Audit of Church: How to Prepare for CPA's Audit
Glenn Tyndall, CPA
As a CPA, I have audited churches and other religious organizations. My experience is that church leaders want to know how they can better prepare for the church's audit and want to have a better understanding of what we'll be doing during the audit of their church. This guide addresses these concerns and highlights issues unique to churches accounting policies.
Church Financial Statements
A complete set of financial statements for a church includes the statement of financial position, statement of activities, statement of cash flows, statement of functional expenses, and accompanying notes. The church’s audit is designed to ensure that these financial statements are presented in accordance with Generally Accepted Accounting Principles (GAAP). When conducting a church audit, we test the accuracy of the church’s accounting records and review the church’s internal control procedures to ensure that the financial statements are presented fairly.
Unique Issues in Church Audit
Churches have unique accounting policies and internal control procedures.
Cash and Cash Receipts
The church uses cash and cash equivalents to fund operations. However, churches receive cash or other assets with donor-imposed restrictions that limit their use to certain purposes. Therefore, it’s important that the church maintain accurate records of restricted donations.
Church Cash Audit Questions
- Are bank reconciliations prepared timely?
- Trace transactions between the bank and the books for completeness and timeliness.
- Are any oustanding checks more than three months?
- Are there any unusual transactions in the bank statement immediately following year-end?
- Does the church have a written policy and procedure for the handling of cash receipts?
- Are Sunday school offerings properly recorded and delivered to the money counters?
- What procedures are in place to account for offerings mailed to the church?
- Does the church have a secure lockbox for donations made outside of services?
During a church audit, we will sit in on a service to conduct a physical walk through of the offering collection process. Any discrepencies or opportunities to improve the church's internal controls will be communicated to church management and the board.
The persons counting the money should not include the pastor or the church treasurer. This is to ensure that there is proper segregation of duties in the handling of and accounting for cash receipts.
Church Offering Counting Audit Questions
- Are at least two members of the counting committee present when counting offerings?
- Do money counters verifying that the contents of the offerings envelopes are identical to the amounts written on the outside of the envelopes?
- Are all checks stamped with a restrictive endorsement stamp immediately after verify the offering envelope contents accuracy?
- Are money counters rotated periodically 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
The depositing of funds should always be performed by two members of the church. This ensures the members’ safety because they usually carry a large amount of cash, while also being a good internal control policy for the church.
Cash deposits need to be done timely and two members of the counting team should be in custody of the funds until deposited.
- Are two members of the offering counting team in custody of the offering until the cash is deposited in the bank, placed in a night depository, or the church’s safe?
- Are all funds promptly deposited? Compare offering and other receipt records with bank deposits.
Church Depositing of Funds Audit Questions
Churches often receive restricted donations - for construction or acquisition for the building of a new annex or for mission trips. The donor’s intention was to restrict the church’s use of those funds for only those stated purposes.
Church Restricted Funds Audit Questions
- Are donations for restricted purposes properly recorded in the accounting records?
- Are restricted funds held for the intended purpose(s) and not spent on operating needs?
Practical advice: Some churches have chosen to physically separate operating funds from restricted funds by keeping the funds in separate bank accounts. This control ensures that restricted donations are not used to fund operations.
Churches rely on donations to fund operations and other special-purpose functions. By keeping accurate records of donations, the church can build rapport with its’ members and increase future donations by providing members with an annual summary of donations for use in preparation of their personal income tax returns
Church Recording Donations Audit Questions
- Are individual donor records kept as a basis for giving donor'sacknowledgment for contributions?
- If no goods or services are provided (other than intangible religious benefits) in exchange for a gift, does the receipt include a statement to this effect?
- Are donors who make in-kind donations given a good faith estimate of the value of such goods and services?
Accounts Payable and Cash Disbursements
The church’s accounts payable and cash disbursement process is closely looked at by the CPA auditing a church. Therefore, we recommend that church leaders look closely at the controls and procedures in this area prior to the CPA’s audit.
Church Accounts Payable and Cash Disbursements Audit Questions
- Is there a schedule of unpaid invoices including vendor name, invoice date, and due date?
- Are any of the accounts payable items past-due?
- Are there any disputes with vendors over amounts owed?
- Are all disbursements paid by check except for minor expenditures paid through the petty cash fund?
- Is written documentation available to support all disbursements?
- Are vouchers prepared for each petty cash fund disbursement?
- 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.
Church Land, Building, and Equipment Records Audit Questions
- Does the church have a written capitalization policy? (For example: The church only capatilizes expenses having a cost of $1,000 or more and a useful life of more than 1 year.)
- 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 taken at year-end?
Church Insurance Policies Audit Questions
- Is there a schedule of insurance coverage in force? Reflect effective and expiration dates, kind and classification of coverage, amounts of each coverage, premiums, and terms of payment.
- Is Workers’ Compensation insurance being carried as provided by law? Are all employees (and perhaps some independent contractors) covered under the Workers’ Compensation policy?
Mortgages, Loans, and Lines of Credit
- Is there a schedule of debt such as mortgages and notes?
- Have the balances owed to all lenders been compared to the obligations recorded in the church’s accounting records?
Church Investments Audit Questions
- 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?
- Have the contents of the safety deposit box been examined and recorded?