Years ago at the start of my career, I was an internal auditor for a large company. We always planned “surprise” audits to our branches so we definitely were not a welcome site. Even then, however, I realized that we were just doing our job and trying to ensure that processes were in place that provided protection to our assets.
Fast forward a few years and I came to the other side of the audit fence. I am pretty sure that the beginning of my career is one of the reasons I am comfortable with audits. Don’t despair if this is not how you began. The more times you go through an audit, the easier it gets. Just remember, the auditors are doing their job to ensure processes are in place to protect the assets of the organization. The most important thing to remember is that auditors are not the enemy, they are there to help the organization and to provide important recommendations.
Usually your auditors will provide you with two lists. One list will include items they need a couple of weeks before the fieldwork begins. They will also provide a list of what they would like upon arrival. Reviewing these lists as soon as they arrive will allow you time to think about how easiest to accomplish what they need in the timeframes provided. The best advice I can give is to not wait until the last minute to try to get everything together. Begin as soon as you can, even if it is only an item here and there.
Make sure that all of your balance sheet accounts are reconciled. They will review each of these. They will also look at year-to-year comparisons of both balance sheet and income statement accounts. Likely, they will ask about variances beyond what they consider normal. One very important thing to remember is that if you don’t know offhand, tell them you don’t know and go back and research it. Many times, they may ask something of you that would be better answered by a colleague within the organization. Enlist others to help! You are the main contact for the audit but you don’t have to be the one with all the answers. If you have a responsible auditor, they would prefer that you allow them access to the expertise that surrounds you. I am a numbers person, I have no clue how meetings are run, how many attended, etc. Let those with the knowledge assist.
The hardest thing for me to produce is the breakdown of expenses by functional allocation. This is required for the 990. It helps if your staff tracks their time by admin, member development, meetings, programs and marketing. Your auditor is there to help you distinguish and provide insight that will make your future audits much easier.
One thing to keep in mind with a not-for-profit organization is that there could be certain types of revenue that are considered unrelated business income. That portion of your business may be subject to income tax. For example, if you have a newsletter or directory in which you sell advertising space, you will likely be subject to unrelated business income tax (UBIT). Again, your auditors will assist you in coming up with an income statement that will support the UBIT.
The auditors are usually onsite for two days and then will likely have a few follow up questions. The process from audit to tax returns and financial statements can take a month or month and a half so be patient. Your auditor will have you sign an extension for filing if you are getting near the due date of four and half months past your fiscal year end.
Find an audit firm and audit staff that you work well with. This is very important since audits could be an annual event. Make use of their expertise, don’t be afraid to ask them questions. I enlist their help with questions throughout the year. They really are there to make processes more smooth and to ensure that all assets are protected. They are not the enemy.