For many nonprofit leaders, the annual audit feels like a whirlwind of questions, document requests, and time-consuming processes. But understanding how auditors evaluate your organization can transform the experience from stressful to strategic.
The Three Types of Audit Testing
Auditors rely on a combination of three primary testing methods to assess your nonprofit’s financial statements. Each serves a distinct purpose in ensuring accuracy, reliability, and compliance.
1. Controls Testing
Controls testing verifies whether your organization follows its own internal policies and procedures. For example, if your nonprofit claims to complete monthly bank reconciliations, auditors will check for documentation that proves those reconciliations are happening. If your internal controls are strong and consistently applied, auditors may reduce the time spent on more detailed transaction testing—saving you time and potentially lowering audit fees.
2. Substantive Testing
Substantive testing is the deep-dive you probably associate with an audit: auditors select specific transactions—donations, expenses, payroll—and request supporting documents like receipts, invoices, or contracts. They’re checking for accuracy, completeness, and proper classification.
This testing is resource-intensive, but a clean controls test can reduce the number of items they need to review.
3. Analytical Testing
This method evaluates financial data for patterns and outliers. Auditors might compare this year’s janitorial expenses to last year’s, for example, and expect an increase if you opened a new facility. If the numbers don’t align with expectations, they’ll ask why. Analytical testing is becoming more sophisticated thanks to software and AI, but the goal remains the same: to ensure your financial data makes sense.
Real-World Impact
One real-life audit revealed that an experienced CFO had recorded every check as if it were paid on December 31—regardless of when the payment was made. While this satisfied the cut-off requirement, it violated the accuracy principle. The auditors had to reconstruct the accounts payable to correct the records—adding time, cost, and stress.
Final Thoughts
Understanding audit testing helps your nonprofit prepare better and avoid unnecessary complications. The smoother the audit, the more time your team can spend on advancing your mission.
Want help getting audit-ready? CFO Leverage works with nonprofits across the country to prepare clean records, implement controls, and guide you through the audit process. Let’s make your next audit your best one yet.