How Should a Nonprofit Prepare for Its First Audit?

A smooth first-year nonprofit audit starts well before the audit team sends a PBC list.

The strongest preparation usually comes down to six things: reconciled accounting records, organized grant and contribution documentation, support for restricted funds, complete financial schedules, current policies and governance records, and clear ownership of the audit process internally.

The goal is not simply to “get through” the audit. It is to make sure the organization’s financial records are complete, supportable, and ready for independent review.

Start Before Year-End

The best time to prepare for a first audit is before the fiscal year closes.

That gives the organization time to identify unusual transactions, clean up old reconciling items, confirm grant reporting requirements, review restricted contribution activity, update fixed-asset and debt schedules, organize board documentation, and clarify who will be responsible for audit requests.

Waiting until after year-end can turn normal accounting cleanup into an audit delay.

Reconcile Every Balance-Sheet Account

The audit team will rely heavily on the organization’s balance sheet.

Before fieldwork begins, management should make sure significant accounts are reconciled and supported, including cash and investment accounts, accounts receivable, grants receivable, pledges receivable, prepaid expenses, fixed assets, accounts payable, accrued payroll and other liabilities, debt, leases, and net assets with donor restrictions.

Old or unexplained balances should be investigated before the auditor has to ask about them.

Organize Grant and Contribution Documentation

For many nonprofits, grants and contributions are among the most significant audit areas.

Maintain organized support for executed grant agreements, award letters, contribution documentation, donor restrictions, reimbursement requests, grant budgets, reporting requirements, amounts received, amounts spent, and remaining balances.

If federal funding is involved, make sure the organization can also identify the federal program, assistance listing information, pass-through entity, and expenditures associated with the award.

Review Restricted Funds

Donor restrictions are a frequent area of nonprofit financial reporting complexity.

Before the audit, management should be able to explain which funds are restricted, the nature of each restriction, amounts received, amounts released from restriction, balances remaining at year-end, and the documentation supporting those conclusions.

A separate internal schedule of restricted funds can make this process much easier.

Complete Key Financial Schedules

A first-year audit typically requires more than a general ledger.

Organizations should prepare clean supporting schedules for significant accounts and transactions. Common examples include accounts receivable aging, grants receivable schedules, contribution receivable schedules, accounts payable listings, fixed-asset rollforwards, debt schedules, lease schedules, investment schedules, net asset rollforwards, grant schedules, payroll reconciliations, and functional expense allocations.

These schedules should reconcile back to the general ledger and financial statements.

Review Accounting Policies

A first-year auditor needs to understand not just the numbers, but how the organization accounts for them.

Management should review whether policies exist and are current for areas such as revenue recognition, restricted contributions, grants, capitalization, depreciation, expense reimbursements, credit cards, purchasing, cash disbursements, payroll, functional expense allocation, conflicts of interest, and document retention.

Policies do not need to be overly complicated. They do need to reflect how the organization actually operates.

Organize Board and Governance Records

Auditors commonly review governance documents because they can contain information affecting the financial statements.

Have articles of incorporation, bylaws, board and committee minutes, significant board resolutions, conflict-of-interest policies, key contracts, debt agreements, lease agreements, and major grant agreements organized and available.

Board minutes are particularly important because they may document significant decisions, commitments, compensation, transactions, or subsequent events.

Review Prior-Year Financial Information

Even if the organization has never been audited, the first-year audit team will need to understand opening balances.

Management should make available prior-year financial statements, prior trial balances, prior Form 990 filings, prior CPA reports if applicable, and supporting schedules for significant opening balances.

If a prior audit, review, or compilation exists, provide that information early.

Opening-balance issues can create significant first-year audit work, so they should not be treated as an afterthought.

Identify Federal Award Activity Early

If the organization receives federal funding, determine whether a Single Audit may be required.

This assessment should happen before audit fieldwork begins.

Organizations should maintain a complete listing of federal awards and expenditures and, when applicable, prepare a Schedule of Expenditures of Federal Awards, or SEFA.

Do not assume federal funding is obvious from the general ledger alone. Pass-through awards can sometimes be missed if the organization does not maintain clear grant-level records.

Assign One Internal Audit Coordinator

One of the simplest ways to improve audit efficiency is to assign a clear internal point person.

That person should coordinate requests, track outstanding items, route questions to the appropriate staff member, monitor deadlines, and make sure responses are complete before sending them to the audit team.

Without a central coordinator, audit requests can become fragmented across departments and harder to track.

Review the PBC List Carefully

A PBC list — short for Prepared by Client — identifies the schedules and documents the audit team needs.

Do not treat it as a checklist to complete at the last minute.

Review it early and identify who owns each item, what still needs to be prepared, whether the requested support exists, whether any balances need additional cleanup, and which items require outside information.

The more complete the PBC package is at the start of fieldwork, the fewer interruptions the organization is likely to experience during the audit.

Resolve Accounting Issues Before Fieldwork

If management already knows something is wrong, resolve it before the auditor begins testing whenever possible.

Examples include old receivables that may not be collectible, unreconciled cash, duplicate liabilities, outdated fixed assets, unclear restricted balances, unrecorded debt, unreconciled payroll liabilities, or grants that have not been properly reconciled.

The audit should not become the organization’s year-end bookkeeping process.

When substantial cleanup happens during fieldwork, both the timeline and cost can increase.

Make Sure the Financial Statements Are Ready

Ideally, management should have a complete year-end close before the audit begins.

That means all significant entries are recorded, reconciliations are complete, financial statements have been reviewed internally, obvious variances have been investigated, and balances are supported.

If the organization expects the CPA firm to assist with financial statement preparation, clarify that during the proposal and planning process.

Prepare Management and the Board

An audit involves more than the accounting staff.

Management and those charged with governance may need to discuss fraud risks, internal controls, litigation, related-party transactions, significant estimates, subsequent events, going-concern considerations, and major organizational changes.

Board leadership should understand the audit timeline, reporting process, and their role in governance communications.

Common First-Audit Mistakes

The most common problems are usually operational rather than highly technical.

Examples include waiting until year-end to start preparing, providing unreconciled records, incomplete grant documentation, missing support for donor restrictions, sending partial PBC responses, not assigning clear responsibility, changing accounting records after audit work begins without communicating the change, and assuming the auditor will clean up the books as part of the audit.

Each of these can create unnecessary delay.

First Audit Readiness Checklist

Before fieldwork begins, a nonprofit should ideally be able to answer yes to the following:

Are all bank and investment accounts reconciled?
Are receivables and payables supported?
Are payroll liabilities reconciled?
Are fixed-asset schedules current?
Are debt and lease schedules complete?
Are grant agreements organized?
Are restricted funds supported?
Are major contracts available?
Are board minutes complete?
Are prior financial statements and Form 990s available?
Are accounting policies current?
Is federal award activity identified?
Is the year-end close complete?
Is each PBC request assigned to an owner?
Is one person coordinating the audit internally?

If several answers are “no,” the organization may benefit from additional preparation before fieldwork begins.

The Bottom Line

The best first-year audits are rarely the result of last-minute effort.

They are the result of disciplined accounting, organized documentation, clear ownership, and early planning.

A nonprofit does not need perfect records before an audit begins. But it should be able to support its significant balances, explain its funding and restrictions, produce requested documentation, and respond to questions efficiently.

That preparation can reduce disruption, improve the audit experience, and give both management and the board greater confidence in the organization’s financial reporting.

How Bilotta & Company Can Help

Bilotta & Company, CPAs, LLC provides financial statement audits, reviews, and Single Audits for nonprofit organizations.

For first-year audits, we emphasize clear planning, defined expectations, organized request lists, and proactive communication so both teams understand what is needed before fieldwork begins.

For organizations that need help improving the accounting and reporting infrastructure behind the audit, our Nonprofit Navigator® Financial Stewardship program can provide ongoing accounting, controllership, board reporting, forecasting, and fractional financial leadership.

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This article is provided for general educational purposes and should not be considered accounting, tax, or legal advice for a specific organization.