Whether your goal is to provide assurance to regulators, donors, or your board of directors, a financial statement audit is an important tool in ensuring your growing not for profit organization is healthy and prepared for every opportunity. The final deliverable of an audit opinion attached to your financial statements will allow you to distribute those financial statements to interested third parties that can safely rely on them to make donation, investment, or business decisions.
However, even for those with many years of accounting experience, understanding what is needed to help your auditors complete your first audit can be overwhelming. It is normal to be uncertain about which steps come first, how much work will be required, and what everyone can do to make the audit as productive and effective as possible.
Here are some steps not for profit organizations take to make their first financial statement audit run smoothly, and ways an external audit can help set you up for continued success:
First, it is essential to have a good handle on the period under audit, and just how long your first financial statement audit is likely to take. Keep in mind, your first audit is likely to take more time than those that follow, as your auditors will need to spend some time gaining a thorough understanding of your organization and its unique processes and systems.
One major reason first-year audits may be more involved than subsequent audits is what auditors refer to as “beginning balance procedures.” For instance, say you need an audit of your financial year ending December 31, 2020. In order to ensure that the numbers for those 12 months are correct, the auditors will need to perform testing procedures on the account balances as of December 31, 2019. In other words, opening balance sheet audit procedures seek to provide a full picture of exactly what activity occurred during the financial year under audit, and the first step in doing so is getting comfortable with the balances as of the beginning of the year.
Another reason first-year audits are more challenging than subsequent years is that you, as a client, are learning what the auditors need, and by the same token, the auditors are learning about your organization, its people, and its procedures. The best audits are true collaborations, and the steps you put in place to minimize inefficiencies and provide the necessary information will yield major dividends.
Making sure auditors have all they need to perform the audit is the single most important step you can do to ensure an efficient and accurate audit.
The documents, covered in the “prepared/provided by client” (PBC) list, usually include the following, among other items:
- Final trial balance for the period under audit
- Complete general ledger for the period under audit
- Cash reconciliations
- Detailed roll-forward of Investment account balances, including annual investment statements
- Accounts receivable and accounts payable aging reports, showing how much you are owed and how much you owe—and for how long
- Grants receivable detail and copies of major grants awards during the year
- Detailed list of prepaid expenses, fixed assets, and intangible asset roll-forwards
- Detailed list of accrued expenses
- Net Assets Roll-forward, Donor restrictions on Net Assets, and details of releases from restrictions
- Revenue detail by customer/donor and by invoice, with any deferred revenue listed and the deferred revenue detail (if relevant)
- Cash disbursements detail
- Payroll register
- Agreements having to do with how the company is structured: articles of incorporation, information about affiliates or subsidiaries, line of credit or debt agreements, major revenue contracts, major gifts, and grants
- Minutes of the Board of Directors
Additional requests will likely come later as the auditors make selections for testing, and as questions arise; however, by giving them what they need in a timely manner, you will help drive the audit to completion.
Ready for an Engagement?
Before the auditing firm begins its work, it will send you an engagement letter. This is a contract laying out the firm’s duties and responsibilities, as well as the scope, objectives, and approach it will take when providing its audit services. The letter will also note the fee and any responsibilities your company undertakes, such as providing accurate documents on time. At this point, it is helpful to give the auditors a single point of contact at your organization to streamline requests and minimize the chances of crossed wires once things get underway. It is also important to make the auditors aware of external reporting deadlines (whether desired deadlines or regulatory deadlines) when scheduling the audit.
Benefits of an Audit
Nobody wants to find mistakes, but remember that the purpose of the audit is to make sure the financial statements you are sharing with outside parties are accurate and can be relied upon. Audits are useful to discover areas where transactions may not be accounted for correctly, how to correct them, and how to improve accounting procedures and methods going forward. Although a first-year audit is not any busy non-profit’s favorite activity, it is an undeniable sign that the organization is maturing and growing. Through careful planning and by getting a smart and effective audit services team on your side, you will be able to ensure that the audit process runs smoothly and produces value-added results you can rely upon.
We’re Here to Help
In today’s ever-changing regulatory climate, the right guidance is more important than ever. With diverse experience across many industries, Holtzman has earned a strong reputation for delivering independent audit services to nonprofit organizations in a customized, risk-based manner to help our clients achieve their financial objectives and strengthen their accounting processes. With clients ranging from startups to large and mature nonprofit organizations, we dedicate ourselves to delivering stellar results for our clients. Learn more about our Audit & Assurance Services and Get in touch.