Preparing for your organization’s first financial audit can feel intimidating, especially if you don’t know what to expect. After auditing hundreds of nonprofit organizations since 2012, our team at Altruic Advisors can reassure you that the key to a smooth audit is readiness.
Here are four practical steps you can take to prepare for your first audit and set yourself up for long-term success.
Clean up your accounting records
During an audit, your auditors will request many different reports and documents to verify that your organization’s financial activity is accurate, complete, and compliant with accounting standards. The more organized your records are, the smoother the audit will go. This includes keeping detailed support for every transaction: invoices, receipts, bank statements, payroll records, grant agreements, and anything else that ties to your financial statements.
You will also want to make sure that every bank account, credit card, and balance sheet account is fully reconciled before the audit begins. Unreconciled accounts can cause considerable extra time and frustration, which can drive up the price of an audit and extend its duration.
And if you haven’t already, be sure to establish a clear filing structure for your organization’s digital or physical files. A predictable, logically named folder system prevents last-minute scrambling and reduces the risk of missing documents.
Review and strengthen your internal controls
Internal controls are policies designed to prevent fraud and misuse and to protect your organization’s assets. Even very small nonprofits need internal controls, and your auditors will pay close attention to whether these policies are clearly documented and consistently followed.
Start by looking at how your organization handles cash, approves expenses, reconciles bank accounts, and produces financial reports. Then make a list of everyone who is involved in each step of the process. It’s important to divide responsibilities so no single person has complete control over an entire financial transaction. Even if your team is small, you can still segregate duties. For example, you might have a board member review your bank statements, or require two signatures on outgoing payments above a certain amount.
Document these policies in writing and make sure everyone knows their roles and responsibilities. Strong internal controls not only improve audit readiness but also build trust with funders, board members, and the public.
Understand your grant requirements and restrictions
Many nonprofits rely on grants that come with specific financial requirements, from allowable costs to reporting timelines. If your organization hasn’t tracked these details closely, an audit can expose gaps that may require corrections or even repayment.
Review every active grant agreement and confirm that your chart of accounts, expense tracking, and documentation support compliance. If you’ve received restricted donations, make sure you can show how funds were used in alignment with donor intent. Clear grant tracking practices – such as using class codes in QuickBooks Online – can make this process much easier.
If anything is unclear, now is the time to clean it up. Clarifying grant terms with funders, updating documentation, or improving how expenses are allocated will all help prevent issues during the audit.
Communicate early and often with your auditors
Auditors don’t expect perfection. But they do expect transparency, readiness, and collaboration. Once your audit is scheduled, your auditors will typically provide a “prepared by client” list, often called a PBC list. This includes the documents, schedules, and reports you’ll need to provide before fieldwork begins.
Review the list carefully and start gathering items early. If something on the list is unfamiliar, or if you aren’t sure how to pull a report from your accounting system, ask for clarification. Auditors would much rather spend a little extra time helping you prepare than run into unexpected delays later on.
We also strongly recommend that you designate a primary point of contact on your team - someone who can coordinate document requests, respond to questions, and manage communication across departments. This keeps the process efficient and prevents duplicated efforts or missing information.
