The word audit makes most nonprofit leaders nervous. It does not need to. Organizations with clean financial records, up-to-date filings, and documented processes typically move through audits quickly and without issues.
What auditors are actually checking falls into four main areas: bookkeeping, Form 990 compliance, payroll, and accounts payable. Here is what they look for in each area and how to make sure your organization is ready.
What Auditors Look for in Your Nonprofit Bookkeeping
Your nonprofit bookkeeping records are the foundation of the entire audit. Auditors start here and use what they find to determine how deeply they need to dig elsewhere.
Specifically, they look for:
- A clean, reconciled general ledger with no unexplained entries
- Proper separation of restricted and unrestricted funds
- Documentation for every significant transaction
- Consistent application of accounting policies throughout the year
- Monthly bank reconciliations that match your books
The most common bookkeeping finding in nonprofit audits is misallocation of restricted funds. If grant money was spent on anything outside its designated purpose, auditors will catch it. The fix is fund accounting that tracks restrictions from receipt to expenditure.
Form 990 and What It Tells Auditors
If your nonprofit undergoes a federal single audit because you receive more than $750,000 in federal awards, auditors will compare your Nonprofit Form 990 filing to your audited financial statements line by line.
Discrepancies between the 990 and your financial statements are a red flag. Common mismatches include:
- Revenue reported differently on the 990 versus the financial statements
- Program expense allocations that differ between the two documents
- Compensation disclosed on the 990 that does not match payroll records
The 990 is also a public document. Even for routine audits, auditors review it to understand your organization’s activities, governance, and financial trends. A 990 that is internally consistent and matches your books signals a well-run organization.
Payroll Records Auditors Will Review
Payroll is one of the highest-risk areas in any nonprofit audit because it typically represents the largest expense category. Auditors reviewing payroll for nonprofits will look at several things.
At the transaction level:
- Payroll registers showing gross pay, deductions, and net pay for each employee
- Payroll tax deposit records showing timely remittance
- W-2s and W-3 filings matching your payroll records
- Time and attendance records for hourly employees
At the allocation level:
- Time distribution reports showing how employee hours were allocated across programs
- Documentation supporting the allocation percentages used in your bookkeeping
- Evidence that payroll costs charged to grants match approved budget categories
Program-based payroll allocation is the piece most nonprofits handle inconsistently. If an employee works across multiple programs, their salary needs to be split accordingly in your books. Auditors will verify that the split is supported by actual time records, not just an estimate.
Accounts Payable Documentation Auditors Expect
Well-run accounts payable processes create the documentation trail auditors need to verify that expenses were legitimate, properly approved, and correctly coded.
For each vendor payment, auditors typically want to see:
- The original invoice from the vendor
- An internal approval record showing who authorized the payment
- The corresponding bank or check record showing payment was made
- The general ledger entry coding it to the correct fund and expense category
When any of these four items is missing, auditors note it as a finding. Enough findings across enough transactions can result in a qualified audit opinion, which is something funders and boards take seriously.
Build a file for every vendor payment at the time it is processed. Reconstructing documentation months later is difficult and sometimes impossible.
A Pre-Audit Checklist for Nonprofits
If an audit is approaching, work through this list:
- Reconcile all bank and credit card accounts through the audit period
- Review the general ledger for uncategorized or miscoded entries
- Confirm all restricted fund releases are properly documented
- Pull payroll registers and verify they match tax filings and W-2s
- Compile time distribution records for any employees allocated to grants
- Organize vendor invoice files and confirm approvals are on record
- Compare your draft financial statements to your most recent Form 990
- Have your engagement letter and prior-year audit findings ready for reference
Organizations that work through this list before the auditor arrives typically spend far less time in the audit process and emerge with fewer findings.
Working With a Nonprofit Financial Partner
The best audit preparation is year-round financial discipline, not a last-minute scramble. Non-Profit Books provides ongoing bookkeeping, payroll, Form 990 support, and accounts payable management specifically for nonprofits. When your books are clean and current every month, audit season is not a crisis. It is just a process.
Frequently Asked Questions
Q: What triggers a nonprofit audit?
A: Receiving more than $750,000 in federal awards requires a single audit. State contracts, board policy, bylaws, or lender requirements may also trigger audits regardless of size.
Q: How long does a nonprofit audit take?
A: For well-prepared organizations, a few weeks. For organizations with disorganized records, it can stretch to several months.
Q: What is a qualified audit opinion?
A: It means the auditor found material misstatements or was unable to verify significant portions of the financial records. It is a serious finding that concerns funders and boards.
Q: Can bookkeeping errors cause an audit to fail?
A: Yes. Misallocation of restricted funds, missing documentation, and inconsistent accounting policies are among the most common causes of audit findings.
Q: How far back do auditors look?
A: Typically one fiscal year for a standard audit, though comparative statements may go back two years. Federal single audits may examine multi-year grant activity.
