Checklist to Prepare for a Nonprofit Audit

By Julianne Schwallie, CPA, MBA
Gray, Gray & Gray, LLP

Nonprofit organizations continue to play a pivotal role in society, tackling diverse challenges and enriching communities through their endeavors. Their financial integrity is crucial to maintaining public trust and ensuring the continued impact of their work. Annual audits serve as a crucial mechanism for assessing and validating the financial health of nonprofit organizations.

Preparing for an annual nonprofit audit can seem daunting, but with careful planning and organization, the process can be streamlined and efficient. This comprehensive checklist will guide you through the essential steps to ensure your nonprofit organization is well-prepared for the annual audit.

Pre-Audit Preparation: Laying the Foundation

• Gather Financial Statements: Collect and organize all financial statements for the fiscal year under review. This includes the statement of activities, the statement of functional expenses, and the statement of cash flow.
• Prior Year Audited Statements: Obtain the prior year’s audited financial statements for reference and comparison. Review previous adjustments to ensure they were not needed for the current year. Review 265 Letter or audit results to see any comments and how they can be addressed in the current year. This will provide context for the current year’s audit.
• Bank and Investment Accounts: Compile a list of all bank and investment accounts maintained by the organization, including account numbers and contact information.
• Grants, Contributions, and Pledges: Prepare a schedule of all grants, contributions, and pledges received during the fiscal year. Ensure this schedule tracks income and expenses. If anything requires allocation, ensure you have rationale and supporting evidence. This documentation will be crucial for verifying revenue sources.
• Internal Control Policies: Review and update the organization’s internal control policies to ensure they are current and aligned with best practices. Effective internal controls reduce the risk of financial irregularities.

Document Collection and Recordkeeping

• General Ledger: Ensure the general ledger is accurately maintained and reconciled with bank statements and other financial records.
• Payroll Information: Organize all payroll records, including employee pay stubs, payroll tax filings, and payroll summaries.
• Investment Statements: Obtain and review all investment statements for the fiscal year. These statements will provide details of investment transactions and balances.
• Fundraising Details: Compile documentation related to fundraising activities, including donor records, Sponsorship agreements, and event receipts.
• Prepaid Items: Prepare a schedule of all prepaid expenses, such as insurance premiums, rent payments, and prepaid supplies.
• Tracking In-Kind Labor: Organizations should be tracking specialized volunteer time. Nonprofits must maintain comprehensive records of their services, including detailed descriptions, hours worked, and the way the services were utilized. Examples of donated specialized time would be a professional photographer taking pictures at an event or a lawyer performing pro bono legal advice. General volunteer work would not be considered in-kind.
• Track In-Kind Goods Donated: These would be items that were donated that an organization would otherwise have to purchase. For example, food or drink donated for an annual gala. The organization should be tracking the market cost of the donated items.
• Tracking of Temporarily Restricted Net Assets: Ensure your organization is tracking year-end balances, additions, and releases of temporarily restricted net assets on an ongoing basis. Accurate tracking of these restrictions will provide management and those charged with governance with a clear understanding of the portion of net assets that are available for general operations versus those restricted for specific purposes.
• Grants Received: Obtain documentation for all grants received during the fiscal year, including grant agreements, grant reports, and proof of grant disbursements.
• Vendor Invoices: Collect and organize all vendor invoices for the fiscal year. Ensure invoices are properly authorized and paid.
• Expense Documentation: Gather documentation for all expenses incurred during the fiscal year, such as travel receipts, utility bills, and equipment purchase records.

Communication and Collaboration

• Engage the Audit Committee: The Audit Committee plays a critical role in overseeing the audit process. Keep the audit committee informed of progress and address any questions or concerns promptly.
• Select an Auditor: Choose a qualified and experienced auditor who specializes in nonprofit audits. Establish a clear communication channel and set expectations for the audit process.
• Schedule the Audit: Collaborate with the auditor to schedule the audit dates and ensure all necessary personnel are available for interviews and meetings.
• Provide Access to Documents: Grant the auditor access to all relevant financial records, including the general ledger, bank statements, and supporting documentation.
• Respond to Inquiries: Respond promptly and thoroughly to any inquiries or requests for additional information from the auditor.
• Share the Form 990: Once the audit is complete, the final audit report (Form 990) should be provided to all members of the organization’s governing board for their review before it is filed with the IRS.

Audit Preparation Checklist

• Review Accounting Policies: Review and update accounting policies to ensure they are consistent with generally accepted accounting principles (GAAP) or other applicable accounting standards.
• Reconcile Accounts: Reconcile all bank and investment accounts to ensure account balances match the general ledger.
• Review Fixed Assets: Review fixed asset records to ensure assets are properly capitalized, depreciated, and valued.
• Assess Related Party Transactions: Identify and disclose all related-party transactions in accordance with accounting standards.
• Evaluate Revenue Recognition: Evaluate the timing and recognition of revenue to ensure it is accurately reflected in the financial statements.
• Review Expense Recognition: Ensure functional expenses are properly allocated and recognized for the period in which they were incurred. Keep in mind that operations can shift from year-to-year, depending on an organization’s goals, so allocations may need to be adjusted.
• Assess Liabilities and Commitments: Review and disclose all liabilities and commitments, including accounts payable, loans, and contingent liabilities.
• Review Temporarily Restricted Net Assets: Ensure the balance is up to date. Throughout the year, the balance can change based on new donor or grant restrictions and previous obligations being met.
• Evaluate Disclosures: Ensure all required disclosures are included in the financial statements, such as related-party disclosures, restricted funds disclosures, and subsequent event disclosures.

A well-prepared nonprofit organization can approach the annual audit with confidence. By following this comprehensive checklist, you can ensure your financial records are organized, readily accessible, and compliant with accounting standards. This proactive approach will streamline the audit process, minimize disruptions to operations, and reinforce the financial transparency that is essential for nonprofit success.