Setting up your nonprofit for audit success is a year-round task, but with the proper preparation, your next audit can be the best one to date.   

Your organization can work throughout the year to make the audit process more manageable. From preparing for your audit, assisting the auditor during your audit, to implementing any post-audit changes, follow these best practices to ace your next audit:  

Pre-audit

1. Selecting the right auditor

The relationship between your organization and your auditor is a special one. The right auditor is a partner who wants to help your organization stay in compliance and will issue recommendations at the end of the audit to do so. When selecting an auditor, start by working with your board and the finance and audit committee to develop a list of attributes you’re searching for in an auditor. 

When selecting candidates with nonprofit experience, consider:  

• Talking to peer organizations for guidance and referrals
• Scheduling plenty of time to plan and execute a request for proposals, if needed
• Finding out what level of detail auditors will provide. Is it just the basics to satisfy reporting requirements or a comprehensive analysis that compares your organization to its peers?
• Ask your auditors how they can help you if they uncover fraud 

2. Planning and preparing

This step is where the majority of your preparations come into play. While this list is long, putting in the prep work today results in faster audits with fewer surprises.   

Follow these best practices:  

• Align your ongoing internal policies and processes to what is needed for audits
  • Ensure the right people in your organization have access to needed financials
  • Store all relevant documentation in one centralized location
• Reconcile all areas your organization can reconcile on a monthly (or, at minimum, quarterly) interval 
• Track restricted and unrestricted net assets and activities
• Track grant reporting
• Assess financial reports for errors to reduce surprises during the audit
• Ensure you have internal controls in place, including:
  • Segregation of duties
  • Clear classification of restricted and unrestricted net assets
  • Auditable general ledger
  • Ability to monitor accounting operations
• Reach out to the auditor early and, create an audit timeline, and meet with your auditor to kick off the project
  • If you had an audit last year, ask your auditor if the request list will be the same or if new standards need to be implemented 
• Review the last audit and verify that the recommendations were addressed
• Ensure your internal finance staff knows the timing of the audit and what they are responsible for gathering and reporting on
• Build a year-end audit process calendar with deadlines for each deliverable
• Coordinate supporting schedules in advance
• Review how funds and grants were applied and be prepared to explain any variances
• Check-in with the board and audit/finance committee 

3. What your auditors are looking for

As they assess your organization’s financial position, auditors look at how much money comes in and goes out and whether you handle it appropriately. Details they want to see include:  

• Strong internal controls over access to funds and records to prevent mistakes or fraud
• An audit trail that connects transactions to sources of revenue
• Nonprofit audit reports that show how you use funds and other relevant financial activities 

During the audit

When it’s time for the audit, your nonprofit will receive an auditor engagement letter or proposal for audit work and services. This outlines what supporting schedules and documentation will be needed.  

While the audit is underway, your auditor (and their supporting team) will work onsite at your organization to review all the information needed to issue an opinion on your nonprofit’s financial state.  

Ensures your audit point person is available to answer the auditor’s questions and follow these best practices to execute the audit: 

• Ease-of-access is key—provide auditors the access they need
• For first-year audits, ask to walk through a couple of transactions with the auditor so they understand how to access information
• Attach supporting documentation at the transaction level
• Don’t guess—ask the auditor clarifying questions to confirm what is needed and why
• Pull in support from other teams as needed
• Nurture the relationship with the auditor and trust them to evaluate your organization fairly 

After the audit

Your organization should reflect on the audit after the audit has concluded and before you receive your auditor’s final report. 

Ask and collect feedback from your audit team on:  

• How easy was it to generate the reports needed?
• How easy was it for the auditor to access and retrieve information?
• Do updates to the organization’s Policies and Procedures need to be made? 

Once the auditor has completed their analysis and submitted their final report or opinion letter to your board or audit committee, it’s time to review the results and address any concerns.  

If your auditor has any issues, they will most commonly fall into two categories: 

• Material Internal Control Issues
  • Weaknesses in processes, systems, and procedures that put the organization at risk for errors, issues, and irregularities.
• Operating Inefficiencies
  • Inefficient or unnecessary operating procedures may be identified with proposed improvements to help strengthen operations. The auditor will often include recommendations for organizations to implement new technologies that improve the organization’s financial management and financial operations. 

Address any outstanding issues with leadership and your board and save the audit report with your other relevant material for the following year’s audit.  

The audit process highlights your organization’s commitment to being good stewards of public funds while keeping your organization informed of potential inefficiencies. While the process is time-consuming, the work you put into an audit pays dividends that cannot be replaced.