When you think of your next audit by an outside CPA firm, do you fear hearing words such as “unexplained differences,” “unsatisfactory explanation,” “noncompliant” and “we’ll need more time”? If you have an audit phobia, you’re not alone: Some nonprofit leaders equate an independent audit with criticism, demands and time taken from their workweek.
But such anxiety may be unwarranted. An audit provides you with a genuine assessment of your organization’s financial condition and the controls surrounding its financial reporting — and it can provide your constituents with peace of mind. If you understand what to expect during an independent audit, the event should proceed smoothly.
Line up the audit
Start by scheduling the audit engagement far enough in advance to give you time to fully prepare. Make sure that key personnel will be in the office and available to answer questions during the auditors’ visit.
Set an agreed-upon timeline with the audit firm that outlines key responsibilities in the audit process and establishes due dates. This will clarify expectations for both you and the audit firm.
Get your records in order
In an external audit, a CPA verifies certain information on the nonprofit’s financial statements and issues an opinion on whether those statements offer a fair picture of the organization’s finances and whether they adhere to Generally Accepted Accounting Principles. To provide the audit firm with the information to make those judgments, you’ll need to supply an analysis of each major balance sheet, revenue and expense account. You also should provide detailed documentation about your not-for-profit’s operation in areas that include:
- Bank correspondence, including monthly statements, reconciliations, records of deposits and issued checks.
- Annual statements from all investment and endowment accounts,
- An inventory of salable items, including sales records,
- Invoices and payments to support transactions in accounts receivable and payable,
- Payroll records, including Forms 941, W-2 and W-3,
- Loans and mortgages, leases and other contracts,
- Grants and contributions, including restrictions in their use — plus donated services and materials,
- Special events and benefits,
- Any formal financial or accounting policies and procedures, and
- Information for your Form 990.
The documentation also should include board meeting minutes, the current year’s budget and interim financial statements. Be prepared to explain variations between budgeted and actual results.
It’s helpful to have the list of items your auditors will need during the close of your financial year — many records can easily be gathered or prepared during the close process. Make sure that everything requested by your auditors is ready on the first day of audit fieldwork.
Your auditors may request your trial balance, to be used in audit planning, before the first day of their fieldwork. It’s also helpful to review your prior year financial statements and update the footnote disclosures once all accounts have been reconciled.
Prepare for a focus on internal controls
Auditors once performed year end “cleanups” during annual audits, rebalancing and completing book entries. But current rules requiring external auditor independence may prohibit them from performing accounting duties during the audit engagement. This gives auditors more time to focus on risk assessment and internal accounting control policies and procedures.
You’ll have a less stressful audit if you review your organization’s internal controls before the audit and make any necessary improvements. If there are significant adjustments to your financial statements needed as a result of the audit, the auditors may conclude that your internal controls over financial reporting are deficient.
Your auditors will be able to answer questions about proper internal controls at your preaudit meeting. And remember, the more time you spend resolving issues before the audit, the less time they’ll need to spend addressing such problems during their visit and the less likely your auditors will issue a report on control deficiencies.
Put your auditors on speed-dial
Contact your auditors with any questions in the weeks leading to the audit, but don’t let that be the only time you give the CPA firm a call. Stay in touch all year as issues arise about your organization’s accounting and financial reporting processes and about your internal controls.