Do you know what you need to do to prepare for your nonprofit’s next audit? Preparation can be a daunting task, whether you’ve never been through an audit or been part of a hundred. There are several steps you should follow, including selecting the right auditor, gathering the items you’ll need (like bank account reconciliations and detailed general ledger), as well as designating and preparing your people, processes, and paperwork.
Selecting an Auditor
Searching for an auditor requires input from your board and plenty of work by staff members. You’ll need to establish timelines, perform research in your sector, perhaps develop a request for proposals (RFP), and evaluate the proposals of candidate auditing firms. According to the Fiscal Management Associates’ Nonprofit Auditor Selection Guide, you should follow five planning steps:
- Ensure that the board’s audit committee is involved in the selection process from the beginning. If your organization doesn’t have a separate audit committee, the finance committee should take on this role. Identify one individual from the committee to manage the process and coordinate with members of management.
- Clarify the logistics of the selection process and determine a timeline to complete the process and finalize the decision.
- Conduct initial research, for example by getting recommendations from peer nonprofits.
- Identify key attributes that you want in an auditor and determine a method for evaluating auditor proposals.
- Throughout the process, keep in mind your organization’s strategic objectives.
Regardless of how you find your auditor candidates, you should conduct in-person interviews. One key thing you want to learn from this process is the level of detail your auditor will provide. Some firms merely offer the basics, while others will conduct detailed analytic procedures to produce year-over-year analysis and uncover any anomalies.
Planning for an Audit: Give Yourself as Much Time as Possible
Once you have your auditors selected, be sure to sit down with them well in advance to discuss how the audit will proceed and what’s needed to make it successful. You should receive a “Prepared by Client” list from the auditor with items you’ll need to gather to complete the audit. You’ll also want to be sure to agree on basics of timeline, documentation, workflow, and staff.
People – If you want your audit to proceed smoothly and efficiently, make sure you designate a well-organized person – perhaps your controller or one of his or her deputies – to help make it happen. This person, perhaps backed by a small team on larger audits, will be tasked to:
- Coordinate the auditors’ scheduling
- Organize documents for the auditors
- Manage the details of the actual onsite visit – the auditors will need parking; a quiet, private space, such as a conference room or spare office where they can work; strong Wi-Fi access; and a point person to handle any other logistical issues that come up
Processes – The audit will go a lot more smoothly if you can easily:
- Demonstrate strong internal controls over access to financial resources and related recordkeeping
- Provide an audit trail that clearly tracks transactions to sources of revenue
- Produce reports that quickly and efficiently show how funds are used and other relevant financial activities
Paperwork – Even before your auditors supply you with a “Prepared by Client” list, you can start pulling together the necessary documentation using the National Council of Nonprofits’ basic list of items for audits:
- Bank statements and reconciliations
- Investment summary showing YTD transactions and year-end balances
- Documentation of donor pledges, donated securities, and grant funds received
- Fixed asset and depreciation schedules
- Year-end accounts payable and expenses
You should also provide the auditors with thorough documentation of your accounting procedures and internal controls. This material should answer questions such as, “How do you process money coming in?” “How do you process money going out?” And, “How do you handle cash?” If you don’t document this, your auditors will have to gather the information through interviews with your staff.
Bonus Planning: Keeping Your Audit Costs Down
A small, two-person firm that provides a small nonprofit with minimum assurance that there are no material misstatements in its financials may charge as little as $5,000 to conduct an independent audit. On the other end of the spectrum, a detailed audit for a large nonprofit with multiple operations and significant revenue could cost into the millions. Regardless of the scope, there are a few simple things you can do to control your audit costs.
- Work around the auditor’s busy season – Auditors can get very busy during peak periods so plan ahead by scheduling your audits earlier or later.
- Make it easy for them – If your finance team is slow to gather information or hamstrung by systems that don’t allow it to quickly produce information that the auditors need, the time and expense of the audit can mount.
- Don’t change auditors without a good reason – It’s expensive to change auditors. You have to start all over again with your selection process, and then get up to speed
- with all of the preferences of the new auditor, who will be seeing your financial books for the first time. If you have a good reason to make a change go ahead, but if not, spare yourself the extra expense.
I hope this helps those of you about to face an audit! If you want to learn more about audit basics, preparing for an audit, roles during an audit, and what you can expect during and after an audit, download our latest guide, “Nonprofit Audit Workshop 2018: Preparing for a Smooth, Successful Audit.”