In an article titled Are You and The Organization Audit Ready? The NonProfit Times provides good advice and examples of what items a nonprofit needs to have ready for an annual audit. What the article does not mention is that the books and records must be prepared in accordance with Generally Accepted Accounting Principles (GAAP) prior the start of the audit. To avoid receiving reports from your auditors that use language like “Material Weaknesses” and “Significant Deficiencies,” the auditors should not have to propose any material audit adjustments after the commencement of the audit. It is incumbent on the organization to have the internal capacity to prepare financial statements that are fully compliant GAAP.
There are a lot of GAAP nuances that relate to nonprofit organizations and this is why it helps to make sure you receive proper, specialized nonprofit accounting advice when it comes to audit preparation. Larger nonprofits can afford to hire this expertise internally but smaller nonprofits should consider obtaining this advice on an outsourced basis. Material weakness and significant deficiency findings can have a material impact on your organization, particularly if you receive federal funding. These findings may cause your federal funding source to classify your organization as “high risk” which has all sorts of ramifications for current and future funding proposals.