Preparing for an annual external audit is often daunting and time-consuming. Whether your organization is a large nonprofit with years of experience with external auditors or preparing for its first external audit, the preparation challenges can be similar. Read on for tips to help improve the efficiency and accuracy of the audit prep process.
Tips to Implement Ongoing Throughout the Year
- Analyze significant contributions and contracts throughout the year
Organizations receive pledges and contributions all year long. Likewise, they enter into contracts, such as grants, throughout the year. The accounting and finance department should receive the documentation (contract, award letter, agreement, relevant supporting emails, etc.) when it is executed, rather than at the end of the year in preparation for the audit. The accounting department can review the documents to help ensure proper accounting is implemented on the front end. For example, it will need to consider any restrictions, conditions, or any other special accounting treatment that may apply.
If this review is performed throughout the year, there is significantly less year-end audit prep work related to these revenue streams. In addition, the accounting department has access to all supporting documents that the auditors may request.
Consider maintaining the important documents in a donor management system, so multiple individuals can access the information as needed. This also will relieve the burden of sending an urgent request list to the development department during the audit, with quick turnaround requested. In addition, any questions or missing documents will be researched while the contract is still current.
- Consider allocations for functional expense and restricted revenue
During an annual external audit, nonprofits are required to allocate expenses to functional categories (program, general and administrative, and fundraising). Many nonprofits tackle this exercise at the end of the year just in time for the auditors to arrive. There is often a combination of a head count, staff time, and square foot analysis, as well as a review of individual expenses to determine classifications.
However, there are methods to alleviating this time-intensive, year-end exercise. For example, a nonprofit can assign classifications to expenses as they are recorded using the accounting software’s class or dimension functionality. At the end of the year, the organization can run a report that will be the basis for its statement of functional expense. In addition, a nonprofit can perform actual staff time analysis multiple times per year, such as quarterly.
Additional allocations may be required for grants and other compliance reporting. Continually tracking those classifications also may save time in preparing required reports.
- Maintain rollforwards of balance sheet accounts
The auditor’s request list will ask for balance sheet rollforwards, i.e., schedules that show beginning balance, detailed activity during the year, and ending balance. Often, nonprofits will create the rollforward at the end of the year in preparation for the audit. However, if a nonprofit updates the rollforwards each month and reconciles with general ledger detail and supporting documentation, then the year-end rollforward will be nearly complete for audit prep. This can save time during the year-end crunch and help catch and correct any issues in a timely manner.
Typical rollforwards include investments, fixed assets (particularly if there is a construction project or many additions or disposals during the year), capital campaign pledges, and long-term debt.
Tips to Implement at Year-End Audit Prep
- Keep a repository of what was provided to the auditors in the past
During an audit, a nonprofit will provide a host of documents to the external auditor for their review. It’s common for audit support to be requested over many months, beginning before year-end until audit issuance. It can be helpful for a nonprofit to maintain a repository, such as an electronic folder, of the documents provided to the auditor. Consider indexing, or naming, the files to match the auditor’s request list. Referencing this file during the following year’s preparation may help save time and confusion of what to provide the auditors. Sometimes the auditor’s request list will refer to a file by an unfamiliar name, but this method will allow the accounting team to reference what was provided last year and prepare a file with consistent formatting and relevant information.
- Review cutoff when preparing for the audit
A thorough audit preparation will include a review of expenses and what period they are recorded in. One method to achieve this is to review a report of payments after year-end and identify any invoices for services or goods received prior to year-end. Those invoices identified should be accrued in accounts payable at year-end or recorded in an other liabilities account. This review will likely require reviewing physical invoices to determine proper period. Common accruals to watch for are payroll (including payroll taxes and benefits), professional services, utilities, and unreimbursed employee travel expenses.
A similar exercise should be performed for prepaid expenses. To do this, review a detail of expenses during the year and identify any that relate to services or goods received after year-end. A separate schedule of prepaid expenses should be maintained and will likely be an audit request. Common prepaids are rent, postage, special event venue and speaker expenses, and some utilities.
- Agree on an audit timeline
It’s not uncommon to feel unsure of the next steps during any part of the audit process. It’s particularly ambiguous during the period after auditors performed on-site work but have not finalized the audit report. It is critical to agree on a timeline with the auditors, starting from planning all the way through audit issuance (and in some cases, 990 preparation). The timeline should lay out the following steps, at a minimum: planning fieldwork, audit fieldwork, audit report draft, and audit issuance target date. At each of these milestones, confirm with the auditor that they are still on track with the timeline or if any modifications are needed. In addition, it may help to have periodic check-in meetings with the auditor to set aside time to answer questions and help ensure everyone is in agreement.
Audit preparation for a nonprofit organization can be intimidating and time-consuming, especially if it’s your first. With thoughtful planning, project management, and considering the tips noted above, much of the annual challenges can be alleviated.
Our Nonprofit Advisory Services offers audit preparation services including preparing auditor-requested schedules, answering auditor questions, and preparing draft financials. We also can assist in evaluating and improving your audit prep process to save time in future years.
For assistance, please contact your advisor or submit the Contact Us form below.