Cost Effective Audit Process: How to Create a Robust Audit Trail

Woman conducting an audit trail of a client's nonprofit organization

A nonprofit accounting audit is a thorough examination of an organization’s financial records. Audits can be time-consuming and very expensive for any organization. Many membership and association organizations find themselves paying far more than they had expected or budgeted to complete a required financial audit, but there is a way to have a more cost-effective audit process. The solution is a: robust audit trail

Continue reading as we discuss some best practices to manage GAAP compliance, reduce risk to the organization, and prepare for a less challenging, less expensive audit process.

Why Nonprofits Need A Robust Audit Trail

The obvious reason for a membership and association organization to create a robust audit trail is to set the entity up for a more efficient, cost-effective audit process. However, not all organizations are required to complete a formal nonprofit financial audit. But even those that are exempt from an audit can benefit from creating effective audit trail procedures.

Is Your Organization Required To Be Audited?

There is more than one type of financial audit. Some businesses conduct internal audits annually as a means of evaluating performance and improving processes and procedures. That is a great way to ensure that your organization is operating at maximum efficiency, preventing fraud, and increasing productivity in the accounting and finance departments.

Another type of audit is an independent audit performed by a third-party CPA firm.  Your membership and association organization may need an independent financial audit if any of the following criteria apply:

  • It’s requested by state, federal, or local governing agencies.
  • A formal audit is needed for a loan, grant, or funding application.
  • The organization receives more than $750,000 per year in federal funds

Other Ways An Audit Trail Benefits Your Organization

Even if your organization is not required to have a formal audit conducted, creating a robust audit trail can benefit your organization. Creating the processes and procedures that make a robust audit trail will give leadership insight into the functional aspects of the organization and protect the organization in the following ways:

  • An audit trail can track software activity, alert management to any extraordinary employee login attempts, duplicate records, or fraudulent use, and provide an overall measure of productivity.
  • Tracking donor, member, and board correspondence can protect the organization from future legal consequences and aid in dispute resolution.
  • A detailed record of financial transactions can help organizations create a better annual budget and cash forecast.

How To Create A Robust Audit Trail

By this point, you’re probably realizing that your organization needs to implement audit-friendly processes. Whether it’s to save time and money on your next financial audit or simply to improve the processes within your organization. Making some small changes today will get your nonprofit on its way to mastering a robust audit trail. 

  1. Understand the components of an audit trail – A robust audit trail will give a complete history of all financial transactions. The data will be recorded in the correct revenue and expense periods and be able to be organized in chronological order. The ledgers, reports, or transaction logs need to make sense to a third-party user, be legible, and allow each record to be searchable. 
  2. Schedule an internal, informal audit – Beginning to conduct monthly, quarterly, or annual internal audits is a great way to learn more about your nonprofit’s readiness for a formal audit. Internal, informal audits can give leaders insight into any transactions or data that is not recorded correctly or easy to access on demand. Internal audits can be conducted by anyone in the organization, although it is a great idea to designate an audit committee
  3. Review current software applications – Look at the software you are using to process accounts payable, record membership revenues, and generate financial statements. Some accounting and financial management software programs, like Sage Intacct, have built-in audit trail capabilities. If your accounting system does not provide audit trail reports and searches, you may consider an upgrade or the more cost-effective route of outsourcing some accounting functions. 
  4. Consult an expert – Often, the most efficient way to create a robust audit trail at your organization is to work with an accounting support firm. Outsourcing some bookkeeping, accounting, or CFO functions to JFW Accounting services can help your organization prepare for an audit or improve internal processes by creating an audit trail. Designating employees to oversee the audit trail and implementing new software solutions can be expensive and stressful but working with the experts at JFW can give your team access to robust financial software, consult on implementing new procedures, compile financial statements, and organize and store all transactional records that make up a robust audit trail.

The Takeaway

Creating an audit trail is the best way for membership and association organizations to avoid the experience and costs of a long, drawn-out financial audit. A robust audit trail will be a complete record of transactions that is in chronological order, easily readable, and searchable. For a cost-effective, efficient way to get started improving processes, and preparing for smooth audits, give JFW Accounting Services a call today.


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