Why You Shouldn’t Fear Your Audit

Your annual financial audit shouldn’t be anything to fear, and yet it is easy to feel wary. Did we recognize revenue correctly? Do we have sufficient and appropriate audit support? Are there any new pronouncements we’re not aware of? These questions are quite typical for financial professionals to ponder. This article will answer these questions and offer some additional tips to help you sleep easy as you approach your upcoming audit.

Auditors generally ask for a number of standard items, regardless of the type of nonprofit organization being audited. Below is a basic list of these general requests.

Standard Auditor Requests

• Bank statements.
• Investment statements.
• Payroll reports, timekeeping records, W-2s, and 1099s.
• List of fixed assets and related depreciation schedule (cost and accumulated depreciation).
• Accrued expenses and A/P and A/R aging reports, with the ability to show proper cutoff and collectability.
• Grant award agreement letters, if applicable, including a net asset roll forward and reconciliation of deferred revenue.
• Monthly account reconciliations for all balance sheet accounts.
• Sponsorship/membership valuation analysis.
• Trial balance and general ledger.
• Financial statements: Statement of financial position, statement of activities, and statement of functional expenses.
• Expense allocation methodology.
• Organization program descriptions.
• Budgets and budget versus actual reports.
• Bylaws, articles of incorporation, and board and committee minutes.

Auditors typically provide this list of requests 30 days or more before 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 help ensure both sides have the same expectations about the scope and content of deliverables, and that information is delivered to the auditors on a timely basis.

Audit Preparation

While it is important to be prepared to provide all audit fieldwork requests before fieldwork starts, preparing for an audit takes time and shouldn’t be rushed. To assist with this, it is best to reconcile and compile audit-ready support on a monthly basis.

Audit preparation should take place all year long. Success largely hinges on maintaining reconciliations for each balance sheet, revenue, and key expense account tied to the accounting system trial balance each month. Staying organized and ensuring records and support are easily accessible helps immensely when preparing for your organization’s audit.

Another aspect of your organization’s preparation should be ensuring the policies and procedures manual is up to date and reflects any recent changes. Written accounting procedures should clearly define the process and assign responsibility for each accounting function in the organization. There are four basic objectives for maintaining policies and procedures in an accounting manual.

1. Documenting procedures that standardize the methods so the correct and most efficient procedures are consistently used.
2. Documenting procedures that will be helpful in training accounting personnel, including current and new staff.
3. Documenting procedures that will be useful to non-accounting personnel as a reference guide.
4. Documenting procedures as a tool for management control of operations, in that the procedures can be specifically prescribed, changes can be approved, and unauthorized deviations can be detected.

Timing

Within your accounting department you should prepare your own timeline for when the books are finally closed for your fiscal year, when you will have all documentation to the auditors, when audit fieldwork should be wrapped up, and when you can expect drafts of the audited financial statements. You should share the timeline of the audit with the board and audit and finance committee and talk about any areas you expect may be discussion points with the auditors.

Discussion points with auditors should center on major differences from one year to the next and if there are subsequent events to note. For example, if your organization had more employee turnover this year than planned or if more professional services were incurred causing a year-over-year fluctuation, it should be noted for the auditor. Explanations of significant year-over-year fluctuations assist the auditors with their documentation and increase their overall understanding of your organization’s financial health.

Standards

There are two accounting pronouncements from the Financial Accounting Standards Board (FASB) that nonprofit organizations must be prepared to address for their upcoming audit.

ASU 2016-13, a new expected credit loss accounting standard introduces the current expected credit losses methodology (CECL) for estimating allowances for credit losses. The standard is effective for most SEC filers in fiscal years and interim periods beginning after December 15, 2019. For all others it takes effect in fiscal years beginning after December 15, 2022.

ASU 2023-08 addresses the accounting and disclosure requirements for certain crypto assets. The new guidance requires entities to subsequently measure certain crypto assets at fair value, with changes in fair value recorded in net income in each reporting period. Additionally, entities are required to provide disclosures about the holdings of certain crypto assets. This ASU amendment is effective for fiscal years beginning after December 15, 2024, including interim periods within those years.

If you need assistance implementing these standards, or if your organization’s leaders want to better understand how they might apply, reach out to your auditors or Marcum.

Conclusion

The annual audit process is a vital part of an organization’s responsibility to management, its donors or membership base, and the board of directors. Ensuring that all transactions are recorded in conformity with accounting standards and that your organization’s financial statements are presented fairly is paramount to good governance and your organization’s long-term financial viability.

If your organization is looking for guidance or assistance as it prepares for its annual audit, ask Marcum! We are ready and eager to support our partners in the nonprofit community.