For a nonprofit organization, a regular audit can reassure donors and other stakeholders that you take seriously your responsibility. Advance audit preparation may also help you identify risks before they become intractable problems. Here’s how to initiate and prepare for an audit.
Audit Preparation Step One: Find and Meet With an Auditor
Start by drafting a request for proposal (RFP) for prospective auditors. The RFP should describe your organization, its programs, major funding sources, and the type of service you need. Once you select an auditor, the firm will provide an engagement letter outlining the scope of services to be performed and assign responsibility for various tasks to your staff or the auditors.
The pre-audit meeting with your auditors comes next. Finance staff and management should attend, as well as representatives from your board of directors or audit committee. Those involved will draw up a timeline for the work, and the auditors can answer any questions about the information they’ll need.
During this meeting, inform the auditors of any changes in your nonprofit’s activities since you first met. Also communicate new or eliminated programs, new grant reporting requirements, and internal controls and staff changes.
Audit Preparation Step Two: Do Your Part
Your audit preparation will entail collecting and organizing the documentation auditors need before they arrive. Advance audit preparation saves them time and saves you money. Usually, auditors will provide a list of documents — such as financial statements, accounting records, physical inventories, and investment-related documents — and the date when each item is needed. Auditors also generally need organizational records such as:
- Articles of incorporation,
- Financial policies,
- Exemption letters,
- Board meeting minutes,
- Grant agreements,
- Pledges and other funding documents,
- Contracts, and
- Insurance policies.
As you conduct your audit preparation, you should gather support for footnote disclosures, as well. This includes documentation of significant estimates, pending litigation, restricted contributions and related-party transactions.
Head off Issues
Don’t wait for auditors to find problems and ask questions. You can expedite the audit process and reduce costs by identifying and addressing issues before they’re raised by auditors.
For example, after making year-end closing entries, reconcile all your schedules and workpapers to the trial balance and review for obvious anomalies. Double-check manual journal entries, accrual calculations, entries that require estimates and in-kind donation valuations. Compare actual figures with budgeted ones and be ready to explain any significant variances.
No Mandate?
Some nonprofits are required to conduct audits due to their large size (generally if they expend more than $750,000 a year). Grantmakers, banks, and some states and municipalities may also require audited financial statements. But consider conducting regular audits, even if no mandate applies. Contact us for more information.
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