Church Audit ... or Not?

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.

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

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.