For nonprofit organisations, financial audits are a crucial component of ensuring accountability, transparency, and compliance. These audits provide stakeholders—including donors, grant providers, and regulatory bodies—with confidence that the organisation is managing its finances responsibly and effectively. Whether it’s a statutory requirement or part of best practice, preparing for a financial audit can seem daunting. However, with the right approach, nonprofits can navigate the process smoothly and efficiently.
In this article, we will discuss how nonprofit organisations can prepare for a financial audit, outlining the key steps to ensure the process runs smoothly, and the organisation is ready to demonstrate its financial health and compliance.
1. Understand the Purpose and Scope of the Audit
The first step in preparing for a financial audit is to understand its purpose. A financial audit typically involves an independent review of the organisation’s financial statements, accounting practices, and internal controls. The goal is to provide an objective assessment of the accuracy of the financial reports and ensure they comply with accounting standards and regulatory requirements.
How to Approach This Step
Ensure that key personnel—such as the finance team, board members, and senior leadership—are aligned on the purpose of the audit. Understanding its scope and the types of records that will be reviewed helps the organisation focus its efforts on gathering the right information and addressing any potential concerns in advance.
2. Review and Organise Financial Records
A comprehensive and well-organised set of financial records is essential for a successful audit. This includes your income and expenditure statements, balance sheets, bank statements, tax filings, and any other financial documentation that reflects the financial health of the organisation.
How to Approach This Step
Before the audit begins, conduct an internal review to ensure that all financial documents are up to date, accurate, and complete. This includes verifying that all transactions have been recorded correctly, reconciling bank statements, and ensuring that any financial discrepancies have been addressed. Properly categorising income and expenses—particularly distinguishing between restricted and unrestricted funds—will also make the audit process more straightforward.
3. Ensure Compliance with Accounting Standards
Nonprofit organisations are required to adhere to specific accounting standards, which may vary depending on their jurisdiction. For instance, in the UK, charities must comply with the Charities SORP (Statement of Recommended Practice), while in the US, they must follow Generally Accepted Accounting Principles (GAAP) or the Financial Accounting Standards Board (FASB) standards for nonprofits.
How to Approach This Step
Familiarise yourself with the accounting standards applicable to your nonprofit. Ensure that your financial records and reporting practices align with these standards. If necessary, seek the guidance of a professional accountant or auditor to ensure that your financial statements meet all the required criteria. This can significantly reduce the likelihood of issues arising during the audit and demonstrate your commitment to transparency and compliance.
4. Prepare for Internal Control Testing
Auditors will assess your organisation’s internal controls to ensure that financial transactions are properly authorised, recorded, and monitored. Internal controls are the policies and procedures your organisation has in place to prevent errors, fraud, and mismanagement. This includes processes such as how transactions are authorised, how receipts are recorded, and how the organisation prevents conflicts of interest.
How to Approach This Step
Review your internal control systems and ensure that they are well-documented and functioning as intended. This may involve checking that the separation of duties is maintained (e.g., different individuals should handle bookkeeping and approving payments), reviewing your cash-handling procedures, and confirming that all staff are aware of and adhere to the financial policies. Strengthening these controls will not only help during the audit but will also enhance your organisation’s overall financial integrity.
5. Compile Supporting Documentation
Supporting documentation is essential for substantiating your financial records. This includes contracts, invoices, receipts, donor records, and any other relevant paperwork that provides evidence of your financial transactions. Auditors will request these documents to verify the accuracy of your financial statements and to ensure that your reporting aligns with actual financial activities.
How to Approach This Step
Ensure that all supporting documents are readily accessible and organised. For example, group documents by type (e.g., donations, expenses, grants) and ensure that they are stored in a logical order. Digital tools and accounting software can help streamline this process by enabling easy access and organisation of records. Keeping a record of all correspondence with donors and grant providers, along with the appropriate paperwork, will also be beneficial during the audit.
6. Communicate with the Auditor
Open communication with the auditor is key to a successful financial audit. Begin by setting a clear timeline for the audit process and ensure that both your organisation and the auditor are aligned on expectations and deliverables. This will help avoid misunderstandings and ensure that the process runs smoothly.
How to Approach This Step
Schedule an initial meeting with the auditor to discuss the scope of the audit, the documents required, and any specific areas of focus. This is also an opportunity to ask questions about the process and clarify any concerns. Be prepared to provide the auditor with easy access to the necessary documentation and personnel for interviews or clarifications. Maintaining a cooperative and transparent relationship with the auditor will help facilitate a more efficient and effective audit.
7. Address Potential Issues Beforehand
During an audit, auditors may identify issues or discrepancies in the financial records. It is advisable to address any known issues before the audit process begins to avoid delays and to demonstrate your organisation’s commitment to best practices.
How to Approach This Step
Take a proactive approach by conducting a preliminary internal audit or review of your financials. Identify any potential areas of concern—such as discrepancies in your records, issues with internal controls, or difficulties in reconciling funds—and address them prior to the official audit. This may involve rectifying accounting errors, updating financial policies, or training staff on proper procedures.
8. Prepare Your Staff and Board Members
The financial audit process may require input from various staff members, including those who manage finances, human resources, and fundraising. Board members may also be involved, particularly if they are required to provide oversight or answer questions about the organisation’s financial policies.
How to Approach This Step
Prepare staff and board members by providing them with an overview of the audit process, their roles, and the expectations for their involvement. Consider conducting a training session to ensure that everyone is familiar with the documents and processes the auditors will review. This preparation will help ensure that the audit goes smoothly and that your team is confident in providing the necessary information.
