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


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

An audited financial statement prepared by a qualified CPA is an integral part of administering a nonprofit organization, and can have a profound effect on the future of your organization. Any organization that receives $750,000 in Federal funds is required to have a Single Audit performed, and foundations often require an audited financial statement as part of a grant application. 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. 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 Federal payments being delayed due to increased review of your payment documentation prior to payment, payment(s) being returned to the funder, and/or your foundation grant application being denied.

To help you achieve a successful audit, your organization needs to be prepared a year in advance, plus have staff and systems in place to safeguard the proper utilization of grant and donated funds in compliance with IRS rules, and the regulations that govern the type of grant(s) received, whether Federal, State, local government, and/or foundation. Following are some strategies that will help make your audit process go smoothly and hopefully result in a clean audit.

Be Highly Organized

Key administrative and accounting staff should know right where all the 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. It is important throughout the year to keep up with filing, 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), and 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; 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; plus 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 items that he/she needs a copy of that you should already have on hand, such as monthly bank reconciliations, copies of grant award notices, last quarter payroll tax reports, list of fixed assets, board minutes, and list of aged payables at the year end. 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 all throughout the year your staff should be mindful of the audit. 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 of your documentation by copying it digitally and/or maintaining a separate paper files in different locations from the originals. Knowing in your head that at one time you had that receipt or originally signed contract won’t satisfy the auditor if no one can find that one important document.

Sufficient Internal Controls

Whether you are a small or large organization, you have to demonstrate there are sufficient internal controls and standard processes that include, but are not limited to, proper division of duties; staff are double-checking the work of other staff; that program and accounting staff are following the organizational budget and the grant budgets; and only specified staff have access to cash and checks, can sign checks, can approve certain levels of expenditures, can approve certain types of transactions, and can sign legal documents. These internal controls need to be reflected in your organizational chart, in your accounting and programmatic work flow charts, and your policies and procedures. 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; 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 I 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, if you have received or are applying for Federal and State grants. Your accounting staff need 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 be knowledgeable about 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 to two staff people as the regulations “experts” who other staff can go to with questions.

If you would like our experienced staff to assess your organization for audit readiness, and provide you with personalized guidance and training on preparing for an audit, please contact our office at 505-326-4245.

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