Nonprofit organizations operate in an environment where transparency, accountability, and public trust are essential to sustaining their mission. Independent audits play a critical role in reinforcing trust – providing assurance to donors, regulators, and boards while strengthening internal governance and financial oversight.
At NCheng, we work closely with nonprofit organizations to help them navigate audit requirements efficiently and proactively. Whether an audit is mandated by regulators, funders, or governance best practices, being prepared allows organizations to reduce disruption, identify risks early, and use the audit process as an opportunity for operational improvement rather than a compliance burden. Thoughtful audit preparedness positions nonprofits to demonstrate responsible stewardship and long-term sustainability.
1. Benefit of Audits
Not all nonprofits are legally required to undergo an independent audit; there are still several factors that often impose one:
- Revenue thresholds required by state charity
- Grantor requirements, especially from federal agencies or large private
- Donor expectations for organizational
- Loan covenants or capital campaign
- Board-directed audits to reinforce governance and risk
2. Foundations of Audit Preparedness: Establishing Strong Internal Controls
Effective internal controls reduce the risk of fraud and mismanagement.
- Segregation of duties that include separating financial responsibilities among
- Documented procedures for expenditures, payroll, and journal
- Limiting financial system permissions to appropriate personnel
- Regular reconciliations: monthly reconciliations of bank accounts, credit cards, and restricted
Maintaining Accurate and Timely Financial Records
- Updated general ledger
- Proper classification of revenues (restricted unrestricted).
- Detailed expense tracking aligned with the chart of
- Consistent application of accounting policies, especially revenue
Document Retention and Organization
Auditors will request documents covering:
- Bank and investment statements
- Board meeting minutes
- Grant agreements
- Payroll reports
- Lease and contract details
3. Pre-Audit Planning
Nonprofits benefit from performing an internal “mock audit,” asking questions such as:
- Are all reconciliations complete through year-end?
- Are restricted funds properly tracked and released?
- Are significant or unusual transactions clearly documented?
- Have new accounting standards been implemented?
- Are there potential audit adjustments we can identify early?
Communicate Early with the Audit Firm
Auditors generally hold a planning meeting to:
- Review materiality thresholds
- Discuss significant risks
- Set timelines for interim and year-end work
- Request preliminary documents
Nonprofits should also communicate any major changes during the year – new programs, mergers, significant grants, leadership turnover, or system implementations.
4. Core Phases of the Audit Interim Audit Work
Typically occurs before year-end and may include:
- Reviewing internal controls
- Testing key processes (payroll, A/P, cash receipts)
- Preliminary analytics
Issues identified here are easier to fix before the final audit.
Year-End Fieldwork
Auditors will:
- Perform substantive testing of balances
- Confirm receivables, payables, and donations
- Validate compliance with grant terms
- Review board minutes for governance oversight
Timely completion of PBC items is essential to keep the audit on schedule.
Post-Audit Deliverables
Organizations will receive:
- Draft financial statements and footnotes
- Management letter with control or operational recommendations
- Audit conclusions and opinion
5. The Role of the Audit Committee
A strong Audit Committee plays a central role in nonprofit governance, bringing independence, financial know-how, and steady oversight to the entire audit process. Audit Committee elevates the audit process from a routine compliance activity to a powerful tool for strategic governance and organizational accountability.
6. Common Challenges and How to Avoid Them Late or Incomplete PBC Items
This is the number one cause of delayed audits. Use a shared tracking system with weekly status updates to avoid issues.
Weak Documentation of Restrictions
Grant restrictions and donor-imposed conditions are often misunderstood, so plan to maintain a clear schedule of restricted funds, releases, and balances.
Lack of Coordination Across Departments
HR, programs, and fundraising all contribute data – it might be beneficial to assign a cross- functional audit liaison team.
Unrecorded or Misclassified Transactions
These are especially common with in-kind donations or multi-year grants. Review transactions quarterly for proper classification to avoid these errors.
Audit preparedness is more than a year-end exercise—it is an extension of strong governance, disciplined financial management, and organizational accountability. Nonprofits that invest in sound internal controls, timely financial reporting, and proactive audit planning are better equipped to manage risk, meet stakeholder expectations, and support informed decision-making at the board level.
When supported by an engaged Audit Committee and a clear understanding of audit requirements, the audit process becomes a strategic tool rather than an obligation. With the right preparation, nonprofits can approach audits with confidence, minimize disruption, and reinforce the trust placed in them by donors, regulators, and the communities they serve.
