Most nonprofit Controllers dread audit season — not because the financials are wrong, but because pulling together everything the auditor needs takes weeks of manual work that your software was never designed to support. Organizations that prepare well reduce audit fees by 20 to 30 percent and eliminate the painful back-and-forth that drags out fieldwork.
Nonprofit audit preparation is the process of organizing financial records, reconciling accounts, and assembling documentation before your external auditor arrives. Done systematically, it is not a scramble. It is a checklist.
This guide gives you that checklist, organized by area, along with a timeline and the most common mistakes that turn a smooth audit into a months-long ordeal.
Why Audit Preparation Matters More Than You Think
Auditors bill by the hour. Every hour they spend searching for a document, asking a follow-up question, or waiting on a reconciliation schedule is billed at their rate, not yours. A disorganized PBC (Prepared By Client) package can add $5,000 to $20,000 to your audit fee at mid-size organizations, while also consuming weeks of your Finance team's time.
Beyond cost, audit preparation signals organizational health. Auditors form impressions about internal controls based on how you present your records. Organized, complete documentation suggests a Finance function that operates with discipline throughout the year. Disorganized or incomplete packages raise questions about whether your processes are reliable even when no one is watching.
The good news: most of what makes an audit go smoothly is not about the quality of your accounting. It is about the quality of your preparation.
Audit Preparation Timeline
Start earlier than you think you need to.
90 days before fieldwork: Confirm audit dates with your auditor. Identify the PBC list from prior year and update it for any new activities, new grants, or new programs. Assign ownership for each item.
60 days before fieldwork: Complete all account reconciliations. Resolve any open items or discrepancies. Begin gathering supporting documentation for major transactions.
30 days before fieldwork: Deliver your PBC package to the auditor in full. Send complete, organized documents on time rather than trickling items in response to follow-up requests.
During fieldwork: Be available. Designate one point of contact who can answer questions promptly. Delays in responding extend fieldwork and add to your bill.
After fieldwork: Review the draft management letter carefully. Address any findings or recommendations before they carry into next year's audit.
The Complete Audit Preparation Checklist
1. Financial Statements and Trial Balance
- Draft financial statements for the audit period (Statement of Financial Position, Statement of Activities, Statement of Functional Expenses, Statement of Cash Flows)
- Final trial balance with all year-end adjustments posted
- Prior year comparative statements
- Reconciliation of trial balance to financial statements
- Roll-forward of net asset balances by restriction class
Common mistake: Delivering statements that don't tie to the trial balance. Any gap between these two will generate an immediate auditor question and signal a control weakness.
2. Cash and Bank Reconciliations
- Bank reconciliation for every account as of year-end
- Bank statements for all accounts (all 12 months, or at minimum the last 3)
- Outstanding check list as of year-end
- Petty cash count and reconciliation (if applicable)
- Investment account statements and reconciliation to the general ledger
Common mistake: Bank reconciliations that have unreconciled differences carried forward from prior months. Resolve these before fieldwork. Every unexplained item becomes an audit finding.
3. Accounts Receivable and Pledges
- Accounts receivable aging schedule as of year-end
- Pledge receivable schedule with donor names, pledge amounts, and expected collection dates
- Documentation of allowance for uncollectible pledges methodology
- Grants receivable schedule with funder names, award amounts, and amounts billed vs. received
- Confirmation letters for significant receivable balances (your auditor may send these directly)
4. Accounts Payable and Accrued Liabilities
- Accounts payable aging schedule as of year-end
- Accrued payroll and benefits calculation as of year-end
- Accrued vacation and PTO schedule
- Deferred revenue schedule (particularly for multi-year grants and program fees received in advance)
- Subsequent disbursements list (payments made after year-end that relate to prior-year expenses)
5. Net Assets and Donor Restrictions
- Schedule of net assets with donor restrictions, listing each restriction by donor or grant, original amount, expenditures during the year, and ending balance
- Documentation of restriction basis for each restricted fund (gift agreements, grant award letters)
- Release from restriction schedule showing restrictions satisfied during the year
- Board resolutions designating any board-designated net assets
This section is where fund accounting software like sherbertOSOS pays dividends at audit time. When every transaction has been tagged to the appropriate fund and restriction throughout the year, this schedule generates in minutes rather than days.
6. Revenue and Contributions
- Contribution revenue schedule by type (cash, pledge, in-kind, recurring)
- Grant revenue schedule with funder, award amount, period, and revenue recognized
- Documentation supporting revenue recognition methodology for multi-year grants
- In-kind gift documentation with valuations and acknowledgment letters
- Significant contribution documentation (gift agreements, correspondence for major gifts)
- Special event revenue and expense schedule
7. Functional Expense Allocation
- Functional expense allocation methodology documentation
- Allocation schedules showing how shared costs (salaries, rent, utilities) were allocated across program, management and general, and fundraising
- Support for time-and-effort allocation percentages (timesheets or surveys for staff whose time is split across functions)
- Final Statement of Functional Expenses reconciled to the trial balance
Common mistake: Using the same allocation percentages every year without documentation or review. Auditors look for evidence that allocation methodology is applied consistently and supportable.
8. Payroll and Benefits
- Payroll registers for the full year
- W-2s and W-3 transmittal (if year-end is calendar year)
- 941 quarterly payroll tax filings, reconciled to W-3
- Benefits plan documentation (health insurance, retirement plan)
- IRS determination letter for retirement plan (if applicable)
- Executive compensation documentation and Board approval
9. Grants and Federal Compliance
- List of all grants active during the year with funder, award number, period, total award, and cumulative expenditures
- Grant agreements and any amendments
- Budget vs. actual schedule for each grant
- Financial reports submitted to funders during the year
- Subrecipient monitoring documentation (if applicable)
- Schedule of Expenditures of Federal Awards (SEFA) if federal expenditures exceed $750,000 and a Single Audit is required
10. Compliance and Corporate Records
- Most recently filed Form 990 (auditors use this to understand your organization)
- Board minutes for the full year
- Conflict of interest disclosure forms for all board members
- Insurance certificates (general liability, D&O, workers' comp)
- State registration certificates and any regulatory correspondence
- IRS determination letter
- Any legal correspondence or pending litigation documentation
- Related party transaction schedule
Where the Manual Workflow Breaks Down
The checklist above is straightforward in concept. In practice, assembling it is painful for organizations that lack proper fund accounting infrastructure.
The typical audit prep workflow at spreadsheet-dependent organizations involves exporting data from an accounting system, manually building allocation schedules in Excel, hunting through email for grant agreements and board minutes, and assembling documentation into a shared folder while simultaneously fielding auditor requests that arrive before the package is complete.
At organizations using purpose-built fund accounting software, most of this work is already done. The net asset restriction schedule is a standard report. Budget vs. actual for each grant pulls from the same general ledger that produced the financial statements. The functional expense schedule generates automatically from the allocation rules applied throughout the year. The audit trail is built in, showing every transaction, edit, and approval with timestamps.
The difference is not just efficiency. It is accuracy. When the audit package assembles itself from a single source of truth, there are no reconciliation gaps between the schedule and the financial statements, because they come from the same data.
The Three Most Common Audit Findings at Nonprofits
Understanding what auditors look for helps you prioritize your preparation.
1. Inadequate segregation of duties. One person should not have the ability to authorize transactions, record them, and reconcile the accounts they affect. In small nonprofits, this is common and understandable. Document compensating controls (board review, management oversight) if full segregation is not possible.
2. Restricted fund misclassification. Expenses charged to restricted funds that do not meet the restriction criteria, or restricted revenue classified as unrestricted. This comes from poor fund tracking systems, not usually from intent.
3. Incomplete or missing documentation. Transactions without supporting documentation, particularly for grants, in-kind gifts, and significant contributions. Build a documentation standard into your normal operations rather than trying to reconstruct it at year-end.
Frequently Asked Questions
When should we start preparing for our audit?
Begin 60 to 90 days before the auditor's fieldwork date. Create a timeline working backward from the audit start date and assign a specific owner to each section of the PBC checklist.
What documents should be ready for the auditor?
Bank reconciliations, trial balance, financial statements, board minutes, grant agreements, major donor records, insurance certificates, reconciliation schedules for all significant account balances, and your functional expense allocation documentation.
How can we reduce audit fees?
Provide organized, complete PBC documents on time. Every hour the auditor spends searching for information or waiting on a follow-up is billed at their rate. A clean, complete package delivered 30 days before fieldwork is the single most impactful thing you can do to control audit costs.
What is a Single Audit?
A Single Audit (also called a Uniform Guidance audit) is required when a nonprofit expends $750,000 or more in federal awards in a fiscal year. It includes additional testing of federal program compliance and internal controls, and requires a Schedule of Expenditures of Federal Awards (SEFA).
What triggers an auditor finding vs. a management letter comment?
Findings represent material weaknesses or significant deficiencies in internal controls. Management letter comments are less severe observations. Both should be taken seriously and addressed before the next audit.
The Bottom Line
Audit preparation is not a once-a-year scramble. It is the accumulated result of how well your financial systems and processes work throughout the year. Organizations that maintain clean, reconciled books on a monthly basis, tag every transaction to the right fund and function at entry, and retain documentation as a habit rather than a deadline response spend a fraction of the time on audit prep that their peers do.
If your current software makes monthly reconciliation and restriction tracking difficult, the audit bill is not the real cost. The real cost is the organizational risk that comes from not knowing whether your restricted funds are being used correctly until an auditor tells you.
sherbertOSOS tracks every transaction against the right fund, grant, and functional category from the moment it is entered, so your audit schedule is never more than a report pull away.
→ Request a demo and see how sherbertOSOS simplifies your next audit.
Frequently Asked Questions
When should we start preparing for our audit?
Begin 60-90 days before the auditor's fieldwork date. Create a timeline working backward from the audit start date.
What documents should be ready for the auditor?
Bank reconciliations, trial balance, financial statements, board minutes, grant agreements, major donor records, insurance certificates, and all reconciliation schedules.
How can we reduce audit fees?
Provide organized, complete PBC documents on time. Every hour the auditor spends searching for information is billed at their rate, not yours.
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