For nonprofit organizations, an audit is not merely a financial event, it is a governance responsibility.
While management and finance staff carry out much of the technical preparation, the board of directors holds fiduciary oversight. Donors, grantors, regulators, and community stakeholders rely on audited financial statements to assess transparency, stewardship, and operational integrity. A well-prepared audit reinforces credibility. A disorganized one raises questions that can linger far beyond the audit report.
Understanding what to expect and how to prepare throughout the year can transform the audit from a stressful annual scramble into a structured governance exercise.
Nonprofit audits are often required when organizations:
Even when not legally required, audits provide independent assurance that financial statements are presented fairly in accordance with GAAP and that internal controls are functioning effectively.
For boards, this connects directly to fiduciary duty. Board members are responsible for ensuring that:
An audit is ultimately about accountability, not compliance alone.
Board members are not expected to prepare reconciliations or draft financial statements. However, effective governance requires active oversight in several areas:
Boards that treat the audit as solely a management function often miss early warning signs of process gaps or control weaknesses.
Preparation begins long before fieldwork starts.
One of the most overlooked drivers of a smooth audit is the quality of the monthly and annual closing process.
Organizations that maintain disciplined monthly closings experience fewer surprises during year-end fieldwork. A competent close should include:
When financial statements are routinely reviewed and finalized, the numbers remain stable and dependable. This consistency reduces the volume of audit adjustments and minimizes last-minute corrections.
Boards should regularly review financial statements that include budget-to-actual comparisons and variance explanations. As discussed in Top 5 Financial Metrics Every Nonprofit Board Should Review Monthly, consistent oversight of key indicators strengthens governance long before audit season arrives.
Internal control deficiencies are among the most common nonprofit audit findings.
Boards should evaluate whether the organization has safeguards in place such as:
Smaller nonprofits often face staffing limitations, but governance controls can still be implemented creatively. For example, board-level review of reconciliations or external oversight from an advisory partner can significantly reduce risk.
Internal control strength directly affects audit outcomes and stakeholder confidence.
Audits are document-driven. The smoother the documentation process, the more efficient the audit.
Boards should confirm that management maintains an organized, continuously updated “Prepared By Client” (PBC) file containing items such as:
Creating structured subfolders by financial statement area – cash, revenue, receivables, expenses, investments, endowments, fixed assets, and disclosures can significantly reduce fieldwork delays.
The goal is to eliminate the year-end “paper chase.”
Nonprofit audits differ from for-profit audits in several critical areas. Boards should ensure management is prepared to address:
1. Revenue Recognition and Grant Compliance
Auditors examine whether revenue is recognized in accordance with GAAP and donor-imposed restrictions. Conditional grants, multi-year pledges, and in-kind contributions require careful documentation.
2. Net Asset Classification
Proper classification of unrestricted, temporarily restricted, and permanently restricted funds is essential. Errors in net asset presentation often lead to audit adjustments.
3. Cost Allocation
Shared expenses must be allocated across programs, administration, and fundraising in a reasonable and documented manner.
4. Compliance with Federal Uniform Guidance
Organizations receiving significant federal funding may require a Single Audit. This includes compliance testing of federal program expenditures and internal control design.
Proactive attention to these areas prevents avoidable audit findings.
Boards should treat the audit as a structured project with clear milestones.
Effective audit planning includes:
Consistent communication with auditors reduces misunderstandings and avoids last-minute surprises. Asking auditors to clarify the objective of documentation requests can also improve efficiency and reduce unnecessary workload.
Modern audits increasingly rely on data analytics and secure document-sharing platforms. Boards should confirm that management:
Technology does not replace governance discipline, but it enhances transparency and reduces risk of manual error.
An audit should not end with the issuance of a report.
Boards should carefully review:
Questions worth asking include:
The audit is an opportunity to improve systems, not merely confirm compliance.
Organizations that already operate with disciplined financial oversight often find audits less disruptive. For example, nonprofits that maintain structured monthly reporting and financial strategy conversations, similar to the practices outlined in First 90 Days with an Outsourced Bookkeeping Team, typically enter audit season with fewer surprises.
The difference between a smooth audit and a chaotic one rarely lies in last-minute preparation. It lies in year-round discipline.
Boards that emphasize:
are far more likely to experience efficient audits and stronger stakeholder trust.
At DWG CPA PLLC, we work with nonprofit leaders and boards to build this type of financial infrastructure. Audit readiness is not an afterthought, it is embedded into disciplined reporting, governance alignment, and structured internal controls throughout the year.
A nonprofit audit is not a test to pass; it is a tool to strengthen governance and transparency.
When boards actively engage in financial oversight, ensure structured documentation, and support strong internal controls, audits become confirmation exercises rather than crisis events.
For nonprofit organizations committed to stewardship, audit readiness is not simply about compliance; it is about reinforcing trust in the mission.
If you’re building something important and need a trusted financial partner to grow with you – we’d love to hear from you.
DWG CPA PLLC is a Texas-based accounting firm serving businesses and nonprofits since 2005. We specialize in virtual accounting, tax strategies, and personalized financial guidance across industries like healthcare, construction, real estate, and nonprofits.
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