Nonprofit accounting is the backbone of any nonprofit organization’s financial health, ensuring that financial management is accurate and transparent. From preparing audited financial statements and cash flow statements to streamlining tax filings and balance sheets, effective nonprofit accounting empowers organizations to mitigate risk and make informed decisions.
Join Capital Business Solutions’ nonprofit financial software team as we outline eight key strategies to enhance your organization’s management of financial accounts to prepare for internal audits and external audits.
#1: Be Aware of Federal and Your State Law Audit Requirements
Not all nonprofit organizations must have an independent audit. However, depending on your annual budget or funding sources, the Internal Revenue Service’s federal and state rules may require one. Even if your nonprofit foundation is not subject to every regulation, it’s important to understand the basics of tax compliance and applicable accounting standards. This knowledge will help ensure your nonprofit’s financial management procedures meet federal and state guidelines.
Nonprofit Accounting Audit Resources
For further guidance and to stay updated on the latest audit procedures and nonprofit accounting standards, explore these key resources:
#2: Hold a Pre-Audit Meeting with Your Team
A pre-audit meeting brings your nonprofit staff together with external auditors to set clear expectations and prepare your organization for the upcoming audit. This meeting helps everyone understand the auditing standards and process, outlines timelines, and identifies any financial records needed to verify your nonprofit accounting practices. This pre-audit meeting also offers a chance to review internal controls and ensure that income statements, balance sheets, expense management, and other financial data are in good order to ensure compliance.
Key Questions to Expect
During the meeting, auditors will ask questions such as:
- Were there any major operational changes this year?
- How does your nonprofit guard against fraudulent reporting?
- What are your organization’s program costs?
- Are you considering changes to your nonprofit accounting methods?
- Are there any areas that need special attention based on financial risk assessment?
- Do you work with a nonprofit accountant, use nonprofit financial software, or invest in other financial resources?
#3: Assemble Necessary Financial Documents
Gather the necessary financial information to support your nonprofit accounting practices during the auditor’s field work. Use your meeting insights to create a checklist of items that will help ensure the audit of your nonprofit’s finances runs smoothly and meets all applicable regulations.
Common Items an Auditor Will Review
While requirements may vary, auditors typically expect to see documents such as:
- Year-end reconciliation statements and bank statements
- Lists of grant funds received and anticipated grant income
- Fixed asset records and a depreciation schedule
- An inventory of physical items intended for sale
- Documentation of all grant awards and related correspondence
- The general ledger for the fiscal year
- Your accounting manual and financial management policies
- Payroll tax reports, along with W-2s, 1099s, and timekeeping records
During your pre-audit meeting, you can ask specific questions about any additional financial records required. Being well-prepared with these essential financial statements helps support an efficient audit process and enhance transparency.
#4: Prepare for the External Auditor’s Visit
An external auditor is likely to visit your nonprofit office to carry out their field work and review your operations firsthand. To ease the process, assign a team member to coordinate the logistics of the visit. This person will serve as the point of contact to ensure that the auditor has a smooth, efficient experience while reviewing your nonprofit’s financial health and operations.
Key Logistics Details
Consider the following during the planning process:
- Workspace Setup: Decide where the auditor will sit and review the documents comfortably.
- Internet Access: Ensure that the auditor has access to the internet if needed for digital financial records or nonprofit financial accounting software.
- Visitor Coordination: Confirm the number of visitors or team members attending and arrange for a suitable environment that minimizes disruptions.
#5: Stay Organized
One of the most effective strategies to prepare for your nonprofit’s financial management audit is to stay organized. Use your pre-audit meeting as an opportunity to confirm that all necessary documents are ready and easy to access. Being organized not only saves time but also helps reduce overall audit costs.
Tips for Staying Organized During an Audit
- Prepare Early: Give yourself plenty of time to gather and verify your financial records, including financial statements, bank reconciliations, and related documents.
- Create a Checklist: Use the details discussed in your pre-audit meeting to create a comprehensive checklist of required documents.
- Centralize Your Records: Keep all documents in a single, well-organized location so auditors can easily find and review materials.
- Maintain Clear Labels: Ensure all files and records are clearly labeled and date-stamped, which simplifies the audit process and reinforces sound financial management practices.
#6: Provide Progress Updates to the Nonprofit Board and Staff
Keeping everyone informed is key to a stress-free and efficient nonprofit accounting audit. Regular communication ensures that your team stays on track and that no detail is overlooked during the process.
Internal Communication
Keep your nonprofit board and staff updated on your progress. Inform them about which documents are being gathered, what has been completed, and what tasks remain. Regular updates can help streamline the process, boost team morale, and even serve as a team-building opportunity.
External Communication
Stay in regular contact with your auditing firm. Provide the auditors with updates on document preparation and clarify any questions they might have during the process. This back-and-forth communication helps ensure that both your organization and the auditors are aligned on expectations and timelines.
#7: Have Realistic Expectations
Your audit responsibilities are outlined in your engagement letter with the auditing firm. Knowing exactly what is expected of you helps set realistic expectations, making the process smoother for everyone involved.
Setting Realistic Goals
- Clarify Responsibilities: Review the engagement letter and understand your roles and deadlines. This clarity reduces surprises and helps you stay prepared.
- Learn from Others: Reach out to colleagues in other nonprofits for insights. They can share practical tips on preparing for and managing an audit efficiently.
- Plan for the Long Term: Remember that the audit process may require ongoing effort. Stay organized year-round so that when an audit comes around, your team is ready to handle it.
#8: Invest in Nonprofit Financial Software Solutions
Adopting reliable financial software is essential for efficient nonprofit accounting. The right tools not only help with day-to-day financial management and documentation but also streamline audit processes and ensure compliance.
Blackbaud Financial Edge NXT
Financial Edge NXT is a powerful financial software solution specifically designed for nonprofits. It provides robust functionality to manage financial statements, budget tracking, and cash flow statements while supporting tax compliance. By automating routine tasks and offering detailed financial reporting,
Blackbaud’s financial management tools help nonprofit organizations maintain accurate financial records and prepare for external audits. This resource also enhances financial transparency and streamlines board reporting, making it easier for your nonprofit to focus on its mission.
Contact Our Nonprofit Accounting Software Training Team Today
Take your nonprofit accounting to the next level with Financial Edge NXT training from Capital Business Solutions. Our nonprofit accounting software training equips you and your team with the practical tools and knowledge needed to streamline processes and enhance your organization’s financial transparency.
Empower your nonprofit to manage its financial resources confidently. Contact us today to learn more by calling (843) 971-9061 or filling out our online contact form to get started.