This publication provides an overview of the audit process. It explains what a grant recipient can expect from an audit, presents best practices for your grants management system, and identifies the types of information that will be expected for presentation throughout an audit process.
What Is an Audit?
Grant awards are subject to conditions of general, program, and fiscal administration to which a grant recipient expressly agrees. Accordingly, the audit process is utilized to review the consistency with which grant programs are being managed on the part of both funding agencies and recipients.
Objectives of an Audit
In general, audits seek to ensure that the funds that flow within grant programs are being utilized in accordance with the law and the intent of the grant. Audits help to ensure the following objectives of a successful grant program:
- Accounting system is integrated with adequate internal fiscal and management controls to provide full accountability for revenues, expenditures, assets, and liabilities
- Grant funds are being managed in compliance with applicable laws and regulations
- Financial statements are presented accurately, in accordance with generally accepted accounting principles
- Financial reports contain accurate and reliable financial data and are presented in accordance with the terms of applicable agreements
- Funds are expended in accordance with the terms of applicable agreements and relevant federal or state laws or regulations.
Types of Audits
Internal audits examine the programs or operations of federal or state agencies. Internal audits are used to test the adequacy of an organization's regulatory compliance and financial reporting. Additionally, they are used to test the effectiveness of an agency’s resource management, operating procedures, program results, and financial operations. Internal audits may evaluate the entire organization or a single program or operation within an organization. Grantees should be aware that assistance recipients may be evaluated as part of an internal audit in order to provide further information about the performance of a specific agency.
External audits examine a federal or state agency's grant recipients. They may be performed before, during, or after the completion of a project. Examples of external audits include:
- Pre-award audits
- Risk audits
- Single audits
- Programmatic audits
- Interim and final cost audits
- Indirect costs audit
Award recipients need to be aware of the potential for an audit and take the necessary steps to ensure that their programs and projects will hold up to the scrutiny.
Preparation – It’s All in the Administration
The most important step a grant receipient can take in preparing for an audit is understanding the importance of post-award grant administration. Once a project has started, the project manager must ensure that:
- The organization is complying with the programmatic terms and conditions of the agreement
- The project is being carried out as originally outlined in the workplan/proposal
- Adequate progress is being made toward achieving project goals and objectives
- Grant funds are being expended properly
With a clear understanding of the above, staff can adequately understand what auditors will look for, set up systems that provide appropriate project tracking, and be prepared with comprehensive project files to support inquiries.
Typically, the following information will be required for a program or project that is undergoing an audit:
- Applications, agreements, amendments, contracts, and subcontracts
- Accounting records, including reimbursements of funds, travel, records of in-kind contributions, etc.
- Copies of performance reports and any other reports or products developed under the agreement
In addition to the above, staff should be equipped to demonstrate an accurate knowledge of the program or project being funded. It is always a good practice to ask your grantor or others within your organization about past audits of your program.
While excellent record keeping is the basis for a successful audit process, sometimes something falls through the cracks. It is important that your organization develop and maintain good working relationships with auditors. This can be accomplished by:
- Being responsive to requests for information
- Making all documents available to the auditors
- Answering all questions honestly
- Being willing to discuss any problems or issues that are identified
- Explaining what action(s) you have taken to improve problem areas
- Agreeing to take corrective action, as necessary
While audits can be time-consuming, they don’t necessarily need to be a bad experience. The audit process can be used as an opportunity to identify and address weaknesses within an organization. Viewed in the proper light, audits can help solidify project and program management systems and ensure success.