Audit Surprises Nonprofits Don’t See Coming and How to Stay Ahead of Them 

1. Segregation of Duties in Small Teams

For some nonprofits, teams consist of a handful of individuals handling the day-to-day operations of the organization. Small teams mean people naturally wear multiple hats and that feels normal. Unfortunately, when one person handles too much of a transaction from start to finish, auditors flag it as a risk even in close-knit, trustworthy teams. 

Auditors understand resource constraints. What they look for is intentional oversight. You don’t need more staff, just smarter oversight. 

Some controls to consider are: 

• Have a board or finance committee member review bank reconciliations  

• Document reviews that already happen informally  

• Schedule periodic check-ins instead of daily controls  

2. Grant and Contribution Revenue Isn’t Always as Simple as Cash In 

Some nonprofit accounting teams think, if the money arrived, shouldn’t it be revenue on the date of receipt? Actually, it depends. Some grants are conditional, some are restricted, and others fall under different accounting standards altogether. Timing matters. 

A little upfront documentation saves a lot of year-end stress. 

Some processes to consider are: 

• Track grant conditions and restrictions clearly  

• Document why revenue is recognized when it is  

• Keep a simple summary of each major grant’s terms  

3. Approvals Happened, They Just Aren’t Documented 

Some nonprofits have more informal controls in place. Discussions are held, purchases, payments and payroll changes are approved. However, these are done verbally and there are no written trails to support these controls. Auditors, unfortunately, can only rely on what’s documented. 

If there’s no audit trail, auditors can’t rely on it. 

Next time you get transactions approved: 

• Save approval emails  

• Add sign-offs or electronic approvals  

• Keep evidence of review with the transaction  

4. Journal Entries Need a Story, Not Just a Number

For some organizations, year-end entries are made quickly to close the books. Verbal discussions are held between accounting team members to correct a previous entry, accrue an expense or maybe record the pledge received at yearend. However, the documentation to support these journal entries are not put together and filed to support the journal entries booked. 

When auditors review these entries, they need to understand the “why,” not just know the amounts. Auditors also look for proper approvals for these journal entries to make sure management properly authorized the recording of the entries. 

Clear support builds confidence and speeds up the audit. 

For each transaction recorded, make sure to: 

• Attach calculations or brief explanations to entries  

• Make sure entries are reviewed and approved  

• Avoid unexplained “plug” entries  

5. The Board Is Involved, But the Minutes Don’t

Show It 

The Board actively reviews financials and discusses them during meetings. However, minutes are not prepared after each meeting. As mentioned above, unfortunately for auditors, without documentation, that oversight doesn’t technically exist. 

Strong governance deserves to be visible. 

Next time the Board holds a meeting: 

• Make sure the supporting meeting minutes are prepared  

• Note financial statement reviews in board or finance committee minutes  

• Retain materials provided to the Board  

• Note in the minutes the key questions or discussions  

6. Year-End Accruals Are Easy to Miss

The accounting team thinks, if the invoice hasn’t arrived, the expense doesn’t need to be recorded yet. Based on accounting standards, however, expenses need to be recorded when incurred, not when billed. 

Consistency helps avoid last-minute surprises. 

Best practices to consider include: 

• Use a year-end checklist for common accruals  

• Estimate amounts when necessary and true them up when final information becomes available  

• Carefully review subsequent disbursements after year end to identify items that should be accrued  

• Perform a thorough review of year-end schedules such as accounts receivable for collectability and prepaid expenses to ensure appropriate expense recognition  

• Look to prior-year audit adjustments for recurring patterns or risk areas  

Final Thoughts 

Audit surprises don’t mean something went wrong. More often, they mean documentation or processes just need a little polish. With clear responsibilities, light but consistent documentation and periodic process check-ins, nonprofits can reduce audit findings, shorten audit timelines, and approach audits with confidence rather than concern.