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V. Financial Reporting

A. Audit Guidelines | B. Annual Balance Sheet | C. Church Financial Policies and Practices

INDEX

A. Audit Guidlines

Auditing of Church Books

INTRODUCTION
One of the worst things that can happen to the finances of a church is for the congregation to lose confidence in the integrity of the money handlers. An annual audit of the Treasurer's and Financial Secretary's books can help keep confidence high.

PRESENTATION
The term “audit” typically either conjures up images of the Internal Revenue Service or a team of highly paid professionals going through each transaction (neither particularly desirous for most congregations). If an audit is desired but unaffordable if conducted by a professional outside accounting firm, two options may be available and adequate (the audit methodology shown below does not replace a professional outside audit but may be ample for your congregation):

• A “Self-Audit” Of The Books
• Teaming With Another Local Congregation To Audit Each Other's Books (It's a great way to get financially knowledgeable folks doing the audit when most churches have a limited number of these people.)

The methodology for both would follow the steps itemized below:

1. Are the Treasurer and Financial Secretary functions separate so that the person receipting funds is different than the person writing checks? There are too many control issues to ever allow one person to do both functions.
2. Are these positions rotated periodically to keep a person from performing one of the functions for many years? Prudence dictates that a congregation change each function at least every three years (check your church’s constitution/bylaws and make sure you never exceed what it stipulates). It’s nice to give these stewards a rest from their tasks as well.

TREASURER'S AUDIT

1. Does the office secretary (or other designated person who is not authorized to sign checks) open the bills coming to the church (where all church bills should be) to insure a second set of eyes sees bills and knows that the church isn't running delinquent on any bills. Any delinquency and/or unusual bills should result in the senior pastor being informed.
2. Does the office secretary (or other designated person not authorized to sign checks) open the monthly bank statement and review all checks to insure payments are going to recognized entities? Any unrecognized or questionable payees should be brought to the attention of the senior pastor. Obviously, any payments going to the Treasurer should be closely scrutinized.
3. Review authorization procedures:
       a. Does the Treasurer need other approvals for payment of bills?
       b. Do all the bills (100%) in one randomly selected month follow the approved pattern of approvals?
       c. Does a sampling of the bills (say 5% of the total checks in two randomly selected months of bank statements) follow the approved pattern of approvals?
       d. In b and c above, the amount, date, check number, and payee should all agree with the invoice.
       e. Any check written to the pastor, council/board member, treasurer, and/or financial secretary should all have proper substantiation.
4. Were all bank statements properly reconciled? Most computerized accounting systems produce a printed record of the reconciliation. They will show all checks cleared and those outstanding.
5. Are payroll records properly handled? There should be some master file on the information and copies of each quarter’s tax reports (941s among others). These reports should be sampled with a few random reports added down columns and across rows to insure accuracy.
6. Were any line items on the budget up or down significantly from the previous year? Any change of more than 20% should be investigated and substantiated to insure entries are being made in a consistent fashion.
7. Are blank checks kept in a secure place?
8. Contact the church's bank:
       a. Get a copy of the most current bank signature card to insure only those currently authorized signers are on the bank records.
       b. Verify whether or not there were any “insufficient funds checks” written by the church during the past twelve months?
9. Does the church have a “master list” of all church assets? This should include serial numbers, dates purchased, and cost. Is that list up to date? If in doubt, a physical inventory of the assets may be required.
10. Does there appear to be a fair representation of the assets and liabilities of the church on the balance sheet? Does the cash position at the end of the accounting period match those on the final checkbook reconciliation?
11. Are excess cash resources invested following a wise (and preferably written) investment program? Are those assets properly reflected on the Balance Sheet? The audit team should verify all statements from National Covenant Properties/banks/savings and loans/mutual funds or other financial reporting entities against the amounts shown on the Balance Sheet. As these funds are typically more substantial than those kept in the church’s checking account, is there a dual signature authority required for the utilization of these funds?
12. Get a copy of the church’s insurance policy to make sure that all assets are protected (if certain assets aren’t protected, that a conscious decision was made not to cover them) and at amounts that approximate replacement value (or at a minimum coverage equal to any debt backed by those assets as collateral). Are the liability coverage levels “appropriate”?