How to Prepare for An Audit: Financial Statement Audit vs. Single Audit

Obtaining an audit for your nonprofit may feel like an intimidating task. But with the right partner and comprehensive preparation, there’s no reason to be nervous.

Audits demonstrate that your nonprofit is spending money in accordance with the organization’s mission and is a responsible financial steward of donor and taxpayer funds. Conducted by an independent auditor, audits provide stakeholders with assurances that all of your financial records are accurate, verifiable and compliant.

Regardless of what kind of audit you need, preparing appropriately will streamline the audit process and ensure the audit is cost-effective and conducted on schedule. In this article, we’ll show you effective ways to prepare for a financial statement audit and single audit so you can minimize stress and keep your nonprofit operations running smoothly.

Financial Statement Audit vs. Single Audit: Key Differences

As a nonprofit, you might be required to obtain two types of audits: a financial statement audit and a single audit.

A financial statement audit is what most people think of when they think of an audit. It assures that your nonprofit’s financial statements accurately present the financial position of your organization. In Florida, nonprofits are required to undergo an audit if their revenues or public contributions exceed $1,000,000 annually. Organizations with contributions between $500,000 and $1,000,000 must obtain reviewed financial statements, and organizations with contributions under this threshold are not required to obtain any audits, reviews or compilations.

A single audit is more specialized and is required if your nonprofit receives a certain level of federal or state funding. It provides assurance to the government on several key points:

• You’re using the funds awarded to your organization for the designated purposes.
• You have adequate internal controls in place to prevent fraud.
• Your organization is in compliance with the requirements of the funding.

A single audit includes a financial statement audit as part of its process.

Selecting a Nonprofit Audit Firm

The first and most important step is to select an audit firm that specializes in conducting nonprofit audits and has extensive nonprofit experience. Ideally, the audit firm should also have experience with the specific type of funding your organization receives.

One of the most effective ways to find the right audit firm is to create a Request for Proposal (RFP) document that clearly defines the scope of your needs, the challenges you face, and the type of audit firm you want to hire.

When looking for an audit firm, prioritize partners that focus on building long-term relationships and getting a deep understanding of your operations. Do they know the day-to-day accounting challenges you deal with?

It can be valuable to work with a firm with a comprehensive set of solutions. At James Moore, our nonprofit practice provides a variety of services to clients, from nonprofit audits to guidance on HR solutions, nonprofit outsourced accounting services and more.

While cost is definitely a factor for most nonprofits, it’s not always advisable to go with the least expensive auditor. An audit is a rigorous financial undertaking, and it’s important you select the firm that’s best qualified for the job. For example, is the audit firm up to date on changes in compliance standards for your industry? This could impact not only your audit, but also your year-round operations.

What to Look For When Hiring an Auditor

Understanding Audit Timelines

From start to finish, an audit typically takes two to three months and must be scheduled well in advance. That’s why it’s so important to begin your planning ahead of time. Start having your pre-planning conversations one to three months before year end so you’re ready for the formal audit planning and interim procedures. Well-established audit firms schedule work months ahead of time, so taking a proactive approach is key in ensuring you can schedule your audit in time for you to meet all deadlines.

The auditor begins their fieldwork after your organization has closed its year-end books, typically anywhere from one to six months after your year-end. After the fieldwork is complete, there will be a wrap-up process where the auditor compiles the audit report and ties up any loose ends. The last step is the exit conference, which is when the auditor summarizes their findings to your audit committee and issues their final report.

Key Steps to Prepare for an Audit

Your nonprofit can take a number of steps to ensure the audit timeline happens on schedule. Without taking the time to prepare, you risk derailing the schedule and increasing the cost of the audit process. Follow these steps to ensure your audit process is as smooth as possible.

Documentation Collection

Larger nonprofits are audited every year, and if you’ve already gone through the audit process, you’ll have a pretty good idea of what documentation the auditor is going to ask for. Either way, your audit firm will provide a request list so you can ensure everything is ready to go for when the audit starts.

Review and update your financial records. Perform accounting checks, like making sure subsidiary ledgers tie to your trial balance and net assets tie to your previous years’ ending balances. You’ll also need to make sure any internal written policies for internal controls match what your nonprofit is actually doing.

Conduct a pre-audit self-assessment to determine where your nonprofit’s areas of greatest risk are. This will help you prioritize areas to address with the auditor.

Staff Training

The audit process might involve people at your nonprofit who may not be familiar with your financial processes and documentation. Meet with your finance and accounting department and other staff, including your development team. Discuss the importance and necessity of the upcoming audit, and build familiarity for team members who haven’t gone through an audit before.

Explain how the audit process will work and set expectations for your team regarding the demands of the audit versus their ongoing day-to-day responsibilities. The audit process can often seem overwhelming for nonprofit staff. So the goal is to build familiarity and provide direction for a smooth audit.

Additional Steps for Single Audits

If you’re required to obtain a single audit, you’ll need to compile additional documentation that is not required for a financial statement audit. This includes:

•       Schedule of Expenditures of Federal Awards (SEFA)
•       Grant agreements and compliance documentation

If your organization has expended over $750,000 of federal funds (or state funds in Florida), it is required to obtain a single audit.

Best Practices: Always Be Audit Ready

Regardless of what type of audit you need or which thresholds you hit, it’s important to always be audit ready — not just at the end of the year. Being audit ready is a sign of a mature nonprofit organization that has a fully functioning accounting and finance team with good fiscal management and compliance policies.

How can you ensure you’re audit ready? Here are three best practices to follow:

• Conduct regular internal reviews on a monthly or quarterly basis. Maintain an auditor file that you can add to throughout the year.
• Build strong internal controls. An internal culture of governance and compliance helps everyone stay on track with their financial documentation year-round.
• Contact your audit firm with any questions. Your audit firm should be available to you all year long. Don’t hesitate to approach them if you come up against a complex accounting issue.

James Moore: Experienced Nonprofit Audit Professionals

Financial statement audits and single audits can seem daunting for many nonprofits. However, with the right preparation and the right team on your side, you can make them a painless experience.

Select an audit firm that understands the nuances of your nonprofit. Start planning well in advance of your audit, collecting and updating documents you’ll require. And don’t forget to set expectations with your nonprofit team, explaining the role and importance of an audit.

By working with an experienced nonprofit accounting firm like James Moore, you can streamline the audit process and get a high-quality audit that delivers deep-reaching insights into your organization’s financial position. Our team brings extensive familiarity with various types of nonprofit organizations, providing expert guidance and direction.

To learn more about how James Moore can support all your audit needs, contact us today or submit an RFP directly through our website.

Want to learn more about preparing for an audit? In this on-demand webinar, James Moore’s Karsten Derendorf and Andrew Ferguson walk you through tips, timelines, and accounting updates you need to understand to prepare for a financial statement audit or single audit: 2024 Nonprofit CPE Series: Preparing for Your Financial-Single Audit: Tips, Timelines and Updates.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.