Preparing for a nonprofit audit can feel overwhelming. But with the right approach, it’s not only manageable, it’s a chance to enhance your nonprofit’s credibility and financial health. In this guide, we’ll walk you through a practical checklist and tips to help you prepare for a smooth, stress-free audit. Let’s dive into how you can get ahead of the curve and turn the nonprofit audit preparation process into a valuable learning experience.
The Purpose of Nonprofit Audits
Why are nonprofit audits important? Well, audits do more than just keep you compliant—they boost trust. Whether you’re trying to meet government regulations or win over donors, an audit is a way to show that your nonprofit organization is responsible for its financial records. It’s a powerful tool that demonstrates your nonprofit’s commitment to transparency and accountability.
An independent audit provides an external, unbiased look at your organization’s financial health. The audit report you receive at the end can make or break your credibility with stakeholders. Plus, nonprofit audits help catch issues early—like weak internal controls—that could hurt your organization in the long run.
Key Benefits of Nonprofit Audits:
- Enhance credibility: Show donors, board members, and regulators that you’re managing funds responsibly.
- Identify risks: Catch financial or compliance issues early.
- Ensure compliance: Many states and grantors require nonprofits to undergo independent audits.
Pre-Audit Planning: Start Early
Planning ahead is key to making the audit process smoother. Let’s talk about some steps you can take to be ready before your auditor even arrives.
1. Pick the Right Auditor
Choosing the right independent auditor is crucial. You want someone experienced with nonprofit audits. When you’re looking for an auditor, consider:
- Experience with Nonprofits: Not all audits are the same. Make sure your independent auditor has specific experience with nonprofit financial audits.
- References: Ask other nonprofits who they’ve worked with. Word-of-mouth recommendations are golden.
- Fit: This is a partnership. You need someone who communicates clearly and works well with your team.
2. Schedule Early
The audit process takes time, and you don’t want to rush it. Make sure to schedule your audit early enough in the year. This gives you plenty of time to gather documents and address any issues.
3. Delegate Responsibilities
Who’s handling what? Assign tasks early so there’s no confusion later. Identify a point person for the audit who will act as the main contact between your nonprofit organization and the audit team. This keeps things running smoothly and avoids last-minute chaos.
Documentation Checklist: What Auditors Look For
One of the most critical parts of preparing for a financial audit is gathering the right documents. Below is a free nonprofit audit checklist to ensure you don’t miss a thing:
- Financial Statements
- Statement of Financial Position (Balance Sheet)
- Statement of Activities (Income Statement)
- Statement of Cash Flows
- Statement of Functional Expenses
- Bank Reconciliations
- Monthly bank statements
- Reconciliation reports matching bank balances to the financial records
- Grant Agreements and Contracts
- Copies of all active grant agreements
- Records of restricted funds and how they’ve been used
- Payroll Records
- Pay stubs
- Tax filings (like 941 forms)
- Timekeeping records
- Expense Receipts
- Receipts or invoices for any large purchases or expenses
- Donor Records
- Proof of contributions and grants
- Donation receipts
- Internal Financial Policies
- Copies of your organization’s financial policies, including internal controls and procedures
- Tax Filings
- IRS Form 990 or 990-EZ
- Any state-level filings or reports
Having these documents ready in advance helps streamline the nonprofit audit process. Auditors will look for these records to confirm the accuracy of your financial statements and verify compliance with the law.
Conducting an Internal Review
One of the smartest things you can do before an audit is to conduct an internal review. This is like a mini-audit you do yourself to catch and fix any potential issues ahead of time. Here’s how you can do that:
- Review Financial Records Thoroughly Go through all financial statements and documentation. Check for errors, missing information, or anything that doesn’t look right.
- Check for Compliance Make sure all your records match up with legal requirements and donor restrictions. If you’ve received grants or restricted funds, double-check that you’ve used the money as agreed.
- Test Your Internal Controls Test your internal controls to see how well they’re working. This includes everything from approving expenses to tracking donations. Weak internal controls can lead to audit findings, so catching problems early is key.
- Prepare Staff Let your team know the audit is coming and what their role will be. Make sure everyone understands how to answer questions from the auditor and where to find necessary documents.
Communication with Auditors
Good communication with your independent auditor makes all the difference. You want an open line of communication throughout the audit process.
- Be Transparent: Don’t try to hide issues or mistakes. Auditors are here to help, not punish. Being upfront about potential problems allows them to work with you on solutions.
- Ask Questions: Don’t be afraid to ask the auditor questions. If there’s something you don’t understand, speak up. It’s better to clarify now than to face bigger issues later.
- Provide Information Promptly: When auditors request documents or explanations, get back to them quickly. Delays can slow down the process and increase costs.
- Exit Interview: After the audit, schedule an exit interview with your auditor. This gives you a chance to hear about any findings and ask questions about how you can improve for the next time.
Common Audit Issues and How to Avoid Them
Even with preparation, nonprofit organizations can run into common audit issues. Knowing what to look out for helps you avoid unnecessary hiccups.
Frequent Audit Findings:
- Missing Documentation
Problem: Incomplete or missing financial records can cause delays.
Solution: Use the documentation checklist to keep everything organized. - Weak Internal Controls
Problem: Inadequate processes for managing funds or approving expenses may raise red flags.
Solution: Review and strengthen internal controls before the audit. - Non-Compliance with Grant Agreements
Problem: Misusing restricted funds or not following grant terms can lead to compliance issues.
Solution: Regularly review all grant agreements and ensure funds are used properly. - Payroll Mistakes
Problem: Misclassifying employees or misreporting salaries can lead to payroll errors.
Solution: Double-check payroll records to ensure accuracy. - Late Financial Reports
Problem: Not preparing financial reports on time can lead to penalties or damaged relationships with stakeholders.
Solution: Keep your reporting on schedule and ensure accuracy.
Post-Audit: What’s Next?
After the audit, your auditor will issue an audit report. This is your chance to take any findings seriously. Audits are not just about compliance—they provide valuable insights into your organization’s financial health.
What to Do After Receiving Your Audit Report:
- Review findings with your team: Discuss any issues or recommendations in the report.
- Address any weaknesses: Take corrective actions on internal controls or financial management.
- Plan for the next audit: Use the insights from this audit to make the next one even smoother.
Wrapping It Up
Nonprofit audits might seem like a lot, but with the right prep work, you can sail through the process. By choosing the right auditor, gathering all your documentation, and conducting an internal review ahead of time, you’ll be well-prepared. Keep communication open with your auditors, avoid common issues, and don’t forget to check off everything on your free nonprofit audit checklist.
An audit is more than just a requirement—it’s a chance to improve your organization’s financial health, strengthen internal controls, and boost your credibility with donors and funders. The better prepared you are, the smoother the nonprofit audit process will be.
Frequently Asked Questions
What are the main preparations before an audit?
To prep for an audit, start by choosing the right independent auditor with experience in nonprofit audits. Schedule early, gather key documents like financial statements, bank reconciliations, and grant agreements. Conduct an internal review to catch any issues ahead of time, and make sure your internal controls are solid. Lastly, delegate responsibilities to your team, so everyone knows their role in the process.
How do you prepare an audit checklist?
Start by listing all the key documents you’ll need for the audit. Include financial statements, payroll records, bank reconciliations, grant agreements, and tax filings. Add internal financial policies and any donor records too. Once your checklist is ready, make sure everything is organized and easy to access. Double-check it against what auditors typically request to avoid missing anything.
How much does an audit cost for a nonprofit?
The cost of an audit for a nonprofit can vary depending on the size of the organization and the complexity of its finances. On average, a nonprofit audit can cost anywhere between $5,000 and $20,000. Smaller organizations with straightforward financials might pay on the lower end, while larger nonprofits could see higher fees.
How do you prepare a financial audit?
To prepare for a financial audit, gather key documents like financial statements, tax filings, and bank reconciliations. Ensure all your financial records are up-to-date and accurate. Conduct an internal review to identify potential issues and make sure your internal controls are solid. Keep communication open with your auditors and be ready to provide documents quickly when requested.
How much does an audit cost for a small nonprofit?
For small nonprofits, the cost of an audit typically ranges from $3,000 to $10,000. The actual cost depends on the size of the organization, its financial complexity, and the region. Smaller nonprofits with simple financials generally pay less, but it’s always good to get quotes from multiple auditors for an accurate estimate.
