Nonprofit Audit Checklist: How to Prepare for a Smooth Audit

For nonprofit leaders, the annual audit is more than a financial exercise—it’s a critical checkpoint that a wide range of stakeholders rely on to gauge organizational integrity and performance. A smooth audit builds trust, reinforces your credibility, and validates the way your organization stewards its funds. On the other hand, a sub-par audit can tarnish your organization’s reputation and damage its relationships.

Despite the importance of the annual audit, too many nonprofits treat audit prep as a once-a-year scramble—digging through files, chasing missing records, and hoping things line up. This reactive approach often results in extended timelines, avoidable corrections, and a more stressful experience for everyone involved.

The difference between a clean audit and a chaotic one often comes down to one thing: ongoing, intentional preparation. Organizations that treat audit readiness as a year-round discipline consistently experience faster audits, fewer issues, and stronger relationships with stakeholders.

Understanding Nonprofit Audit Requirements

A nonprofit audit serves purposes well beyond regulatory compliance. Major donors, government agencies, and corporate partners frequently require audited financials to approve grants or renew an organization’s funding. Donors and board members rely on audit results to understand how effectively the organization is managed and whether resources are being used as intended. In many states, audits are also legally required once certain revenue thresholds are met.

Unlike for-profit audits, nonprofit audits demand deeper scrutiny of fund restrictions, donor intent, and grant compliance. Auditors must verify that funds are segregated correctly and spent in accordance with both legal and donor-imposed restrictions. They also examine how organizations track and report conditional grants, in-kind donations, and pledges—especially those that span fiscal years.

All of that can make the process of preparing for a nonprofit audit complex, particularly for nonprofit organizations with under-resourced finance functions. Working with an external audit preparation partner can help organizations take a more proactive approach to their annual financial statement audit.

Essential Audit Preparation Checklist for Nonprofits

Effective audit preparation requires systematic organization of financial records and supporting documentation well before auditors arrive. The following checklist addresses both standard financial requirements and nonprofit-specific compliance needs that auditors will examine during fieldwork.

Documentation and Records Organization

Auditors rely on comprehensive documentation to verify financial accuracy and organizational governance. The following documents form the foundation of any nonprofit audit and should be organized and readily accessible:

• • Financial Statements with Proper Fund Segregation: Monthly and year-end financial statements that clearly separate unrestricted, temporarily restricted, and permanently restricted funds, including detailed schedules showing fund balances and restrictions.
  • Grant Documentation and Compliance Records: Complete grant agreements, award letters, and modification documents for all active grants, plus detailed expenditure tracking that demonstrates compliance with funding restrictions and reporting requirements.
  • Board Meeting Minutes and Resolutions: All board and committee meeting minutes for the fiscal year, including resolutions authorizing major transactions, compensation decisions, and policy changes that impact financial operations.
  • Internal Control Documentation and Policies: Written policies covering financial management, conflict of interest, expense approval, and segregation of duties, plus evidence that controls are actively monitored and enforced.

Account Analysis and Reconciliation

Accurate account balances supported by detailed analysis demonstrate financial control and reduce audit queries significantly. Prepare the following reconciliations and supporting schedules:

• • Bank Reconciliations and Cash Management Records: Monthly bank reconciliations for all accounts, including detailed explanations for outstanding items and evidence of management review and approval.
  • Accounts Receivable Aging and Grant Receivables: Detailed aging reports for all receivables, including grant reimbursements, pledges, and program fees, with supporting documentation for collection efforts on past-due amounts. Items such as pre-paid expenses should also be included here.
  • Inventory and Fixed Asset Documentation: Physical inventory counts with supporting documentation, plus detailed fixed asset registers showing acquisitions, disposals, and depreciation calculations throughout the year.
  • Payroll and Benefits Records: Complete payroll registers, tax filings, and benefits administration records, including documentation supporting any allocation of personnel costs across programs and grants.

Nonprofit-Specific Requirements

Nonprofit compliance testing focuses on fund restrictions, program effectiveness, and regulatory adherence that distinguish mission-driven organizations from for-profit entities. Ensure these specialized areas are thoroughly documented:

• • Restricted Fund Tracking and Donor Compliance: Detailed records showing how restricted contributions were received, tracked, and expended in accordance with donor stipulations, including board-designated fund activity.
  • Program Expense Allocation and Supporting Documentation: Cost allocation methodologies with supporting calculations that demonstrate how shared expenses are distributed across programs, administration, and fundraising functions.
  • Form 990 and Related Tax Filings: Current and prior year Form 990 submissions, state registration renewals, and any correspondence with tax authorities regarding exempt status or filing requirements.
  • Grant Reporting and Compliance Testing Materials: All grant reports submitted during the fiscal year, plus supporting documentation that demonstrates compliance with federal uniform guidance and foundation reporting requirements.

Common Audit Challenges Nonprofits Face

Even well-prepared nonprofit organizations encounter predictable audit challenges that can extend timelines and create findings. At G-Squared Partners, our experience has shown that most audit issues fall into a few key categories—and with proper preparation, they're largely preventable.

Fund accounting complexities frequently create audit delays when organizations struggle to maintain proper segregation between restricted and unrestricted funds. Grant compliance gaps emerge when detailed expenditure tracking or cost allocation documentation is incomplete. Internal control weaknesses often surface in smaller nonprofits where limited staff handle multiple financial functions without adequate oversight.

Revenue recognition issues commonly arise with complex donations, pledges, and conditional grants that span multiple periods, while technology limitations compound these challenges when organizations rely on spreadsheets or basic systems that can't handle sophisticated nonprofit requirements.

Our approach addresses these challenges proactively by implementing robust fund tracking systems, maintaining grant compliance documentation year-round, and ensuring proper internal controls are documented and monitored. By identifying and resolving these common issues before auditors arrive, organizations experience significantly smoother audit processes with fewer findings and reduced timelines.

The Strategic Value of Professional Audit Preparation with G-Squared Partners

At G-Squared Partners, audit readiness isn’t an afterthought—it’s built into everything we do.

Our nonprofit clients who engage us for outsourced CFO, accounting, and bookkeeping services benefit from year-round audit-ready financials. Clean books, consistent reconciliations, proper fund tracking, and clear documentation aren’t something we scramble to assemble at year-end—they’re part of our standard operating rhythm. When the auditors arrive, there are no surprises.

We also partner with organizations on standalone audit preparation projects, providing focused support to help nonprofit leaders establish the right systems, organize documentation, and identify issues before they become audit findings. Whether you’re gearing up for your first audit or looking to streamline a process that’s been inefficient in the past, our professionals can help lay the foundation for a smooth, efficient audit experience.

Let’s talk about how we can support your audit readiness—whether through ongoing financial leadership or a one-time engagement designed to set you up for success. Contact us today to set up a free consultation.