Not all nonprofit organizations are required to have an independent audit of their financial statements. However, there are several circumstances that trigger a mandatory audit, including expending $750,000 or more per year in federal funds. Many state and federal contracts, bank loans and private foundations may also require audited financials.
As important as they are, audits can be time consuming, costly and frustrating for nonprofit organizations, their boards and staff. To ensure that the process goes smoothly, here are five ways to prepare:
1. Assemble the Team
Even if audits are an annual event for your organization, you can’t assume that you’ll have the same people or talent on your team every year. It’s better to have a few more people on board to contribute than to manage the disruption of adding people as you go.
Who should you include? You will want to include your accounting and finance staff, as well as members of your board finance or audit committee. It’s also helpful to include the board chair for the kickoff with the auditors.
Additionally, you may want to include your head of operations. The audit may disrupt your organization’s operations. This is especially true when a single person manages key functions. You might need to get some temporary help to either augment your audit staff or your operations efforts.
2. Prepare for the Pre-audit Meeting
The pre-audit meeting is the initial consultation between your audit project staff and the auditors. It’s the time to discuss the overall audit process, introduce key team members, understand the schedule and requirements for the auditors’ field visit and list the documentation required.
Be sure that you have your accounting and executive staff available during this meeting. Doing so will ensure that your key players understand any adjustments or accommodations necessary for the audit. This is a big effort, so build in contingency time to handle workloads and the unexpected.
3. Get Focused
Take what you’ve learned from the pre-audit meeting and relay relevant information to the rest of your staff. Everyone will appreciate being in the loop. If this is your first audit — or the first audit for certain staff members — explaining the demands on your accounting and management personnel can foster cooperation from other departments.
4. Pull It Together
Nothing slows the audit process more than missing or incorrect requested documents. Your pre-audit meeting should provide a specific list of documents and describe the format for their delivery.
At a minimum an auditor will need the following:
• Accounting manual and financial management policies
• Closed general ledger
• Trial balance
• Bank statements
• Lists of contributions and grant funds received and pledges receivable
• Grant awards and supporting documentation
• Fixed assets and depreciation schedule
• Access to payroll tax reports — W2s, 1099s and timesheets
• Year-end reconciled financial statements and reconciliations
5. Plan for the Field Visit
The auditing team will likely spend time in your office to conduct field work. To make their visit efficient and effective, make sure one person on your staff handles logistics. For example, how many people will come per day? Where will they sit and work? Do they need internet access or after-hours building access?
Audits are important organizational efforts that take time. Getting the right people involved early, gathering the necessary documentation discussed in the pre-audit meeting and welcoming your audit guests will help you execute successfully.
Thinking about an upcoming audit? Let’s talk about how to prepare. Fill out the form below and we’ll help you.
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.
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