Your first audit: what actually gets asked for

The first audit is one of the more stressful things a growing nonprofit goes through, and a lot of that stress comes from not knowing what is about to be asked.

Worth saying clearly at the start: an audit is performed by an independent licensed CPA firm, and independence is the point. The people who keep your books cannot audit them. Prosperity Works does not perform audits. This is about what the process involves and how organizations get ready for it.

Why you might need one

Audit requirements come from several directions at once, and they do not all apply to every organization. State charitable registration rules, a specific funder’s grant agreement, federal award thresholds, a lender, or your own bylaws can each trigger one, and the thresholds differ between them.

Because these vary by state and by funder, the question of whether you need one and which kind is worth confirming specifically rather than by analogy to a similar organization. Some organizations that assume they need a full audit actually need a review, which is a different and lighter engagement.

What an auditor is testing

Not whether every transaction is correct. An auditor is forming an opinion on whether the financial statements are fairly stated as a whole, which is a narrower thing than most people expect.

In practice that means sampling. They will pick transactions and trace them back to evidence, test whether the controls you describe actually operate, confirm balances directly with third parties such as banks, and look hard at the areas where judgment was involved: revenue recognition, how restricted funds were released, how shared costs were allocated.

Roughly what gets requested

The list varies, but most first audits ask for some version of this.

• Trial balance and the general ledger for the year.
• Bank statements and reconciliations for every account, for every month.
• Grant agreements and award letters, along with the correspondence that modified them.
• Board minutes for the full year, including committee minutes.
• Payroll records and the related filings.
• Support for a sample of transactions: invoices, receipts, contracts, approvals.
• The documented basis for how shared costs were allocated across programs.
• Fixed asset records and the depreciation schedule.
• Signed policies: conflict of interest, document retention, whistleblower.

Nothing on that list is exotic. What makes it hard is that it has to be produced quickly, and for a year that is already closed.

What actually slows audits down

Three things, consistently.

Reconciliations that were never really done. If a month was closed with an unexplained difference absorbed into an account, that difference will surface, and explaining it eleven months later is much harder than it would have been at the time.

Allocations with no written basis. If 45 percent of a salary was charged to a program, the auditor will ask why 45. A documented method that is imperfect is fine. A number with no method behind it is a finding waiting to happen.

Documents that live in one person’s email. Grant amendments, approvals, and contracts that were never filed anywhere central turn a two-day request into a two-week search.

The months before

Preparation is almost entirely about closing months properly as they happen rather than doing anything special in the run up. Reconciled monthly closes, allocation methods written down before they are used, grant documents filed centrally, board minutes actually approved and signed.

Organizations that do those four things tend to describe their audit as tedious. Organizations that do not tend to describe it as the worst month of the year.

Who does what

The auditor forms an independent opinion. Your bookkeeping or financial management support gets the records into a state where that opinion can be formed efficiently, and answers the questions that come back during fieldwork. Those are separate roles for a reason, and the separation is not a technicality.

If the same party is doing both, that is worth asking about before the engagement starts rather than after.