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5 ways nonprofits can prepare for an audit

Annual audits are not an event many not-for-profit organizations look forward to. However, regular maintenance and preparation specific to an impending audit can make the process less disruptive. We recommend taking the following steps:

1. Reconcile routinely
Do not wait until audit time to reconcile accounts — for example, cash, receivables, pledges, payables, accruals and revenues. Reconcile general ledger account balances to supporting schedules (i.e. bank statements and receivable and payable aging schedules) monthly — or at least quarterly. And do not forget to reconcile the accounting records to database information provided and maintained by non-accounting departments, such as contributions, events revenue, registration revenue and sponsorships.

2. Prepare supporting documentation
Collect all supporting documentation before the 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 the planning process, auditors typically compile a provided-by-client (“PBC”) list of materials they expect the organization to produce. At the same time, the auditors should indicate when each item is needed. Submit everything on the list according to the timeline. Missing these deadlines could push back the audit itself, resulting in potentially missed board deadlines for completion. Additionally, 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 account balances compared to the previous year. Auditors will inquire into significant variances in revenues and expenses. Be ready to explain these variances — 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 the same errors were not made this year. Also confirm that all of the previous year’s audit entries were posted to the general ledger.  If these entries are missed, your financial statements might be distorted.

Year-long relationship
Do not think of audits as a once-a-year obligation. Keep in touch with auditors throughout the year. For example, if you are awarded a new grant or contract and are not certain how to properly record it, do not hesitate to ask your auditors.

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