When You Need an Audit and How to Prepare for a First-Year Audit
by Madchen Petrie, CPA
Your organization is growing and in the back of your mind the question grows as well: should we get an audit?
An audit is a significant investment to make as an organization, and when done right, can yield some awesome results. An audit is part of a healthy system of checks and balances and helps your organization achieve good governance and accountability to your community.
At Larson Gross, we’re always looking at the bigger picture when combing through your books and records: where are there areas for process improvement? What changes to standards and regulations are coming down the pipeline that may impact your organization? How can critical compliance documents be leveraged as marketing tools to bring in new funding?
Despite all these benefits, it’s important to consider whether the investment is right for your organization at this time. Aside from the financial cost of an audit, there’s also a great deal of time required from your team to have an audit performed. An audit is a collaborative process and your team will need to set aside some time to pull support, answer questions, and talk through difficult areas with your auditors. Because of this, I always like to begin with the question:
When is an Audit Required?
Here are a few common reasons your organization may be required to get an audit:
- State requirements: In the State of Washington, a charitable organization is required to get a financial statement audit if they have average annual gross revenue in excess of $3M over the last 3 years.
- Federal requirements: If you receive federal assistance, such as federal funds, grants or awards (with an associated CFDA number) and expend over $750,000 of federal funding in one fiscal year, you will be subject to a Single Audit under OMB Uniform Guidance. A Single Audit has its own complexities and procedures, but a financial statement audit is a necessary component.
- Grantor or bank requirements: A grantor or bank may require a financial statement audit for you to qualify for grant funding or a loan. Often, you can reach out to the grantor or bank and ask if they will accept a financial statement review instead of an audit, but an audit may be necessary to obtain funding from certain sources.
How to Prepare for a First-Year Audit
There are a few things you’ll want to take a close look at before your first audit, to avoid audit findings on the back end:
- Review and update your written policies & procedures. Make sure you have some strong internal controls in place and that the policies are being followed.
- Document everything! Make sure you have support for every transaction during the year (electronic if possible) and evidence that your key controls are operating (such as sign offs to support review controls).
- If you are anticipating a Single Audit: Read through the OMB Compliance Supplement – it walks through all our audit procedures. No surprises there! Understand your individual award requirements – read the CFR (included in the award) and assign a point person to each award. Expect some audit findings – most first year audits end up having a few findings, which can vary in severity. Your auditors are there to help you work through these and resolve them for the following year!
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Madchen Petrie, CPA
Madchen Petrie joined Larson Gross in 2019 with several years of experience managing nonprofit audits and Single Audits. Today, she is a leader on the Larson Gross nonprofit team, assisting organizations with their tax, financial statement and consulting needs.