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Five common EOFY audit issues NFPs should know
For NFPs, preparing for EOFY is a busy time. On top of the usual year-end tasks we have to cover, most organisations will have audit requirements to consider.
When you’re under pressure with deadlines and the Board is keen to know the year-end result fast, there is no room for mistakes. So what are some of the more common EOFY audit issues NFPs might face? And how can you easily avoid them?
1. Payroll discrepancies
One of the first things your not-for-profit auditor will be looking at is the accuracy of your organisation’s payroll.
Auditors will be looking at the super paid, particularly to ensure it’s in line with the FY23 statutory rate of 10.5 percent, and verifying that amount against employee entitlements. We recommend you do a quick calculation yourself – is the super expense 10.5% of the wages expense? If not, you need to understand why – because we can almost guarantee it will be one of the first questions you’ll be asked.
An important note is that this statutory rate will increase again to 11 percent for any super paid from July 2023. So keep that in mind when finalising your upcoming financial year budget. Most payroll software applications will automatically update the rate, as long as you have the calculating rate set to ‘statutory’ rather than a manually entered figure.
You’ll need to ensure annual and long service leave entitlements are calculated correctly and are grossed-up for superannuation and leave loading where applicable. It’s best practice that leave entitlements at 30 June are held at the July rates if you pay under the Award system or have a planned increase for the new financial year.
Some organisations will have a pay period that conveniently ends on 30 June. Many though will be paying that final week of June in the first July pay run, so you’ll need to accrue the portion of that payroll to 30 June.
2. Not complying with grant agreements
Another common mistake we see NFPs making – usually inadvertently – is failing to comply with grant conditions.
Non-compliance with grant conditions includes:
- Misusing grant funds
- Failing to achieve grant objectives
- Not returning any unused funds in line with the agreement
- Misrepresenting grant results
Failing to comply with grant conditions leaves you susceptible to risks like missing out on funding in future years, reputational damage and, if you’re a registered charity, even being stripped of charity status.
The most effective way to mitigate the risks of non-compliance with grant agreements is to periodically review any grant documentation throughout the year so you’re across the necessary conditions.
Additionally, prior to accepting any funding, you should also carefully review the agreement to ensure you understand the compliance and reporting obligations. That will allow you to structure your work to achieve the objectives and also to set up your accounting system to make record-keeping straightforward and ensure easy reporting on the expenditure of grant funds throughout the period.
3. Insufficient documentation
Insufficient documentation is another issue you might face during audit. NFP organisations that fail to provide adequate documentation or records during their audit will face many questions from their auditor as they aim to verify.
If an auditor isn’t able to easily view supporting documents for transactions throughout the financial year, they’ll have a hard time substantiating the accuracy of your organisation’s reported figures which in the worst case, could lead to a qualified audit opinion.
An effective solution is to implement suitable internal controls and foster a company culture of accountability in your organisation.
Using NFP accounting technology, like Dext and Xero, helps maintain clean records, as you can simply upload the necessary receipts and invoices for each transaction as they’re made throughout the year. This also helps avoid anyone having to scramble to find invoice samples selected by the auditor – you can give them access to the accounting software to help themselves to the information they need.
4. Non-compliance with regulatory requirements
NFP organisations are required to follow a number of key regulations and industry standards. Failing to do so can result in a number of penalties that include fines, loss of funding and corrective actions.
Key tips for maintaining regulatory requirements include:
- Ensuring your bank statements are verified against your accounting system – you should aim to reconcile the bank every month to keep on top of this.
- Making sure your ATO lodgements are up to date, including any tax obligations relevant to your organisation (like income tax and fringe benefit tax returns).
- Confirming your GST compliance with copies of your BAS and IAS returns.
Another key way to ensure compliance is by keeping up-to-date with regulatory requirements applicable to NFP organisations, such as the Australian Accounting Standards Board (AASBs) as well as bodies like the Australian Charities and Not-for-profits Commission (ACNC) and state regulators and fundraising authorities.
5. Failing to address issues from a previous audit
As well as maintaining compliance with regulatory bodies, you’ll also need to ensure you’re compliant with your own organisational policies as your auditor will highlight any current activities or processes that don’t comply with procedure.
Additionally, your auditor will review any findings from past audits and if they haven’t been addressed, you’ll need to explain why they haven’t been resolved.
A good way to manage these expectations is to review the findings from each audit as it is received, to make sure any requests, recommendations or issues have been properly addressed.
If you find there are things in a past audit that still need to be fixed, we suggest having a reasonable explanation about why it hasn’t yet been addressed, and/or a proposed plan for doing so.
Work with your auditor for the best outcome
Remember, your auditor can be a great resource to ensure your NFP organisation is achieving best practices in financial management, maintaining compliance and reporting accurately. So even if there are mistakes picked up on during an EOFY audit, it’s ultimately to the overall benefit of your organisation.
Check out more not-for-profit audit resources here.
