So you have an audit coming up. Whether it’s annual, independent, or even from the IRS, the word “audit” can inspire dread for a nonprofit.
You might wonder whether you’re adequately prepared for your pending audit. From ensuring the needed support to properly recognizing revenue, even the most standard financial requests from an auditor can make the whole process even more daunting if you don’t fully know what to expect.
Take a breath and relax.
Here’s what you can generally expect from an upcoming audit for your nonprofit, and how you can best prepare.
What do auditors request?
About 30 days or more before a nonprofit’s audit takes place, the auditor will send an engagement letter, giving the organization an idea of what to expect during the process. This includes a description of the services to be performed, any fees the organization needs to be aware of, relevant dates for start and completion of the audit, and a list of what material the organization will be responsible for.
Concerning the latter, auditors will also generally request the following:
- Bank statements
- Investment statements
- Financial statements (position, activities, and functional expenses)
- Grant award letters
- Payroll reports
- Timekeeping records
- AP and AR reports
- Expense allocation methods
- Monthly account reconciliations
- Detailed financial processes and procedures
For nonprofits specifically, an auditor may also request descriptions of the organization and its programs, along with samples from board and committee minutes.
Also worth noting: up through the end of the COVID-19 pandemic, auditors have more often resorted to remote auditing practices as the norm – with high likelihood to stay that way. This makes efficiently gathering paperwork and ensuring its timely receipt imperative for a successful nonprofit audit.
Learn how virtual bookkeeping and virtual accounting helps nonprofits work effectively by this growing industry standard, in keeping with auditors’ growing remote practices post-pandemic.
How can a nonprofit prepare for an audit?
Technically, audit preparation should occur all year long. Your practices, record-keeping, and accessible records should add up to a glowing picture of your nonprofit’s earned reputation. Having the right people in your organization’s financial spaces helps ensure a positive audit experience.
After the engagement letter
After your organization receives an engagement letter from the auditor, don’t be afraid to ask more clarifying questions. The letter is generally a solid summary of expectations, and ways that you can best prepare financial documentation for the auditor’s review.
Some audit firms will also be willing to send you a preparation packet. Be sure to request one if they’re willing to offer one.
Additionally, a pre-audit meeting with the auditor is vital. If you have selected staff (like a CPA) who will work directly through the auditor, have them meet with the auditor to further discuss timelines, needed documents, responsibilities, potential issues, and general recommendations. Better to ask more questions than not enough in preparation for a nonprofit’s audit.
Once you close on a schedule (typically 90 days from year-end to final audit), have your auditor officially agree to the schedule before you sign the engagement letter.
Document, document, document
The key to a successful audit is documentation. This includes the following areas:
- Anything and everything relating to the nonprofit’s financial activity. This includes (but is not limited to) reconciliation statements, bank statements, grant information, items sold or planned to sell, general ledger for the fiscal year, payroll tax reports, timekeeping records.
- Policies and procedures. Make sure the accounting policies and procedures that the organization’s members follow are up-to-date. Clearly define and assign responsibilities.
- Previous audit results. This helps in several ways. It provides a past perspective to navigate your current circumstances, and gives you a clear picture of noted deficiencies that you can correct with the time you have left before the next audit.
- Financial closing process. Auditors will always check these entries, as they tell the story of the quality of your reconciliation procedures through the year.
- Related parties. Who does your organization have a professional relationship with? Document those parties and clearly note what that relationship (and any pertinent agreement) entails. You might want to consider getting legal counsel on this to ensure proper documentation.
Be ready to provide copies of any further supporting documentation the auditor will ask for. Your online filing system should be checked often for efficiency to this end.
How can your virtual CPA help during your audit?
Having a virtual CPA on hand – especially one who is well-versed on the unique financial needs that nonprofits face – is valuable when it’s time to handle an audit.
A few reasons for this:
- Virtual CPAs are a proactive necessity, and their wide expertise can catch financial issues before they become more serious, and could very likely prevent you from facing an audit.
- Virtual CPAS have the benefit of their remote environment, much like the increasing number of remote auditors, to be flexible in order to meet critical audit deadlines.
- If your nonprofit is audited, a knowledgeable virtual CPA can confidently represent you well and carry out the requirements of the audit process with their continually up-to-date tax, accounting, and business knowledge.
If you’d like to learn more about how we help nonprofits with their virtual accounting, head here.
Some audit insights to take the edge off
As we said, the prospect of an audit can be daunting. But for a nonprofit, there are several factors to consider that may help ease the tension of facing a nonprofit audit:
- Getting an audit does not necessarily mean you’re in trouble with the law. There are several common reasons that a nonprofit may get an audit. One is to demonstrate commitment to transparency for your donors’ peace of mind, and for the general public to see. Assurance of integrity is one of the greatest assets a nonprofit can have to generate support! Another reason for a nonprofit audit is that the nonprofit may be trying to qualify for specific funding, and an audit is required for consideration.
- An audit does not typically detect fraud. The assumption that an audit’s sole function and purpose is to detect fraud is actually a myth. Audits play an important part of preventing potential fraudulent practices, but the auditor can only really depend on the nonprofit’s direct representation of its finances. That’s why having a communicative, knowledgeable financial professional on your side is crucial.
- A nonprofit audit is not a generic checklist that’s “out to catch you.” Your assigned auditor will work to gain understanding of your nonprofit organization. Thus, they will try to mitigate risk of misunderstanding or misinformation with a tailored set of guidelines and procedures for the nonprofit’s financial representative to follow.
Temple Management consists of industry professionals whose virtual bookkeeping and nonprofit accounting services services can help you be more audit ready. They can also give you sound advice for whether an independent audit could be in your nonprofit’s favor, or if there are alternatives to consider.
Whatever the case, Temple Management’s virtual CPAs want you to focus on what you love, while we focus on what we’re good at: helping nonprofits succeed financially.
Reach out to our team virtually here, or give us a call at 770-892-2087.