Outsourced HR

Five Ways Non-Profits Can Prepare for an Audit

While non-profits may not look forward to annual audits, regular maintenance and preparation specific to an impending audit can make the process less disruptive. We recommend taking the following five steps.

1. Reconcile Routinely
You should not wait until audit time to reconcile accounts (e.g., cash, receivables, pledges, payables, accruals, and revenues). Reconcile general ledger account balances to supporting schedules (bank reconciliation, receivables, and payable aging) monthly or at least quarterly. Also, do not forget to reconcile database information provided and maintained by nonaccounting departments, such as contributions, events revenue, registration revenue, and sponsorships.

2. Prepare Supporting Documentation
Collect all supporting documentation before your audit and, if anything is missing, alert auditors immediately. It might be necessary to request duplicate invoices from vendors or ask donors for copies of letters describing restrictions on contributions.

3. Assemble the ‘Provided by Client’ List Items
As part of their planning process, auditors typically compile a Provided by Client list of materials they expect you to produce. The list includes a timeline indicating when the auditors need each type of material. Submit everything on the list according to the timeline. If you do not, you could push back the audit itself and miss your board deadline for completion. Be sure to perform a self-review of all information before you send it.

4. Be Ready to Explain Variances
Before the auditors arrive, identify major fluctuations in your account balances compared to the previous year. Your auditors will inquire into significant variances in revenues and expenses. Make sure you are ready to explain them as well as budget variances promptly and clearly.

5. Review Earlier Audits
Audits from previous years provide useful guidance. Check prior years’ audit entries and confirm that you did not make the same errors this year. In addition, confirm that you posted all of the audit entries from the last audit. If you did not, your financial statements might be distorted.

Year-Round Relationship
Do not think of audits as a once-a-year obligation. Keep in touch with auditors throughout the year. For example, if you land a new grant or contract and are not certain how to properly record it, do not hesitate to ask your auditors.

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