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3 ways to ensure a smooth-as-butter audit

by with No Comment AuditFeatured BlogNonprofitProductivity

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Are you soaking in the summer sun as much as I am? Here at 100 Degrees, I’m splitting my time between supporting clients and taking as many Zoom meetings as possible outdoors. The weather here in Buffalo is only nice for so long, so I’ve got to take advantage of that sunshine!

Lots of our clients have audits going on right now, and all of this audit work can be a major source of stress for nonprofit leaders. There are a lot of questions, a lot of panicked moments looking for that one missing contract, and tons of uncertainty as to whether or not you’ll “pass”.

But I’ve learned a few things after supporting dozens of audits over the years and want to share how to drastically improve efficiencies and reduce time spent on your audit.

If you don’t yet have an audit, STICK WITH ME! These are best practices you can use to free up time and brain space to focus on your mission and ensure you’re ready for any future audit.

Ready? Here are my secrets to a smooth-as-butter audit!

1. An organized, cloud-based document storage system halves prep time. Many audit firms use online file sharing systems, where they have clearly labeled folders for each item requested, so you can just drag and drop files into each one. This has virtually eliminated all back-and-forth email and helped us to speed up the time to prepare and submit documents. And to make your own preparation as quick as possible, start from day one with an online folder system in Google Drive or Dropbox – create a folder for each month and store all timesheets, receipts, bank statements, reconciliations, etc within that folder for easy reference later!

2. Quarterly reviews throughout the year dramatically decrease prep time. If you’ve ever undergone an audit, you probably know the hot topics and past issues for your organization. Common issues I’ve seen are around cash management and grant restrictions, so I suggest you do a mini internal audit of those hot issues each quarter. One client recently did this, completely solved their issues, and wiped the comment from the management letter!

3. The audit is a team effort, not just a task for the finance team. The audit timeline and goals should be shared across the organization because development, leadership, the board, and programs may all get pulled in at some point. Communicate early and often to get the whole team on board.

What questions do you have for me about the audit? Just click Reply and I’d be happy to answer!

PS – Want more info on how to prepare for a stress-free audit? Check out this article >>> https://100degreesconsulting.com/stressfreeaudit/

 

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How to avoid the most common audit management letter comments

by with No Comment AuditFeatured BlogNonprofitProductivity

Grab this amazing guide to help avoid the most common management letter comments!

Remember back to elementary school when it was report card day, and you’d go rushing home, excited to show your parents your straight As? Maybe that was just me?

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I spent my school days as a complete over-achieving nerd, so I never really had the experience of bringing home a bad report card, but I imagine it didn’t feel great.

I have, on the other hand, been through many audits with different nonprofit organizations, and getting a laundry list of management letter comments feels like a bad report card.

You wish you would’ve worked harder or done things differently throughout the year, and it’s amazing how a few typed words on a letter (that goes to your board – yikes!) can motivate you to make whatever changes necessary.

So that you don’t get that icky bad report card feeling, I am going to share three common comments I’ve seen on many nonprofit organizations’ management letters. Make sure you’ve got these items cleaned up and in order:

1. Cash. The old adage “cash is king” rings true. Cash will be one of the first things the auditors look at and something they focus on, for good reason, because cash = risk.

How to nail it: Make sure all bank and petty cash balances tie to the reconciliations and the statements. Clean up any unreconciling items and make the appropriate journal entries to adjust, if necessary. Ensure there is a proper review and approval process for all bank reconciliations, and document it. Organize all backup documentation and bank statements.

2. Temporarily restricted net assets. I shared the basics of TRNA here and be advised that this will be the second thing the auditor looks at because it is all about donor intent and how we’re spending our money. We should be accounting for any type of restrictions on our funding so we know at any given time how much of our assets are temporarily restricted or unrestricted.

How to nail it: You must begin tracking restrictions long before the auditors arrive. Make sure you have the systems in place to categorize revenue and expenses by donor or award. Reconcile all TRNA, make sure it ties to the trial balance, and prepare all backup documentation for the auditor’s review – they will want to see the donor’s letter that shows exactly how they want their money spent.

3. Finance manual & policies. Every organization should have a finance manual that documents approval policies, procurement process, bank signatories, and much more. Oftentimes, an organization creates the manual then completely forgets about it. Same with conflict of interest policy – we create it, have everyone sign it once, and file it away, never to be seen again. The auditors want constant vigilance on policies and procedures.

How to nail it: Set a time to review your manuals and policies annually. Update as needed, get new staff to sign the appropriate policies, and add any new changes to your business. Did you expand to a new location or add another restricted bank account? Update that manual!

So there’s your head start to the audit. Make sure you tackle these items starting NOW to ensure they don’t end up as comments on your management letter.

Want more about audits?

Grab this amazing guide to everything you need to know about nonprofit audits.

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The Complete Guide to Tracking and Managing Restricted Funds for Nonprofits

by with No Comment AuditFeatured BlogFinancial ManagementFinancial StatementsNonprofit

Updated 2025: This article has been expanded into a complete guide to help you track and manage restricted funds with ease, from definitions to best practices.

If you’ve ever scrambled to pull together a donor report, felt unsure whether you were spending funds in compliance with donor intent, or wondered how much unrestricted cash you really have, you’re not alone.

For nonprofits, funds with donor restrictions are both a gift and a responsibility. They allow you to carry out mission-critical work, but they come with rules — and not following them can put your credibility, funding, and compliance at risk.

In this guide, you’ll learn:

    • ⏺ What “with donor restrictions” and “without donor restrictions” really mean
    • ⏺ Why proper restricted fund tracking matters for compliance, donor trust, and decision-making
    • ⏺ The systems and tools you need to track restricted funds accurately
    • ⏺ Common mistakes nonprofits make (and how to avoid them)

1. What Are Restricted Funds in Nonprofits?

Without Donor Restrictions

    • ⏺ Can be used for any purpose that supports your mission — operations, programs, fundraising, overhead
    • ⏺ No specific donor-imposed stipulations
    • ⏺ The most flexible and essential funds you have

With Donor Restrictions

    • ⏺ Given with specific donor-imposed stipulations that must be met by:
      • 1. Passage of time (e.g., funds for use in 2026)
      • 2. Mission purpose (e.g., funds for a particular program or project)
    • ⏺ Once the restriction is met, the funds are “released” and reclassified as without donor restrictions

How about a few examples?

The Jones Family Foundation gives $10,000 to your organization. Their pledge letter, dated June 1, 2025, states that their gift is for “operational support”. 

Are these funds with donor restrictions or without donor restrictions? 

If you guessed without donor restrictions, you’re right! (Operational support means that you can use the funds at your own discretion, assuming it is furthering the mission of your organization.)

Susan Jones gives $5,000 and the post-it attached to her check says “for 2025 adult education program”. 

Are these funds with donor restrictions or without donor restrictions? 

If you guessed with donor restrictions, you’re right! (The donor has specified the exact program where she wishes her funds to be spent.)

The World Education Foundation pledges $100,000 over four years – $25,000 in 2025, 2026, 2027, and 2028 – but did not specify a project to fund. 

If you guessed with donor restrictions, you’re right! (The donor has specified the years in which the funds must be used.)

Pro Tip: Board-designated funds are still without donor restrictions — because the board can change its decision. Donor restrictions are legally binding.

2. Why Restricted Fund Tracking Matters

Accurate restricted fund tracking allows you to:

    • ⏺ Honor donor intent and meet compliance requirements
    • ⏺ Build donor trust and secure future funding
    • ⏺ Understand your true financial position so you can make better decisions
    • ⏺ Pass audits confidently and avoid stress during grant reporting

Without it, nonprofits risk:

    • ⏺ Audit findings or compliance issues
    • ⏺ Loss of donor trust and funding
    • ⏺ Internal confusion about available resources and potential accidentally spending restricted funds on something else

💡 Related reading: How to Ensure a Stress-Free Nonprofit Audit and Best Practices for Nonprofit Financial Sustainability.

3. The Two-Part System for Managing Restricted Funds

You need both your accounting system set up properly and an offline tracking schedule to be fully confident in managing your restricted money. 

A. Set Up Restricted Funds in Your Accounting System

Whether you use QuickBooks Online or another accounting platform, you need to be able to tag and report on restricted funds.

    • ⏺ In QBO, turn on Class Tracking (Settings → Advanced → Categories → Track Classes)
    • ⏺ Create a class structure by program and major donor-restricted funding sources

💡 Related reading: Check out this blog post for details on how to set up your class structure in Quickbooks Online to make tracking restricted funds a breeze!

B. Maintain an Offline Schedule for Donor Restricted Funds

Even with great in-system tracking, you still need an offline schedule (formerly called a TRNA schedule) that includes:

    • ⏺ Opening balance by program/fund
    • ⏺ Additions (new restricted income)
    • ⏺ Releases (spending that meets donor restrictions)
    • ⏺ Ending balance (ties to your audited balance sheet)

Your auditors will ask for this schedule and it’s another good way to make sure your accounting system ties with your grant agreements and offline records.

4. Compliance & Documentation Requirements

    • ⏺ Review every grant agreement and donor letter for exact restrictions
    • ⏺ Keep all documentation in one accessible place
    • ⏺ Understand when to release restrictions (when purpose or time stipulations are met)
    • ⏺ Follow FASB and GAAP standards for nonprofit financial reporting

💡 Related reading: Nonprofit Chart of Accounts and Bookkeeping Best Practices podcast episode.

5. Common Mistakes Nonprofits Make With Restricted Funds

  1. Mixing restricted and unrestricted funds in reports without clear separation.
     → Solution: Always run reports that distinguish between with and without donor restrictions.
  2. Over-reliance on restricted funding for core operations.
     → Solution: Diversify revenue so core operations aren’t dependent on restricted grants.
  3. Spending too quickly before program deliverables are met.
     → Solution: Align spending with program milestones.
  4. Spending too slowly, delaying impact and eroding donor trust.
     → Solution: Maintain a spend plan that balances compliance with timely impact.
  5. Lack of communication between fundraising and finance teams.
     → Solution: Hold regular reconciliation meetings to ensure donor reports match financial records.

6. Three Steps to Handle Restricted Income Properly

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1. Are you identifying income restrictions as they come in? Are you tracking in both the donor database and accounting system?

2. Are you tagging/coding income restrictions into your books?

3. Are you preparing a schedule outside of the accounting books on a regular basis (annually at the bare minimum) that shows opening balance, additions, releases, and ending balance, that then flows into our balance sheet?

7. Your Next Step: Go From Theory to Action

Reading about restricted funds management is a great first step — but setting up the system, building your offline schedule, and running donor-ready reports is where the real transformation happens.

That’s why I created the Manage Your Restricted Funds for Nonprofit Leaders Masterclass. For just $27, you’ll get:

    • ⏺ My exact restricted funds tracking template
    • ⏺ Step-by-step video tutorials for setting up your accounting system
    • ⏺ My monthly reconciliation process
    • ⏺ Real examples of donor-ready reports
Mockup Restricted Funding Masterclass

👉 Get the masterclass here and have your system running this week!

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Six Steps to Ensure a Stress-Free Audit

by with No Comment AuditFeatured BlogFinancial ManagementNonprofit

Grab this amazing FREE E-BOOK to ensure a stress-free, quick, and painless audit!

I had a few alternative titles for this post.

Audit Prep: You’re Already Behind the Eight Ball

Audit Prep: Shape Up So They Can Ship Out

Audit Prep: No Management Letter Comments, No Cry (sung to the tune of Marley’s No Woman, No Cry)

Joking aside, the audit can be one of the most stressful weeks (or months!) of a nonprofit ED’s year. Not only are you expected to make sure every single journal entry is properly booked, but you’ve got HR files and donor letters and receipts from a year’s worth of expenses to be sure are coded, organized, and easily accessible. Not to mention the things that can be just plain confusing: temp restricted net assets, anyone?

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The auditor’s arrival to your office does not have to be the worst moment of your year (and in fact, it shouldn’t – they truly are here to help us!) and I’ll give you six action items to ensure it’s as smooth as can be.

1. Fix any prior year issues. As soon as the auditors sent you that final report and management letter last year, you should’ve started tackling their comments right away to make institutional changes to fix any issues. If you didn’t jump on that, jump now! You need to demonstrate you’ve taken their recommendations seriously and have made substantial effort to correct any issues. This is important to all stakeholders to ensure we’re maximizing and being good stewards of our resources to further our mission.

2. Practice ongoing communication with your auditor. This should not be the first time you have spoken with your auditor since they walked out last year. Most good firms will be in communication throughout the year on new regulations, best practices and be available to answer your questions as they come up. Audit week is NOT the time to ask how to track your temp restricted net assets – be prepared for an auditor brain explosion if you ask her.

3. Familiarize yourself with the PBC list. If you haven’t already, ask your auditor now (seriously, GO EMAIL HER NOW!) for the PBC, or Provided By Client, list. This is a comprehensive list of everything the auditor needs both prior to on-site and when they arrive. Here’s a great sample list.

4. Create an internal team game plan. As soon as I have the PBC list in my hands, I schedule a team meeting and assign a person responsible and a deadline to each item. We also have a year end close deadline list (e.g. soft close on January 15th, review reports and fix any issues by January 22nd, hard close by January 31st) which helps determine when PBC list items can be completed. The final part of the game plan is our brief weekly check-ins on the status of each item until the auditors arrive.

5. Start early. If you’ve got enough capacity in your finance team to do so, I recommend tackling as many items as you can simultaneously with closing the books for the year. You’ll likely be asked for personnel and finance policies, employee lists, check registers and other items that can be sent immediately.

6. Double-check every submission. I think we can all relate to this: we work really hard to complete the temp restricted net asset schedule quickly this year, send it off to the auditor before we officially close the books and realize that there was an edit which throws off the whole balance. While you can send many items early, you should wait until your books are absolutely final to send all your schedules. Remember, everything must agree – general ledger vs. schedule vs. balance sheet and income statement – and a surefire way to ensure this is to wait until your books are solidly closed. You don’t want to show the auditors fifteen different reconciliations later to show how you made the changes.

The six action items above will help ensure a smooth audit process even before the auditors arrive. Remember, preparation is crucial to a smooth audit – stay organized and you’ve got this!

Don’t forget to grab this amazing FREE E-BOOK to ensure a stress-free, quick, and painless audit!

How do you feel about the annual audit? Do you view it as a learning opportunity or pure agony?

Need help getting your ducks in a row for this year’s audit? Give me a buzz!

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Finding an auditor: the RFP process

by with No Comment AuditFeatured BlogNonprofit

We’ve got more audit talk for you today! The 12/31 year-enders are prepping and the 6/30 year-enders are looking for auditors, so we’re trying to cover all our bases here.

I spoke with not one but two organizations last week that need a new auditor and asked me for suggestions (good first step, by the way!). I’ve worked with a great audit firm for many years and immediately thought of them but unfortunately, they’re in another state. I texted the audit partner (yes, I basically have him on speed dial!) and he said he’d love to participate in an RFP process. That got me thinking about how important those referrals are for great firms – you’ll likely have a much better experience than simply Googling “nonprofit auditor [your location]”.

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Not only do we need an audit firm that specializes in nonprofits, but we also want someone we connect well with. You will likely be communicating with that auditor not only during the annual audit process but also throughout the year as questions come up. The auditor will also meet with your board’s audit/finance committee or perhaps even present at a board meeting.I recommend an RFP (Request for Proposals) process to appropriately do your due diligence and get an auditor that will work best for your organization. I promise it’s not complicated!

  1. Form a committee of stakeholders. Perhaps the ED, your lead finance person and a board member would be a good place to start.
  2. Determine what you’re looking for in an audit firm and write it down. This will be the basis of your RFP document. Here are some things to think about: What size firm do you want? What is their expertise? How many staff will work on your engagement? What is their average turnaround time? Here is a sample.
  3. Identify who you want to send the RFP to. This is where your network comes in! I suggest reaching out to colleagues, peers and board members and finding out which audit firms they recommend. Come up with a list of maybe 10 firms and their contact information.
  4. Send the RFP out. Send both a paper and email copy to the contacts you identified with specific instructions on how to submit the proposal.
  5. Review the proposals, select your two or three finalists and invite them into the office for a meeting to discuss their proposal. Don’t forget to discuss fees!
  6. Make your final decision and hire your new audit firm. Let the fun begin!

With the proper due diligence, this new audit firm will serve as a solid sounding board for your organization. If you have a new project come up throughout the year and you aren’t sure how to make the accounting entry, you can call them for advice rather than waiting for them to find potential mistakes during the audit.

On the contrary, if the audit firm didn’t live up to your expectations, remember that the relationship isn’t forever – simply go through the RFP process again to find a better fit.

How did you find your audit firm? How long have you been with them? Need help managing the RFP process or don’t know where to begin?

I can help!

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Do we need an audit?

by with No Comment AuditFeatured BlogNonprofit

I hope everyone had a restful weekend! Are you December-31st-close people finishing up year-end? More importantly, is everyone sticking to their resolutions? I’m proud to say that I’ve gone to yoga once a week! It’s amazing how much better I stick to something when I simply put it in my calendar and treat it as I would a doctor’s appointment. Non-negotiable, not cancellable, not available for anything else during this time. Let’s keep it up!

We talked last week about how to prep for an audit and I’m here this morning to talk about those organizations who are in the initial phases of growth (less than $1M) and haven’t yet had an audit. They’re not sure if they need an audit and once they decide they do, they have no idea how to find the right auditor.

Let’s tackle this head on!

First, what is an audit? Is it when the big, scary IRS comes in and rifles through all your files and you’re in trouble? No way! This is when you choose an independent auditor to come in and assess not only your books but also your policies and internal controls, then they hand you a neatly comprised set of financials that you can then share with donors, funders and other stakeholders. Also, you pay them.

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Now that we’ve got that cleared up, does my organization really need an independent auditor? There are a few factors to consider here:

What state are you incorporated/registered in? Each state has different audit requirements. Are you registered in any other states? Oftentimes, organizations will register in a number of states in order to fundraise there and those states may require audited financials. Here is a great guide of state-by-state audit requirements and links to statutes. [Please always consult your legal counsel before making any decisions – sites like this could be outdated!]

Who are your funders? Many private foundations and government agencies will require audited financials along with grant or contract applications. If they don’t require an up-front audit, they may require one when you spend above a certain threshold of federal funds in a year (currently $750,000).

The IRS requires nonprofits to complete the 990 but does not require an independent audit. Part XII Financial Statements and Reporting of the 990 asks whether or not the organization has had an independent audit and, as you probably know, this form is public information.

In short, even if your organization manages to squeak by without technically needing an audit, it is certainly a best practice because:

  • You’ll gain the credibility and confidence of funders and promote financial transparency of the organization.
  • Your organization will potentially be eligible for new and different sources of funding as well as ratings by the important charity watchdog organizations (Charity Navigator, Guidestar, etc).
  • Finally, and maybe most importantly, it’s an opportunity to do a deep dive into your policies and procedures to ensure you’re using your limited resources most efficiently.

Here at 100 Degrees Consulting, we are all about BEST PRACTICES!

Come back tomorrow for the second installment of this thrilling series: Okay, let’s do it. Now how do I find an auditor?