How to Prepare Your Texas Nonprofit for a Clean Audit | Trinity Rivers Financial

How to Prepare Your Texas Nonprofit for a Clean Audit

A nonprofit audit can feel daunting, especially if you're managing finances while juggling your organization's mission. Yet a well-prepared audit doesn't have to be stressful. The reality is that most audit findings and delays stem from one root cause: insufficient preparation. The good news? Audit preparation is entirely within your control.

This guide walks Texas nonprofit leaders—whether you're an Executive Director, board treasurer, or finance manager—through the exact steps to organize your books, strengthen internal controls, and walk into your audit with confidence.

Why Audit Preparation Matters for Your Nonprofit

Before diving into the checklist, it's worth understanding why preparation matters beyond just "passing" the audit. A clean audit signals to your board, donors, and grantors that your organization manages funds responsibly and operates with transparency. This builds trust, supports future grant applications, and protects your nonprofit's reputation.​

Conversely, audit findings—even small ones—can:

• Delay funding from grantors
• Raise red flags with major donors
• Create extra work and cost for remediation
• Weaken board confidence in your finance team

Robust audit preparation is the most cost-effective insurance policy a nonprofit can take out.

Understanding Texas Nonprofit Audit Requirements

Texas does not mandate financial audits by state law. However, your organization is required to maintain current and accurate financial records in accordance with generally accepted accounting principles (GAAP), and your board must prepare or approve a financial report that conforms to AICPA standards.​

If your nonprofit receives federal grant funding exceeding $750,000 in a fiscal year, you'll face a Single Audit requirement under 2 CFR 200. Notably, 2024 introduced a revised Uniform Guidance with new compliance requirements, so if you receive federal funds, confirm with your auditor how this impacts your audit scope.​

The bottom line: Start preparing early and communicate with your auditor about specific requirements. What applies to your organization depends on your size, funding sources, and whether you receive federal grants.

The 8-Step Audit Preparation Framework for Texas Nonprofits

Step 1: Establish Clear Communication with Your Auditor

Start here, ideally 60–90 days before your audit fieldwork.

Request a PBC (Provide By Client) list from your auditor. This itemizes everything the auditor will need from you—schedules, documentation, account reconciliations, and supporting evidence. Many auditors now provide digital portals to streamline this exchange.​

Schedule a pre-audit meeting with your auditor to:

• Clarify roles and responsibilities
• Review any changes to your organization (leadership, policies, systems, grants)
• Discuss new accounting standards or compliance requirements that may apply to you
• Address any questions your team has upfront​

Why this matters: This conversation prevents surprises and ensures your team is aligned on expectations. It's also your chance to flag any known issues or challenges so the auditor can plan accordingly.

Step 2: Organize and Reconcile All Bank Accounts

Timeline: 4–6 weeks before audit fieldwork

This is non-negotiable. Your auditor will verify that your recorded cash matches reality.

• Reconcile every bank account for the full fiscal year, not just year-end. Prepare detailed bank reconciliations showing:
  • Deposits recorded and cleared
  • Checks written and cleared
  • Outstanding items (in-transit deposits, uncleared checks)
  • Reconciling items linking your general ledger balance to the bank statement balance​
• Identify and resolve old items. If there are outstanding checks from prior years, investigate why. If they should be written off or reversed, address that now.​
• If you use credit cards, prepare similar reconciliations and ensure all charges are properly coded to expense accounts.​
• Verify petty cash counts if applicable and reconcile to your accounting system.​

Pro tip: Use your accounting software (QuickBooks, AppFolio, Buildium, Yardi) to generate bank reconciliation reports. If you're still working with unreconciled accounts, this is the audit's wake-up call that a process change is needed.

Step 3: Prepare a Complete, Reconciled Trial Balance

Timeline: 4–6 weeks before audit fieldwork

Your Trial Balance is the backbone of your audit. It lists every general ledger account and its balance as of your fiscal year-end and must balance (debits = credits).

Your auditor will reconcile this trial balance to your financial statements and to supporting account schedules. Before you hand it over:

• Run your Trial Balance from your accounting system as of December 31 (or your fiscal year-end).
• Verify that it balances. If it doesn't, investigate and correct the underlying entries.
• Provide it in a standard format (Excel or exported from your accounting software) with account numbers and descriptions.

This is also your moment to review account structure. If you have dozens of misnamed or unused accounts, consolidate and clean them up now. A tidy chart of accounts reduces audit friction.​

Step 4: Reconcile All Major Balance Sheet Accounts

Timeline: 4–6 weeks before audit fieldwork

Your auditor will test these accounts extensively, so make sure they are fully reconciled and supported:

Accounts Receivable:

• Prepare an aged accounts receivable schedule (outstanding pledges, grants receivable, other income due).
• Remove or write off items in accordance with your organization's receivables policy.
• Evaluate and document any allowance for uncollectible amounts.​

Accounts Payable & Accrued Expenses:

• Reconcile accounts payable to your trial balance.
• Review invoices received shortly after your fiscal year-end to determine if they should be included as year-end payables or accruals.
• Ensure accrued expenses (payroll, professional fees, utilities, etc.) are accurately reflected.​

Donor-Restricted Net Assets:

• Prepare a detailed schedule of all restricted contributions received during the year.
• Document which restrictions were satisfied during the year (and thus released to unrestricted net assets).
• Reconcile this schedule to your trial balance and board-approved financial statements.​

Fixed Assets & Depreciation:

• Verify your fixed asset schedule against physically existing assets.
• Document any additions or disposals during the year.
• Ensure depreciation is calculated correctly and recorded.​

Investments (if applicable):

• Provide year-end investment statements.
• Document the basis of valuation (fair value per statement, cost basis, etc.).​

Step 5: Ensure Accurate Functional Expense Allocation

Timeline: 4–6 weeks before audit fieldwork

Nonprofits must allocate expenses into three functional categories: program, management and general, and fundraising. This is a frequent audit focus area because the allocation methodologies can be subjective if not well-documented.​

Review your current allocation approach:

• Program Expenses: Direct costs of delivering your mission (e.g., program staff salaries, supplies, participant services).
• Management & General: Finance, HR, executive leadership, board, general administration.
• Fundraising: Donor development, grant writing (if it's a separate function), marketing to attract donors.

For expenses that span multiple functions (e.g., executive director salary, office rent, insurance):

• Document your allocation methodology (percentage splits, headcount allocation, square footage allocation, etc.).
• Ensure the methodology is reasonable and consistent year-over-year.​
• If you're allocating by headcount or time, ensure you have supporting documentation (time studies, job descriptions, historical percentages).

Example: If your Executive Director spends 60% of time on program oversight and 40% on board management and fundraising, allocate salary accordingly and keep that calculation documented.

Step 6: Compile All Compliance and Governance Documentation

Timeline: 6–8 weeks before audit fieldwork

Your auditor reviews these to assess your governance and compliance posture:

Board & Leadership:

• Board meeting minutes for the full fiscal year
• Board roster (names, titles, affiliations)
• Any board resolutions approving budgets or major financial decisions
• Board Finance Committee meeting minutes (if applicable)

Tax & Regulatory:

• Copy of your 501(c)(3) exemption letter (or applicable exemption).
• Most recent IRS Form 990, 990-N, or 990-EZ filed for your organization.
• Any correspondence from the IRS, Texas Attorney General, or state charitable registration.
• W-2s and 1099s for the year (for payroll verification and contractor compensation).​

Policies & Procedures:

• Conflict of interest policy and signed acknowledgments from board and staff.
• Whistleblower policy.
• Document retention policy.
• Financial policies covering:
  • Capitalization policy (what asset threshold triggers fixed asset recording)
  • Functional expense allocation policy
  • Allowance for uncollectible receivables policy
  • Investment policy (if applicable)
• Any updated policies not yet formally approved; flag these for board approval before audit fieldwork.​

Grant Compliance (if federal or state funded):

• Grant agreements and associated compliance requirements.
• Documentation of compliance testing (e.g., Single Audit compliance matrix compliance).
• Prior year audit findings and management's response plan.
• Cost allocation plans or indirect cost rate agreements (if applicable).​

Contracts & Agreements:

• Major contracts (leases, service agreements, loan agreements, significant vendor contracts).
• Insurance policies and coverage summaries.​

Step 7: Prepare Supporting Documentation for Accounting Estimates

Timeline: 4–6 weeks before audit fieldwork

Accounting estimates—such as allowances for uncollectible contributions, depreciation methods, valuation of donated assets, or reserves—require clear supporting documentation.​

For each material estimate, prepare a written summary that documents:

• What is being estimated (e.g., "Allowance for uncollectible pledges")
• Why the estimate is necessary (e.g., "Historical data shows 10% of pledges over 2 years old are not collected")
• The methodology (e.g., "We apply 10% to all pledges outstanding >2 years; 5% to pledges 1–2 years old")
• Who approved it (e.g., "Approved by Finance Committee on [date]")
• Calculation & result (e.g., "$50,000 allowance as of Dec 31, 20XX")

This level of documentation demonstrates that estimates are thoughtful and defensible, which significantly smooths the audit process.​

Step 8: Prepare Process Narratives for Critical Financial Processes

Timeline: 4–6 weeks before audit fieldwork, can be ongoing

A process narrative documents how a key financial process works in your organization. It's one of the most valuable internal control tools you can have and demonstrates competence to your auditor.​

Create narratives for:

Cash Receipts:

• Who receives contributions, grants, and other income?
• How are they logged/recorded?
• When are they deposited?
• Who reconciles deposits to the accounting system?
• What controls prevent theft or recording errors?

Cash Disbursements:

• Who approves invoices for payment?
• What is the approval threshold?
• How are payments made (check, ACH, credit card)?
• Who reconciles payments to the accounting system?
• How are payments segregated by role (preparer vs. approver vs. recordkeeper)?

Payroll:

• Who calculates payroll?
• Who approves time entries?
• How are taxes and withholdings handled?
• How are paychecks distributed?
• Who reconciles payroll to the GL?

Revenue Recognition (especially for grant/restricted contributions):

• How do you determine if a contribution is restricted?
• How do you track and release donor restrictions?
• How do you recognize grant revenue (when received, when expended, when milestones are met)?
• Who is responsible for compliance with donor/grantor restrictions?

Each narrative should name the role (not just individuals), describe the flow step-by-step, and highlight key internal controls (approvals, segregation of duties, reconciliations, supervisory review).​

Timeline: Your 90-Day Audit Preparation Calendar

Days 90–60 Before Fieldwork:

• Contact your auditor and request the PBC list.
• Schedule pre-audit meeting.
• Begin organizing financial records in one location.
• Assign team member ownership for each section of the PBC list.

Days 60–30 Before Fieldwork:

• Complete all bank account reconciliations.
• Prepare and reconcile Trial Balance.
• Reconcile accounts receivable, accounts payable, net assets, and fixed assets.
• Compile board minutes, board roster, and governance documents.
• Review and update financial policies.
• Prepare functional expense allocation methodology and supporting calculations.

Days 30–1 Before Fieldwork:

• Prepare process narratives.
• Finalize supporting documentation for accounting estimates.
• Complete PBC list assembly.
• Conduct internal review meeting: Have finance team walk auditor through the organization's year in review (strategy changes, new programs, staffing changes, etc.).
• Ensure auditor has portal access or knows how/where to submit PBC items.

Day 1 of Fieldwork:

• Kick-off meeting with auditor.
• Introduce audit team to your finance staff.
• Confirm all preliminary documents are received and complete.

Red Flags to Avoid: What Delays Audits and Creates Findings

Based on thousands of nonprofit audits, here are the most common stumbling blocks:

Incomplete or Late Reconciliations – Auditors often spend days trying to reconcile accounts that management should have already completed. This eats into the audit budget and creates pressure to complete quickly.​

Missing Documentation – An expense or entry with no supporting receipt, contract, or authorization creates audit questions. Have documentation on hand for everything.

Unclear Donor Restrictions – Many nonprofits struggle to track which net assets are restricted and when restrictions are satisfied. This frequently leads to misstatements. Document this clearly.​

Weak Segregation of Duties – If one person handles cash receipts, deposits, reconciliations, and GL entry, your auditor will cite this as an internal control weakness. Ensure at least basic segregation (even in small offices).

Lapsed Policies – A policy written five years ago that doesn't reflect your current practice is worse than no policy. Update policies annually.

Unresolved Prior-Year Findings – If your last audit identified issues, have a documented corrective action plan and evidence of implementation. Auditors will specifically test this.

How Trinity Rivers Financial Helps Texas Nonprofits Prepare

Preparing for an audit requires thoroughness, attention to detail, and knowledge of nonprofit accounting standards. If your finance team is stretched thin or lacks audit readiness expertise, Trinity Rivers Financial specializes in nonprofit bookkeeping and accounting for Texas organizations.

We help nonprofits:

• Implement fund accounting structures that clearly segregate restricted and unrestricted net assets.
• Set up monthly close processes that keep reconciliations current and prevent year-end surprises.
• Design internal controls tailored to your organization's size and risk profile.
• Organize supporting documentation in a format that auditors can easily access.
• Prepare PBC lists and audit support so your team isn't scrambling in the weeks before fieldwork.

Whether you need ongoing bookkeeping support or a one-time audit readiness engagement, we understand the unique financial challenges Texas nonprofits face—from grant compliance to donor restrictions to functional expense allocation.

Ready to walk into your next audit with confidence?

Schedule a free 20-minute audit readiness consultation with one of our nonprofit accounting specialists. We'll assess your current financial processes, identify any gaps, and create a roadmap to ensure your next audit is smooth, efficient, and clean.

Key Takeaways

• Start early. Begin audit preparation 90 days before fieldwork, not the week before.
• Reconcile everything. Bank accounts, receivables, payables, net assets, fixed assets—all must tie to your trial balance.
• Document your methodology. For allocation, estimates, and processes, have written, board-approved documentation.
• Organize governance. Board minutes, policies, tax documents, and grants should be readily accessible.
• Separate your roles. Even small offices should segregate cash handling, approval, and reconciliation.
• Communicate with your auditor early. Ask questions, share the PBC list, and flag any known challenges.
• Use your audit as a planning tool. Audit findings aren't just compliance issues—they're opportunities to strengthen operations.

A clean audit isn't luck; it's the result of systematic preparation and strong internal controls. Follow this roadmap, and you'll be audit-ready.​