Do you bite your nails before your not-for-profit’s external audit each year? Does your staff start showing signs of anxiety in anticipation of the auditors walking in the door?
If this sounds like your situation, take a deep breath. Here are five tips for making the audit experience run more smoothly for you and your auditors.
1. Be ready
Ask your auditors for a list of items they’ll need during the audit, with deadlines for each item, if such a list isn’t provided automatically. Talk to your auditor before the fieldwork if you have questions about any of the items, and let your auditor know right away if you won’t be ready by the agreed-upon dates.
Because surprise is a required element in the audit, you’ll also need to produce some information on the spot, such as specific expense reports, journal entry support, or grantor or program reports. But you can still prepare by establishing files during the year to collect the information you need.
2. Have realistic expectations
Base expectations on the details included in your contract with the auditing firm. It will spell out what the audit will accomplish and your responsibilities.
Auditors once did accounting “clean-up” work for their clients during the audit, such as preparing year-end journal entries, fixed asset schedules, and various prepaid and accrued liability analyses. But today’s professional standards draw a clear line between accounting and auditing services, and your auditor must stay independent of your accounting processes.
If there are accounting tasks you can’t do internally due to lack of expertise, consider hiring a different firm to handle them. But if you’re fully capable and “own” the process, you can engage your audit firm to assist with certain analysis and adjustment information outside the audit.
3. Minimize your risks year-round
Draft and review your accounting and procedures manual. Self-assess inherent internal control weaknesses and determine the necessary internal controls to avoid such weaknesses. Periodically check to make sure your organization’s policies and procedures are being followed.
If your operations have changed or evolved, discuss these developments with your auditor during the year and update your policies and procedures accordingly. Waiting until fieldwork begins can delay the process.
4. Deal with any control deficiencies
Your auditor works by applying risk standards during the audit, guidelines that are defined by official accounting standards. If the auditors see a serious problem, they will describe it with phrases such as “deficiencies in internal control,” “material weaknesses” or “significant deficiencies.”
The auditor, for example, will look to see if there is
- more than one person handling cash receipts and reviewing and approving cash disbursements and payroll,
- a second person authorizing contracts and their payment, and
- adequate oversight of your checks and balances system.
The auditor’s report will include a formal letter (known as the auditor’s SAS 115 letter). If the audit letter describes a problem as a “significant deficiency” or the more serious “material weakness,” you should prepare a written response that describes what action you have taken or intend to take in response to the finding. This is important to the audit committee and board as they oversee the audit and the overall system of checks and balances.
5. Stay in touch
Don’t let the annual audit be the only time you talk to your auditor. If you save up all your questions, it’s likely to extend the length of the audit.
Also ask if there are new accounting pronouncements or changes for the year so you and the board aren’t surprised after year end. Be proactive in understanding the new guidance and its impact on your next audit and future financial reporting.
It’s all good
Although the audit—and the preparation that precedes it—requires some work, the benefits are plentiful. The audit not only assesses your overall financial condition, but also can pinpoint problems with financial management and financial reporting, identify ways to reduce risk, and strengthen internal controls.
Reprinted from the Nonprofit Issues Newsletter (Fall 2011).
Used by permission of Capin Crouse LLP.