Though time-consuming and expensive, nonprofit organizations are often required to conduct audits. External audit requests can be made by governing bodies —such as the Canadian Revenue Agency (CRA) — but also by other stakeholders, for example, as part of a grant agreement, as a loan condition. Alternatively, the organization's board of directors can also request an internal audit.
Whatever the reason, it’s good governance and a best practice for organizations in the NPO space to conduct audits. Audits are a crucial way to provide transparency and accountability and assure regulatory compliance to all stakeholders.
A nonprofit audit will help strengthen the organization's financial reporting, assuring donors, funders, and the general public that money invested into or given to the organization has been spent responsibly.
The Role of the Nonprofit's Board Members and Management in an Audit
When an audit has been requested, the board of directors first establishes an audit committee if one doesn't already exist. It then, often through the audit committee, selects an independent and qualified external auditor. It will often be tasked with approving the auditor's engagement letter, outlining the scope, objectives, and fees of the audit.
It will also set the tone for staff in its engagement with the audit team and support during the audit.
The board members will then oversee the progress of the auditor's work, assist in finding necessary documentation or evidence, and help overcome organizational or administrative barriers to success.
The organization’s management will also play an integral role in preparing audit documentation and allowing access to the key personnel who will be able to provide the audit evidence. The more management does to prepare in advance of and be available during the audit, the faster the audit process will be, and the easier it will be to keep costs down. In short, management should:
Prepare Financial Records
- Accurate Record-Keeping: Ensure that all financial transactions are recorded accurately and timely.
- Documentation: Maintain comprehensive supporting documents for all financial activities.
Facilitate the Audit Process
- Audit Coordination: Serve as the primary point of contact with the auditors, scheduling meetings and providing necessary information.
- Resource Provision: Supply auditors with access to financial systems, records, and personnel.
Before the Audit - How to Prepare for the Audit
1. Set up an audit committee
An audit requires many players to ensure success. Larger organizations often have an audit committee; however, smaller or mid-sized NPOs usually do not have the budget to establish a dedicated audit team. Nonetheless, having a few senior managers as point persons or internal leads during the audit is helpful for the auditors and the non-profit's other staff.
When an audit is requested, however, even a small NPO should set up a committee to assist the board in maintaining the organization’s financial credibility and integrity. The audit committee will establish internal controls, and ensure accurate financial statements are prepared while maintaining compliance with laws and regulations. Specifically, the committee should review the non-profit's financial records to:
- Ensure Accuracy: Double-check all financial statements for correctness.
- Reconcile Accounts: Match bank statements with internal records to ensure consistency.
- Update Ledgers: Ensure all transactions are recorded up to the audit date.
The committee should also organize documentation for the audit team:
- Financial Statements: Prepare balance sheets, income statements, cash flow statements, and statements of changes in net assets.
- Supporting Documents: Gather receipts, invoices, contracts, bank statements, and investment records.
- Payroll Records: Compile employee payment details, tax withholdings, and benefits information.
2. Check financials and ensure your books are up to date
A nonprofit audit will be executed more smoothly if all accounts — specifically the trial balance, statement of operations, and statement of financial position — are up to date before it begins. Any accounts with problems will cause delays in the audit process, which means more fees.
Ideally, you should treat audit preparation as an ongoing process. By keeping schedules and reconciliations up-to-date throughout the year, you will reduce the time it takes to prepare for an audit when one is requested.
3. Meet with the auditors for a pre-audit meeting
Prior to the start of the audit, the audit committee will meet with the external auditors to review the timeline, set or confirm expectations for the upcoming work, finalize pertinent dates, and review materials needed. It will also discuss the audit engagement letter. The meeting usually covers the following:
- Engagement Letter: Reviews and discusses the engagement, which outlines the scope, timing, and fees associated with the audit.
- Audit Scope or Other Matters: To discuss any concerns, unique transactions, or changes in operations with the auditor beforehand.
- Timeline Coordination: Establishes deadlines for document submissions and audit milestones.
The pre-audit meeting also allows the audit committee to raise any concerns or issues about a specific financial area they want to ensure is included in the work plan. Your auditor might ask about the following issues:
- Which individuals are responsible for what tasks?
- What internal controls are in place, and how are they monitored?
- Were there any major operational changes this year?
- How does your nonprofit minimize fraudulent reporting?
- Are you thinking about changing any of the accounting methods?
Having a clear idea of what your auditor will look for allows you to prepare your team to answer these questions and the necessary documentation before the audit.
4. Gather documents required for the audit
Using the pre-audit meeting as a guide, prepare and place all the documentation needed during the auditor’s fieldwork into a binder including, but not limited to:
- Balance sheet supporting documents
- Bank reconciliations with supporting bank statements
- Accounts receivable schedule with supporting invoices
- Accounts payable with supporting invoices
- Capital asset schedule
- Fixed assets and depreciation schedule
- List of grant funds already received and those that are expected
5. Clearly document the organization’s policies and processes
In any organization, documenting policies and processes is a best practice, especially if there is a high employee turnover. In the case of a nonprofit audit, it’s even more important as the auditor will want to know each and every financial process, from the technology emergency backup plan down to processing the payment of an expense.
6. Brief your team
Audits often have a negative connotation associated with them, and auditors on-site can create anxiety among team members. In these situations, effective and ongoing communication is key!
Before the audit, you should inform your employees of their roles and responsibilities and ensure everyone is ready to answer any questions the auditor might have.
During the Audit - How to Make the Audit Easier for Everyone
To complete the audit job correctly, the auditor will need to interview various members of the organization, including the board of directors and management. Communication between parties is critical during an audit.
- Management should check in with the audit field staff daily and communicate any changes in timing or expectations.
- The external auditor will provide regular updates to management regarding outstanding items.
- The audit committee — which works independently of both the board and management — will communicate directly with the auditors on-site during the audit process to ensure everything goes as smoothly as possible.
Here are some best practices to ensure a positive audit experience. The non-profit's audit point person or audit lead should communicate these best practices to all staff members. Having staff use these best practices to shape their contribution to the audit process sets a foundation for a successful audit. These expectations are:
Be Responsive and Cooperative
- Timely Information: Be sure to provide requested documents and information promptly to avoid delays.
- Availability: Ensure that key personnel are available to answer questions or provide clarifications.
Maintain Open Communication
- Regular Updates: Stay in touch with the audit team to address any issues as they arise.
- Transparency: Be honest and forthcoming about any challenges or discrepancies discovered.
Facilitate Access
- Workspace for Auditors: Provide a comfortable area where auditors can work efficiently.
- System Access: If using accounting software, grant auditors access while maintaining data security.
After the Audit
1. Post-audit meeting with the audit committee
Once the external auditors have concluded their work, there is usually a post-audit meeting with the audit committee to conduct an initial review of the results.
At this meeting, there are several key topics of discussion, including the accounting principles selected, management judgements, estimates used, audit adjustments, management disagreements, and any difficulties encountered while performing the audit.
2. Post-audit meeting with the board of directors
Next, the audit results will be communicated to the board members and other important stakeholders, including the general public. A positive nonprofit audit result is something to be proud of, indicating that the organization is reputable, trustworthy and financially stable.
Thorough preparation for the board meeting means fully understanding the organization’s financials and journal entries to answer board members' questions.
Prepare an action plan for the management letter’s recommendations so that, after reviewing the results with the board and management, a discussion can be had concerning what needs improvement and implement solutions to fix any issues.
A nonprofit audit can seem overwhelming at the end of the day; however, auditing is an important aspect of healthy organizational financial governance. The key is thorough preparation, strong communication between all parties, and accurate year-long bookkeeping.
At Enkel, we work with many NPOs to provide accurate bookkeeping and month-end reporting services throughout the year and can offer audit assistance if we manage your books.
We provide bookkeeping and other accounting services to nonprofit organizations across Canada. For clients going through a nonprofit audit, we also provide audit assistance so you can rest assured that your reports and numbers can be relied on. Get in touch and see how we can help!
