Nonprofit Checklist: Guide to NFP Financial Statement Audit

Key Takeaways

• Prioritize Communication: Keep your auditor informed — especially before posting new entries after closing your books. Share any changes in processes and use your auditor as a resource for operational pain points.
• Get Financials in Order: Reconcile all major accounts — net assets, bank accounts, receivables, payables, etc. — to your year-end trial balance. Ensure documentation is clear, accurate, and reflects donor restrictions and valuation standards.
• Prep Operational Documents: Have key policies, board materials, and process narratives updated and ready. Clear, current documentation supports audit efficiency and accuracy.

Audits consist of two primary items: the financial statements and operational understanding. Provided is a basic checklist for each that can aid your audit preparation.

Effective Communication Tips for a Smoother NFP Audit Process

Preparation is important, as is communication. The later sections will guide you through our crafted NFP preparation checklists, but first there are some communication items to remember during the audit that impact how smoothly the audit progresses.

Once your books are closed and trial balances are provided for the audit, contact your auditor before posting any entries into the audit period. If entries are posted and the auditor is not notified, this causes a discrepancy between the numbers the auditor has and what you as the client have. This can be time-consuming to reconcile and is easily avoidable with a simple conversation on the front end.

Each audit requires an understanding of what the organization’s policies and controls were during the audit period for various processes, such as for cash receipts and cash disbursements. Within an audit period, processes can change due to ordinary life circumstances such as employee sickness, turnover, maternity or paternity leave, etc. If, for a portion of the year, processes operated differently, please describe that to the auditor. This doesn’t hinder the audit but rather gives a clearer understanding and addresses possible pain points early instead of at the last minute.

Every organization has operational pain points and areas for improvement. While the auditor’s ultimate responsibility is to the users of the audited financial statements, they also can be a resource for you. If you have identified pain points, discuss them with your auditor and see how they can help. Some audit firms include an advisory practice that may be a great and convenient resource.

Communication is key in every phase of the audit, but it doesn’t stop there. When complex issues arise throughout the year, contact your auditor and see how they can help. This not only helps you address matters as they arise, but also makes your auditor aware of items that may affect next year’s audit.

Essential Financial Statement Checklist for NFP Audit Readiness

This checklist contains steps pertaining directly to your financial statements that should be complete and ready to provide to the auditor when the audit begins.

1. Reconcile net assets. Net assets consist of two sub-categories: net assets without donor restrictions, and net assets with donor restrictions. These should both reconcile to the trial as of year-end, and your supporting schedule should clearly indicate the distinction of both categories instead of reconciling total net assets in one lump sum. This reconciliation should provide an audit trail about what donor restricted net assets were received during the year, and what net assets were released to net assets without donor restrictions that met their restrictions during the audit period. Once reconciled, retain this schedule to provide to your auditor.
2. Reconcile bank accounts. Bank reconciliations should be completed and reconciled to the trial balance as of year-end. Any variances between the reconciliation and the trial balance should be addressed and resolved internally before the audit begins. Once reconciled, bank statements and reconciliations for year-end should be retained to provide to your auditor, along with a listing of any new bank accounts, or accounts closed during the year.
3. Reconcile receivables. An organization should maintain a detail of accounts, notes or pledge receivables and that schedule should be reconciled to the trial balance as of year-end. The schedules should be reviewed, and aged items should be written off in accordance with the organization’s policies, if applicable. The allowance for credit losses should be evaluated as well, utilizing both historical collection information as well as current economic or forecasted conditions. Ensure that the allowance is updated as of year-end, and that you have reasonable support for your valuation. Once reconciled, retain these schedules to provide to your auditor.
4. Reconcile fixed assets. Your fixed assets schedule should reconcile to the trial balance. This includes reconciliation of the cost basis, related accumulated depreciation, and depreciation expense. Review the schedule to ensure that only items requiring capitalization per the organization’s policy are capitalized. Once reconciled, retain this schedule to provide to your auditor.
5. Reconcile payables and accrued expenses. Accounts payable and significant accrued expense accounts should be reconciled to the trial balance. Carefully review invoices received after the audit period to determine if they should be included in accounts payable or accrued expenses within the audit period. Invoices subsequently received that apply to the audit period but were posted in the improper period could cause additional testing requirements if identified by the auditor. If you have any known errors, please communicate that with your auditor. Once reconciled, retain these schedules to provide to your auditor.
6. Reconcile debt. All debt should reconcile from your supporting schedule to the trial balance. Ensure that the principal and interest allocation is properly stated. Once reconciled, retain the schedule to provide to your auditor, along with any new debt agreements or modifications that occurred during the year.
7. Reconcile leases. Operating and finance leases should be reviewed to determine if related right-of-use assets and lease liabilities are necessary under ASC 842. If a lease contains an option to extend after the initial term, you should evaluate whether it is likely that you will exercise that option, as this impacts the valuation. You should maintain all leases and amendments to provide your auditor, along with the calculated values of the right of use assets and liabilities whether performed internally or by a third party.
8. Revenue review. Verify that various revenues such as contributions, grants, dues, etc. match between the supporting schedules and the trial balance. They should be evaluated to ensure they are correctly recorded as with or without donor restriction.
9. Functional expense allocation. Expenses not fully allocated to either program expenses, management and general, or fundraising activities should be reviewed for reasonableness of their allocation between the three categories. You need to be consistent in the allocation of expense types between the three functions year-over-year, although different categories of expenses can have a different method of allocation. Two typical expenses requiring allocation are wages and occupancy costs. Wages may be allocated based on an individual’s time spent working in the different functions, while occupancy costs could be allocated using an estimate of total facility square footage that applies to the different functions. You should assign all expenses among these three functions and be able to support your reasoning for the allocation of any expenses that are spread across more than one function.
10. Reconcile gifts-in-kind. Gifts-in-kind are contributed non-cash items such as equipment, services, or supplies. These can often be linked to fundraising events, where a business may donate their goods or services at no cost to you. Since you received a good or service that would ordinarily require payment, this is considered a contribution and should be both recognized and disclosed as a gift-in-kind contribution. Maintain a detailed listing of any non-cash contributions, including the date of donation and any donor restrictions. Obtain a fair market value of the items received to ensure the contribution valuation is accurate. If you identify any contributions that did not have a listed fair market value, reach out to the donor to obtain an estimate, as this is required for proper reporting. Reconcile this listing to the year-end trial balance and have the schedule along with documentation of major gift-in-kind contributions ready for your auditor.

NFP Operational Audit Checklist: Key Documents and Policies for Compliance

This checklist contains documents pertaining to operations and internal policies and procedures that should be complete and ready to provide to the auditor when the audit begins.

1. Organizational documents. Provide new organizational documents, amendments, board roster, board minutes, and communications from regulatory authorities, as these must be reviewed annually and keep your auditors informed.
2. Significant policies. Provide documentation of any policy changes to your auditor. It is recommended to maintain a consolidated list of significant policy summaries that you review and update before the audit. While some policies don’t change often, they should still be reviewed for reasonableness. Some key policies include:
   • Receivables write-off policy
   • Allowance for credit losses policy
   • Capitalization policy
   • Functional expense allocation policy
3. Process narratives. A narrative should be updated annually to detail the flow of significant processes. This should describe who performs each step of the process, and progress from the transaction initiation to authorization, processing, recording, and review. Any internal controls in place to identify errors, failures, risks, or improper access should be identified as well. Some key process narratives include:
   • Cash receipts
   • Cash disbursements
   • Revenue recognition
   • Payroll

Start Smart: A Practical Guide to Preparing for Your NFP Audit

As the June 30, 2025, fiscal year-end approaches for many NFP organizations, we hope the communication keys and audit preparation checklists will be a valuable resource to implement and aid in providing a smoother audit experience.

While the information included is not a comprehensive list, it can apply to the majority of not-for-profit organizations and can serve as an excellent starting point for your audit preparation. Whether you are preparing for your first audit or you are well-versed in the audit experience, this guide will help ensure that you begin the audit ahead of schedule.

If you desire a more tailored checklist, or aren’t receiving the proper audit guidance, please visit our website or reach out to me directly at logan.george@lbmc.com to see how we can help provide you with a smoother audit experience.

Content provided by Logan George, LBMC Audit Manager.