How To Conduct A Financial Audit

By Ray Woods, Business Manager, Converge MidAmerica

We get calls from churches from time to time asking if they should be doing a financial operations audit. The answer to that is YES.

Why? Because you want to satisfy your congregation that their contributions are being handled with integrity; and to protect your board and Pastor from possible charges of negligence.

All of our churches should be auditing their records, but not all churches need to use outside auditors for this. It can be done by as few as 2 people. Many churches use board members and possibly someone from the facilities team. The auditors should not be paid staff.

Here is a list of items that would normally be covered in a financial operations audit. Your in-house audits can do a few of them on a rotating quarterly basis so they’re all covered in the course of a year.

  1. Review internal financial controls to make certain they are adequate.
    1. Are collected moneys always handled and counted by two or more people?
    2. Is collected money placed in a secure location at all times until deposited?
    3. Are there 2 signatures on record of counts to be deposited?

(For more information on internal financial controls click here)

  1. Verify that deposits equal the offering counts.
  2. Reconcile the church checkbook(s).
  3. Review expense reports of the Senior Pastor (possibly every quarter) and ensure some one is reviewing the expense accounts of other employees.
  4. Compare that bank and investment balances agree with the balance statement.
  5. Verify that the church's debt (loan) statement(s) balance agrees with the balance statement.
  6. Make sure there is support documentation to confirm accounts receivable (pledges, loan repayments, etc.) and reconcile them with the balance statement.
  7. Review Accounts Payable to insure all bills are being paid. If you’re on an accrual basis, confirm all amounts incurred but not paid have been accrued.
  8. Verify that donations in the donor system reconcile to the general ledger.
  9. Reconcile the church's quarterly 941 reports with payroll expenses (easiest in January).
  10. Review an inventory of fixed assets for insurance and security purposes. Correct for additions and disposals. Verify depreciation is accurately reflected.
  11. Compare current year to prior year amounts of income and expenses to see if there are any large or unexplained differences. Determine if it is legitimate or reveals a flaw in the system. (Most easily done at year end or during the budget process.)

If you have questions about any of these, feel free to contact Ray Woods in our Converge office.

Categories/Tags: 
Church Finances