5 Steps to Prepare for Your Nonprofit Audit
Does your nonprofit need to undergo an independent audit? Conducting independent financial audits may seem like a big endeavor to nonprofits working to control costs and focus on their mission, but with proper planning, it doesn’t have to be stressful.
An independent audit allows your nonprofit to identify risks and act quickly to prevent problems, in addition to offering valuable reassurance to donors. Fortunately, you can reduce the cost of a nonprofit audit with good preparation.
1. Choose an auditor
You will first need to prepare a request for proposal (RFP) to submit to prospective auditors. The RFP should include a description of your organization, its programs, major funding sources, the type of service you need and any questions you need the prospective audit firm to include in their proposal that will help your organization determine if they are the right fit for the organization’s needs.
Once you select an auditor from the proposals, 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.
2. Hold a pre-audit meeting
The pre-audit meeting will include the auditors and your finance staff and management as well as representatives from your board of directors or audit committee. During this initial consultation, they will put together a timeline for the nonprofit audit and answer any questions about the information they’ll need from you. The auditors will ask about any changes in your nonprofit’s operational changes, new or eliminated programs, new grant reporting requirements, and changes to internal controls and staff.
3. Gather your documentation
The auditors will provide a list of documents they need to conduct the nonprofit audit. Common documents they will request include:
- financial statements
- accounting records, including general ledger and trial balance
- physical inventories
- investment-related documents
- articles of incorporation
- financial policies
- exemption letters
- board meeting minutes
- grant agreements, pledges and other funding documents
- insurance policies
- current organizational chart
- support for the footnote disclosures
- documentation of significant estimates
- allocation of expenses by function, including by program, fundraising, administrative and salary/payroll
- pending litigation
- restricted contributions
- related-party transactions
4. Stay Organized
Keeping accurate, complete and up-to-date records throughout the year will make the nonprofit audit process much easier for all parties. Be sure to have all the documentation ready before the auditors arrive to save them time and save you money.
5. Be proactive with issues
You can facilitate the audit process and reduce costs by identifying and addressing issues before they’re raised by auditors.
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.
Have Questions About Your Nonprofit Audit?
For guidance on preparing your nonprofit for an audit, contact us today to discuss your needs with our audit team.
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