{Article} Grant Audit Prep: Don’t Stress, Learn from the Best

Grant Audit

Congratulations! Your organization has been successful in receiving federal grants and your team is on cloud 9. Then you remember two words that create a moment of panic: Grant Audit. Is your organization ready for it? If you are not sure, we have some great information for you on how to successfully prepare.

Any organization that receives $750,000 in federal funds is required to have a Single Audit performed, and many foundations require an audited financial statement as part of a grant application. This audit is necessary because federal funders need to make sure the organizations are spending the funds with high integrity and honesty, as they are responsible for making sure tax payers’ money is being spent in compliance with regulations.

Because an audited financial statement is fundamental to your organization’s reputation and success, a qualified CPA is an integral part of the process and can have a profound effect on the future of your organization.

Your auditor will review your federal programs application, Federal Notice of Grant Awards, Contract, Budget and be sure you have spent the funds in compliance with not only these items, but also in compliance with 2 CFR 200. The goal is to have the scrutiny of your finances and programs result in an “unqualified” audit without any “findings”. A “qualified” audit or an “unqualified” audit with several “findings” could result in delayed federal payments due to increased review of your payment documentation.

To put it simply, trying to retrieve that receipt or originally signed contract from memory won’t satisfy the auditor if no one can find a physical copy of that one important document.

We offer the following strategies that will help make your audit process cleaner and easier to manage, which will increase your likelihood for audit success.

Be Highly Organized

Key administrative and accounting staff should know where all digital and paper files are located without hunting. An auditor can ask for any document and be in your office when he/she requests the same. Quickly obtaining documents is a sign of efficiency.

One way to maintain organized documentation is to keep up with filing throughout the year, and not be behind a month or more. Neatly put together files and/or binders should be set up at the end of each year for the following year. For instance, in December, set up hanging files or manila folders for each month of the year for each of the following categories:

  • Monthly bank reconciliations
  • Payroll
  • Federal and State grant payment draws (in addition to by grant)
  • Board meetings (Minutes with all reports discussed attached)
  • Internally generated financial statements or profit/loss statements

If your organization has periodic fundraisers, such as annual mailings or special events, then a separate binder for each fundraiser can be set up ahead of time with tabs for various types of income and expenses. Here is an organized list of what you may keep:

  • Copies of participant registration forms with liability disclaimers
  • Copies of checks from sponsors and participants
  • Internally generated income and expense reports from your accounting system
  • Contracts with event locations and vendors
  • Outreach and marketing materials
  • Documentation for in-kind donations of prizes, media marketing, and auction items
  • Spreadsheet of information on auction items, purchaser and price
  • Copies of thank you letters in compliance with IRS regulations

Maintain Detailed Documentation

For any penny that was spent, especially of federal or state grants, you need to have documentation that matches and justifies that expense. This can be a receipt, invoice, a purchase order, a lease, and/or a contract.

At the onset of the audit process, your auditor will give you a list of about 20 standard copied items that he/she needs that you should already have on hand, such as monthly bank reconciliations, copies of grant award notices, last quarter payroll tax reports, a list of fixed assets, board minutes, and a list of aged payables at the year’s end.

To maintain this information, develop a spreadsheet that keeps track of who is responsible for gathering certain information and when it was turned over to the auditor. Then based on the auditor’s review of information provided, the auditor will start digging deeper and ask for more information as she/he spot checks for proper documentation and levels of approval, and for anything that he/she wants to verify was handled properly. This is one important reason why your staff should be mindful of the audit throughout the entire year.

Ask yourself, “What type of documentation might the auditor want to see for this particular transaction, and where should it be filed?” Also, be sure to “back-up” all documentation by copying it digitally and/or maintaining a separate paper files in different locations from the originals.

Have Sufficient Internal Controls

Whether you are a small or large organization, you have to demonstrate that there are sufficient internal controls and standard processes that include, but are not limited to, the following: a proper division of duties; staff mentoring and supervision; organizational program and accounting budget compliance; and a limited, yet trusted, team to monitor and control all monies. These internal controls need to be reflected in your organizational chart, in your accounting and programmatic work flow charts, and your policies and procedures to remain successful.

Your auditor will check some transactions to make sure you are following your own policies. Another way you can indicate that you have proper internal controls are that purchase orders or internally created purchase forms must have numerous levels of approval signatures for expenses, and initial or explain how the transaction is in compliance with the budget and regulations. Good internal controls also are a step in the right direction for preventing embezzlement and unauthorized or fraudulent use of federal grant funds, which are both very important to your Board of Directors and your federal program officer.

Hire and Train Competent Staff

If your organization cannot afford to have a CPA on staff (not the CPA who will perform the audit) full time, then we suggest that you contract with one to review your accounting records on a quarterly basis. Your accounting staff should have at least 10 years’ experience, preferably with a nonprofit, having worked for a CPA, and/or experience with federal and state grant accounting, especially if you have received or are applying for federal and state grants. Your accounting staff needs to be very familiar with GAAP at the very least.

Whether you send accounting and program staff to trainings on Federal regulations that govern Federal grants (2 CFR 200), or you provide them online information and training, if you are receiving federal grants, your accounting, programmatic and other administrative staff need to know these regulations.

You may also want to provide ongoing training at monthly staff meetings where information is presented, discussed and staff are even quizzed to ensure their understanding. Another good idea is to assign one or two staff members as the regulations “experts” to whom other staff can go with questions.

If your organization does not have the current capacity for these suggestions, our experienced staff can assess your organization for audit readiness, and provide you with personalized guidance and training on preparing for an audit. Fill out the form below to schedule a free consultation, or call 505-326-4245.

We Win Funds For:


Education Agencies


Grant Writers

Grant Sirent

Search For Grants

Twitter Updates

Visit Our Other Sites:

Capacity Builders

Capacity Builders
Working with tribes and nonprofits to build their internal capacity

Grant Experts

Grant Experts
Grant services specifically for educational institutions

Grant Experts

Grant Harmony
Grant writing and consulting for businesses

Resource Associates BBB Business Review

2020 Resource Associates Grant
Writing & Evaluation Services, Inc.