Nonprofits: Are you prepared for your financial audit?
In an independent nonprofit audit, an auditor examines the financial side of your organization, including transactions, accounts, accounting practices, financial records, and internal controls.
Some financial audits are required by law – majority of states have laws requiring charitable nonprofits to conduct an independent audit under certain circumstances. The requirement for a nonprofit to submit audited financial statements to the state is most often triggered by either the total revenue or contributions received during the fiscal year. Most states also require annual submission of audited financial statements in connection with the renewal of charitable registration.
Spending the time to prepare in advance for your nonprofit audit will save time and money.
The best place to start the preparation work for your nonprofit audit is with the engagement letter and/or proposal of services provided by your auditor. This document will usually include a description of services being performed by the auditor, a list of what the organization’s staff is responsible for providing, the fees that will be charged, and the timeline.
From there, nonprofit organizations can help prepare for and facilitate the audit process by reviewing and assembling the following items in a central, organized location:
Financial & Accounting Documents
- Journals that detail your organization’s transactions
- Ledgers for the fiscal year being audited
- Bank statements and canceled checks
- Payroll records
- IRS Form 1099s for independent contractors and consultants
- Prior year’s tax returns
- Invoices and paid bills (receipts)
- Receipts for credit card transactions
Corporation or Organizational Documents
- Policies related to financial management and controls
- Tax exemption letters
- Board or committee meeting minutes
- Grant proposals, commitment letters and contracts with funding sources
- Final reports submitted to funders
- Contractors with vendors
- Lease agreements
- Equipment maintenance agreements
- Insurance policies
Organizations should also review accounts payable and accounts receivable aging reports as well as bank reconciliations. All AP/AR reports should be current and all outstanding checks on your bank reconciliation should also be current.
Devoting the proper time and attention to preparing in advance for your nonprofit audit will create a smoother audit process, reduce the time burden placed on staff, and help your organization reap the benefits of an independent, financial audit.
What are the benefits of an audit?
In our post, Independent audits are valuable decision-making tools, but only if you follow through, we explore how audits mitigate risk and build confidence. Audits can help your organization improve internal processes and controls, improve risk-management strategies, and inspire and maintain trust.
Since 1974, our trusted advisors have partnered with nonprofit organizations to navigate every step of the financial journey. At Dugan & Lopatka, our CPAs and consultants are always on the cutting edge of changes in the nonprofit sector. We understand the challenges you face—the special accounting, auditing and reporting requirements of your organization—and we use our deep expertise to deliver exceptional service tailored to your needs.