CPAs and accountants receive hundreds upon thousands of questions a year pertaining to both for-profit businesses and nonprofit organizations. Among some of the many questions asked of CPA’s, the most common is “How can I prepare my organization for an upcoming nonprofit audit?”. While we have written several blogs that address nonprofit audits, we’d like to go into a little more detail to help you fully prepare for an upcoming audit.
The best way to prepare for a nonprofit audit is to be proactive and plan ahead. No one likes being caught off guard, especially by an auditor. While it may be uncomfortable to have someone examine everything your organization has done over the past year, being prepared will make the whole experience easier and less frustrating. Consider the following steps developed to improve your nonprofit financial reporting process and, in turn, improve the nonprofit auditing process as well:
- Document Your Internal Controls
You are most likely familiar with the term “risk based auditing standards”. If you are not familiar with this term, you should know that these standards came into effect in December 2006 and completely changed the way nonprofit audits are performed. Auditors are now required to focus on identifying areas of risk. In order to fully identify these areas of risks, auditors must spend a considerable amount of time gaining a complete and total understanding of an organization’s internal control structure and the effectiveness of these controls. The organizations that have taken the time to understand what controls they have in place will be much better prepared to face an auditor’s questions. - Improve Identified Inadequacies
Once you have a comprehensive understanding of the internal controls your organization has in place, you should make every effort to improve the areas where inadequacies have been identified. This is important not only for the upcoming nonprofit audit, but for the organization in general. Identifying inadequacies and implementing strategies to overcome them will only help your organization run more efficiently. - Utilize Your Organization’s Strengths
As you know, it can be difficult to staff a nonprofit organization even in good economic times. When the economy is less than desirable, it becomes even more challenging to find enough qualified individuals to improve upon every identifiable control weakness in the organization. If you find this is true for your organization, consider asking specific board members for help. While it is true the main role of the Board is to govern the organization, members of the Board could prove to be a valuable resource. Take advantage of the financial knowledge and expertise of your Board members. Allow their guidance to help you implement beneficial controls, review auditing schedules and draft financial statements prior to your audit. - Educate Yourself on the Nonprofit Accounting Principles
Nonprofit organizations have more specific accounting concepts than the traditional business. Take the time to learn about the accounting principles specific to your type of organization. If the accounting concepts your review seem foreign to you or your organization does not have the appropriate in-house resources to properly record such items, consider seeking outside help from your accountant or CPA. However, keep in mind that new accounting laws are requiring separation between accounting/bookkeeping services and audit services so the assistance you receive from your auditor may be limited. - Keep in Touch with Your Accounting Firm Throughout the Auditing Process
Begin the auditing process with a meeting with your auditors. Request an audit timeline, as well as a client task list (a detailed list of what they will need from you and when they will need it). Make sure that you communicate with your auditor about who to contact in your organization regarding each specific item on the list. Do not hesitate to contact your auditor for advice or to keep them informed of what is occurring within your organization throughout the year. Trust us, they will appreciate the opportunity to address any issues with you prior to beginning the audit.
These steps will prove to be beneficial to your organization during the auditing process. You may also want to look at any letters received at the conclusion of your last audit to ensure that the items are properly addressed prior to the start of your next audit.