Tips to Prepare for Your Nonprofit’s Year-End Audit

Preparing for a year-end audit can be extremely time consuming, but with regular maintenance you can make the process much smoother. Here are five tips to help you avoid unnecessary stress during your year-end audit.

Document any internal control changes

With many organizations transitioning to hybrid or remote working environments, it is important to make sure you formally document any internal control procedure changes in your manual or handbook. This includes any roles or responsibilities that may have changed due to workforce shrinkage and IT-related risks. Your auditor will also want to see your nonprofit’s System and Organization Controls report to make sure your internal controls and safeguards are effective.

IT-related cybersecurity risks for cloud-based and remote environments include:

Collectability and sustainability

For outstanding receivable balances, you’ll want to review your collection history and subsequent collections to properly assess your uncollectable accounts. Then you’ll want to perform a liquid analysis to determine if you have enough financial assets to fund a reserve. Reviewing your collectability and performing a liquid analysis will help you find the right asset mix to create a predictable return while still being able to convert to cash when need be.

Allocate functional expenses

Properly allocating your nonprofit’s expenses differentiates administrative expenditures from expenses incurred for mission fulfillment. Presentation by nature and function can be done in either the statement of activities, statement of functional expenses or within the notes of the financial statements. Remember, financial statement disclosures should also include a description of the methods being used to allocate costs. Reviewing your allocations frequently and consistently will help you prepare the required analysis and report.

Pay attention to upcoming accounting pronouncements

As the Financial Accounting Standards Board continues to issue new accounting pronouncements, it’s important to make sure you understand how and when your nonprofit will be impacted. Once you have a good understanding of the guidance, setting up an implementation timeline and process will help ensure a smooth adoption. Nonprofits should take note of two upcoming accounting pronouncements, Accounting Standards Update (ASU) 2020-07, Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets (Topic 958), and ASU 2016-02 Leases (Topic 842).

Take note of Statement on Auditing Standards No. 134

Introduced in May 2019, Statement on Auditing Standards (SAS) No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements, introduced significant changes to the auditor’s report in the financial statements. The revised reporting model is intended to help the users of the audited financial statements by enhancing the communicative value and relevance of the auditor’s report. It does so by:

The effective date of this SAS includes audits issued for periods ending on or after December 15, 2021.

Save yourself time and frustration by incorporating these five tips for a smooth year-end financial close and annual audit. If you have questions regarding reporting methods, pronouncements or auditing standards, our nonprofit team is here to help.

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