If you’re getting ready for your first audit, it helps to know what to expect – and how you can prepare for it.

Once you have decided on an auditor, you can expect the following:

• Execution of an engagement letter (contract) that delineates the respective responsibilities of the auditor and your not-for-profit organization
• A “Prepared By Client” (PBC) list of items for you to provide before the site visit (fieldwork). This will include your annual financial statements and various supporting documents (bank statements, grant agreements, etc.)
• A link to your auditor’s secure portal to exchange documents

After that, it’s a case of preparing your organization for the audit.

How to prepare for your first audit

Not-for-profit audits may require hours, days, or weeks of preparation, depending on the condition of your books.

Preparation is key, as it will help avoid costly overruns and frustrating delays.

While the following is not a comprehensive list (as each not-for-profit has unique circumstances), it should provide some useful tips:

 1. Make sure your financial statements are prepared in accordance with US GAAP. For example,

a. Receivables, payables, prepaid expenses, and obligations for unused employee vacation time should be properly recorded.

b. Fixed assets should be capitalized and depreciated.

c. Temporarily restricted net assets (TRNA) and permanently restricted net assets (PRNA) activities should be properly segregated in your general ledger accounting system and corroborated with supporting spreadsheet analyses.

d. A methodology should be in place for properly allocating functional expenses between programs and supporting services.

2. Make sure that someone within the organization has a basic working knowledge of current not-for-profit accounting standards (e.g. they can handle the items in step 1). If not, engage a qualified high-level bookkeeping/accounting consultant to help you.

 3. Make sure that your development staff and accounting staff have a good working relationship and that they communicate effectively with one another. The development team often has information that the accounting department needs, e.g., long-term pledge commitments and irrevocable bequests that may be fulfilled in future years, and in-kind contributions. This can help facilitate accurate and compliant financial statements.

 4. Because the audit team will spend a lot of time studying and assessing your internal controls, you should document and evaluate those controls before the audit process. This will make the audit more efficient and put you in a better position to have a meaningful conversation about internal controls with the audit team. An accounting policies and procedures manual is a good way for you to document and evaluate your internal control structure.

What happens during an audit site visit?

The auditors will typically visit you for a few days to observe your operations, ask questions, and examine documents.

Since the ultimate goal of the audit is to express an opinion on the reliability of your financial statements, these procedures are performed to identify the “at-risk” areas of your financials that are prone to misstatement (due to errors or fraud).  The auditors then design additional audit procedures to further test the “at-risk” areas.

At the end of the site visit, you’ll likely have a list of follow-up assignments from the audit team. This may include additional documents to locate, or spreadsheet analyses to prepare.

During the audit, the auditors will form a list of errors that they have identified in your financial statements.

Some of the errors may be material (i.e. they have the potential to change a reasonable person’s impression of your financial statements), while others may be inconsequential.

The auditors will give you the opportunity to correct the errors. Provided that management elects to correct at least the material errors, then the audit firm will render an unmodified (“clean”) opinion on the financial statements that reflect the corrections.

All in all, the audit process can last from a few weeks to several months, depending on various factors, including the complexity and preparedness of your organization.

Here is a sample not-for-profit’s unmodified audit report.

Virtual fieldwork

Many not-for-profits these days do not have a physical “brick and mortar” office and the modern auditor should be well equipped to address such a situation.

If you operate “virtually”, be sure to mention this to your audit firm as early as possible in the process so that plans can be made accordingly.

What happens at the end of an audit?

At the end of the audit, you will receive an independent auditor’s report (opinion letter) with audited annual financial statements reflecting the corrections proposed by the audit team and accepted by management.

You will also receive at least one letter to management, the audit committee and/or the governing board to communicate various matters about the audit, which may include deficiencies in internal control and other comments/recommendations.

The audit firm partner or principal will typically meet with the audit committee, finance committee and/or your entire governing board to present the above materials and communicate the results of the audit process.

With few exceptions, the audited financial statements and the auditor’s report must be made available to members of the public upon request.

This should give you a more complete understanding of what happens during an audit – and how to prepare for your first one. However, if you have any questions, feel free to contact us here: dc@cookandcompanycpa.com