How to Prepare for a Not-for-Profit Audit

Written by Ryan Hynson, CPA, Manager at Nisivoccia LLP

 

Hearing the word “audit” should not send you and your board members into a panic. Instead, the audit should be looked at as a tool that will help improve your organization’s financial reportings and internal controls. Learning more about what an audit is, the different types of nonprofit audits and how your organization can prepare for an audit may make you feel more at ease when the auditors come knocking at your door.

What is an audit?

An audit is an inspection that auditors conduct to verify the information contained in a nonprofit’s financial statements. After examination, an auditor will issue a report to the board of trustees as to whether your organization’s statements present a fair picture of its finances or if any deficiencies exist.

Do all charitable nonprofit organizations need to be audited?

No, not all charitable nonprofit organizations are required to conduct an independent audit. A few circumstances that may trigger the requirement for an independent audit include:

• Federal, state and local governments may request a copy of the organization’s audited financial statements
• Charitable nonprofits that expend $750,000 or more in federal or state funds in a year are subject to special audit requirements
• Charitable nonprofits that expend $100,000 or more in combined federal and state funds in a year are subject to special audit requirements
• Some contracts with state and local governments to provide services in the community may require the nonprofit to conduct an independent audit
• Financial institutions may require a nonprofit to conduct an independent audit as a condition of receiving financing

What are some of the different types of audits conducted for nonprofit organizations?

Some common audits conducted for nonprofit organizations are as follows: The Regular Independent Audit, the Yellow Book Audit and the Single Audit.

• Regular Independent Audit: An independent audit is an examination of the financial records, accounts, business transactions, accounting practices and internal controls of a nonprofit organization.
• Yellow Book Audit: Nonprofit organizations that expend $100,000 or more in combined federal and state awards, but less than $750,000 in a given fiscal year, are required to obtain a Yellow Book Audit (performed in accordance with Government Auditing Standards “GAS”).
• Single Audit: Nonprofit organizations that expend $750,000 or more in federal or state awards in a given fiscal year are required to obtain a Single Audit.
  • Single Audits cover the entire organization’s financial operations, and are substantially more detailed than a regular independent audit. A Single Audit requires higher levels of testing by the independent auditor to establish that:
    • The financial statements are presented fairly and accurately; and in accordance with federal cost principles;
    • The organization has an adequate internal control structure, and that;
    • The organization is in compliance with any special government regulations/laws that apply to the specific federal funding stream.

 

How can you and your organization prepare for an audit?

There are multiple steps your board can take to make the audit process as smooth and efficient as possible:

• Provided by Client List (“PBC List”)
  • The PBC List is a list of items requested by the auditor made up of the organization’s records used to complete the independent audit. Be sure to have the items on the list gathered for when the audit fieldwork is scheduled.
  • Items on your auditor’s PBC list may include the following:
    • Current operating budget
    • Bank statements and reconciliations
    • Annual investment account statements
    • Loans and mortgage information
    • Leases and other contracts
    • Payroll records
    • Board meeting minutes
    • Organizational Documents: By-Laws, Financials or Accounting Policies and Procedures
    • Form 990 information

• Assign Employees Tasks
  • Delegate tasks to employees who handle the specific roles covered in the PBC list. Communicate with your auditors as needed to confirm the proper documentation is being assembled.

• Review Accounting Records
  • In general, audits are less stressful if your organization keep well documented and organized accounting records. Specifically, make sure that subsidiary ledgers are reconciled and ending balances have been reviewed before field work begins.

• Hold a Pre-Audit Meeting
  • This is your time to ask your auditor any questions you and your board may have. The more time spent resolving issues before the audit, the fewer issues your auditor will need to address during it.
  • Examples of some questions you may be asked include:
    • Were there any major changes to operations during the year?
    • Were there any new major sources of funding?
    • What are your expectations in terms of timeline, issuance of audit, informational return, board meeting presentation?
    • Are there any specific areas of concern or any issues that you would like to discuss?

 

While an audit of your organization may feel overwhelming, following these preparation steps will help you and your auditors get the process done in a well-organized and timely manner. Always ask your auditor questions as concerns arise, and remember that your auditors are there to help continue the success and growth of your organization. For more help, contact us at (973) 298-8500.