Three Keys to a Successful Audit

Washington Monument

Catherine M. Pennington, CPA, Senior Manager,
Renner and Company, CPA, P.C..
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For many nonprofit organizations the thought of the annual audit brings to mind images
of late nights, stress and annoying auditors. It’s enough to make you skip the whole
process. It doesn’t have to be that way. Any organization, no matter how small, can
have a successful audit while minimizing the associated aggravation. Achieving this
success involves three key steps: preparation, communication and review.

The preparation stage for an audit is the longest and most important. It involves many
parts of the organization; not just the accounting or finance group. A successful audit
may include the Executive Director, membership department, general counsel,
accounting department, Audit Committee and possibly even the receptionist.

Any organization preparing for its audit, whether it’s for the first or the 100th time,
needs to spend time upfront, planning for the timing of the audit. We all want to get
the audit over with as soon as possible but it’s not always within our ability to do so.

If your organization is like many others, you may have cut back on staff in your
accounting department because of the economic constraints of the past few years. It
may be all that your staff can do to just keep up with the daily requirements without
adding the extra burden of preparing for and participating in an audit. Your staff may be
able to handle the extra work if they are given enough time, or you may need to bring in
outside accounting assistance. Both of these approaches can work, but your plan needs
to include either extra hours for your staff, or outside help.

Another important item to consider in the plan is the choice of auditors. Auditors
should ultimately be selected and hired by the Audit Committee of the Board. Each
organization needs to balance the cost and timing of the audit with the need for
specialized industry knowledge and accessibility of the auditors.

Many organizations have not established a separate Audit Committee and still have the
Finance Committee serve that function. Unfortunately, these two groups should have
very different functions that are largely incompatible.

An Audit Committee oversees the organization’s financial reporting function. It is
charged with examining the systems and controls over reporting, and to do so it needs
to be independent of management. The Audit Committee hires the outside auditors to
serve as its eyes and ears in fulfilling its mission.

A Finance Committee sets and reviews budgets. It analyzes financial information
throughout the year using comparisons with budgets and prior year data. It approves
financial policies such as credit terms and check signing authority. In doing these
functions the Finance Committee demonstrates that it is an extension of management
and cannot effectively serve as an Audit Committee.

Communication is the second key to a successful audit. Communication needs to be
maintained between accounting staff, the CFO and the Executive Director to adjust
staffing needs, audit expectations, address issues before the audit starts and monitor
the pre‐audit plan. Just as importantly, there needs to be communication between the
Controller or CFO and the auditors.

CFOs often complain that the auditors show up for fieldwork at the scheduled time,
work diligently for a week or two and then disappear. Management hears nothing from
the auditors until the report drafts show up a week before the Board meeting leaving
the organization’s staff to scramble in those last few days to get the reports finalized.

This scenario is not preordained; it can be changed by CFOs requiring updates from the
auditors. An easy and timely way to do this is to establish a date for a post‐fieldwork
update. As the auditors wrap up their fieldwork, set a time a day or two later for a short
call to discuss their initial findings. Their workpapers will not have been reviewed by the
manager or partner, but they will have a good idea of any adjustments, material
weaknesses or significant deficiencies they think they’ve found.

Armed with this information, the organization’s staff should examine each of the
findings to ensure the auditors correctly understand each situation. Additional
information about compensating internal control procedures or clarification regarding
amounts in the general ledger can result in the elimination of potential audit findings
before they appear in the report drafts.

The final key to a successful audit is review. Management should review all audit
reports and letters for errors, typos, transposed numbers, incorrect names of Audit
Committee members and even incorrect dates. Auditors are human, too, and can and
will make some mistakes. The Audit Committee will ultimately see all the reports but
there is no reason not to get errors or misunderstandings corrected as early as possible.

Audits are a necessity for many organizations and a “best practice” for many others.They are challenging, but they can be managed using the Three Keys to a Successful
Audit. With the right preparation, communication and review procedures in place, you
can complete your audit effectively, efficiently and with minimal disruption to the