The term “audit” usually sparks fear and apprehension in businesses and nonprofit alike. An audit can refer to any internal review, contract review, or external review by the nonprofit Board or other managing body; however, many people immediately think of a visit from the IRS.
This is not the most common type of audit for nonprofit organizations. A financial audit typically refers to an independent review of a nonprofit organization’s books and accounts. This is usually done annually as a way to ensure that the nonprofit is in compliance with federal regulations and private donor requirements.
If your organization is getting ready to undergo a financial audit, you need to be prepared. In order to ensure a smooth auditing process for all parties involved, we’ve compiled a checklist for a financial audit of a nonprofit organization. The following checklist is designed to help you prepare for your financial audit and know what to expect from your auditor.
Before the Audit
Before you even begin to compile documents and reports for your financial audit, you need to select a CPA or auditing firm. When it’s time to find a CPA or audit firm for your nonprofit’s financial audit, keep the following in mind:
- Ask other nonprofit organizations for recommendations on CPAs or auditing firms in your area
- Check each professional’s references and request a copy of their Peer Review
- Prepare a Request for Proposal (RFP) once you have narrowed your selection down to a few CPAs or audit firms
- Involve your board members in the selection process
- Interview all potential CPAs and audit firms
- Ask for the references or resumes of CPAs in larger firms
- Make sure the CPA or audit firm has experience in nonprofit financial audits
- Research their memberships and associations in the accounting profession
- Review each firms costs and fees
Preparing for the Audit
There is a lot your nonprofit organization can do to successfully prepare for a financial audit. The following checklist will help you save time (and frustration) during a nonprofit financial audit:
- Ask the auditor for a list of documents you will need during the audit and compile these documents before the auditor arrives
- Make sure the documents are in the proper format suggested by the auditor
- Make sure your accounting records are organized, accurate, and up-to-date
- Create an electronic folder on your computer for all of the documents and records you will be needing for the audit
- Make sure that you have the proper documentation for every financial transaction made throughout the fiscal year
- Create an audit committee or oversight group
- Plan a pre-audit meeting to get further guidance on what your organization will be needing for the audit
After the Audit
- Once the audit is complete, the audit committee meets with the auditor to ask the following questions:
- Was our team cooperative and forthcoming with the requested information and documentation?
- How do our accounting procedures and policies compare to similar nonprofits?
- Are there any “at-risk” items that could be disputed by the IRS? If so, what documentation do we need to prepare in order to support these items?
- Did the team follow suggestions recommended by past auditors to improve our internal accounting system?
- Do you have any suggestions for improvement in reporting, accounting, or other procedures?
- The audit committee, financial directors, and executive director reviews the draft of the audit report
- The above group asks questions about the auditor’s discoveries
- The group evaluates any recommendations prior to presenting the final audit report to the board
- The final audit report (signed and dated by the auditor) is delivered to the board of directors
- The final audit report is presented to the board of directors
As you can see, the audit process is a lengthy one. However, it does not have to be a scary one. With the right amount of information and preparation, you can come out of a nonprofit financial audit successfully.
If you’d like to learn more about the auditing process or would like to connect with a CPA, contact us today. Our CPAs are experienced in nonprofit financial audits and have the tools and information you need to prepare you for a smooth auditing process.