We’ve seen it time and time again: a nonprofit suddenly learns their biggest funder now requires audited financial statements—and they have just six weeks to deliver. The panic is real. ‘Our books are a mess,’ they admit. ‘We don’t even know where to start, and we’re terrified of what the auditors will find.’
Sound familiar? The truth is, being audit-ready doesn’t have to feel overwhelming. After nearly 50 years of helping organizations through this exact situation, we know the ones that handle audits with confidence all share one thing in common: they treat audit readiness as a year-round habit, not a last-minute scramble.
And the good news? We can help you build that same confidence—so your next audit feels like just another step forward, not a crisis.
AUDIT READINESS WITHOUT THE ANXIETY
Most business owners we meet have built up financial audits into something far scarier than they actually are. They imagine stern-faced auditors swooping in to uncover every mistake and judge their competence. The reality? Professional auditors are there to help you present accurate financial information to stakeholders who need it.
The real stress comes from being unprepared. When your records are disorganized, your internal controls are weak, and you’re missing key documentation, even a routine audit becomes a nightmare. But when you maintain strong financial practices throughout the year, the audit process becomes straightforward, almost boring, in the best possible way.
Here’s what we tell many clients: audit readiness is simply good financial hygiene. The same practices that help you make better business decisions also make audits smooth and stress-free. You’re not preparing for an interrogation; you’re organizing information that tells the story of your organization’s financial health.
WHAT ARE AUDITED FINANCIAL STATEMENTS?
Let’s start with the basics. Audited financial statements are your organization’s financial reports that have been examined and verified by an independent certified public accountant. Think of them as your financial story, but with a professional stamp of approval that says, “Yes, these numbers accurately represent what happened.”
Every set of audited financial statements includes six key components:
- Income Statement: Shows your revenues and expenses over a specific period
- Balance Sheet: Displays your assets, liabilities, and equity at a point in time
- Cash Flow Statement: Tracks how cash moved through your organization
- Statement of Functional Expenses: (For nonprofits) Shows how you spent money on programs versus administration
- Notes to Financial Statements: Provides context and details about your accounting methods
- Independent Auditor’s Opinion Letter: The auditor’s professional assessment of your financial statements
Who actually needs these audited statements? More organizations than you might think:
- Lenders require them before approving significant loans or lines of credit. They want independent verification that you can repay what you borrow.
- Investors and major donors often require audited financials before making substantial commitments. They’re investing in your success and need confidence in your financial management.
- Government agencies and foundations frequently require audited statements as part of grant applications or compliance requirements.
- Board members and other stakeholders use them to make informed decisions about your organization’s direction and leadership.
AUDITED FINANCIALS VS REVIEWED OR COMPILED STATEMENTS
Not every organization needs a full audit. Understanding your options helps you choose the right level of service, and budget accordingly.
Here’s how the three main types of financial statements compare:
Compilations are basically organized presentations of your financial data. The CPA doesn’t verify anything, they just put your numbers into proper financial statement format. It’s like having a professional organize your photos into an album without checking if they’re actually pictures of your family.
Reviews involve limited testing and inquiry. The CPA will ask questions, perform analytical procedures, and flag anything that seems unusual. They provide “limited assurance” that your statements are reasonable.
Audits include extensive testing of your records, internal controls, and supporting documentation. The auditor provides “reasonable assurance” that your statements are free from material misstatement.
Most nonprofits with budgets over $750,000 need audits. Many lenders require audited statements for loans over $1 million. When in doubt, ask your stakeholders what they specifically require. Don’t assume you need the most expensive option.
THE AUDIT PROCESS EXPLAINED STEP-BY-STEP
Understanding what actually happens during an audit removes much of the mystery and anxiety. Here’s how the process works:
Phase 1: Planning and Engagement (Weeks 1-2)
You’ll sign an engagement letter that outlines the audit scope, timeline, and fees. This is your contract with the audit firm, so read it carefully. The auditors will also send you a “Prepared by Client” (PBC) list. Basically a detailed list of every document they’ll need.
Pro tip: The quality of your PBC list tells you a lot about your audit firm. Good auditors provide detailed, organized lists that make sense. Vague or disorganized lists are red flags.
Phase 2: Interim Fieldwork (Weeks 3-6)
The auditors begin testing your internal controls and reviewing your processes. They’re not looking for perfection. They want to understand how you handle financial transactions and identify areas that need extra attention.
They’ll test things like:
- How you approve purchases and payments
- Whether you’re properly separating financial duties
- How you handle cash receipts and deposits
- Whether you’re following your own policies
Phase 3: Year-End Fieldwork (Weeks 7-10)
This is when auditors test specific transactions and account balances. They’ll select samples of your receipts, invoices, and other supporting documents to verify that everything is properly recorded.
Common items they’ll test:
- Bank reconciliations and cash balances
- Accounts receivable and bad debt estimates
- Fixed asset additions and depreciation calculations
- Payroll expenses and related liabilities
- Revenue recognition and deferred income
Phase 4: Draft Review and Final Report (Weeks 11-12)
The auditors prepare draft financial statements and their opinion letter. You’ll have a chance to review everything and ask questions before the final version is issued.
Understanding Audit Opinions:
- Unqualified (Clean): Everything looks good (this is what you want)
- Qualified: There’s an issue, but it doesn’t affect the overall reliability
- Adverse: The financial statements are materially misstated
- Disclaimer: The auditor couldn’t get enough information to form an opinion
Most well-managed organizations receive clean opinions. If you get something else, don’t panic. Work with your auditor to understand what needs to be fixed.
THE STRESS-FREE AUDIT READINESS FRAMEWORK
Here’s where we see the biggest difference between organizations that breeze through audits and those that struggle: the prepared ones think about audit readiness every quarter, not just when the auditors call.
Why Last-Minute Preparation Creates Problems
When you wait until audit time to organize your records, several things go wrong:
- Missing documentation: You can’t find receipts, contracts, or other supporting documents
- Reconciliation errors: Your bank statements don’t match your books, and you can’t remember why
- Policy gaps: You realize you don’t have written procedures for key financial processes
- Staff overwhelm: Your team drops everything to respond to auditor requests
The result? Delayed audits, higher fees, and lots of stress for everyone involved.
Your Year-Round Audit Readiness Checklist
Instead of cramming, build these practices into your quarterly routine:
Q1 Tasks (January-March):
- Complete all prior-year adjusting entries
- Update your fixed asset schedules
- Review and update financial policies
- Schedule your annual audit and send signed engagement letter
Q2 Tasks (April-June):
- Complete mid-year financial review
- Test your backup and document retention systems
- Review internal controls and segregation of duties
- Update vendor and customer master files
Q3 Tasks (July-September):
- Prepare preliminary year-end closing timeline
- Review significant contracts and commitments
- Update depreciation schedules and useful life estimates
- Train any new accounting staff on audit procedures
Q4 Tasks (October-December):
- Complete monthly closes within 15 days
- Prepare detailed year-end accrual estimates
- Organize supporting documentation by account
- Complete all bank and account reconciliations
Monthly Basics (All Year):
- Close your books within 20 days of month-end
- Complete all bank reconciliations
- Review and approve all journal entries
- File supporting documents in organized folders
This might sound like a lot, but most of these tasks should be part of good financial management anyway. You’re not adding extra work. You’re organizing existing work to make it audit-ready.
YOUR AUDIT-READY TOOLKIT: TEMPLATES, CHECKLISTS, AND SOFTWARE
The right tools make audit preparation significantly easier. Here’s what we recommend:
Essential Software Platforms
QuickBooks Online remains the gold standard for small to medium organizations. Its audit trail features and user permission controls make auditor reviews much smoother. The key is setting it up properly from the start with:
- Separate accounts for each major revenue and expense category
- Proper class or location tracking for departments or programs
- Regular data backups and user access reviews
Bill.com streamlines your accounts payable process and creates excellent documentation for auditors. Every invoice, approval, and payment gets tracked electronically.
For document management, consider platforms like Suralink or Karbon that allow you to organize and share audit documentation securely with your CPA firm.
Automating Your Audit Prep
Set up these automated reminders in your calendar system:
- Monthly bank reconciliation deadlines
- Quarterly financial review meetings
- Annual policy review dates
- Audit planning meeting schedules
Document everything using cloud-based storage with clear naming conventions:
2024_BankStatements_January_Chase
2024_Invoices_Vendor_ABC_Company
2024_Contracts_Service_Agreement_XYZ
Free Resources to Get You Started
We’ve created a comprehensive Bookkeeping Health Self-Diagnostic Scorecard that helps you identify exactly where your financial processes need attention. It covers everything from basic bookkeeping practices to advanced internal controls.
COMMON AUDIT RED FLAGS AND HOW TO FIX THEM EARLY
After decades of audit work, we’ve seen the same issues pop up repeatedly. The good news? They’re all preventable with proper planning.
Red Flag #1: Inconsistent Financial Records
What it looks like: Your bank statements don’t match your books, journal entries lack adequate support, or account balances seem to change randomly between months.
How to fix it:
- Establish monthly close deadlines and stick to them
- Require supporting documentation for every journal entry
- Complete bank reconciliations within 10 days of receiving statements
- Investigate and resolve any reconciling items immediately
Prevention tip: Set up monthly financial reviews where someone other than the bookkeeper examines the financial statements for unusual changes or obvious errors.
Red Flag #2: Weak Internal Controls
What it looks like: The same person handles cash receipts and deposits, invoices get paid without approval, or financial records are accessible to too many people.
How to fix it:
- Separate financial duties among different people
- Require written approval for purchases over set dollar limits
- Limit access to your accounting system and review user permissions quarterly
- Create written procedures for all financial processes
Prevention tip: Even small organizations can implement basic controls. If you only have two people handling finances, have them check each other’s work.
Red Flag #3: Unrecorded Liabilities and Revenue Issues
What it looks like: Bills that arrived in January for December services aren’t recorded in December, or you’ve received payments for services you haven’t provided yet.
How to fix it:
- Set up accrual entries for significant expenses incurred but not yet billed
- Properly classify advance payments as deferred revenue
- Review contracts to understand when revenue should be recognized
- Create year-end cut-off procedures for recording transactions in the correct period
Prevention tip: Keep a simple spreadsheet of recurring expenses and their timing. This makes year-end accruals much easier to calculate.
THE HIDDEN VALUE OF BEING AUDIT-READY
Here’s what might surprise you: organizations that maintain audit-ready financial practices often discover benefits that go far beyond satisfying external requirements.
Unlocking Financing and Funding Opportunities
Banks and investors view clean audited financial statements as a signal that you’re professionally managed and lower risk. I’ve seen clients secure significantly better loan terms simply because their financial house was in order.
Grant funders increasingly prefer organizations with audited statements because it demonstrates accountability and transparency. Some opportunities are only available to organizations that can provide recent audited financials.
Gaining Strategic Business Insights
When your financial records are clean and current, you can actually use them to make better decisions. Monthly financial statements that are accurate and timely reveal trends, identify problems early, and highlight opportunities.
Common scenario: Organizations with timely, accurate financial statements often discover important trends early. Like when program costs are increasing faster than revenue. This early warning allows them to adjust their fundraising strategy or operational approach before facing a budget crisis.
Peace of Mind During Growth and Transitions
Whether you’re considering a merger, planning for leadership transition, or simply growing rapidly, having audit-ready financials gives you confidence that your numbers will stand up to scrutiny.
Due diligence becomes straightforward when your documentation is already organized and your financial practices are solid.
WHEN AND WHY TO ENGAGE A CPA FOR AUDITED FINANCIAL STATEMENTS
Not every organization needs audited financial statements, but many benefit from them even when they’re not required.
When Audits Are Required
- Legal requirements: Some states require nonprofits over certain revenue thresholds to have audited statements. Check with your state’s attorney general office.
- Contractual obligations: Grant agreements, loan covenants, and major donor agreements often require audited financials.
- Governance requirements: Some boards adopt policies requiring audits above certain budget levels as a governance best practice.
When to Consider Voluntary Audits
Even if not required, audits can be valuable for:
- Organizations considering major growth: Audited statements help secure financing and demonstrate readiness for increased responsibility.
- Leadership transitions: New executives and board members often appreciate the confidence that comes with independently verified financial statements.
- Stakeholder transparency: Some organizations use audits to demonstrate accountability to donors, members, or the public.
Choosing the Right CPA Firm
Not all audit firms are created equal. Look for:
- Industry experience: Choose auditors who regularly work with organizations like yours. Nonprofit accounting has unique requirements that generic business auditors might miss.
- Communication style: Your auditors should explain things clearly and be responsive to questions. Avoid firms that make you feel stupid for asking.
- Value beyond compliance: The best audit firms provide insights about your financial management, suggest improvements, and help you understand your options.
- References: Ask for references from similar organizations and actually call them.
Choosing the right CPA firm is essential. At Greenwood Ohlund, our audit and assurance services provide more than just compliance. We partner to support your strategic financial goals.
MANAGING THE IRS AND REGULATORY REQUIREMENTS
Staying compliant with tax authorities requires ongoing attention, especially for nonprofits. Your audit-ready practices should support your tax compliance, not compete with it.
Key areas to monitor:
- Proper documentation for all charitable contributions
- Accurate tracking of program versus administrative expenses
- Compliance with unrelated business income tax rules
- Timely filing of required forms and returns
Integration tip: Use the same chart of accounts and expense classifications for both your audit and your Form 990. This eliminates confusion and reduces the risk of errors.
AUDIT READINESS AS A STRATEGIC ADVANTAGE
Here’s the bottom line: being audit-ready isn’t just about satisfying external requirements. It’s about building financial practices that help your organization succeed.
When your financial house is in order, you spend less time scrambling to find information and more time using that information to make good decisions. You reduce stress for your staff, save money on professional fees, and build confidence with stakeholders who matter to your mission.
The key is changing your mindset from “getting through the audit” to “maintaining audit-ready practices all year.” It’s the difference between cramming for a final exam and staying caught up with coursework.
Need personalized guidance? Contact us for a free audit readiness consultation. We’ll review your current practices and create a customized plan to get you audit-ready without the stress.
Remember: every organization that handles audits with confidence started where you are now. The difference is they decided to get prepared and stay prepared. You can do the same.
FAQs
Audited financial statements are your organization’s financial reports that have been independently examined and verified by a certified public accountant. They include your income statement, balance sheet, cash flow statement, and notes, along with the auditor’s professional opinion on their accuracy.
Organizations typically need audited financial statements when required by lenders, major donors, government agencies, or internal governance policies. Many states require nonprofits over certain revenue thresholds to have audits. Even when not required, audits can help secure financing, demonstrate accountability, and provide confidence to stakeholders.
An audit provides the highest level of assurance through extensive testing and verification. A review provides limited assurance through analytical procedures and inquiries. A compilation simply organizes your financial data into proper statement format with no assurance provided. Audits cost the most but provide the most credibility.
Start by maintaining clean, current financial records throughout the year. Complete monthly closes within 20 days, keep bank reconciliations current, organize supporting documentation, and establish written financial policies. The key is treating audit readiness as a year-round practice, not a last-minute project.
Auditors typically request bank statements, general ledger details, supporting documentation for major transactions, contracts and agreements, board meeting minutes, tax returns, payroll records, and detailed trial balances. They’ll provide a specific “Prepared by Client” list during planning.
Most audits take 8-12 weeks from start to finish, including planning, fieldwork, and report preparation. Well-prepared organizations often complete audits faster, while those with disorganized records may take longer. The complexity of your operations and the auditor’s schedule also affect timing.
Audit costs vary widely based on your organization’s size, complexity, and location. Small nonprofits might pay $15,000-$25,000, while larger organizations can pay $50,000 or more. Well-prepared organizations typically pay less because the audit work goes more efficiently.
“Failing” an audit isn’t common, but auditors might issue qualified opinions or identify deficiencies that need correction. Work with your auditor to understand any issues and develop correction plans. Most problems can be resolved with improved processes and controls.
Small businesses typically don’t need audited financial statements unless required by lenders, investors, or contracts. Many small businesses use reviews or compilations instead. However, some choose audits voluntarily for credibility or to prepare for growth.
No. Audited financial statements must be prepared by an independent certified public accountant. However, you can significantly reduce costs by maintaining good financial records and being well-prepared for the audit process.
A PBC (Prepared by Client) list is a detailed request for documents and information that auditors need to complete their work. It typically includes items like bank statements, supporting documentation for major transactions, contracts, and account analyses. A well-organized PBC list makes the audit process much smoother.
Common problems include incomplete bank reconciliations, poor documentation for journal entries, weak internal controls, unrecorded liabilities, and revenue recognition errors. Prevent these by maintaining current reconciliations, requiring documentation for all entries, separating financial duties, and understanding proper accounting principles.
The audit opinion letter is the auditor’s professional assessment of your financial statements. An “unqualified” or “clean” opinion means everything looks good. “Qualified” opinions indicate specific issues that don’t affect overall reliability. “Adverse” opinions suggest material problems, while “disclaimer” opinions mean the auditor couldn’t get enough information to form an opinion. Most well-managed organizations receive clean opinions.
