Whether you’re an old hand at conducting audits for your nonprofit, or you’re leading your first audit, it’s always good to check against best practices. We understand that an audit can be a painful task, so we’ve included several steps you can follow to help alleviate the stress.
Some of the important steps include selecting the right auditor, gathering the financial items you’ll need (for example, detailed general ledger, statement of activities), as well as preparing team members, processes, and reports.
Selecting the Right Auditor
If your nonprofit is set with an auditor of record, then you will be one step closer to preparing for your next audit. If you’re nonprofit is seeking an auditor, you want to start by working with the board of directors and the finance or audit committee to define key attributes you want in an auditor, and to plan your selection process. Here are some helpful tips:
- Talk to peer organizations for overall guidance and to get specific referrals.
- Allow plenty of time to plan and execute a request for proposals (RFP), if needed.
- Look for auditors with relevant experience. For example, if you’re a small membership-driven organization, don’t use an auditor who specializes in large grant-funded nonprofits.
- Find out what level of detail your auditors will provide. Just the basics to satisfy reporting requirements? Or a comprehensive analysis that compares you to peers?
- Ask your auditors how they can help you if they happen to uncover fraud.
Regardless of how you find your auditor candidates, you should conduct in-person interviews and compare proposals for timing, process, and pricing. 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 and Preparing for Your Audit
Once you have your auditors selected, be sure to sit down with them to discuss how the audit will proceed and what’s needed to make it successful.
To help the process:
- Collect relevant documents and figures year-round.
- Establish a clear timeline and work milestones with your auditor.
- Hold a kickoff meeting that includes both the audit staff and your own finance team, so everyone is in sync about timetables and duties.
- Prepare electronic and hard copies of an “audit binder” with standard documentation for bank accounts, investment accounts, fixed assets, payroll, and so on.
- Designate one person – probably your controller – as the single point of contact for when the audit team has questions.
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.
Ensure You Have the Right Technology
Over the last 20 years, accounting systems for nonprofits have shifted, evolved, and in some cases, ideally centralized for efficient and effective practices. Your audit will go more smoothly if your accounting systems enable:
- Granular control over how your personnel access financial systems
- A fully auditable general ledger
- Automation of business rules to prevent errors and fraud
- Clear classification of restricted and unrestricted net assets
- Quick generation of profit and loss statements and other reports for individual grants
- Easy access to documentation
As a nonprofit professional, you know solid business processes, dependable internal controls, and accurately accumulated documentation drive audit preparation. Make sure your accounting system provides you with the key features necessary for a smooth and successful audit.
By implementing these steps and best practices for your next audit, you and your nonprofit will have a smoother experience.
If you’re looking to streamline your nonprofit financial management process and work with a tool that will ensure you’re prepared for your next audit, join us for our next MIP Fund Accounting webinar.