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Frequently Asked Questions

Question

How do we prepare for an audit?

Answer

Choosing an Auditor
What Information is Needed for the Audit?
When Does an Audit Begin?

Choosing an Auditor

A nonprofit's audit is addressed to its board of directors, who have ultimate financial accountability for the organization. The board's finance or audit committee should recommend an auditor for approval by the full board. If you do not have an appropriate board committee, the director or an individual board member can bring a recommendation to the board.

While there are many criteria you may consider when selecting an auditor, the following are usually important considerations:

Experience in the nonprofit sector
Since there are some differences between for-profit and nonprofit accounting and in how financial statements are interpreted, an auditor who has other clients in the nonprofit sector is likely to be more helpful and efficient.
Experience with other nonprofits in your area of work
You may want to consider an auditor experienced with similar agencies who knows the specific reporting requirements of your primary funding sources.
Training in General Accounting Office (GAO) Standards
If you are required to have an audit which meets government standards, your auditors must fulfill GAO s continuing education requirements.
References for the audit firm and the auditor
In addition to experience, you are looking for indications that the auditor has the technical expertise, communication skills, and flexibility to conduct your audit in an efficient and effective manner. A good working relationship with your auditor will help ensure that the audit goes smoothly.
Fee
In those states where it is permitted, you will want to compare bids from auditors regarding the fees they charge to do the work you require. Pro-bono (free) audits are rare and nonprofits are cost sensitive. However, fees can be a tricky measuring stick for choosing an auditor. There are some outstanding auditors who work with nonprofits for a reduced fee. A firm may produce a lower bid the first year to get your business and then significantly raise the fee in subsequent years. Auditors who do not have the necessary experience with nonprofits may take longer to produce the audit, causing them to raise the audit fee in later years. They may also prepare a less complete report which has less value to the board and the public. Also, they may require nonprofit staffs, who are typically overburdened, to do even more work in preparing for the audit. Finally, some auditors who charge a lower fee do not provide the organization with a management letter detailing areas of weakness in the accounting system. This letter is an important management tool, of benefit to both the board and staff.

On the other hand, an expensive audit does not guarantee an excellent product. Your goal will be to get the reports and advice that you need and can understand for a reasonable fee.

There are differing recommendations regarding changing auditors after you have established a relationship with one individual or firm. Auditors argue that, if you are getting the information you need from your audit and are satisfied that the reports are complete and usable, it is unwise to start over with a new auditor. Management consultants reply that, after a period of a few years, auditors may be unable to provide the organization with fresh insights. In addition, bidding out the audit may provide an incentive to your current auditor to maintain reasonable fees. It may be useful to talk to one or two other qualified auditors every few years to determine whether the upheaval of working with a new auditor will be offset by better quality, lower fees, and/or new perspectives.

What Information is Needed for an Audit?

To prepare for your audit ask your auditor what information you will be required to provide. Many auditors prepare a list of those records which they will need to examine, forms which you will need to complete, and questions you will need to answer. Complete, accurate, and accessible records and other information prepared well in advance of the audit will help ensure that the process goes smoothly and more quickly, reducing the financial and emotional cost of an audit.

While the following is not a complete list, it is representative of the information an auditor is likely to require:

Confirmations
A confirmation is an independent statement which supports the financial information in your records. Auditors will ask you to prepare confirmation letters on your letterhead (they will provide the format) to your bank(s), funders, attorney, people, and organizations you owe money to and who owe you money to confirm the amounts reflected in your books. Confirmations are mailed by and returned directly to your auditor to ensure their credibility.
Evidence of Internal Controls
The auditor will either meet with staff members or request that they complete a questionnaire documenting the procedures related to spending and receiving money and other resources, complying with laws, donor restrictions and regulations, maintaining property and equipment, and recording financial information in the books.
Documentation.
The auditor will request a number of schedules (lists) of information related to the following:

Assets

Accounts Receivable -- Who owes you money, how much, when it was due?

Property and Equipment (Fixed Assets) -- When acquired, how much you paid, how long they are expected to last, how much they are depreciated each year, and how much has been depreciated to date?

Note: Many nonprofits ask their auditors to maintain this schedule for them and to prepare the annual calculation of depreciation.

Liabilities

Payables -- Who you owe money to, how much you owe each individual/organization? Copies of invoices or loan agreements.
Deferred Revenue -- If you have deferred any contributions due to donor conditions or restrictions, provide the information noted under Grants and Contributions, in the Revenue section below.

Revenue

Grants and Contributions--Funder/donor names and addresses, grant period, grant amount, when received, restrictions, and copies of the grant letters and grant applications. In the case of individual contributions, your auditor will specify which donors to include on this list based on a minimum level of contributions they will establish for you based on your overall budget and total contributions.

Donated services and materials--You may be required to place a dollar value on contributions of certain services and materials. Prepare a list of these donations to discuss with your auditor.

Special events and benefits--Show income and expenses, and documentation for the value of goods or services which donors received (and, therefore, are not included in the tax-deductible portion of their payment.)

Documentation--such as contracts and invoices, names and addresses, registrations, etc. for fees from memberships, tuition, performances, and other services.

Inventory--If you sell tee-shirts, books, or other products, keep a record of sales throughout the year so that beginning inventory can be reconciled with inventory at the end of the year.

Expenses

Payroll records, including federal and state tax returns related to payroll, vacation records.

Smaller nonprofits rely on their auditors to prepare many of these schedules based on information they give to the accountant. You can save on the cost of your audit by preparing the majority of these schedules internally, using staff or board volunteers, rather than asking the auditor to prepare them.

ADDITIONAL INFORMATION
In addition to the schedules noted above, be prepared for the auditor to review the following items:

Board minutes

Leases and other contracts

Bank statements, bank reconciliations, checkbooks, and canceled checks

Financial files for paid bills and deposits

Components of the accounting system -- chart of accounts, journals and ledgers, printouts if the system is computerized, trial balance, etc.

Budget for the fiscal year being examined

Finally, you will want to consider the non-financial aspects of the audit. The staff should understand what is involved in an audit, that it is a routine examination of financial and other information, and that they may be asked a few questions in relationship to that examination. You should assign one person to be the audit coordinator. In a small nonprofit, that may be the bookkeeper or executive director. In a larger organization, it may be the finance director. The audit coordinator should have access to all in formation the auditors may need, and should plan to be available to the auditors while they are on-site. In addition, some thought should be given to setting aside a physical location for the auditors so they can work efficiently.

When Does an Audit Begin?

Most organizations select an auditor prior to the end of their fiscal year. About the time your fiscal year ends, you will want to meet with your auditor to determine what information will be required for the audit. If your financial management system is reasonably well organized, the audit can usually begin within two months of the end of your fiscal year. However, new government funding and other complicating factors may extend the amount of time needed to prepare for the audit.