How to Pass a Financial Audit: 10 Steps for Internal Readiness

Start by reviewing last year’s financials and comparing them to your current statements. Use this time to: 

• Reconcile accounts 
• Ensure documentation supports all major entries 
• Note any large or unusual transactions that may need explanation 

📌 ATG Tip: Our audit readiness checklist helps you identify gaps and reconcile issues before auditors do. 

Auditors expect access to a wide range of records, including: 

• Trial balances 
• General ledgers 
• Bank statements and reconciliations 
• Invoices, receipts, and contracts 
• Payroll reports and tax filings 
• Board meeting minutes (for nonprofits) 

Organize your records into clearly labeled folders—physically or digitally. Use a consistent naming convention and consider providing a “document index” to make auditor review faster. 

🔐 Cloud Storage Note: Secure cloud systems like SharePoint or Google Drive (with limited access permissions) can speed up collaboration and reduce auditor downtime. 

Internal controls are your organization's policies and procedures that safeguard assets and ensure accurate financial reporting. Auditors will review: 

• Who approves expenses and budgets 
• How payments are processed and tracked 
• How access to financial systems is granted 
• How bank accounts and credit cards are monitored 

⚠️ Common Issue: Small organizations often lack segregation of duties. If one person has access to receipts, approvals, and account reconciliation—it’s a red flag. 

🛠️ ATG Solution: We help clients document and implement internal controls even with lean finance teams. 

Make sure your team has: 

• Reconciled all bank, credit card, and loan accounts
• Matched payroll records to tax filings 
• Verified vendor balances and aged receivables/payables 

Adjusted inventory and depreciation schedules where applicable 

👀 Auditor Red Flag: Unreconciled differences or mismatched statements between your books and bank records will immediately trigger deeper scrutiny. 

Your fixed assets (property, equipment, vehicles) must match your depreciation logs. Ensure: 

• Each item is listed with acquisition date, cost, and depreciation method 
• Assets sold or discarded are removed from the books 
• Depreciation entries match the year-end financials 

📊 ATG Tax Advantage: We also perform cost segregation studies for businesses and nonprofits with real estate assets to accelerate depreciation and reduce tax exposure. 

If you’re a nonprofit, auditors will want to see board and committee minutes that match major financial decisions: 

• Budget approvals 
• Fundraising campaigns 
• Executive compensation 
• Capital expenditures 

📝 Tip: Meeting minutes must be clear, dated, and signed to be considered legitimate documentation during audits. 

Under ASC 606 (revenue recognition standard), organizations must recognize revenue when it’s earned—not just when it’s received. 

Auditors may request:

• Copies of donor pledges and grant letters 
• Contracts with clients or service recipients 
• Documentation of restrictions on funds 

📚 Nonprofit Concern: Improper revenue recognition of restricted grants is one of the most common audit failures for mission-based organizations. 

Payroll is often the largest expense for most organizations—and also one of the most heavily scrutinized areas. 

Ensure: 

• W-2s and 1099s match reported payroll 
• Payroll taxes are filed and paid timely 
• Employee classifications (W-2 vs. 1099) are correct 

Bonuses and fringe benefits are documented and approved 

🧾 ATG Payroll Compliance Service ensures your filings, deductions, and benefit programs hold up under audit and IRS review. 

For organizations subject to federal, state, or contract-based compliance requirements (e.g., HUD, DOL, CMS, DOE), a parallel compliance audit may apply. 

• Are you following grant restrictions? 
• Are matching contributions properly recorded? 
• Are you filing required compliance reports? 

🚨 ATG Alert: Failure to comply with funder requirements could result in a revocation of grant funds or future funding ineligibility. 

Audits run more smoothly when communication is proactive. Share: 

• Your year-end close schedule 
• Team availability 
• Any major events (leadership changes, system migrations, etc.) 

Ask your auditor: 

• What documents they need in advance 
• What their deadlines are for fieldwork and wrap-up 
• What format (PDF, Excel, etc.) they prefer for submissions 

🤝 ATG Advisor Role: We act as liaison between your team and the auditor—handling documentation, Q&A, and delivery of audit packages in your preferred format.