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. Relax, if you are routinely generating financial statements that are accurate, timely, and relevant to the various stakeholders.
An audit can be an event to look forward to as it will affirm your worthiness and set-up high-fives all around. If, as an organization, your financial reporting falls short of five stars (i.e., a clean audit), don’t despair; you will know what must be done to get there next year.
The purpose of your nonprofit’s audit
A nonprofit audit is designed to ensure financial reports are “reasonably accurate” while presenting the information in agreement with Generally Accepted Accounting Principles (GAAP). Here are a few things to keep in mind. First, auditors only review the financial statements that you create internally. They conduct various tests and confirmations to reach an opinion on their fairness and accuracy. If you’d like information on financial reports, consider reading Interpreting Financial Reports – A Guide to Strong Nonprofit Financial Leadership or Nonprofit Accounting Reports and What to do With Them.
Also, there’s a common misconception that audits are designed to search out fraud. Auditors perform special-purpose forensic audit designed for that purpose, but not as part of the regular audit. If they fortuitously find it, of course, they are obligated to report it to management and the Board. An important part of your nonprofit’s audit is a review of the system of internal controls. A weak system puts the organization at risk of fraud and could result in a qualified opinion. NFP Partners have covered internal controls in a separate article, Internal Controls for Nonprofits- Top 10 Best Practices.
Preparing for your nonprofit’s audit
As with anything, preparation is key to a successful audit. An important element for success is to 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 and other documents such 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 to as well as what their preference is 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 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, you can avoid wasting your time as well as theirs.
Nonprofit audit components
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 that the internally prepared statements are accurate and internal control procedures are followed. This will be done through examination of portions of the data, systems, processes, 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. Lastly, this portion of the audit strives to ensure there is a clear understanding of the processes. It also ensures the procedures in place are being followed and adequate internal controls are in place.
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.
After your nonprofit’s audit
Now, you can breathe a steady sigh but don’t stop. It is important 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 auditors’ overall knowledge and their ability to relate to the organization?
If you are interested in expert support in developing processes to ensure a successful audit, or for support in preparing for an upcoming audit, please reach out to us.
To learn more about how outsourced nonprofit accounting can help with your nonprofit’s audit, click into our Ultimate Guide to Outsourced Nonprofit Accounting here.