Lately, you’ve noticed that your projects are getting bigger, as well as you’re considering bigger grants from donors. In addition, each year, your organization is growing, and contribution revenue is increasing.
When you review new grant requirements, you notice a new item for your nonprofit; an annual audit. So, now what? In this blog post, we will discuss what to expect, and how a nonprofit can prepare for an audit.
Albeit a nonprofit organization is not automatically required to have an audit, but may need to work with an auditor when:
- Applying for a bank loan and they require it.
- A local, federal or state government requires it for a contract or grant.
- Your organization spends or uses $750,000 or more in federal funding in a year.
- Your Board of Directors requires it as a show of good faith to potential donors and the public.
How A Nonprofit Can Prepare For An Audit
First, don’t panic. Everything is going to be fine. However, you should be aware that generally, the first audit is a bit messy, but your organization will be in a better position. Second, try not to be become paranoid, thinking that the auditor is ‘out to get you’. In a word, they don’t want widespread problems anymore than you do. The purpose of an audit is to make things up-to-date and tidy, as well as help you implement best practices for your organization.
A First Year Audit Will Cover Two Years
The first thing your auditor will need to do is substantiate the beginning balances. Therefore, it’s necessary for him or her to examine prior year’s activity. During this process, the auditor verifies that there is no material misstatement in the Balance Sheet of the year prior to that year under audit.
This process is one of the main reasons why first-year audits can be so long and laborious. For this reason, if you suspect you need an audit in the next few years, how a nonprofit prepares for an audit now is by getting controls and processes in hand. If you think you’re already prepared, then that’s great!
Things Your Auditor Will Look For
Auditors focuses on two things; documentation and compliance. Let’s briefly discuss what each entails.
Documentation
An auditor uses documentation related to specific transactions provided by the organization to verify that the organization is compliant. The key here is to provide documentation that shows what a transaction is and substantiates how it was recorded.
For example, an expense could be an invoice or receipt for a monthly service or online order. Depreciation documentation would be a listing of the fixed assets and their related depreciation period. Revenue documentation might be pledge agreements from donors, or a receipts report for tickets sold.
You will also be asked to provide documentation for non-financial information. For instance, conflict of interest acknowledgements, questionnaires, or board meeting minutes. Because these types of documents need to be easily accessible and shared with the auditor, electronic format would be best. But physical documents are usable also, just make sure they are well-organized.
Compliance
An audit is to provide reasonable assurance, not complete assurance that there is no misstatement or fraud. Auditors are keen on making this distinction because complete assurance of 100% accuracy would far outweigh the benefit.
Instead, the auditor’s job is to provide an objective evaluation of whether the financial statements are ‘fairly presented’ and are ‘in accordance with the applicable accounting framework’. Fairly in this instance means that the auditor’s testing detects no indication of fraud or material misstatement. In essence, the auditor tries to make sure that the correct accounting treatments have be consistently and accurately applied.
Conclusion
Knowing how to prepare for an audit can be confusing and overwhelming, particularly if you don’t know where to start. The above information alongside a little legwork by your accounting will be helpful to your first audit going smoothly. To find out how The Ray Group can provide audit support and help you get your books ready, schedule a consultation online. You can also call us directly at (951) 296=0785 and speak with one of our advisors.
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