Church board members have a long list of responsibilities. Among these is the responsibility for the money that flows through the church.
Included in those responsibilities is keeping accurate records and never letting a single individual have control of the money. These make good common sense. There also should be an annual audit of the church’s financial records. This is much more challenging.
External audits are performed by an independent auditor who has no impairing relationship to the church and, therefore, can review its data procedures with maximum objectivity. Internal audits generally are performed by church members or by persons closely associated with the church.
External Audits
The ideal is to have an annual audit performed by independent Certified Public Accountants (CPAs). Generally, however, only larger churches can afford this extra expense. External audits of smaller churches often are done on a non-GAAP basis—the statements do not conform to the full accrual method with depreciation recognized. Non-GAAP audits of smaller churches often are acceptable to banks and other agencies that require audited financial statements. (GAAP stands for Generally Accepted Accounting Principles.)
Some churches opt to engage independent CPAs to perform reviews or compilations of church financial statements or conduct agreed upon procedures while these steps may be very helpful to a church, they are not a substitute for an annual external or internal audit.
Internal Audits
Members of the church may form an audit committee to perform an internal audit to determine the validity of the financial statements. If the committee takes its task seriously, the result may be significant improvements in internal control and accounting procedures. Too often, the internal audit committee only conducts a cursory review, commends the treasurer for a job well done, and provides a false sense of security to the church.
The following are sample guidelines for an internal church audit:
FINANCIAL STATEMENTS
Are monthly financial statements prepared on a timely basis and submitted to the church board in an understandable format?
Do the financial statements include all church funds (unrestricted, temporarily restricted, and permanently restricted)?
Do the financial statements include a statement of financial position and statement of activity?
Are key account balances in the financial records reconciled with amounts presented in financial reports (contributions, accounts payable, mortgage balances(s), etc.)?
CASH RECEIPTS
General
Are cash handling procedures in writing?
Has the bank been notified never to cash checks payable to the church?
Are all offerings, fees, sales, etc. received in venues other than worship services recorded properly and delivered to the church staff?
Are procedures established to care for offerings and monies delivered or mailed to the church office between Sundays?
Offering Counting
Are at least two members of the counting committee present when offerings are counted? (The persons counting the money should not include the pastor or the church treasurer.)
Do money counters verify that the contents of the offering envelopes are identical to the amounts written on the outside of the envelopes?
Are all checks stamped with a restrictive endorsement stamp immediately after the offering envelope contents are verified?
Are money counters rotated so the same people are not handling the funds each week?
Are donor-restricted funds properly identified during the process of counting offerings?
Depositing of Funds
Are two members of the offering counting team in custody of the offering until it is deposited in the bank, placed in a night depository, or in the church’s safe?
Are all funds deposited promptly? Compare offering and other receipt records with bank deposits.
Are all receipts deposited intact? Receipts should not be used to pay cash expenses.
Restricted funds
Are donations for restricted purposes recorded properly in the accounting records?
Are restricted funds held for the intended purpose(s) and not spent on operating needs?
DONATION RECORDS/RECEIPTING
Are individual donor records kept as a basis to provide donor acknowledgments for all single contributions of $250 or more?
If no goods or services were provided (other than intangible religious benefits) in exchange for a gift, does the receipt include a statement to this effect?
If goods or services (other than intangible religious benefits) were provided in exchange for a gift, does the receipt:
Inform the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of the amount of any money and the value of any property contributed by the donor over the value of the goods and services provided by the organization, and
Provide to the donor a good faith estimate of the value of such goods and services?
Although not required by the IRS, has your church adopted a policy of issuing a contribution report to donors at least annually listing at least each week’s donations, if not each donation?
Are the donations traced from the weekly counting sheets to the donor records for a selected time period by the audit committee?
It is helpful to provide the donor with a gift acknowledgment for all gifts of cash whether under or over $250. Federal law requires that the donor have an acknowledgment from the church by the date they file their tax return for all gifts of cash, regardless of the amount.
CASH DISBURSEMENTS
Are all disbursements paid by check except for minor expenditures paid through the petty cash fund?
Is written documentation available to support all disbursements?
If a petty cash fund is used, are vouchers prepared for each disbursement from the fund?
Are pre-numbered checks used? Account for all the check numbers including voided checks.
Are blank checks ever signed in advance? This should never be done.
PETTY CASH FUNDS
Is a petty cash fund used for disbursements of a small amount? If so, is the fund periodically reconciled and replenished based on proper documentation of the cash expenditures?
BANK, SAVINGS AND INVESTMENT ACCOUNTS
Are written bank reconciliations prepared on a timely basis? Test the reconciliation for the last month in the fiscal year. Trace transactions between the bank and the books for completeness and timeliness.
Are there any checks that have been outstanding over three months? If so, is there a valid reason?
Are there any unusual transactions in the bank statement immediately following year-end? Obtain the bank statement for the first month after year-end directly from the bank for review by the audit committee. Otherwise, obtain the last bank statement (unopened).
Are all savings and investment accounts recorded in the financial records? Compare monthly statements to the books.
Are earnings or losses from savings and investment accounts recorded in the books?
Are all bank, savings and investment account statements mailed directly to someone unrelated to the person receiving or expending funds?
Account statements should be opened and perused by the recipient. The weekly deposits should be compared to the bank statements and checks clearing the bank should be reviewed for unusual items.
LAND, BUILDINGS AND EQUIPMENT RECORDS
Are there detailed records of land, buildings, and equipment including date acquired, description, and cost or fair market value at date of acquisition?
Was a physical inventory of equipment taken at year-end?
Have the property records been reconciled to the insurance coverages?
ACCOUNTS PAYABLE
Is there a schedule of unpaid invoices, including vendor name, date, and due date?
Are any of the accounts payable items significantly past-due?
Are there any disputes with vendors over amounts owed?
INSURANCE POLICIES
Is there a schedule of insurance coverage in force? It should reflect effective and expiration dates, kind and classification of coverages, maximum amounts of each coverage, premiums, and terms of payment.
Is Workers’ Compensation insurance being carried as provided by law in most states? Are all employees (and perhaps some independent contractors) covered under the Workers’ Compensation policy?
AMORTIZATION OF DEBT
Is there a schedule of debt such as mortgages and notes?
Have the balances owed to all lenders been confirmed directly in writing?
Have the balances owed to all lenders been compared to the obligations recorded on the balance sheet?
SECURITIES AND OTHER NEGOTIABLE DOCUMENTS
Does the church own any marketable securities or bonds? If so, are they kept in a safety deposit box, and are two signatures (excluding a pastor) required for access?
Have the contents of the safety deposit box been examined and recorded?
PERSONNEL MATTERS
Does the church maintain the following documents?
Applications for employment
Personnel files
Performance appraisal and evaluation forms
Employee handbook and Immigration I-9 forms
FEDERAL REPORTING OBLIGATIONS
Does the church file on a timely basis the following forms, if applicable?
Federal payroll tax forms (Form 941, Form W-2, Form W-3, Form 1099-MISC)
Donee information returns (Form 8282)
Annual certification of racial nondiscrimination for Christian schools (Form 5578)
Used with permission from the ECFA Knowledge Center. ECFA.org
