5 ways nonprofits can prepare for an audit

No not-for-profit looks forward to annual audits. But regular maintenance and preparation specific to an impending audit can make the process less disruptive. We recommend taking the following steps.

1. Reconcile routinely

You shouldn’t wait until audit time to reconcile accounts — for example, cash, receivables, pledges, payables, accruals, and revenues. Reconcile general ledger account balances to supporting schedules (bank reconciliation, receivables, and payable aging) monthly or at least quarterly. And don’t forget to reconcile database information provided and maintained by nonaccounting departments, such as contributions, events revenue, registration revenue, and sponsorships.

2. Prepare supporting documentation for the audit

Collect all supporting documentation before your audit and, if anything is missing, alert auditors immediately. It might be necessary to request duplicate invoices from vendors or ask donors for copies of letters describing restrictions on contributions.

3. Assemble the PBC list items

As part of their planning process, auditors typically compile a Provided by Client (PBC) list of materials they expect you to produce. The list includes a timeline indicating when the auditors need each type of material. Submit everything on the list according to the timeline. If you don’t, you could push back the audit itself and miss your board deadline for completion. Also, to ensure accuracy, perform a self-review of all information before you send it.

4. Be ready to explain variances

Before the auditors arrive, identify major fluctuations in your account balances compared to the previous year. Your auditors will inquire into significant variances in revenues and expenses. Make sure you’re ready to explain them — as well as budget variances — promptly and clearly.

5. Review earlier audits

Audits from previous years provide useful guidance. Check prior years’ audit entries and confirm that you didn’t make the same errors this year. Also, confirm that you posted all of the audit entries from the last audit. If you didn’t, your financial statements might be distorted.

Year-long relationship

Don’t think of audits as a once-a-year obligation. Keep in touch with auditors throughout the year. For example, if you land a new grant or contract and aren’t certain how to properly record it, don’t hesitate to ask your auditors.

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