How to avoid the most common audit management letter comments
Remember back to elementary school when it was report card day, and you'd go rushing home, excited to show your parents your straight As? Maybe that was just me?
I spent my school days as a complete over-achieving nerd, so I never really had the experience of bringing home a bad report card, but I imagine it didn't feel great.
I have, on the other hand, been through many audits with different nonprofit organizations, and getting a laundry list of management letter comments feels like a bad report card.
You wish you would've worked harder or done things differently throughout the year, and it's amazing how a few typed words on a letter (that goes to your board - yikes!) can motivate you to make whatever changes necessary.
So that you don't get that icky bad report card feeling, I am going to share three common comments I've seen on many nonprofit organizations' management letters. Make sure you've got these items cleaned up and in order:
1. Cash. The old adage "cash is king" rings true. Cash will be one of the first things the auditors look at and something they focus on, for good reason, because cash = risk.
How to nail it: Make sure all bank and petty cash balances tie to the reconciliations and the statements. Clean up any unreconciling items and make the appropriate journal entries to adjust, if necessary. Ensure there is a proper review and approval process for all bank reconciliations, and document it. Organize all backup documentation and bank statements.
2. Temporarily restricted net assets. I shared the basics of TRNA here and be advised that this will be the second thing the auditor looks at because it is all about donor intent and how we're spending our money. We should be accounting for any type of restrictions on our funding so we know at any given time how much of our assets are temporarily restricted or unrestricted.
How to nail it: You must begin tracking restrictions long before the auditors arrive. Make sure you have the systems in place to categorize revenue and expenses by donor or award. Reconcile all TRNA, make sure it ties to the trial balance, and prepare all backup documentation for the auditor's review - they will want to see the donor's letter that shows exactly how they want their money spent.
3. Finance manual & policies. Every organization should have a finance manual that documents approval policies, procurement process, bank signatories, and much more. Oftentimes, an organization creates the manual then completely forgets about it. Same with conflict of interest policy - we create it, have everyone sign it once, and file it away, never to be seen again. The auditors want constant vigilance on policies and procedures.
How to nail it: Set a time to review your manuals and policies annually. Update as needed, get new staff to sign the appropriate policies, and add any new changes to your business. Did you expand to a new location or add another restricted bank account? Update that manual!
So there's your head start to the audit. Make sure you tackle these items starting NOW to ensure they don't end up as comments on your management letter.
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