A financial statement audit is notoriously an intense process for an organization, yet adopting specific strategies can help make it more manageable for everyone involved. These audits serve a critical function by providing external stakeholders with assurances regarding the accuracy of financial reporting.
For not-for-profit organizations, securing an unmodified or clean audit opinion is not just a necessity but a gateway to numerous benefits. Such an opinion not only affirms that the financial statements are free from material misstatements and faithfully represent the organization's financial status but also plays a pivotal role in maintaining an organization's reputation, securing funding and fostering strong relationships with donors.
Understanding the importance of preparation is the first step toward ensuring a smooth audit experience. Each audit has its own requirements and procedures, and being aware of them can help you prepare effectively.
Does My Organization Need an Audit?
Not every not-for-profit is mandated to undergo an independent audit, with the requirement often depending on the size of its annual budget or the sources of its funding as stipulated by state or federal laws. In certain instances, not-for-profits have the discretion to decide whether to conduct an independent audit, adding a layer of flexibility based on their specific circumstances.
However, for those receiving federal funds, the situation becomes more regulated. Not-for-profits benefiting from federal government funding may need to adhere to a specific type of independent compliance audit, known as a Single Audit. This requirement has recently seen significant updates, with the White House announcing a major revision to the Office of Management and Budget (OMB) Guidance, which increases the single audit threshold from $750,000 to $1 million, signaling a notable change for not-for-profits in terms of compliance requirements.
Not-for-profits that receive state or local government funds might also be subjected to independent financial audits as dictated by various state and local laws. Compliance with these regulations is crucial as noncompliance can lead to severe consequences and, in some cases, loss of funding.
Given the complexities and potential repercussions of failing to meet these regulatory requirements, it is important for not-for-profits to seek professional guidance.
Tips for a Smooth Audit Process
Your organization can undertake several preparatory measures for the audit to ensure a smooth process for both your staff and the auditors.
Here are the top 10 tips to follow:
1. Frequent Communication: Maintain ongoing dialogue with your auditor to discuss any issues or unusual transactions as they arise, ensuring financial statements remain accurate all year.
2. Board Involvement: Engage your board in the audit process, understanding that auditors may require discussions about internal controls and audit outcomes with them. Educate the board on their responsibilities in this context.
3. Manage Deadlines: Be aware of and communicate the various deadlines related to funding sources and financial institutions to your auditor, setting realistic expectations for all parties involved.
4. Reconciliation: Regularly reconcile all accounts with the trial balance, making timely adjustments as needed to provide accurate information to your auditors.
5. PBC List Adherence: Carefully review and adhere to the prepared-by-client (PBC) list provided before the audit engagement, ensuring all documentation and other materials are ready by the target dates. These documents may include anything from financial statements to contracts and other specific records.
6. Delegate and Schedule: Assign clear tasks and deadlines for each item on the PBC list to appropriate team members, creating a structured timeline for completion.
7. Electronic Documentation: To facilitate an efficient audit process, prepare audit documents in electronic format whenever possible, ensuring they are properly backed up and secured.
8. Designate a Point-of-Contact: Appoint a specific individual within your organization to act as the main contact for the audit, streamlining communication and avoiding potential confusion.
9. Maintain Internal Controls: Continuously document and assess your internal controls, especially critical for Single Audits, to ensure they are functioning effectively.
10. Understand Accounting Standards: Proactively familiarize yourself with new transactions and accounting standards, preparing for them in advance of the audit fieldwork.
By integrating these practices into their audit preparation strategy, not-for-profits can significantly enhance the efficiency and effectiveness of the audit process while strengthening their financial management and oversight.
Next Steps
For more information about Single Audits or other independent audits or reviews, please connect with our not-for-profit finance team.
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