Nonprofit Audit Readiness Tips: Is Your Nonprofit Ready for Its Next Audit?  

Nonprofit Audit Readiness Tips: Is Your Nonprofit Ready for Its Next Audit?  

As audit season approaches for many nonprofit organizations, we’d like to offer some tips to prepare in advance. The word “audit” can be intimidating as organizations often worry about the potential downsides of audit findings or management letters. Simply put, a nonprofit audit reviews an organization’s financial statements for accuracy, compliance with Generally Accepted Accounting Principles (GAAP), and adherence to its financial policies and procedures. Our years in this sector have identified a few common audit areas where nonprofit organizations have shown weakness during audit reviews. We share a list of items nonprofits might review/prepare before their next audit.  

Revenue

Restricted Revenue – Review all restricted revenue agreements to ensure that revenue has been recorded based on the donor’s wishes and in the proper period (time/purpose satisfaction).  

Deferred Revenue – Organizations should not recognize revenue before it is earned. While future period fundraising, ticket sales, event sales, and other revenue can be received, they must be recorded as deferred revenue until they are earned. We recommend making sure that all revenue that has been recorded is in its proper period or deferred until it is earned.  

Expenses

Prepaid Expenses – Expenses paid in advance should be recognized in their proper periods. Items such as insurance, subscriptions, software packages, and other lump-sum expense payments often cover a period that extends past the audit year. Reviewing these expenses to ensure that the cost matches the period incurred is essential. 

Expense Accruals: Often, organizations end the year without receiving all invoices from their vendors/service providers. Organizations should accrue the expense for these services to state them in the correct financial period. 

Note: A common area for audit findings is when organizations do not accrue credit card expenses for end of year charges.  

Example: If the fiscal year ends 12.31.2024, the January 2025 credit card statement may have transactions dated in December that would need to be recorded in 2024. It is important to have a look at credit charges at the end of the year to make sure that they are recorded in the proper periods.  

Conversely, it is easy to forget to reverse all accrued expenses at the beginning of the fiscal year once the invoices/credit card bills are paid.  

Accounts Receivable

Doubtful Collections – Many organizations have donors, patrons, or funders with outstanding commitments. To prepare for the audit, if funders/donors/patrons have pledges/commitments/payments over 120 days past due, the organization should assess these receivables to determine collectability. All uncollectable receivables should be written off or recorded via an allowance for doubtful accounts. 

Financial Policies & Procedures

Making Updates to Existing Policies & Procedures – Before the start of an audit, organizations should review their financial policies and procedures to ensure that they are compliant with GAAP and that they reflect current practices. 

Implementing new technologies, systems, and other efficiencies might impact an organization’s policies and procedures. It is advisable to review these policies annually and make updates as needed.  

Review of Previous Year’s Audit

Before starting a new audit, we advise reviewing the organization’s previous year’s audit and comments to be sure that auditor comments were adequately addressed. We also recommend examining any significant changes of the prior year and preparing variance analyses before the audit.    

Other Administrative Items That May Be Easy to Miss

Updating Bank Signatory Authorities – Before an audit starts, organizations should ensure that the signers on their banks and investment accounts are up to date, as this can change with staff and board of directors transitions. 

Employee Human Resources File Updates – Organizations should maintain up-to-date files for each employee, particularly documentation of employee pay increases, promotions, disciplinary actions, termination/offboarding paperwork, and performance review and development documentation.  

Board-Approved Salaries – We recommend documenting the board of directors’ approval of annual salaries for all employees; many auditors request proof of this information via meeting minutes or other documentation. 

If your organization seeks assistance with audit preparation or remediation, the CLE team is here to help. Book a free 30-minute consultation here.

Property of CLE Business Services, LLC, All Rights Reserved, 2023 – Disclaimer

CLE Business Services: http://clebusiness.com

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