The importance of setting internal controls to prepare for an audit 

setting internal controls to prepare for an audit

One of the key steps an auditor takes during an audit is to review and ensure your organization has the proper internal controls in place. Internal controls are the mechanisms, rules and procedures you have implemented to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud. 

By setting strong internal controls, your organization can effectively set up an audit process at the onset to be successful. In setting controls, it’s important to understand how an audit works in relation to nonprofits. The Council of Nonprofits defines an audit as, “the examination of the financial statements by an accounting professional to determine whether they conform to accounting standards. An independent audit is performed by a public accounting firm or an individual who is a certified public accountant (“CPA”) who is engaged to provide an independent opinion to the management whether or not the nonprofit’s financial statements/records comply with accounting standards known as GAAP (generally accepted accounting principles). In an independent audit the person conducting the audit is not a board member or an employee of the organization being audited, therefore the review is thought to be more objective than if the reviewer were under the control of, or controlled the nonprofit.”  

Here are 10 internal controls you can implement now at your organization:  

  • Review and reconcile accounts each monththis helps you catch any variances or errors in data. 
  • Once you’ve identified an auditor to work with, reach out to your auditor early to create an internal timeline for the audit.  
  • Review the items you will need to have in place with your team and your auditor to ensure you’re prepared early.  
  • Be sure your internal finance staff know the dates of the timeline and what they are responsible for gathering and reporting on.  
  • Build a year-end audit process plan with your team including deliverables and deadlines for each task.  
  • As you’re preparing audit materials, make sure you pull all financial reports and assess them for errors to eliminate surprises.  
  • Consider establishing an internal audit team so there is a more robust review of all gathered materials.   
  • Detail and review how donor funds were applied and used to ensure funds were allocated appropriately.  
  • Detail and review how grant funds were applied and used and be prepared to explain any variances. (This is also part of what you will do when you have any grantor audits, so it’s good to incorporate this into your regular practices with grant monies).  
  • Gather all receipts, payroll records and bank statements.  

As you prepare for an audit, be sure to have internal controls, policies, board reports, and grants information easily accessible and in one centralized place. Encourage collaboration and make sure your team understands how audits work and why their participation is important.  

Collaborate with and trust your auditor—they are there to ensure your organization follows financial requirement standards and compliance requirements for nonprofits, and that your mission moves forward!  

An extra tip during the process of preparing for your audit is to track the time staff spent in gathering materials and participating in the audit. Tracking time provides you with key decision-making data if you’re considering upgrading to a more robust fund accounting solution. If your team is drowning in spreadsheets with manual data entry and correction or spending 40 or more hours in preparation for an audit, there are ways to improve efficiency by automating these tasks through a software solution.  

Want to learn more?

Download our Nonprofit Audit Checklist for a successful year-end audit.

Watch our webinar, “Prepare your organization for an upcoming audit: Internal controls and more!to learn which internal controls to set so you’re ready for an audit. 

See how MIP can improve the effectiveness and efficiency of your audit process by viewing our available solutions

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