Key Takeaways
Preparation is key: Establish strong internal controls, a monthly close process, and regular account reconciliation. How to improve internal controls >
Maintain an organized documentation system and over-communicate with your staff and auditors. This checklist template will help you stay on track >
An outsourced partner makes the process much easier: They can streamline audit prep, manage the audit, and help you remedy any material findings. What to expect before, during, and after an audit >
Does the word “audit” raise your blood pressure, tighten your jaw, or drop knots into your stomach? You’re not alone. Preparing your nonprofit for a financial statement audit can feel like a nightmare.
But it doesn’t have to be that way. With the right approach, audit prep can be smooth, stress-free, and even strengthen your organization. (No, we’re not kidding!) We’ll show you how to get ready and stay ready all year long. Plus, we’re including a free downloadable audit checklist to make audit prep even easier!

Is a Financial Statement Audit Necessary?
A financial statement audit is critical for maintaining transparency, keeping your nonprofit in good standing, and building trust with donors and stakeholders.
During an audit, a third-party auditor will assess your organization’s overall financial health and compliance by reviewing financial statements, transactions, accounting processes, and internal controls. It’s a great opportunity to identify areas for improvement in your processes, enhance your reputation with charity watchdogs, and ensure your financial reporting is accurate.
Your nonprofit may be required to conduct one if:
- A grantmaker requests an independent audit report before investing in your organization
- The organization’s founders wrote regular audits into the bylaws
- Your nonprofit receives $750,000 or more of federal funding each year
- The state’s laws require you to conduct one once your total funding exceeds a certain amount
Maryland Nonprofit Tip: Even though it’s not required by Maryland law, if your annual revenue is over $500,000, the state’s best practices recommend your financial statements be audited by a Certified Public Accountant.
Having an audit CAN be a stress-free process, but you’ll need to build the habit of staying ready. So, let’s jump into the nitty gritty of how to prepare for a smooth audit.
Nonprofit Audit Checklist: 10 Must-Dos to Get Audit-Ready
Don’t let the number 10 scare you. Many of these steps are probably already in place at your nonprofit and simply need to be refined. And if they’re not already a part of your workflow, adding them will streamline your process going forward.
1. Build strong internal controls
Clear policies, security measures, and procedures minimize errors and streamline the audit process. So, how do you set up your company for success?
- Organize supporting documentation. Create a company-wide filing system that makes accessing important documents intuitive. We recommend Microsoft SharePoint so team members can access shared documents from outside of the office.
- Be selective with authorization roles. Limit individual user controls for sensitive data and systems. Each team member’s access should correlate with their job responsibilities.
- Designate appropriate review and approval for transactions. This person should be familiar with policies, budgets, and compliance rules.
- Divide tasks among different employees. This way, no single person controls a transaction from start to finish. This reduces the risk of errors or intentional misuse of funds.
- Train employees on the internal controls, policies, and procedures. Communication and training create a culture of awareness and accountability.
- Periodically review and update the internal controls. Changes in business processes, regulations, and risk landscape are just a few reasons to reevaluate and make adjustments.
2. Establish a monthly close process
Reconcile every balance sheet account, every month. This helps you analyze account composition and take a closer look at inactive or stagnant balances. Plus, it ensures a fast, easy year-end close process for the auditor.
3. Reconcile payroll each month
Next, you’ll move on to P&L and reconcile employee payroll. Make sure your wages tie to your 941s and payroll balances out. This is always tested, so we recommend updating your payroll reconciliation monthly. Then at year-end, you’ll know expenses are correct and you have properly allocated wages.
4. Locate unrecorded liabilities
A subsequent check register is always requested on a financial statement audit to search for unrecorded liabilities at year-end. We strongly recommend doing this search yourself to ensure you have all the proper accruals. This is especially important if you have vendors that don’t supply timely invoices. This will help your nonprofit guarantee proper accruals at year-end and correct cutoffs.
5. Prepare preliminary analytics
Compare your prior year to the current year’s P&L by natural account and take a closer look at large variances. You’ll catch errors in posting faster and be able to quickly answer any analytics questions that come up during the audit.
6. Pull historical data of functional expenses
Functional expenses categorize your spending based on its purpose, rather than the specific items purchased (natural expenses). There are typically three main categories:
- Program expenses
- Management and general expenses
- Fundraising expenses
All three can include shared costs. Fortunately, allocation methods exist to assign these shared expenses to your programs for clear reporting. Still, gathering historical data on functional expenses can be tricky–especially with staff and leadership changes or if prior year workpapers are not available. The good news is that this process will become easier with each passing year.
Tip: We can help your nonprofit simplify functional expense reporting. Our team regularly assists clients with redesigning their chart of accounts and department structures so it’s an easier task.
7. Review net assets
We suggest getting the prior year roll forward from your auditor, if possible. There’s no need to start from scratch if you already have one! If you’ve not had an audit yet, a third-party accounting partner can help you report on net assets.
Tip: This resource does a great job explaining how to account for and report on net assets.
8. Communicate clearly with staff
This may seem obvious, but open communication is key to a smooth audit. Let your staff know what to expect, when it’s happening, and what their roles are, and the deadline for audit completeness. Giving your team time to prepare and ask questions makes a world of difference. Also, having a common goal in mind keeps everyone on track.
9. Work closely with the auditor
Maintain open communication with the auditor as well to address any questions or concerns promptly. Don’t be afraid to follow up when you need clarification!
10. Get organized for next year
A lot of audit firms have portals for Prepared By Client (PBC) requests and samples. We find it helpful to keep files submitted in a folder on the network so you can refer back to what was submitted in prior years. Keeping organized is key.
Download Your Nonprofit Audit Readiness Checklist
Use our interactive, editable checklist to complete key audit preparation tasks for a headache-free audit.
Outsourced Accounting Partners Make Nonprofit Audits Smoother
Even the most organized nonprofits struggle with audit prep on top of day-to-day responsibilities. Financial statement audits typically take 2-4 months to complete. With ever-changing accounting standards and complex grant regulations, it’s a lot to manage!
One way to take a little off your plate is by working with an outsourced accounting professional. An accounting partner can lead the process and leverage their expertise to manage the engagement efficiently before, during, and after the audit.
What to Expect From Your Partner

Before the audit, a great outsourced accounting partner will work with your nonprofit to:
- Standardize monthly close processes and internal controls
- Streamline record-keeping for accuracy and accessibility
- Ensure compliance with accounting standards and grant regulations
- Prepare all required documentation and reporting
Then during the audit, your nonprofit can rest assured your accounting partner will:
- Communicate with your auditor and provide clarifications
- Prepare responses to inquiries and address potential issues
- Offer on-the-spot accounting expertise
And once it’s all over, the partner will work with your organization to:
- Understand what the material findings indicate (if there are any)
- Remediate material findings by developing a Corrective Action Plan (CAP), complete with a timeline and outlined responsible parties
- Implement and test the CAP, and make revisions if necessary
- Stay organized and maintain detailed records year-round
Audits don’t have to be a painful, time-consuming drag. With the right proactive steps and a trusted outsourced accounting partner, your nonprofit can turn the audit experience into a valuable and successful experience that leads to smoother accounting practices, more transparent reporting, and a better reputation.