Preparing for a Nonprofit Audit

Many nonprofit organizations undergo an independent audit each year, often as a condition of receiving grant funding or meeting state requirements.  An audit involves an evaluation of financial statements, review of supporting documentation, and gaining an understanding of internal procedures. It is a complex process that requires staff to provide significant information about operations and related documentation. Preparation largely determines how efficiently the process moves and how many follow-up requests arise during fieldwork. To help clients, prospects, and others, Klatzkin has provided a summary of the key details below.

What Is a Nonprofit Audit?

A nonprofit audit is an independent assessment of an organization’s financial statements performed by a CPA firm. After reviewing the nonprofit for accurate financials and compliance, the auditor issues a report with a formal opinion. Nonprofits can use this report to demonstrate financial transparency to boards, donors, grantors, and regulators.

Audit requirements are based on size, funding sources, or state regulations. For example, some organizations may require only a financial statement audit, while organizations that expend $1 million or more in federal funds in a year are subject to a Single Audit.

Smaller nonprofits may not be required to have an audit. In that case, they may opt for a lesser degree of assurance through a review or compilation. These engagements are less costly and often require less time from board members and staff.

It’s important to note that nonprofit audits are typically scheduled based on the organization’s fiscal year-end. Fieldwork often begins a few months thereafter, once the books are closed and schedules are prepared. Because audit firms have busy seasons, it is helpful to confirm timing and expectations with them early.

Preparing for a Nonprofit Audit

• Review financials — An audit is an ongoing process that starts with financial statements maintained throughout the year. That means closing the books every month and making sure account balances match supporting documents. Expenses should be classified correctly and any duplicate entries removed. Auditors will also need to review prepared reports like the trial balance and AR/AP schedules, among others. If records are still being updated during the audit, the process may take longer and cost more.
• Organize documents — Have both financial and organizational documents ready and easy to access. Auditors will request support for selected transactions, including invoices, receipts, grant agreements, payroll records, bank statements, and any issued Form 1099s. They will also review prior filings such as Form 990 and Form 990-T, along with documents that explain how the organization operates, like board meeting minutes, lease agreements, loan documents, and major contracts.

If the organization receives federal funding, include a schedule of those awards with grant details and activity for the year. Keep everything in a central location so items can be pulled quickly.

• Review grants — Grants are a common audit focus because reporting errors are common due to the complexity of revenue recognition standards. To avoid this audit finding, maintain a schedule for each grant showing the beginning balance, amounts received, amounts spent, and what remains. Auditors will likely request this. If the organization receives federal funding, it may be required to prepare a Schedule of Expenditures of Federal Awards (SEFA). The SEFA lists each federal grant, revenue recognized, and expenditures recognized during the year.
• Document internal controls — The audit will look at how financial tasks are handled day to day. That includes key internal controls like segregation of duties, access controls, and workflow approval. These procedures should be written down before the audit begins. When roles are documented and followed, errors and fraud are less likely to occur.
• Prepare a draft Form 990 — A draft Form 990 pulls together financial data, compensation, governance, and program reporting. Reviewing it in advance makes it easier to catch differences between the return and the financial statements before the audit begins.
• Perform a final self-review — Before fieldwork starts, the organization should review the financials as a whole. An outsourced accounting firm, separate from the CPA firm performing the audit, can help with this or any other step. Experienced professionals are often able to catch small issues that would otherwise turn into audit findings. This checklist may be a helpful starting point for performing a final self-review.
• Communicate with auditors — Be proactive in communicating with the audit team throughout the year, especially if there are changes at the nonprofit. A quick conversation can reduce risk and make the entire audit process more efficient. It’s also helpful to designate a point of contact at the nonprofit to manage the audit, coordinate requests, and serve as the primary communication link with the audit team.

Contact Us

Early preparation makes a difference for any type of audit. This allows the audit process to move faster with fewer disruptions. If you have questions about the information outlined above or need assistance with another tax or accounting matter, Klatzkin can help. For additional information call 609-890-9189 or click here to contact us. We look forward to speaking with you soon.