The annual financial statement audit is an important process for nonprofits, ensuring transparency and accountability for donors, funders, and stakeholders. However, many organizations make common mistakes that can lead to unnecessary stress, delays, and even increased audit fees. Here’s a look at some of the most frequent errors—and how to avoid them.
1. Waiting Until the Last Minute to Prepare
One of the biggest mistakes nonprofits make is scrambling to gather financial records when auditors arrive. A lack of preparation leads to delays, missing documentation, and higher stress levels for staff.
How to avoid it: Start preparing well in advance by organizing financial records, reconciling accounts, and reviewing prior-year audit findings. Consider using online document storage to keep everything easily accessible.
2. Weak Internal Controls
Auditors focus on internal controls—the policies and procedures in place to prevent errors and fraud. If your nonprofit lacks segregation of duties, oversight, or clear financial processes, it can raise red flags during an audit.
How to avoid it: Implement strong internal controls, such as requiring multiple approvals for expenses, regularly reconciling bank statements, and ensuring that no single person has full control over financial transactions.
3. Failing to Understand Audit Risks
Auditors classify risk into different categories—inherent risk, control risk, and detection risk. If your nonprofit has complex transactions, relies on grant funding, or lacks oversight, your risk level increases.
How to avoid it: Identify areas of financial complexity and work proactively to minimize risk. Ensure compliance with grant restrictions, maintain accurate records, and document financial decisions clearly.
4. Misclassifying Revenue and Expenses
A common mistake is recording donations, grants, and expenses incorrectly. Misclassifying restricted funds or failing to track designated donations properly can lead to compliance issues.
How to avoid it: Follow proper accounting standards, ensure that restricted and unrestricted funds are correctly recorded, and regularly review financial statements for accuracy.
5. Ignoring Auditor Requests or Delaying Responses
Delays in providing requested documents or incomplete answers to auditor questions can slow down the audit process, increase costs, and create frustration on both sides.
How to avoid it: Designate a point person for the audit and respond promptly to auditor requests. Having well-organized financial records and anticipating common audit questions can help speed up the process.
6. Not Reconciling Accounts Before the Audit
Unreconciled accounts can lead to discrepancies that auditors will flag, causing extra work and potential financial adjustments.
How to avoid it: Perform regular reconciliations of cash accounts, accounts payable, and grants received. Ensure that year-end adjustments from the prior audit have been recorded correctly.
7. Over-Focusing on Small Errors While Ignoring Materiality
Nonprofit accountants often aim for perfection, but auditors focus on materiality—the significant items that could impact financial statements. Wasting time explaining a $10 variance while ignoring a $100,000 grant misclassification is a costly mistake.
How to avoid it: Focus on big-picture accuracy. Ensure that large balances and critical financial transactions are correctly recorded. Small errors below the materiality threshold won’t impact the audit opinion.
Final Thoughts
A successful audit starts with organization, internal controls, and proactive financial management. By avoiding these common mistakes, nonprofits can ensure a smoother, faster, and less stressful audit process.