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3 Steps to Prepare for an Annual Nonprofit Audit

I worked as an auditor for 9 years and it was never lost on me that my presence had a way of making the client uncomfortable. The problem lies with the negative feelings associated with the idea of being audited. The word audit tends to freak people out even though for some organizations it’s an annual requirement. In NYC, if your nonprofit organization has gross revenues of $500k or more, you are required by law to have an independent audit assessment. What’s the purpose of these audits? I’m glad you asked. As an organization that mainly uses outside funds to operate and function, it’s important to ensure that the funds are used for their intended purpose and that the organization is compliant with whatever requirements are in place. As the audit is an annual requirement, you should never be caught slipping. These 3 steps will help you prepare your organization for its annual audit.

Hold a Pre-audit Meeting

About 2-3 months before your audit is scheduled to take place, hold a pre-audit meeting with your staff that will be working on the audit and with the external audit team. The key is to get clear on timeline, documentation needed, and gaps that need to be addressed. While speaking with your staff, you should consider:

  • Major changes in leadership, operations, funding, etc.

  • Internal controls/ proper segregation of duties

  • Changes in accounting methods

  • Written documentation

  • Policies and procedures

You and your staff know your organization best. The ease of the audit process lies on the part of the organization and how well prepared you are. The beauty of audits are that year over year they don’t drastically change unless there were drastic changes to regulations or to the organization. As a result, the prior year’s audit is a great starting point for what you will need to pull together to get prepared. If this is your organization’s first audit, request that the auditors submit their “provided by client” (PBC) list as early as possible so you can have ample time to pull together the documentation needed.

The key is to identify areas of concern and areas needing improvement ahead of time and to communicate those areas to the auditors to save time.

Gather Your Documentation

A great starting point when gathering documentation is to use the PBC list provided by the auditors. Common requests include:

  • General ledger for the fiscal period

  • Bank reconciliations

  • Bank statements

  • Accounting policies and procedures

  • List of grants and funding sources

  • Amount of federal funds expended

  • Payroll tax reports

  • Time-sheets

As a nonprofit organization, auditors pay close attention to time keeping, federal funds, payments to vendors/ outside services, travel expenses, etc. Once you’ve gathered the initial documentation, it’s important to review for discrepancies, accounting errors, and compliance with policies, procedures, and applicable regulations.

More than likely, when the auditors are completing fieldwork they will ask specific questions about the documents provided so ensure that staff are available and able to speak to the nature of events and provide additional context to documents. A common phrase used during audits is “if it’s not documented, it’s not done.” By gathering documentation ahead of time, you can review to determine whether or not you have sufficient evidence to back up transactions. Once you’ve pulled all of the documentation together, place all of the files together for easy access when requested.

Communicate Consistently

The audit process doesn’t have to be taxing or stressful. Keeping the lines of communication open make for a seamless process. Implement consistent check-ins, have a system to keep track of documents provided and open items, and have a point person that is responsible for logistics and liasing between leadership and the auditors. Furthermore, make sure that you have received an engagement letter and that it clearly indicates the scope of work. The engagement letter provides a roadmap of what services are to be performed, who is responsible for what, fees, timing, etc. By having clear communication and a guide to follow, you reduce the possibility of miscommunication and delays in the audit process.

You should now be more than equipped to begin preparing for your next audit. These steps may not be simple but they are a sure way to walk into your next audit prepared. To eliminate overwhelm and stress that could possibly be associated with this process, get all parties on board early and establish a timeline to complete the preparation tasks.

If you’re short staffed or your current staff doesn’t have the capacity to prepare for your next audit, that’s no reason to panic. At Visionary Accounting Group, we provide audit preparation services and having been on the audit side, we provide a unique perspective with getting you prepared. Schedule a free consult here to learn more.


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