Congratulations, it’s December again. Your nonprofit’s year has certainly flown by! There have been some major program successes, some new challenges and roadblocks, and a pivot to a prosperous post-pandemic (hopefully) future. Time to relax a little, perhaps. But something lurks around the corner, and it’s been in the back of your mind since last spring: the upcoming financial statement audit.
Maybe last year’s audit did not go as smoothly as you had hoped. Not only did your auditors spend much more time on fieldwork than anticipated, but they asked for some additional costs to be covered. What’s worse, you were surprised to see a lengthy management letter to you and the audit committee, discussing several issues on internal controls. With the increased scrutiny on how nonprofits utilize their funding, you vow that next year will be different.
In today’s digital, post-pandemic environment, auditors are becoming more accustomed to performing a remote audit, and the trend is expected to continue. In addition, auditors are focusing more and more on their independence in both fact and appearance, leading them to expect more from the workpapers received. Delays in receiving audit-ready workpapers lead to additional charges to your organization and potential internal control deficiencies noted in your management letter.
For any nonprofit, the key to audit readiness is having well-documented transactions, reconciliations and balances. Here are some ways that your organization can get “audit-ready” right now:
- Clearly understand what is required from your auditor. If you, or the head of your finance department, has not had a discussion with your audit team yet, you need to set this up right away. A pre-audit update will refresh both the audit firm and management on the key expectations of the audit. It also helps to ask the auditors to provide a preliminary list of open items to get started on. If this is a first-year audit for your auditor, keep in mind that there will be more requests to assist them in filling out their “permanent file.”
- Review last year’s audit results. Reviewing the audited financial statements, along with correspondence to management from the auditors, will put last year’s audit in perspective, and help to identify and improve internal control deficiencies uncovered by the auditors. Ideally, these deficiencies have already been addressed and corrected during the current year.
- Maintain a financial close process throughout the year, not just at the end. Auditors will always check to see how many journal entries you have recorded towards the end of your fiscal year. This helps them determine the quality of your financial close processes throughout the year. Organizations must make an effort to reconcile all balance sheet accounts throughout the year and maintain accurate supporting documentation for these amounts.
- Ensure that records are available. Even before the Covid-19 pandemic, more and more auditor field work was performed remotely. This has drastically changed the way auditors request and review client information. Expect to provide soft copies of all supporting documentation. It is helpful to review your online filing system prior to the audit, to provide documentation timely and efficiently.
- Address technical issues and other questions throughout the year. Auditors are not just a resource at audit time. They can provide feedback and expertise on an ongoing basis. They are also on the frontlines when new accounting pronouncements are rolled out. Don’t be shy to reach out to them whenever your internal fiscal team hits a bump in the road, anytime during the year.
- Keep your audit committee in the loop. The primary purpose of an audit committee is to provide oversight of the financial reporting process, the audit process, and your system of internal controls and compliance with laws and regulations. Therefore, the audit committee must be constantly updated on all aspects of the fiscal audit, the organization’s audit readiness, and any difficulties that arise during the audit process. The audit committee should also be aware of how management develops internal reporting for accuracy and completeness.
How Grassi Can Help
Grassi’s Nonprofit team consists of experienced industry auditors and advisors who can help you navigate the audit readiness process. Grassi can help you assess audit readiness, liaise with your external audit team, organize your financial balances and records, and prepare audit-ready financial statements. Contact Bryan Fryer, Nonprofit Principal, or Jaime Rapps, Nonprofit Senior Manager, to learn more.