Church Audit ... or Not?

Church Audit Procedures

A church audit or other alternative procedures enhances transparency and accountability, demonstrating to members and donors that their contributions are being managed responsibly.

A church audit can also help in identifying any discrepancies or inefficiencies in financial processes, allowing for corrective actions to be taken promptly.

Most importantly, an audit can provide valuable insights and recommendations for improving financial practices and internal controls, thereby strengthening the overall financial health of the organization.

Additionally, having regular audits can build trust with external stakeholders, including potential donors and regulatory authorities, showing that the church is committed to maintaining high standards of financial integrity.

HOWEVER....they can be quite time consuming and are there other options?

Church Accounting Package

A set of 4 ebook packages that covers the following topics...

  • Fund accounting examples and explanations
  • Best methods for tracking restrictive funds
  • Donation management
  • Minister compensation and taxes
  • Internal controls and staff reimbursements
  • Much more - Click here for details

Church Audit Types and Alternatives:

Church audit types and alternatives

The first and main type of church audit is an External Audit. Those are conducted by external CPAs and can be very costly. There are circumstances when a grant or lending organization may mandate an external audit within a set timeframe. However, if you are not obliged to undergo an expensive external audit, there are alternative options that can offer similar benefits, including:

internal audits conducted by your own finance team. These audits can help identify discrepancies, ensure compliance with internal policies, and improve financial management practices.

Another option is a peer review, where a qualified professional from a similar organization reviews your financial statements and processes, providing an objective assessment without the high cost of an external audit.

Additionally, you might consider utilizing accounting software that offers robust reporting features. This software can streamline your financial tracking and generate detailed reports that can be reviewed periodically. Engaging a certified public accountant (CPA) for a limited scope review or advisory services can also be a cost-effective way to ensure your financial practices are sound and meet necessary standards. 

Financial reviews conducted by CPAs can be half the cost of an external audit and are typically accepted by financial institutions.

An Agreed Upon Procedure (AUP) for a church is a type of engagement where an auditor is hired to carry out specific procedures that have been agreed upon by the church and other involved parties, such as a governing board or donor. Unlike a full audit, an AUP engagement does not provide an opinion or assurance. Instead, it focuses on particular areas of interest, such as verifying the accuracy of financial records, ensuring compliance with church policies, or reviewing the handling of contributions and expenditures.

The procedures are tailored to meet the unique needs of the church and might include tasks such as:

  • Inspecting bank reconciliations for accuracy.
  • Verifying the proper handling and recording of donations.
  • Reviewing expense reports for compliance with church policies.
  • Examining payroll records to ensure proper payment and tax withholding.
  • Checking the accuracy of financial statements.

The results of the AUP are typically compiled in a detailed report, which outlines the procedures performed and the findings. This report can be used to provide transparency, improve financial management, and build trust among the congregation and stakeholders.

Additionally, establishing a strong governance framework with regular oversight by a finance or audit committee can provide ongoing assurance of financial integrity. This committee can review financial statements, oversee risk management, and ensure adherence to best practices, thereby maintaining accountability and transparency within your organization.

By exploring these alternatives, you can achieve a level of financial scrutiny and confidence that supports your organization's objectives without incurring the high costs associated with mandatory external audits.

Church Accounting Package

Managing bookkeeping for churches can present unique challenges. Apart from standard accounting procedures, there is the additional task of managing restricted funds alongside the overall financial records.

You might be facing a chart of accounts overloaded with numerous unnecessary accounts from past volunteers. On top of that, you've come across errors in your payroll entries. These ebooks on church bookkeeping are specifically designed to assist you in handling these issues effectively.

Description page for the ebooks and bonuses included in the Bookkeeping for Churches Package Audit or Agreed Upon Procedures engagement is not a reflection on the competence or integrity of your financial staff. Rather, it is a routine procedure designed to protect both your staff and your church.

A Church Audit should entail:

Guarding Money
  • Independently verify treasurer(s) reports.
  • Ensure funds are handled correctly.
  • Confirm that donated funds are used as per donors' stipulations.

During an audit, the auditor typically assesses:

  • Accounting controls to minimize errors or losses.
  • Segregation of duties to ensure checks and balances.
  • The reasonableness of systems and procedures considering various factors like organization size and budget.
  • Adequacy of insurance coverage.
  • Records demonstrating donors' instructions for contributions.
  • Accounting controls (systems that reduce the possibility of loss or errors)
  • Segregation of duties (assurances that more than one person is involved in critical steps in handling money so that there can be checks and balances)
  • Reasonableness of systems and procedures in the light of all factors, including the size of the organization and its budget
  • Adequacy of insurance coverage
  • Records that show donors' stipulations for the use of contributions made to your organization

Spreadsheet Package

The Spreadsheet Package includes:

  • Contribution Tracking Workbook
  • 5 Fund Automatic Accounting Workbook 
  • Bank Reconciliation Workbook
  • Collection Count Sheet
  • Mileage Log Workbook 
  • Much more - Click here for details

PLUS a Word document with 3 examples of contribution statements for cash, non cash, and quid pro quo donations that you can customize for your own use!

Required documents:

Specific documents required for both external or internal church audits.

For both external or internal audits, specific documents will be required:

  • Copies of all your organizations policies and procedures related to finance and treasury functions and copies of minute approving those policies.
  • Listing of all bank and investment accounts, including the person authorized to sign on each, and including any special use accounts under the control of the pastor(s) or administrator and in the name of the nonprofit or church.
  • All financial statements for each month of the year, plus December of the prior year and January of the subsequent year (a fourteen month period).
  • Bank and investment account statements for the same period.
  • Bank reconciliations for that same period.
  • Original books of entry, which will be the general and subsidiary journals; for those books that are computerized, a print-out of all transactions by account for the entire year.
  • Specified paid invoices, payroll data and files (including 941's, year-end W-2's, 1099's and transmittal forms), income transmittals and deposit records for the audited period.
  • The Financial Secretary's records and other income records for the same period.
How To Guide for Small and Growing Churches

The Church Accounting: How To Guide devotes a whole section of the book to payroll for churches. It covers payroll terminology and forms and then takes you through the steps necessary to set up a payroll, calculate and file the necessary taxes and forms, and even details how to handle the minister's payroll. It also includes sections on filling out IRS forms: 1099, 1099-NEC, and 1096.

If you have QuickBooks or are considering using it in the future, go ahead and purchase the QuickBooks for Churches and the How To Guide combo for a complete package on setting up and administering a payroll using QuickBooks.

QuickBooks for Churches & Church Accounting Combo Bundle

Internal Auditor Qualifications:

Internal Auditor Qualifications

Generally, a person qualified to conduct an internal audit for a nonprofit or church usually possesses experience in accounting principles, obtained through bookkeeping, office management, or accounting courses.

They need to dedicate a significant amount of time to the audit, as it can be a lengthy process.

Consider referring to an internal checklist guideline for guidance.

In some cases, small churches or nonprofits may mutually agree to have their respective treasurers audit each other.

Churches often have congregation members with accounting expertise who are willing to volunteer their services for the audit.

Note: another process to "check the books" is a Church Checkup engagement. See more in this article written by a CPA: Do you need an Audit?