Many nonprofit organizations, especially 501c3 exempt organizations, are required to conduct an audit due to state solicitation regulations or sources of funding (federal, state, or private grant) requirements. A first-time audit can be overwhelming, but there are steps you can take to minimize the burden on your Organization’s staff as well as the potential cost of the audit.

Accumulating documentation – As part of the audit process your auditors should provide you with a checklist, preferably electronically, that will list out all the documents needed for the audit. While some documents may not be available until just before the audit fieldwork begins, a significant amount of documentation can be accumulated and retained throughout the year. These include:

• leases and contracts
• organizational documents such as bylaws, employee handbooks and policy documents
• board minutes
• grant agreements and donation letters.

We would also recommend ensuring all documentation for any unusual or extraordinary items is accumulated. If you have any questions on the accounting treatment for these items, it is helpful to discuss those with the auditors before fieldwork commences.

Setting the plan and preparing for the audit – before the audit commences it’s important to set the expected timeline with your external auditors.  You want to ensure that the audit is scheduled with time for your staff to accumulate all the requested information, and for the auditors to meet all deadlines.

The deadlines could include organizational deadlines such as board meetings or external deadlines such as grantor/governmental requirements as well as the Form 990 deadlines (the audit should be prepared before the Form 990 if at all possible).

It also would be helpful to have an audit planning meeting at the start of the engagement so that you can go over any of the pertinent information for the year under audit and the auditors can discuss their audit plan as well as any changes or updates in the accounting guidance for the year. For 2022, the big change is the implementation of the new lease standards.

Audit fieldwork – whether the audit will be conducted remotely or in your office, it is particularly important to remember the following to reduce the time and potential cost of the audit:

1. Provide the auditors ALL of their requested information at the start of fieldwork. If you are unclear about what is being requested, it’s best to reach out to the auditors in advance of fieldwork.
2. Be sure to make all staff that will be responsible for interacting with the auditors available during the week(s) of fieldwork. Auditors interact a lot with staff during fieldwork, so it’s important to provide staff with time to respond to questions and help progress the audit. Some staff duties may need to be delayed or rotated during the audit process.

The auditors will focus on the following areas:  understanding the procedures and internal controls of the organization, conducting fraud interviews, testing detail transactions for year-end account balances as well as revenue and expense transactions, and inquiring about significant changes in account balances from year to year. It is also essential that all supporting documentation provided agree to the trial balance of the Organization.

There are some common trouble spots worth mentioning for initial nonprofit audits:

1. Revenue and net assets – all revenue and net assets should be properly classified as donor restricted vs. without restrictions. There should also be documentation to support the releases from restrictions.
2. Functional expenses – have you properly allocated all expenses across the program/G&A/fundraising categories either in your accounting system or a separate schedule? The auditors will ask questions about this allocation including the methodology and salary allocations
3. Grants/contributions receivable – the auditors will look into whether the receivables have been collected after year-end. If not, there needs to be an evaluation as to whether or not they are truly collectible and an allowance should be recorded.

Audit wrap-up process – after audit fieldwork the wrap-up stage consists of multiple levels of review within the audit firm (detail/manager, partner, and quality control review). Depending on open items at the end of fieldwork, this process can take 3-6 weeks after the end of fieldwork. The auditors should provide you draft financial statements, as well as a governance letter and possibly an internal control letter.  It’s imperative for you to thoroughly review these drafts and ask questions as it is required for you to take responsibility for these statements. The internal control letter includes suggestions for improvements in processes and procedures. These should be discussed and addressed before the next year’s audit.

At the end of the audit it’s best practice (though not required) for the auditors to meet with the audit/finance committee to go over the results of the audit.  Given the Board’s governance responsibilities, it’s important for them to be aware of the audit results and help enact any significant changes if they are needed.

While an audit can be a scary and challenging prospect, following these guidelines can lead to an easier process and a positive experience. While the audit may be a required process, it can also be a way to maintain and even elevate the financial credibility of the Organization. Please feel to reach out to Snyder Cohn if you have any questions regarding the audit process.