Got A Variance Problem? Tackle It Before Your Audit!

For many non-profits (and community colleges) with a June year end, audit preparation is about to become a flurry of activity that begins once the auditors send their request list. Trial balances are finalized, and schedules are pulled together under time pressure.

But the most effective audit preparations start well before the auditors arrive.

One of the most valuable—and often overlooked—steps in audit readiness is a disciplined comparison of current-year financial results to prior-year balances and budgets, with clear explanations developed for significant variances. This process not only strengthens your audit experience, but also improves internal understanding, governance, and decision-making.

Why Your Auditors Care About Your Variances

From an auditor’s perspective, year-over-year and budget-to-actual comparisons are fundamental analytical procedures. Auditors use these comparisons to:

• Identify unexpected changes
• Assess risk areas
• Determine where additional testing may be required
• Evaluate whether financial statements “make sense” given an organization’s activities

If Management cannot readily explain a significant variance, auditors are obliged to dig deeper—often resulting in more questions, more testing, and more unexpected time spent on the audit.

When organizations proactively prepare for explanations regarding their variances, audits tend to move faster and with fewer surprises.

What Comparisons Should Be Performed?

As part of audit preparation, organizations should perform at least two core comparisons:

1. Current Year vs. Prior Year

This highlights:

• Growth or decline in revenue streams
• Shifts in expense categories
• Changes in asset and liability balances
• One-time or unusual activities

2. Actual Results vs. Budget

This reveals:

• Operational execution issues
• Over- or under-spending
• Revenue shortfalls or surpluses
• Planning assumptions that may no longer hold

Ideally, these comparisons should be done at a meaningful level of detail, not just at a high-level summary.

Establishing a Threshold for “Significant” Variances

Not every difference requires an explanation. The key is to define what is worth explaining.

Many organizations establish:

• A dollar threshold (e.g., variances over $50,000),
• A percentage threshold (e.g., ±10%), or
• A combination of both.

The goal is consistency. By applying the same threshold each year, Management signals that it is systematically monitoring changes rather than reacting arbitrarily to auditor inquiries.

Developing Strong Variance Explanations

A good variance explanation does more than restate the numbers. It clearly answers why the variance occurred.

Effective explanations usually include:

• Operational causes (e.g., program changes, staffing levels, and timing of events)
• One-time items (e.g., grants, settlements, and large purchases)
• Timing differences (e.g., revenue recognized earlier or later than expected)
• External factors (e.g., market conditions, inflation, and regulatory changes)

Avoid explanations that are vague or circular, such as:

• “Due to increased activity”
• “Because actuals differed from budget”

Those statements don’t add insight—and often prompt follow‑up questions.

Best Practices for Incorporating Variance Analysis Into Audit Prep

To make this process effective and sustainable:

• Assign clear ownership for preparing comparisons and explanations
• Standardize templates for variance schedules
• Involve program and department leaders where appropriate
• Review explanations internally before sharing them with auditors
• Retain documentation as part of your audit support files

The more organized and thoughtful this process is, the smoother your audit will be.

Final Thoughts

Preparing for an audit is not just about responding to requests—it’s about demonstrating financial stewardship and understanding.

By making current-year vs. prior-year and budget-to-actual variance analysis a formal part of your audit preparation process, your organization sends a powerful message:

“We know our numbers, we understand our story, and we are prepared to explain it.”

That message benefits auditors, boards, donors, regulators—and most importantly, your organization itself.