Ensure a Successful Nonprofit Audit Engagement by Establishing an Audit Committee

November 15, 2020 | Article

Undergoing an audit can be an overwhelmingly daunting experience for any organization. Nonprofit entities are no different. The audit process is not only nerve-wracking, but it also distracts your attention from your usual workload. However, it can be much less stressful when you’re proactive and prepared. Forming an audit committee in your nonprofit board will go a long way in ensuring a smooth and successful audit engagement.

Stephen Covey, best-selling author of The 7 Habits of Highly Effective People, suggested we all should ask ourselves the question, “Is real life more like school, or the farm?” At school, it’s sometimes possible to slack off for a while, then cram the night before the exam and still get by with a passing grade. Does that work on the farm—to slack off, then at the last minute till the soil, plant the seeds, water the plants, pull the weeds and grow the crops the night before the harvest?

Of course not.

The audit engagement is like the farm. The lesson in this comparison is that you can reduce, if not eliminate, audit stress by being the farmer: tending your crops throughout the year, so when harvest time arrives, you are ready to enjoy the bountiful fruits of your labor. Here are some steps to help you prepare for your audit and achieve a successful engagement.

The most important first step to prepare for an audit in your nonprofit is to establish an audit committee. Best practices for developing an audit committee in your nonprofit board, as well as the ideal timeline and steps to follow, is outlined in the following section. After you’ve established who will serve on your audit committee, then you can start to put them to work on the next (and ongoing) steps of audit preparation.

Why Audit Committees are Valuable for Your Nonprofit Board
Establishing an audit committee in your nonprofit can result in multiple benefits for your organization. The role of an audit committee can go beyond their primary functions of meeting with the external CPA firm, reviewing financial statements and going over Form 990s. The team can also provide lesser-known functions that assist your company in upholding efficient internal processes. More efficient processes can translate to better experiences for your staff, a better product being produced and overall longevity for your business.

An audit committee is one of many ways you can set your nonprofit board up for success. There are other key ways to keep your board performing at its best.

What Audit Committees Do
The audit committee can serve several purposes for your organization and is just one way to ensure you have a smooth audit process. Outside of standard duties, they can help with the following activities:

  • Participate in overall risk assessment of the organization and suggest methods to mitigate risk.
  • Be familiar with the system of internal control, specifically with respect to segregation of duties, to evaluate adequacy of controls.
  • Ensure that recommendations from the external audit firm are being implemented.
  • Safeguard and assist in implementing a whistleblower policy.
  • Review any conflicts of interest between the organization and employees or board members.

How Audit Committees Help Nonprofits
Enforcing your whistleblower policy is just one way an audit committee can help your firm mitigate risk. A strong whistleblower strategy not only encourages speaking up but also protects staff who come forward with information on illegal practices or violations of internal policies. Your audit committee can provide a safe environment in your firm to ensure that individuals feels protected from retaliation. Implementing a whistleblower policy and a committee to enforce a protective strategy is vital to encourage staff to report any wrongdoing or malpractices they may come across.

To be effective, the reporting process must incorporate features that ensure confidentiality of those reporting their concerns. The audit committee must also ensure all employees are confident they will be protected from retaliation.

A sound whistleblower policy contains components such as the following:

  • A flowchart of the reporting communication chain so all employees know who their primary reporting person is. This chart should include information regarding the persons involved in the receipt, handling and disposition of complaints, including the role of the audit committee. Additional information should be included for any concerns involving top management, as these reports will require a different communication chain (such as directly to the chair of the audit committee or to internal counsel).
  • Confidentiality safeguards that ensure anonymity of individuals communicating concerns, as well as the methodology for making an anonymous report.
  • Information regarding how reported matters are investigated; for example, are all reports communicated to the audit committee? You might also consider having a process by which the disposition of concerns is communicated back to the reporting party (which is obviously not possible if concerns are anonymously reported).
  • Safeguards regarding confidentiality, and perhaps a process used to investigate suspected retaliation against reporting parties.

Other matters to consider include:

  • Developing a process for internal audit of the whistleblower program to insure the operating effectiveness of the protocols.
  • Observing retention policies regarding documentation, investigation and resolution of reported concerns.

The importance of establishing a strong whistleblower policy cannot be over-emphasized. Of equal importance, however, is the knowledge such a process exists. It is imperative that employees recognize that their concerns are being communicated and that appropriate investigative steps will be taken to resolve them. While developing your policy, consider having all employees annually sign a statement outlining that they are aware of the policy and are following established protocols.

What other things do you need to consider when it comes to the audit of your nonprofit?

Audit Engagement Timeline
With respect to the annual audit engagement, the committee should follow a reasonable timeline for necessary discussion. The following outlines a suggested timeline.

Three months prior to year-end: Update the committee’s risk assessment of the organization and meet with the audit firm for discussion. At the same time, discuss the engagement timeline with management and the audit committee to ensure deadlines will be met.

During the audit engagement: Monitor the timeline and any audit-related issues that arise that could affect completion of the audit engagement and preparation of Form 990. Be informed of any audit adjustments identified during the audit process that could change internal financial results reported by management.

Following engagement completion: Interview both the external audit committee and management about the audit experience and any improvements that should be made to the engagement for the current year. Also, discuss whether changes to accounting or reporting standards will modify the audit or Form 990 preparation engagement. Finally, consider any recommendations from the external audit firm and discuss with management how the recommendations will be implemented.

As you can see, the role of the audit committee within the nonprofit organization is primarily one of risk oversight. The committee’s goal during interactions with both management and the external CPA is to monitor risk and assess the quality of external reporting by the organization.

A key to a successful nonprofit audit is understanding auditor rotation.

Steps to Achieving a Successful Nonprofit Audit Engagement

Stay on Course
The most effective way to achieve a smooth audit engagement is to provide a fully adjusted trial balance to the audit committee when requested, and make sure it’s supported by appropriate documentation. This can be achieved if your team utilizes a month-end or even quarter-end closing checklist that includes an appropriate amount of account analysis and reconciliation.

Typical action items on a closing checklist include:

  • Reconciling bank accounts and making any adjustments to the general ledger.
  • Reconciling receivable balances and accounts payable balances to subledgers and reviewing the detail to see if any unusual items have crept in that need to be corrected.
  • Performing analysis of your allowance for uncollectible receivables.
  • Performing analysis of prepaid balances, accrued expenses and deferred revenue to ensure they are on track.
  • Reviewing investment statements and recording earnings and other activity to adjust the general ledger balances as needed.
  • Reviewing all transactions within property and equipment general ledger accounts and updating depreciation schedules and recurring depreciation adjustments.
  • Ensuring all debt balances are being reduced by the monthly principal payments and interest is correctly recorded—and adding new general ledger accounts for any new debt proceeds received during the period.
  • Reviewing restricted categories of net assets and determining whether restricted purposes or time restrictions have been met.
  • Reading minutes from monthly board meetings and various committee meetings so you are aware of potential transactions that might require special accounting treatment.

Document as You Go
The information required for an audit engagement is not that different from the information you already use in your day-to-day processes, and it isn’t difficult to accumulate if you work on it regularly. For example, scan purchase documents for property and equipment, investments and other assets and accumulate them in an electronic folder. Do the same with new debt instruments and lease agreements, and remember to save a copy of the final, signed agreements. Also, be sure to accumulate materials from any capital or donation campaigns—and ensure that your development team knows what information the audit committee will need for documentation and that they are retaining that information for easy retrieval. Finally, be sure to stay up to date with new accounting and reporting requirements.

Talk to Your Audit Committee
Communicating throughout the year will produce the best results at audit time. Tell your audit committee if you are starting a new line of business or if you have any non-typical transactions. Let them know if you need more information regarding a new accounting standard that will be applicable in the next year.

Your audit firm can be a great resource for discussing how to record transactions and ensuring that your assessment of accounting standards is on track.

If you have the right nonprofit audit firm, they will be available not only to answer everyday questions but also to provide sound business advice and expertise that comes from working with many organizations over the years.

Plan and Prepare
Sit down with your audit committee to plan the audit and set the timeline. Be sure that everyone understands and agrees to the who, what, when, where, how and why for each item requested. Develop a matrix of roles and responsibilities so that both teams can be held accountable for success.

Ask your audit committee to provide workpaper templates, sample confirmations and roll-forward schedules several months before year-end to reduce your last-minute workload in preparing for the audit. Many of the analyses and schedules could be prepared on a regular basis as part of your closing process.

Audit Time
It’s now year-end, and your monthly close process is paying off. Accounts are reconciled, analysis of reserves and accruals is complete, and all expected adjustments have been made. Time now to complete those last audit request items to ensure that unexpected adjustments aren’t needed on the general ledger. Take one last look at the trial balance and make sure that all balances are as expected and are supported by documentation; that’s the easiest way to avoid audit adjustments.

Accumulate the requested audit documentation and provide it to your audit committee by the agreed-upon date. Today, most information is provided to audit committees over secure portals, so ensure that your team has access to the portal so that the information flow is timely and complete.

Reserve space for the audit committee and notify those in your organization that might require interaction with the auditors. Remember that your audit committee cannot work without adequate internet capability, so it’s important to ensure they have enough space to work and that internet service is available. If your IT personnel is needed to assist, make sure they are available when your audit committee arrives and that they are prepared to switch from wireless to wired access if needed for reliability.

Post-Audit Activities
After you are finished, the board has approved and the reports are issued, sit down with your audit committee and debrief the experience. How could the audit plan be modified to make next year’s engagement better? Did the timeline work? Did you have adequate internal resources when you needed them?

Your nonprofit’s audit committee should have the same goal as you and the board: a smooth and effective audit engagement and a relationship that provides sound advice and personal support to you throughout the year.


Is your nonprofit facing an audit? Our team can help you through a smooth audit engagement.

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