From time to time, we share earlier posts that have enduring significance for nonprofit organizations. The following blog post was originally published in September 2020 and has been lightly refreshed.
Most nonprofits will experience at least one audit during their organizational lifespans. During an audit, an independent auditor will examine your financial records, accounting practices, and internal controls to test the accuracy and completeness of the information presented on your financial statements. Whether your organization is audited on an annual basis or you’re preparing for your very first one, there are a few things you can do to prepare, plan, and keep the audit process going smoothly.
Hold a Pre-Audit Meeting
Before the audit officially kicks off, your organization should meet among yourselves and with the auditors to determine who will be working with the audit team, and in what capacity. This is your opportunity to assign audit responsibilities to your staff and communicate those to the auditors. The audit will move more quickly if the audit team knows exactly who can answer their questions about certain topics. The auditors may also ask specific questions during this meeting to determine which types of documentation might be required. For example, they might ask if your organization has made any major changes this year, or if you are planning on changing accounting methods.
Gather Documentation
Your auditors will provide you with a specific list of required documents, some of which will be unique to your organization. However, most audits will also require some standard documents which you can gather in advance. These common documents include:
Year-end reconciliations and bank statements
Grant funds received (as well as any grant funds expected but not received)
Grant award letters
Fixed assets and depreciation schedules
Financial policies, including your internal control policy
General ledger details and summary
Payroll reports and related forms such as 941s, W-2s, 1099s, etc.
To avoid delays, make sure you have all of these common documents on hand before the audit begins.
Get Organized
A well-organized audit is a successful audit. Before the audit begins, you should conduct your own internal “mini-audit” to ensure that all information is present and accessible. Digitize as much as you can, and make sure that all electronic documentation is clearly labeled distinct filenames. If anything appears to be missing from your records, now is the time to chase those documents down.
Plan for Fieldwork
In an audit, “fieldwork” typically refers to the time the auditors actively spend engaging your staff with testing, assessments, and communications. This period typically covers several days where the auditors will work on-site at your organization’s office; however, remote or virtual fieldwork may also be an option. Efficient fieldwork is critical in keeping the audit on-time and on-budget. To get ready for on-site fieldwork, have someone at your office prepare a space where the auditors can sit and work as they review your documents and conduct interviews. This space can be anything from a spare office to a conference room, but make sure that it covers the basics – tables, chairs, internet access, power outlets, and anything else the auditors may need to work efficiently. Check your calendars to ensure that all key staff members will be present and available during fieldwork hours.
Be Ready for Questions
Your auditors will be asking many questions throughout the audit process to help them understand your accounting environment and test your financial controls. Even after you have provided your initial set of documents, be prepared to answer additional follow-up questions and pull more detailed documentation for their review. The more information you can provide, the better. If you are able to grant the audit team read-only access to your accounting files or bill payment system, this can save time and improve communication. Be sure to answer questions in full and return emails or phone calls as soon as possible, so it doesn’t hold up the audit process. If you are unavailable, make sure the auditors know who to communicate with instead. And if you need clarification or don’t understand a question, don’t hesitate to ask! Your auditors want this process to go just as smoothly and quickly as you do.