Audit Readiness for Nonprofits: Best Practices for Controllers and CFOs

As donor expectations, grant compliance requirements, and regulatory scrutiny continue to rise, audit readiness has become a strategic imperative for nonprofit organizations. For controllers, CFOs, and finance directors, being “audit ready” is not just about preparing for the annual financial statement or Single Audit—it is about building a sustainable framework for financial accuracy, internal control, transparency, and risk management that supports your mission and builds stakeholder trust.

This article outlines best practices in audit readiness, emphasizing actionable strategies that nonprofit finance leaders can use to improve efficiency, reduce audit findings, and reinforce accountability to donors, funders, and the public.

Foster a Year-Round Culture of Audit Preparedness

A common pitfall for nonprofits is treating audit readiness as a once-a-year scramble. Instead, embed audit preparedness into your financial management cycle by:

• Reconciling key accounts (cash, receivables, payables, contributions, grants, and restricted funds) monthly or quarterly.
• Conducting periodic internal control assessments.
• Reviewing documentation standards and supporting schedules throughout the year.

Why it matters: This proactive approach reduces last-minute stress, minimizes errors, and signals to auditors and stakeholders for a commitment to sound financial stewardship.  

Develop a Nonprofit-Specific Audit Readiness Calendar

Create a comprehensive timeline that aligns with your fiscal year-end and audit milestones, including:

• Deadlines for closing entries, reconciliations, and contribution cut-offs.
• Timelines for grant reporting and SEFA (Schedule of Expenditures of Federal Awards) preparation if subject to Single Audit.
• Internal deadlines for draft financial statements and supporting schedules.

Assign clear roles and responsibilities to staff to prevent duplication of effort, ensure oversight, and promote accountability across departments.

Ensure Documentation, Contracts, and Agreements Are Audit-Ready

Auditors rely on your documentation to validate balances and test compliance. For nonprofits, this includes a special focus on contracts and agreements with donors and funders:

• Maintain a central repository for all donor and grant agreements, contracts, and related correspondence. This ensures easy access during audits and supports accurate revenue recognition and compliance.
• Review all contracts and agreements for specific donor restrictions, deliverables, reporting requirements, and allowable costs. Ensure these are clearly documented and communicated to relevant staff.
• Track and document the fulfillment of donor and funder requirements. This includes milestones, performance obligations, and reporting deadlines.
• Ensure contributions and grants are recorded accurately, with clear donor restriction documentation.
• Net asset classifications (with and without donor restrictions) should be tracked and reconciled, with reference to the underlying agreements.
• In-kind contributions should be valued and disclosed in accordance with FASB standards, and supporting documentation (such as agreements or correspondence) should be retained.
• Grant-related expenditures must be approved, tracked, and aligned with funder requirements.
• Use PBC (Prepared by Client) checklists to ensure completeness of audit evidence, including all contracts and agreements.
  
  

Proactive Contract Management: Reducing Risk and Discovering Issues Early

A robust audit readiness framework that emphasizes the careful management of contracts and agreements with donors and funders is a powerful tool for risk reduction and early issue detection in nonprofit organizations.

• Reducing risk: By maintaining a central repository of all donor and grant agreements, nonprofits can ensure that critical terms, conditions, and compliance requirements are not overlooked. This reduces the risk of noncompliance with donor restrictions, missed reporting deadlines, or unallowable expenditures—all of which can jeopardize funding and damage organizational reputation. Regular review of contracts and agreements also helps identify any ambiguities or obligations that may require clarification or renegotiation before they become problematic.
• Early issue discovery: Consistent tracking and reconciliation of contract deliverables, milestones, and financial reporting requirements enable nonprofits to spot discrepancies or lapses as soon as they arise. For example, if a grant agreement requires quarterly reporting and supporting documentation, a well-organized system will quickly highlight any missing reports or incomplete files. This allows finance teams to address gaps proactively, rather than reacting to issues identified by auditors or funders after the fact.
• Strengthening internal controls: Embedding contract and agreement management into routine financial processes—such as monthly reconciliations and internal control assessments—further supports early detection of errors, misclassifications, or noncompliance. This not only helps prevent material misstatements in the financial statements but also provides opportunities to remediate control deficiencies before the audit cycle begins.
• Enhancing stakeholder confidence: When nonprofits can demonstrate that they have robust systems in place to manage and monitor contractual obligations, donors and funders gain confidence in the organization’s ability to steward resources responsibly. This transparency and diligence can lead to stronger relationships, increased funding opportunities, and a reputation for operational excellence.

Prioritize Internal Control Monitoring and Remediation

Nonprofit controllers and CFOs should ensure that control deficiencies identified in prior audits are addressed before the next cycle. This includes:

• Implementing corrective action plans from previous audits.
• Documenting and updating policies and procedures for key processes (contributions, grant management, procurement, payroll, etc.).

Why it matters: Consistent internal control evaluation supports compliance with the COSO framework and nonprofit best practices.

Coordinate Early and Often With Your External Auditors

Maintain open communication with your audit team throughout the year. Schedule a pre-audit planning meeting to:

• Discuss changes in accounting standards (e.g., new FASB ASUs impacting nonprofits).
• Highlight organizational or transactional changes (e.g., new programs, major gifts, capital campaigns).
• Review anticipated challenges or complex estimates (e.g., valuation of contributed nonfinancial assets, compliance with new grant agreements).

Why it matters: Early auditor engagement fosters smoother fieldwork and fewer surprises during the audit.

Leverage Technology to Streamline Audit Preparation

Nonprofits can benefit from financial systems that support audit readiness, including:

• Document management systems for efficient storage and retrieval of supporting documentation, including contracts and agreements.
• Workflow automation tools to monitor compliance and internal approvals.
• Dashboards and analytics for real-time visibility into financial performance and audit risks.

Why it matters: Investing in cloud-based accounting or grant management systems can significantly reduce audit lag time and improve reporting accuracy.

Prepare for Single Audit Requirements with Granular Detail

If your nonprofit expends $750,000 (increasing to $1,000,000 for years beginning after 10/01/24) or more in federal awards, a Single Audit is required under Uniform Guidance. Best practices include:

• Maintaining a running SEFA throughout the year.
• Keeping detailed grant files for each award, including budgets, award letters, contracts, expenditure documentation, and compliance certifications.
• Identifying subrecipients and monitoring subaward performance as required under 2 CFR 200.331.

Engage in Post-Audit Learning and Continuous Improvement

After the audit concludes, hold a debrief with your team and external auditors to:

• Identify process inefficiencies or gaps in documentation.
• Discuss auditor feedback constructively.
• Update procedures and training materials based on audit outcomes.

Strategic move: Treat the audit as a feedback loop to enhance future performance, reduce risk, and strengthen accountability to your mission and stakeholders.

The perfect storm of heightened scrutiny, complex compliance requirements, and increased competition for philanthropic and grant funding makes audit readiness not simply a compliance exercise, but a cornerstone of organizational excellence for nonprofits. By embedding audit readiness into daily operations, maintaining robust internal controls, and prioritizing the diligent management of contracts and agreements with donors and funders, nonprofit leaders can proactively identify and address risks, ensure the integrity of financial reporting, and respond swiftly to stakeholder inquiries. These best practices not only reduce the likelihood of audit findings and funding disruptions but also reinforce the organization’s reputation for transparency, accountability, and sound stewardship. Ultimately, a sustained commitment to audit readiness empowers controllers, CFOs, and their teams to build lasting trust with auditors, donors, funders, and the communities they serve—enabling the organization to advance its mission with confidence, resilience, and credibility.

For more insights on nonprofit finance and audit topics, visit www.bdo.com/insights.