Ongoing Preparation Throughout the Closing Process
A key component of the ongoing planning, documentation, and preparing for the audit is having a consistent and “competent monthly closing”—and the first step in having a competent monthly/quarter closing is to develop a checklist. This should include the following:
- ▪ Confirm all transactions for the period.
- ▪ Post closing entries in the general journal.
- ▪ Close sub-ledgers, if any.
- ▪ Perform all reconciliations.
- ▪ Run review reports.
- ▪ Close the books (depending upon GL software).
Closing the books each month (or quarter) sets the numbers in stone. It is impossible to accurately track performance if those numbers bounce around when someone finds invoices or bills that weren’t recorded on a timely basis, or when someone changes transactions from previous months (or even previous years). Including a monthly closing process in regular accounting procedures ensures that your numbers are dependable, stable, and accurate.
Complete and timely financial statements are the most powerful strategic decision-making tool for any NFP organization. A competent closing not only involves recording transactions and making sure cash ties (that would only provide cash basis reporting) but also recording any accrual journal entries to make sure all revenue earned in the period is recognized and all expenses incurred recorded. The better the closing is, the less work the finance team will have come audit time.
Tips: To have a competent closing, an NFP should do the following:
- ▪ Leverage financial software to provide faster financials.
- ▪ Develop integrations (bank transactions—bank feeds, upload tool, AP, AR).
- ▪ Utilize dynamic allocations or preset allocations.
NFPs also need to consider the annual closing and how it is different from a monthly/quarterly closing, and what can be done during the annual closing to prepare for the audit. The annual closing is more robust, there are hard deadlines as to timing, recognition, and matching to period of expense/benefit, and there is a heightened focus on accruals, allowances, and receivables. The annual closing also includes metrics, analytics, and budget-to-actual comparisons.
This is the time for the finance team to ensure that it has supporting reconciliations which not only tie to the general ledger and trial balance but have also resolved all hanging variances during the year. This is also the time to make sure the trial balance balances tie to the financial statements that will be presented to the auditors. This will minimize the effort an auditor needs to perform their initial ticking and tying, a task usually done by first year staff.
The following are areas that the finance team can focus on to create a smoother audit process:
- ▪ Review revenue streams for proper recognition according to GAAP and propose any necessary journal entries. Staff should gather all relevant grant and contract documentation as required.
- ▪ Prepare pledge receivables schedules, including roll forward, aging, and any applicable discount for multiyear gifts. Verify proper recognition in conjunction with revenue recognition standards.
- ▪ Prepare accounts payable aging, review subsequent disbursements to verify proper cutoff for the year, and gather documentation for selected transactions likely to be assessed.
- ▪ Manage preparation of confirmations and gathering of requested subsequent receipt documentation.
- ▪ Review in-kind expense records for appropriateness and propose adjustments to record in-kind expenses.
- ▪ Prepare and evaluate preliminary analytics on statements of activities and financial position.
- ▪ Prepare net asset schedules and evaluate proper recognition and support for restricted revenue and releases.
Ongoing Planning, Documenting, and Preparing for Your Audit
Audits tend to run smoother when NFP organizations put effort into preparing for them. This includes developing an audit plan throughout the year, compiling documentation early, presenting it to auditors when needed, and preparing data and financial statements through a timely and competent closing process.
Planning is the Key
Planning is a key component to the audit process and should be done throughout the year. When developing an audit plan, NFPs should consider the timelines for both management and auditors, prior year management comments, any questions that come up throughout the year, new or unusual transactions, and using technology.
Timelines.
The finance team should plan to devote additional time both prior to and in connection with year-end closing to adequately prepare for the audit, to be available during audit fieldwork, and to communicate with those involved in the audit process. Meetings should be scheduled with the auditors to go through opening and closing meetings, board communication, coordination of representation letters, and other matters that may arise between fieldwork and issuance.
Prior Year Management Comments and New or Unusual Transactions.
Be aware of management comments from prior audits (not just last year) and be prepared to support how they have been addressed this year, to avoid the risk of a repeat deficiency, or worse, escalation to a significant or material one. Maintain an open line of communication with the external auditors during the year rather than waiting until the audit to discuss new or unusual transactions. This will minimize surprises and also enable the organization to make appropriate plans or necessary changes.
Using Technology.
Technology plays a growing role in an audit. The finance team should speak with the auditors about which tools they have adopted to enhance audit effectiveness and efficiency. Most firms have invested heavily in technology to improve dynamic workflows and increase their audit data analytics capabilities. Beyond traditional tools such as Excel, auditors are increasingly delving deeper into analytic tools and artificial intelligence. These technologies can help the audit team improve its results and provide greater insights to the finance team.
Compile Documentation and Organize the Data.
Much of the required documentation on an auditor’s prepared by client (PBC) list is available throughout the year. Rather than compiling it in the moment, an NFP should continuously update its PBC lists to keep on top of internal documentation. The audit firm may provide a “prep packet” describing what the auditors will ask to review. New auditors may have more questions in advance of the audit than those who have conducted the audit in prior years. The finance team should ask its auditors to let them know what format they want to receive the requested documentation in (e.g., electronic files) since having those documents ready in advance, in the right format, will help save the auditors’ time, and thereby save audit costs.
Items to continuously add to the PBC list might include: board meeting minutes; quarterly income and expenses variance analyses and analytics; updates from the compliance department or internal audit department’s transaction cycle reviews; permanent file documentation such as updated organization charts, workflow charts, and accounting manuals; and board of director’s annual independence checklists. The NFP will also want to provide internal control forms and documentation; organization charts, and the chart of accounts; and any changes in program delivery or deployment of new digital technology, or system changes.
Once the finance team starts compiling data, the key is to organize it to be easily accessible during the audit. The auditors will review the NFP’s financial records by evaluating a variety of financial transactions and may ask the finance team to produce documentation to support any number of them. Be ready to provide the auditors with documentation of any financial transaction made during the fiscal year promptly when asked.
The organization should have subfolders for significant transaction cycles, including the following:
- ▪ Financial statement line items
- ▪ Cash
- ▪ Revenue
- ▪ Receivables
- ▪ Expenses and payables
- ▪ Investments
- ▪ Endowments
- ▪ Fixed assets
- ▪ Debt
- ▪ Disclosures
Tip: All the documents the auditors will need to review should be placed in a single electronic folder. The finance team can do this in advance, anticipating what they may want to review, but this can also be done during the audit.
The organization should also review draft iterations for qualitative and quantitative aspects and provide feedback to management on presentation choices. And lastly, the organization should prepare a summary of related party transactions and a schedule of leases and future lease payments for disclosure. Having these items ready for the audit team upon their arrival, will cut down on the time they need to spend on the paper chase, and may even positively impact fees. The audit process can be thought of as a project. Using simple project management techniques as described above can help ensure that the NFP and its auditors are sailing into the audit committee meeting with good news.
Taking the Stress Out of the Audit
Once an NFP has done all the planning, documentation, and preparation before the audit, there are several steps that can be taken during the audit, in an ongoing manner, to make it run smoother. Some have already been mentioned above, but they are important to consider throughout the year to increase the potential for smoother audits every year.
Communicate.
Consider what has changed since last year. Did the finance team implement new accounting software or face IT issues? Did the organization receive a grant or contribution with unique conditions? Did it hold a fundraiser for the first time? Did it introduce new alternative investments in the portfolio?
An NFP should connect regularly with its auditor—do not wait until fieldwork starts. Send over agreements/documents with the finance team’s conclusion on the appropriate accounting treatment and get buy-in. The external auditor can also be on the board/committee minutes distribution listing.
During the audit, consider having weekly standing meetings to walk through the open items list and address questions that have come up throughout the week. It may be beneficial to have these meetings right up until the audit is issued. Frequent communication with the auditor can help alleviate unwarranted stress and surprises during year-end fieldwork. In addition, the finance team should schedule an exit meeting to debrief after each audit, while memories are still fresh. Take notes, and then reference those notes when preparing for the next audit.
Set Expectations.
Consider the timing of auditor requests. For example, was a deliverable deadline missed because PBC item X was not delivered until the Tuesday before the deadline, but it wasn’t requested by the auditor until the Monday before the deadline? Proper planning and a strong relationship with the audit firm, which includes proper levels of communication and accountability, can help an NFP organization avoid issues like this.
Another way to set expectations is to back into internal/external reporting dates. When is the audit committee/board meeting? When does the board book need to be sent out? Does the finance team need to walk through it with the audit committee chair before sending it to the committee at large? Sit down and work backward from these auditor meetings and collectively establish deadlines. Reconfirm throughout the audit process (perhaps at the weekly standing meeting) that everything is still on track for on-time delivery.
Review Last Year’s Audit.
Revisit, and learn from, last year’s audit process. This includes reviewing oral and written communications from last year, as well as any adjustments.
The finance team should keep the following questions in mind: What went well? What could go better? Were there adjustments noted (whether recorded or just proposed)? What was the nature of those entries? Was an adjustment indicative of a control deficiency? What was the auditor’s recommendation last year to remediate this? What was, or can be, done to help ensure the adjustment does not recur this year? Were there other control deficiencies noted by the auditor that did not result in an adjustment last year? How were these items responded to?
When in Doubt, Ask for the Auditor’s Objective.
There are many requests during audits that may tax an NFP staff’s time and resources. For example, the finance team might be tasked with pulling a tremendous amount of paper (or electronic) support only to find out after that there was a single preexisting report that would have sufficed for the auditor.
Often this happens when there is a new request. The NFP, as auditee, should remember that the auditor does have to enlist elements of unpredictability under Generally Accepted Auditing Standards, and standards do change. Audits do not always look the same each year. In fact, they shouldn’t. Asking the auditor what the ultimate objective is enables the finance team to take a “help me, help you” approach, which can lead to a mutually beneficial outcome. Of course, an NFP’s finance team has a better understanding of what it can provide to support the objective, so let the auditor know—they will appreciate it. It is also worth noting that NFP organizations and audit firms use different names for different reports; communication is critical to confirm what’s needed.
With advanced preparation and consistent auditor communication, the finance team can make the audit process much smoother for a nonprofit organization, taking much of the once-a-year burden off the internal team while developing a more organized reputation with the external audit firm.
