The audit process can be a bumpy road, increasing your anxiety and distracting you from your usual workload along the way. What if we told you there are ways to ensure a smooth and successful audit engagement for your nonprofit?
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.
Stay On Course
The most effective way to achieve a smooth audit engagement is to provide a fully adjusted trial balance to the audit team 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:
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 team 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 Team
Communicating throughout the year will produce the best results at audit time. Tell your audit team 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 team 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 team 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.
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 to 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 team by the agreed-upon date. Today, most information is provided to audit teams 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 team and notify those in your organization that might require interaction with the auditors. Remember that your audit team 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 team arrives and that they are prepared to switch from wireless to wired access if needed for reliability.
After you are finished, the board has approved and the reports are issued, sit down with your audit team 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?
If you stop to think about it, you’ll realize that your audit team has the same goal as you: a smooth and effective audit engagement and a relationship that provides sound advice and personal support to you throughout the year.
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