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An Introduction to Nonprofit Audits

by Tonia Papke

The good news is that your organization is growing.  The bad news is that with gross revenue over $ 750,000, your organization is now subject to an independent audit.

Now what?

Establish a Committee to Manage the Audit Process

The Board of Directors selects and hires the audit firm.  Staff, however, have an important role in this process.

Map out the audit process

At least six months before the end of the fiscal year, create a timeline with clearly designated responsibilities.

Identify Three or Four Audit Firms That Meet the Specific Needs of Your Organization

Speak to colleagues at other similarly sized organizations.  Ask for recommendations from your major funders and board members.

The most important factors when selecting an appropriate audit firm are:

  • Small enough to pay attention to your organization.
  • Have a strong nonprofit practice
  • Have relevant experience in your sector.

Issue an RFP (Request for Proposal)

It is critical to formalize this process.  Send an RFP to three or four appropriate firms that outlines a specific scope of work.

Provide audit firms the opportunity to come in to meet with finance staff and review your records.  Provide them with any requested information.  Audit firms will be able to provide a more accurate price if they have detailed information.

Review Proposals

Staff should interview the qualified respondents.  Proposals should be reviewed based on the following:

  • Ability of the audit team to listen to staff during the interview
  • Size of the firm, relative to the size of the nonprofit
  • Responsiveness to the request for proposal
  • Relevant experience
  • Availability of staff with professional qualifications and technical abilities
  • References
  • Willingness of the firm to speak during the year as issues come up, without additional fees
  • Cost

Auditor Presentations to the Audit Committee and Board

Two or three finalists will make presentations to the audit committee.  The audit committee chooses one or two firms for presentation to the board.  The Board then accepts the recommendation of the Audit Committee in a formal vote.

Prepare for the Audit Field Work

Generally, the CFO or Controller manage the audit process.  The auditors will provide a list of requested documents.

Preparation for the audit starts with a year-end close out of the fiscal year.  Review all final transactions and ensure that all accounting records are on an accrual basis.  Enter all relevant payables and receivables.  Record depreciation.  Complete all bank reconciliations.

When the books have been reviewed and requested documents have been prepared, contact the audit partner to schedule dates for the field work.

Audit field work generally involves several days of work on site.  The audit team will review information and request additional documents.  Generally, a bookkeeper or accountant will work closely with the audit team during their field work.

Presentation of the Audited Financial Statements

After the audit work is completed, they will send a draft report.  The Executive Director, senior financial staff, and the audit committee will review the draft report for errors, ask questions about the findings, and evaluate recommendations in the management letter to the board.  Management will have an opportunity to review and respond to any findings.

After the audit is complete and accepted by the board, the auditors will sign and date the report, and deliver it in final form to the board of directors.

Tonia Papke is President of MDI Consulting, which provides financial management services to nonprofits and businesses.