Keep Your Nonprofit Organization Audit Ready!

June 21, 2024

At a glance:

  • The main takeaway – To stay audit ready you need to stay focused all year long and be proactive!
  • Think like an auditor and using some easy audit techniques, can reduce or eliminate audit adjustments.
  • Aprio’s Nonprofit Outsourced Accounting team successfully manages our nonprofit client’s audits with exceptional success rates.

For some organizations, financial audits are an inevitable part of the accounting cycle. Still, just the mention of the word “audit” can be anxiety provoking. It doesn’t have to be that way. With a little foresight and focus throughout the year, your audit can be efficient and clean. Having a smooth and easy audit can also help keep the costs down.

Start on Day 1: At the start of the audit, you will receive a PBC (Prepared by Client) list from your auditors. This is a list of all of the documents and schedules that the auditors require to complete the audit. Typically, the list will be organized into sections

  • Organizational documents and internal control overviews
  • Contracts and documentation for any large financial transactions such as loans or asset purchases
  • Financial schedules that provide detail for the balance sheet account balances
  • Income statement analyses and comparisons to prior year

The list can be daunting, however, most of it is consistent from year to year which means that you can start pulling some of it together throughout the year – you don’t need to wait for the list. One way to save time at year-end is to create folders in an “audit” directory at the beginning of the year. During the year, file any information that might be included in the PBC list. For example, in your Fixed Assets folder, you should keep copies of invoices for capitalized items, notes regarding disposal or sales and documentation of any other fixed asset transactions. A good practice might be to create folders for Corporate Documents, Policy Manuals, Board and Committee Minutes, Leases and Borrowings, Contracts, Grants, HR approvals, Prepaid Expenses, Accrued Expenses and any other unusual transactions. Having these documents filed and ready to send to the auditors will save you from having to find them at year end. However, please make sure to follow any security protocols for sensitive information!

  • Reconcile consistently: Make sure that cash and credit card reconciliations are completed in the system monthly. Try to resolve outstanding amounts before the last month of the year. Also, preparing monthly reconciliations for every balance sheet account will help alert you to any issues before the audit starts. At year end, ensure that the balances on the reconciliations agree to the trial balance and a majority of your schedules will be complete.
  • Stay organized: When the PBC list comes, download it into excel and use it as your springboard template. Add columns for person assigned, due date, upload/returned date and notes and make sure that everyone working on the audit can access it. This is an easy way to manage the audit work and will provide you with an up to date progress report on where you stand. It’s a good idea to prioritize your work and send as many of the requests to the auditors before their field work starts so that they are prepared and can use your time efficiently.
  • Run preliminary statements: Before you close the year, remember to check your statements. Review the trial balance and make sure the balances are displaying correctly. A credit balance in an asset account might be a sign that you have an error. Review the general ledger and ensure that all of your expenses are consistently coded. Look over any reconciling items on your bank reconciliations. Are there uncleared checks or deposits that should be written off? Are all of the receivables collectible? Also review the income statement before sending it and make sure it is consistent with your expectations.
  • Pre audit: You can complete certain audit procedures yourself which can help eliminate any surprises. Check cash disbursements from the first day of the following fiscal year to just before the audit start date. If you see any expenses that related to the prior fiscal year, make sure to accrue for them (and add a copy of the invoice to your accrued expense folder). You can also check cash receipts and make sure that your year-end receivables reflect the correct balances. To assist the auditors you might also note the date of the cash receipt on the A/R aging schedule that is sent to them.
  • Variance review: One of the most time consuming and difficult parts of the audit is comparing the income statement and balance sheet to prior year. The best tip for making this less challenging is to prepare the comparison pre-audit and start analyzing large variances in advance. Focus mostly on large changes and the largest balances to make the best use of your time.
  • Cloud based bill pay: One additional suggestion is to consider moving to an online bill pay system with routing and approval documentation. All invoice copies are stored on the cloud and the auditors can receive access to review invoices and document approvals and internal controls.
  • Keep in touch: Stay in touch with your auditors throughout the year. Check in with them to discuss new accounting issues that you need to be aware of such as accounting pronouncements for leases and revenue recognition. Asking the auditors for help with an accounting issue up front can save everyone time in the long run.

Each audit is unique and it is impossible to plan for every occurrence. Hopefully, staying organized and working consistently throughout the year can help make the audit a little less stressful.

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About the Author

Leslie Rothstein Zeid

As a Partner with Aprio’s Nonprofit Managed Services team, Leslie leverages her 25 years of experience working in public accounting as well as industry to provide nonprofit organizations with outstanding accounting and consulting services. Leslie's Nonprofit Outsourced Accounting team provides monthly and quarterly GAAP based accounting for nonprofit entities as well as nonprofit financial consulting, grant compliance consulting and fractional controller and CFO placement.