How to Prepare for Your First Nonprofit Audit: A 10-Step Checklist

Whether your organization is undergoing its first audit because you just crossed a grant funding threshold, your bylaws require it, or your board decided it was time, the same fundamental truth applies: the quality of your preparation determines the quality of the audit experience. Organizations that come to fieldwork with complete, organized documentation reduce audit hours, lower their audit fee, receive fewer management letter comments, and sleep better at night. This 10-step checklist walks you through everything you need to have ready before your auditor arrives.

Step 1: Close and Reconcile All Balance Sheet Accounts

The foundation of any audit is a complete, reconciled trial balance. Every balance sheet account -- cash, receivables, prepaid expenses, fixed assets, payables, accrued liabilities, deferred revenue, net assets -- must be reconciled to supporting documentation. Your cash accounts must reconcile to bank statements. Receivables must be supported by grant award balances and pledges receivable schedules. Prepaid expenses must be listed with the underlying invoices and the calculation of remaining prepaid period. Payables and accruals must be supported by invoices, contracts, or calculations. Start the reconciliation process at least two months before your audit fieldwork begins.

Step 2: Prepare a Complete Grant Documentation File

Your auditor will examine every significant grant award you received during the year. For each grant, assemble: the original award letter or grant agreement; all amendments or budget modifications; the approved budget; quarterly or semi-annual reports submitted to the grantor; a schedule of expenditures by budget line item; copies of all invoices and payment documentation for major expenditures charged to the grant; and correspondence with the grantor about any issues or modifications. If you have federal grants, confirm the CFDA number for each and prepare your Schedule of Expenditures of Federal Awards (SEFA) before fieldwork. Missing grant documentation is one of the most common causes of delayed audits and additional billing.

Step 3: Organize Board Minutes and Governance Records

Auditors review board minutes to verify governance oversight of financial matters. For each board meeting during the fiscal year, ensure minutes are complete, approved, and filed. Specifically, auditors will look for: board approval of the annual budget; board review and approval of mid-year budget variances; authorization for significant contracts or expenditures; review of the prior year audit report and management letter; documentation of any conflicts of interest disclosed by board members; and compensation decisions for senior leadership. If your board minutes are sparse or missing, work with your board chair to reconstruct them from meeting notes, email records, and attendee recollections before the audit.

Step 4: Prepare a Fixed Asset Schedule

All capitalized assets (furniture, equipment, vehicles, leasehold improvements) must appear on a fixed asset schedule that shows: original cost, date of acquisition, expected useful life, accumulated depreciation, and net book value. The schedule must reconcile to the fixed asset balance on your trial balance and to your depreciation expense for the year. If your organization does not maintain a formal fixed asset schedule, creating one for the first audit will require researching historical purchases -- check old invoices, prior bank statements, and prior financial reports. Going forward, maintaining the schedule in real time is far easier.

Step 5: Pull Payroll Records and Employee Files

Auditors test payroll by selecting a sample of pay periods and tracing amounts from your payroll register to employee files, time records (if applicable), payroll tax filings (941s), and bank disbursements. Make sure your payroll records are complete for the entire fiscal year: payroll registers, W-2s, 941s, state withholding returns, and documentation for any special compensation (bonuses, severance, housing allowances for clergy). Ensure your HR files contain signed offer letters, I-9s, and W-4s for all current employees. Employee classification issues (employees treated as independent contractors) are a common audit finding -- review your contractor relationships ahead of fieldwork.

Step 6: Gather W-9s and Vendor Documentation

If your organization issued 1099s for contractor payments of $600 or more, your auditor will verify that W-9s were collected before payments were made and that 1099s were issued and filed correctly. Compile all W-9s for the year. If any are missing, reach out to contractors now to collect them. Your auditor may also test disbursements to vendors -- pulling invoice backup, proof of receipt of goods or services, and evidence of approval is part of standard audit procedure.

Step 7: Prepare a Restricted Net Asset Schedule

If your organization received donor-restricted gifts or has grants with purpose restrictions, you must prepare a schedule showing the opening balance, additions, releases (amounts spent in accordance with restrictions), and ending balance for each restriction. This schedule must reconcile to the restricted net asset balance on your trial balance and be supported by grant agreements and donor acknowledgment letters documenting the restrictions. Many organizations are caught without adequate documentation of what restrictions exist and how they have been spent down -- assembling this in the weeks before fieldwork is one of the most time-consuming preparation tasks.

Step 8: Clean Up Your Chart of Accounts

Before your trial balance goes to your auditor, review your chart of accounts and transaction coding for any obvious errors. Look for: revenues coded to expense accounts or vice versa; transactions in the wrong cost center or program; personal expenses that inadvertently flowed through organizational accounts; duplicate entries; and any "miscellaneous" or "clearing" accounts with unexplained balances. Cleaning up coding errors before fieldwork prevents them from becoming audit findings or requiring explanations that consume time during fieldwork.

Step 9: Compile Prior Year Financial Statements and Audit Report

For organizations in their first audit, your auditor must establish opening balances. Provide the most recent prior year financial statements and, if you had a prior compilation or review, that report as well. For subsequent-year audits, the prior year audited financial statements and management letter are essential starting points. Your auditor will compare current year balances to prior year for analytical review and will follow up on any management letter comments from prior years to verify corrective action was taken.

Step 10: Understand What Happens During Fieldwork

Most nonprofit audits involve one to three days of on-site fieldwork (or virtual fieldwork, which has become increasingly common). During this time, your auditor will: conduct an opening meeting to review the timeline and outstanding items; request additional documentation as transactions are selected for testing; interview key financial staff about accounting processes and controls; and potentially observe physical assets (petty cash, inventory if applicable). Designate one or two staff members as the primary audit contacts who will be available to respond to requests promptly. Delays in responding to auditor requests are the single most common cause of audit cost overruns. After fieldwork, the auditor prepares a draft of the financial statements and management letter for your review before issuing the final report.