Nonprofits have many reasons to conduct financial audits, from deterring fraud to improving fiscal management to meeting regulatory requirements. And proper preparation can go a long way toward streamlining the audit process and getting back to business as usual. Here are some critical steps to take before the auditors arrive.

Engage in the pre-audit meeting

The pre-audit meeting typically includes the assigned auditors and staff members who’ll be directly involved during the audit, and possibly members of the board (including, if applicable, members of its audit committee). The main purpose of the meeting is to develop a timeline for the audit and an outline of documents and records the auditors will require.

But your staff shouldn’t be passive participants in the pre-audit meeting. This is a valuable opportunity to ask questions and address issues that can save time down the road. For example, your accounting staff might seek clarification about items on the “Provided by Client” list. Staff can also inform the auditors of any significant changes in your organization since the prior audit, such as new or terminated programs or grants, and developments related to internal controls. Additionally, you can alert auditors to any anticipated problem areas or anomalies.

Check your accounts

To improve the odds that your auditors will find everything in order, bring an auditor’s eye when reviewing accounts. For example, have you analyzed your accounts receivable for collectability? Are assets properly capitalized? Does your donor database reconcile to the general ledger? If you find these or other errors, correct them before the audit.

You also should review any manual journal entries (a ripe area for error) and calculations for accrual purposes, and check that your revenues are recognized in the correct periods. Reconcile your general ledger with bank and investment statements and other records.

Gather your basic documents

Auditors will want access to your organization’s financial statements, including your statements of activities, financial position, cash flow and functional expenses. You can also expect that they’ll need to see statements and records for any investment or bank accounts. Tax filings are another area of interest. Your Forms 990 top the list, but auditors may request Forms W-2 and 1099 for your workers, among other forms and schedules.

Auditors generally need copies of your “foundational” organizational documents, too. This includes articles of incorporation and bylaws, board meeting minutes, exemption letters, relevant policies and updated organizational charts.

Collect supporting documentation

The auditors will test various financial transactions as part of their process. That means they’ll require documentation for these transactions, such as invoices, receipts and deposit slips. This step often accounts for the bulk of your preparation time. Among other information that you should collect and store in a digital file, you’ll need documentation for:

• Expenses and capital purchases,
• Restricted contributions,
• In-kind donations (goods, facilities and labor),
• Significant estimates,
• Valuations,
• Related-party transactions,
• Grants (for example, grant agreements, reports and disbursements),
• Leases, insurance policies and other contracts, and
• Pending litigation.

Management letters from the past several years can provide insights into areas that might receive particular scrutiny from auditors. If those audits highlighted material issues, such as weak internal controls or operating inefficiencies, you should be prepared to demonstrate how you’ve addressed them.

Compare earlier audited financial statements with your current statements, too. If earlier statements required adjustments, see if you can head off similar adjustments for the current year.

Don’t delay

Ideally, audit preparation takes more time than the audit itself. Begin preparations early so your organization can gather documents and review past audit reports. Although it may seem cumbersome, planning can reduce real-time headaches, shorten the audit and possibly even help you save money on fees. Contact your auditor to get started.

Make audit prep a year-round process

You can expedite your audit preparation (see main article) by keeping the upcoming engagement front of mind throughout the year. For example, don’t limit your communication with your auditors to “audit season.” You should apprise them of unusual transactions and other potential issues as they arise, rather than waiting months to discuss them.

Staying on top of your quarterly or, preferably, monthly closings can reduce the stress at audit time as well. Take the time to conduct a comprehensive closing for each period. That includes confirming that all transactions are properly recorded and revenues recognized, posting closing entries and performing reconciliations.

The annual closing is another opportunity before the audit to ensure your figures are accurate and verifiable and to identify possible red flags. Do your book figures match those in your financial statements? Can you explain any significant variances between budgeted and actual figures? These types of disparities are sure to come up in the audit, so investigate, mitigate (if necessary) and prepare to discuss them in advance.

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