Smooth Sailing on the Open Audit Seas
Lush flora in bloom, warmer and longer days, grilling backyard soirees, the call of the ocean… and your annual audit. For many nonprofit organizations, the approach of summer coincides with their fiscal-year end - signaling that it’s almost time for the annual financial statement audit. Required by regulators and government and oftentimes by lenders, donors and grantors, audits are important for regulatory compliance - serving as a report card of whether the organization’s financial statements are presented fairly in accordance with generally accepted accounting principles. The goal of any audit is to obtain a “clean” or “unmodified” opinion – equivalent to earning the “A” on a report card. With the proper planning and a little extra attention to detail you can ensure a smooth process and ultimately success!
An audit typically involves three phases – planning, fieldwork, and delivery.
Planning is an important first step and sets the tone and scope of the rest of the audit, so proper attention and time to these tasks are needed by the organization’s staff. To ensure efficiency in the planning process, upfront communication is key. It’s important to hold a year-end meeting with the auditors prior to the start of planning. You can use this meeting to update your auditors on the events of the year, talk through major changes in the organization, and discuss expected year-to-date financial results, significant new grants and contributions, and changes in personnel. The auditors may also discuss with you any new accounting standards that are expected to impact the financial statements. This time should be used to reflect on the last audit and discuss what went well, what didn’t go well, and what can be done better or differently on this upcoming audit. During this meeting, you and your auditor should agree upon deadlines, establish the audit timeline, and determine whether the audit will be conducted on-site or remotely.
During the planning process, the auditors will need to gain an understanding of your internal control systems and perform walkthroughs of transactions. This may be in person or virtually. The walkthroughs provide documentation to the auditor about the organization’s internal control processes and procedures over key accounting transactions. During the pandemic, many organizations switched to a hybrid in-person/remote workforce out of necessity and post-pandemic formally adopted this policy on a permanent basis. Accordingly, internal control policies were also adjusted to accommodate these recalibrations. Formal narratives on internal control process and procedures should be revisited and updated on a periodic basis to ensure that compensating controls are being implemented timely to address any gaps in internal control that may be caused by workforce logistics recalibrations.
Fieldwork is the next stage in the audit process. The auditors will provide the organization with a list of requested items for audit fieldwork. Nonprofits should review the auditor’s request list and determine who from the organization is responsible for each item. To facilitate the flow of information, it may be helpful to create an “audit documentation” folder so that each member of the finance team can save files to be given to the auditors. As audit information is gathered, staff should verify that all requested information has been included, and that supporting schedules agree to the amounts shown on the trial balance. Since much of the audit process is now electronic/paperless and firms use a secure online information-sharing portal, there are several options that allow for tracking and organization of uploaded files. Coordinate the user access and set up with your auditor to provide efficiencies in the audit process.
The financial records should be fully reconciled and closed prior to the start of fieldwork. If you are not on target to have this done for your scheduled fieldwork date, you should communicate with your auditor and investigate options for moving fieldwork, if possible, being cognizant of meeting and regulatory filing deadlines. Sticking with scheduled fieldwork when an organization is not properly prepared for an audit does not ensure meeting deadlines. Audits often take longer to complete when the books require additional reconciliations or adjustments. In fact, an inefficient audit process with volume of audit entries can lead to reportable internal control deficiencies. If you need assistance closing the books, you should reach out to your accountant before the start of the audit to discuss options. Communication throughout the duration of the audit is vital - stay informed about the progress of the audit and be available to answer questions. This can be accomplished by scheduling regular check-in calls or meetings with the auditors.
Delivery is the final phase of the audit process. At the conclusion of the audit, you will receive drafts of the financial statements and other deliverables to review. Remember – these are YOUR financial statements! View this as an opportunity to tell your organization’s story! This is an opportunity to showcase the wonderful programs you provide, maybe add more color to illustrate the great impact you make in the community! Communicate, communicate, communicate! Don’t be afraid to ask your auditor questions about other ways or options to state or word required disclosures to spin a note in a more favorable light. You should review these financial statements carefully and ask your auditor any questions that you may have.
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