofit audit
Now you can breathe a steady sigh, but don’t stop. It is vital to learn from each audit. An important step following completion of the audit is to review everything with management and the Board of Directors. You can discuss the questions asked by the auditor along with any findings and recommendations. In reviewing these, ask yourself and your staff:
- Should we…?
- What is the best way we can …?
- Were there any documents staff could not produce? If so, why and how can this be avoided in the future?
- Was the staff satisfied with the auditor’s overall knowledge and their ability to relate to the organization?
For more guidance on how to successfully prepare and plan for your audit, download Abila’s new Nonprofit Audit Pocket Guide. The guide provides additional tips on what can be done before, during and after an audit in order to turn high anxiety into smug satisfaction. To learn how NFP Partners can help pave the way for a smooth audit through our outsourced accounting services, click here.
Nonprofit Accounting Consultant