Audit Preparation for Non-Profits

It’s smart to be proactive about audit preparation, especially for a nonprofit where resources might be stretched thin. By following these tips, your nonprofit can navigate the audit process smoothly, efficiently, and with a positive outcome, ultimately strengthening its financial health and credibility.

Here at Bay Business Group, we recognize the importance of clean audits for non-profits. Nonprofit accounting is a dynamic field, constantly adapting to new regulations, trends, and reporting requirements. With years of experience in serving the non-profit sector, we understand deeply the importance of financial transparency and compliance.

Outsourcing audit preparation will provide your nonprofit with access to specialized expertise, improve the accuracy and reliability of financial records, and lead to a more efficient and less stressful audit process. With years of nonprofit accounting experience, our BBG professionals will ensure that financial records are accurate, organized, and compliant with accounting standards, significantly reducing the risk of errors or omissions that could delay or complicate the audit.

Here are some tips on preparing for an audit and working effectively with auditors:

Preparing for an Audit:

Understand the Scope:

1. Ask for the engagement letter early: This document outlines the scope of the audit, the period covered, the auditor’s responsibilities, and your nonprofit’s responsibilities. Make sure you understand what financial statements will be audited (e.g., Statement of Financial Position, Statement of Activities, Cash Flows, Functional Expenses) and what areas will be a focus.
2. Clarify expectations: Don’t hesitate to ask your auditor questions about what specific documentation they will need, what their timeline is, and how they prefer to communicate.

Organize Your Financial Records Meticulously:

1. Keep everything in one place: Create a dedicated audit binder or a digital folder system.
2. Categorize and label: Organize documents by type (e.g., bank statements, invoices, receipts, grant agreements, payroll records) and by fiscal year.
3. Reconcile all accounts: Before the auditors arrive, ensure all bank accounts, credit card accounts, and significant balance sheet accounts are reconciled.
4. Ensure completeness:

• • Bank statements and reconciliations: Have all monthly bank statements and corresponding reconciliations readily available.
  • General Ledger (GL): Ensure your GL is accurate and up-to-date.
  • Accounts Payable/Receivable: Have detailed listings and supporting documentation for outstanding invoices and pledges.
  • Payroll records: Include timesheets, payroll registers, tax filings (941s), and W-2s.
  • Grant agreements and reports: Keep copies of all grant agreements, along with financial reports submitted to funders.
  • Donor acknowledgments: Have records of how donations were acknowledged, especially for large contributions or in-kind donations.
  • Fixed asset register: Maintain a list of all significant assets purchased, including purchase date, cost, and depreciation.
  • Board minutes: Auditors often review board minutes for significant financial decisions.
  • Policies and procedures: Have documented financial policies and procedures (e.g., cash handling, expense reimbursement, conflict of interest).

Review Internal Controls:

1. Document your processes: Even informal processes should be documented. How do you handle cash? Who approves expenses? How are checks signed?
2. Identify strengths and weaknesses: Be prepared to discuss your internal controls. Auditors will assess these to determine the risk of misstatement.
3. Address any known issues: If you’re aware of any weaknesses in your internal controls, have a plan to address them and be transparent with the auditors.

Prepare a “Prepared by Client” (PBC) List:

1. Request it from the auditor: Your auditor will typically provide a PBC list well in advance of the audit. This lists all the documents they will need from you.
2. Start gathering early: Don’t wait until the last minute. This list can be extensive.
3. Check things off: As you gather documents, check them off the list.

Designate a Point Person:

1. One primary contact: This streamlines communication and ensures consistency. This person should be highly organized and have a strong understanding of the nonprofit’s financial operations.
2. Backup person: Have a backup in case the primary contact is unavailable.

Working Effectively with Auditors:

• Be Responsive and Proactive:
  • Provide information promptly: When auditors request documents or explanations, provide them as quickly as possible. Delays can prolong the audit and increase costs.
  • Anticipate questions: Based on prior audits or common audit areas, try to anticipate what questions they might have and have answers ready.
• Maintain Open and Honest Communication:
  • Ask questions if you don’t understand: Don’t be afraid to ask for clarification if an auditor’s request or question is unclear.
  • Be transparent about challenges: If your nonprofit has faced financial challenges or made unusual transactions, be upfront about them. Hiding information can lead to bigger problems later.
  • Communicate issues early: If you anticipate delays in providing information or if you discover an error, communicate it to the auditors immediately.

• Provide a Dedicated Workspace:
  • Quiet and private: If auditors are on-site, provide them with a quiet space where they can work without interruption and have access to necessary files.
  • Access to internet/printer: Ensure they have access to the internet and a printer if needed.
• Listen and Learn:
  • Pay attention to their findings: Auditors often provide valuable insights into financial processes and internal controls.
  • Ask for recommendations: At the end of the audit, discuss any recommendations for improvement. This is an opportunity to strengthen your nonprofit’s financial management.
  • Take notes: Document discussions and commitments made during the audit.
• Review the Draft Report Carefully:
  • Don’t just skim: Read the entire draft audit report, including the financial statements, footnotes, and any management letter or recommendations.
  • Verify accuracy: Check for any factual errors or misinterpretations of your financial data.
  • Discuss concerns: If you have any concerns or disagreements, discuss them with the auditors before the report is finalized.

Your BBG team will ensure your books are audit-ready, gather and organize all required documents, perform thorough account reconciliations, test internal controls, and prepare detailed audit schedules and work papers. Acting as the liaison with your auditor, we streamline the entire process—significantly reducing the internal burden that an audit can place on your small nonprofit organization.

Whether you are a small community organization or a growing member-based organization, Bay Business Group is here to support you in navigating the financial complexities of the non-profit landscape to ensure that your organization is organized and prepared for any audits.

Non-Profits