Your annual financial audit shouldn’t be something to worry about, yet it’s easy to be suspicious. Have we accounted for income correctly? Do we have sufficient and appropriate audit support? Are there any new statements that we are not aware of? These questions are fairly typical for finance professionals. This article will answer those questions and offer some additional tips to help you rest easy as your next audit approaches.
Auditors typically ask for a number of standard items, regardless of the type of nonprofit being audited. Below is a basic list of these general requests.
Standard Listener Requests
- Bank statements.
- Investment declarations.
- Payroll reports, time slips, W-2 and 1099.
- List of fixed assets and corresponding depreciation schedule (cost and accumulated depreciation).
- Accruals and A/P and A/R aging reports, with the ability to show appropriate cutoff and recoverability.
- Grant award agreement letters, if applicable, including a net asset carryforward and deferred revenue reconciliation.
- Monthly account reconciliations for all balance sheet accounts.
- Analysis of the evaluation of sponsorships/memberships.
- Trial balance and general ledger.
- Financial Statements: Statement of Financial Position, Statement of Activities and Statement of Functional Expenditures.
- Expenditure Allocation Methodology.
- Descriptions of the organization’s programs.
- Budgets and budget versus actual reports.
- Board and committee by-laws, articles of incorporation and minutes.
Auditors usually provide this list of requests 30 days or more before the fieldwork. Your organization’s accounting team should review the list, and you should hold a pre-audit meeting with your organization’s auditors and accounting staff. This meeting will ensure that both parties have the same expectations regarding the scope and content of deliverables, and that information is conveyed to auditors in a timely manner.
Preparation for audits
While it is important to be ready to provide all field audit requests before fieldwork begins, preparing for an audit takes time and should not be rushed. To help you, it is best to reconcile and compile audit-ready support on a monthly basis.
Preparation for the audit should take place throughout the year. Success largely depends on maintaining reconciliations for each key balance sheet, income, and expense account linked to the accounting system trial balance each month. Staying organized and making sure records and support are easily accessible helps tremendously when preparing for your organization’s audit.
Another aspect of your organization’s preparation should be ensuring that the policies and procedures manual is up to date and reflects all recent changes. Written accounting procedures should clearly define the process and assign responsibility for each accounting function in the organization. There are four basic purposes for maintaining policies and procedures in an accounting manual.
- Document procedures that standardize methods so that the correct and most efficient procedures are consistently used.
- Document procedures that will be useful in training accounting staff, including current staff and new staff.
- Document procedures that will be useful to non-accounting staff as a reference guide.
- Documenting procedures as an operations management control tool, in that procedures can be specifically prescribed, changes can be approved, and unauthorized deviations can be detected.
Within your accounting department, you should prepare your own schedule for the final closing of the books for your fiscal year, when you will have all documents for the auditors, when the audit field work should be completed and when you can expect draft audited financial statements. statements. You should share the audit schedule with the board of directors and the audit and finance committee and discuss any areas that you think could be discussed with the auditors.
Discussion points with auditors should focus on major year-over-year variances and whether there are subsequent events to note. For example, if your organization experienced more employee turnover this year than expected or if more professional services were incurred resulting in fluctuation from year to year, this should be noted for the auditor. Explanations of significant year-to-year fluctuations aid auditors in their documentation and improve their overall understanding of your organization’s financial health.
After postponing the effective dates of recent accounting statements due to the COVID-19 pandemic, the Financial Accounting Standards Board (FASB) has decided to improve financial accounting and reporting standards to help users of financial reports to better understand them. There are two upcoming accounting statements that all nonprofits should be prepared for.
FASB Accounting Standards Update (ASU) 2020-07, Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets (Topic 958) is effective for organizations with annual reporting periods beginning after the 15 June 2021. Additionally, effective for organizations with annual reporting periods beginning after December 15, 2021, the FASB introduced ASU 2016-02 Leases (Topic 842).
If you need help implementing these standards, or if leaders in your organization want to better understand how they might apply, contact your auditors or Marcum.
The annual audit process is an essential part of an organization’s accountability to management, its donors or members, and the board. Ensuring that all transactions are recorded in accordance with accounting standards and that your organization’s financial statements are presented fairly is paramount to good governance and the long-term financial sustainability of your organization.
If your organization needs advice or assistance in preparing for its annual audit, ask Marcum! We are ready and eager to support our partners in the nonprofit community.