The difference between a smooth audit and a painful one almost always comes down to preparation. Not the complexity of the accounting. Not how many programs the organization runs. Not the size of the federal grant portfolio. Preparation.
Auditors will not say this publicly, but the organizations that make audits difficult are the ones that show up to fieldwork with incomplete reconciliations, missing board minutes, allocation methodologies they cannot explain, and restricted fund schedules that do not tie to the trial balance. Every hour an auditor spends locating a document, waiting for a reconciliation, or reconstructing what should have been provided upfront is billed to your organization.
Here are the ten things auditors consistently wish nonprofit clients would do before fieldwork begins — based on the most common audit friction points.
1. Reconcile Every Balance Sheet Account Before Fieldwork
The single most impactful preparation step is a complete balance sheet reconciliation before the auditor arrives. Every account on your balance sheet — cash, accounts receivable, grants receivable, prepaid expenses, accounts payable, accrued liabilities, deferred revenue, net assets — should have a supporting schedule that ties the account balance to the underlying detail.
What auditors see most often: Unreconciled accounts where the balance sheet account and the supporting detail disagree by amounts that "will be cleaned up during the audit." The auditor cannot proceed with those accounts until the reconciliation is complete. That clean-up happens during fieldwork, on audit time, at audit rates.
What to do: Assign a reconciliation owner to every balance sheet account. Set internal deadlines two weeks before fieldwork begins. Review completed reconciliations for unexplained differences before the auditor arrives.
2. Have a Complete, Organized PBC Package Ready on Day One
PBC stands for "Prepared By Client." It is the list of documents and schedules your auditor sends before fieldwork — the information they need to begin their work. Getting the PBC package complete and organized is the single highest-leverage preparation task.
A typical nonprofit PBC package includes:
- Trial balance and financial statements as of year-end
- Bank reconciliations for all accounts
- Investment statements and reconciliations
- Grant agreements and drawdown schedules for all active federal awards
- Board minutes for the full fiscal year
- Restricted fund schedules with beginning balance, activity, and ending balance by fund
- Functional expense allocation methodology and calculation
- Accounts payable aging as of year-end
- Accounts receivable aging with reserve documentation
- Insurance certificates
- Payroll reconciliation to W-2s
When PBC items arrive to the auditor incomplete or in disorganized form, the audit slows down. When they arrive complete and organized on day one, fieldwork can begin immediately.
3. Have a Complete Set of Board Minutes for the Full Year
Board minutes are reviewed by auditors to understand governance activity during the year: significant commitments made, board-designated funds established or released, executive compensation approvals, major contracts authorized, any transactions with related parties discussed.
What auditors see most often: Missing minutes for one or two meetings, minutes that are not yet approved by the board, or minutes that reference decisions without documenting the substance of the discussion.
What to do: Compile all board and committee minutes for the fiscal year — including Finance Committee and Audit Committee minutes — and have them approved and organized before fieldwork. If a meeting was cancelled or merged with another, document that in the records.
4. Document Your Functional Expense Allocation Methodology
Form 990 and GAAP financial statements both require expenses to be presented by functional classification: program services, management and general, and fundraising. If your organization allocates shared costs across these categories, auditors will ask how.
What auditors see most often: Allocation percentages that are applied but cannot be explained, or allocation methodologies that changed mid-year without documentation. "We used 70/20/10 because that's what we've always done" is not a methodology. It is a habit.
What to do: Write down the allocation methodology — the cost bases used, how they were calculated, and why they are reasonable. Keep supporting calculations showing how the percentages were derived. Update the methodology if the underlying facts change (significant changes in staff time, space, or program mix).
5. Prepare a Complete Restricted Fund Schedule
Auditors test restricted fund balances and releases from restriction. They need a schedule showing every restricted fund with its beginning balance, contributions received, releases from restriction during the year, and ending balance — and that schedule must tie to the trial balance.
What auditors see most often: Restricted fund schedules that are maintained separately from the accounting system and do not reconcile to the net assets balance on the trial balance. The reconciliation happens during fieldwork.
What to do: Generate the restricted fund schedule directly from the accounting system if possible. If maintained separately, reconcile it to the trial balance before fieldwork and document any reconciling items.
6. Prepare the SEFA If Subject to Single Audit
For organizations that expend $750,000 or more in federal awards, the Schedule of Expenditures of Federal Awards (SEFA) is a required schedule that forms part of the Single Audit. It must list every federal program by CFDA number, including pass-through awards.
What auditors see most often: SEFAs prepared at the start of fieldwork with incomplete information, pass-through awards omitted, or expenditures that do not tie to GL account totals.
What to do: Begin SEFA preparation at least 30 days before fieldwork. Cross-reference to grant agreements to confirm CFDA numbers and pass-through entity information. Reconcile total SEFA expenditures to the related GL accounts before providing to the auditor.
7. Clear Open Reconciling Items Before Fieldwork, Not During
Every significant open reconciling item that exists when fieldwork begins will require the auditor's attention. Some items are legitimate: outstanding checks, deposits in transit. Others are unexplained differences that need investigation.
What auditors see most often: Bank reconciliations with reconciling items that have been outstanding for six months or more — sometimes for years. These items require auditor follow-up and client explanation, consuming time from both sides.
What to do: Review bank reconciliation aging before fieldwork. Any reconciling item older than 90 days should be researched and resolved or documented with a clear explanation before fieldwork begins.
8. Have a Complete Payroll Reconciliation Ready
Auditors reconcile total compensation expense in the general ledger to total compensation reported on W-2s and payroll tax returns. Discrepancies require explanation and can be time-consuming to resolve.
What to do: Prepare a reconciliation showing total payroll per the GL, plus an explanation of any differences, before fieldwork. Common reconciling items include fringe benefits handled outside the payroll system, accrued salaries at year-end, and timing differences between payroll period end dates and the fiscal year-end.
9. Know Your Related Party Transactions and Be Ready to Discuss Them
Related party transactions — transactions with board members, staff, family members, or entities in which insiders have a financial interest — require disclosure in financial statements. Auditors ask about them directly.
What auditors see most often: Organizations that have undisclosed related party transactions because no one recognized them as such. The board member's company that does the copier maintenance. The Executive Director's spouse who does graphic design work. These are related party transactions.
What to do: Review all vendor and contractor payments for the year and identify any where an insider relationship exists. Have the related party documentation ready — conflict of interest disclosures, board minutes documenting the approval, evidence that the transaction was at arm's length.
10. Schedule a Pre-Audit Planning Meeting 60–90 Days Before Fieldwork
The most effective audit preparation tool is a direct conversation with your auditor before fieldwork begins. A pre-audit planning meeting gives both sides the opportunity to surface new issues, clarify expectations, and align on timing.
What to discuss:
- Any significant transactions or events during the year that the auditor should know about
- Any new grants, programs, or organizational changes
- Changes in accounting policies or estimates
- Known areas where documentation is incomplete and a remediation plan
- The PBC list and timing expectations for each item
Organizations that have this conversation consistently have smoother audits than those that arrive at fieldwork having not spoken to their auditor since the prior year's report was issued.
The Audit Prep Checklist report in sherbertOSOS tracks readiness across every audit area — reconciliations, documentation, compliance schedules, and PBC items — with auto-populated status indicators that show what is complete and what still needs attention. When fieldwork begins, your auditor's first request is a report pull, not a scavenger hunt.
Frequently Asked Questions
What is a PBC list?
PBC stands for "Prepared By Client." It is the list of documents and schedules your auditor provides before fieldwork begins, specifying the information they need to start their work. Getting this list complete and organized is the highest-leverage preparation task — every missing item delays fieldwork.
How can I reduce my audit fees?
Provide complete PBC items on time, respond to auditor questions quickly, and maintain clean records throughout the year rather than only at year-end. Every hour of auditor time spent locating documents, waiting for reconciliations, or answering questions that should have been anticipated is billed to you.
Should I talk to my auditor before the audit starts?
Yes. A pre-audit planning meeting 60 to 90 days before fieldwork aligns expectations, surfaces new issues, and prevents surprises for both sides. The conversation is free; the alternative — discovering problems after fieldwork begins — is not.
When should audit preparation start?
At least 90 days before the scheduled fieldwork start date. The balance sheet reconciliation process should begin at fiscal year-end. Documentation gathering should begin 60 days out. The PBC package should be complete and submitted at least two weeks before fieldwork begins.
The Bottom Line
A smooth audit is not a matter of luck or of having simple financial operations. It is a matter of preparation — of arriving at fieldwork with complete documentation, reconciled accounts, and a team that knows where everything is.
The organizations that consistently have efficient audits are not the ones with the cleanest books. They are the ones that treat audit preparation as a year-round process, not a four-week sprint before fieldwork.
→ Start a free trial of sherbertOSOS and see how the Audit Prep Checklist tracks readiness across every audit area automatically.
Frequently Asked Questions
What is a PBC list?
PBC stands for 'Prepared By Client' — it's the list of documents and schedules the auditor needs you to prepare before fieldwork. Getting this complete and organized is the single best thing you can do.
How can I reduce my audit fees?
Provide complete PBC items on time, respond to questions quickly, and maintain clean records throughout the year — not just at year-end.
Should I talk to my auditor before the audit?
Yes. A pre-audit planning meeting (60-90 days before fieldwork) aligns expectations, identifies new issues, and prevents surprises for both sides.
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