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Supporting Your Faith with Fiscal Accountability

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Manage Your Internal Audit Committee Meeting to Get Answers

In this final post of our discussion on church audits we’ll look at the fundamentals of an internal audit committee meeting. In our last entry, we discussed the formation of this team to properly prepare your church for an internal review of fiscal accountability.

After assembling the necessary records for the meeting, the typical question asked is, “Where do we go from here?”  While this list is far from comprehensive, here are some fundamentals:

  1. Review a sample of the bank reconciliation that covers the last day of the fiscal year along with others. The reconciliation should start with the ending balance from the bank statement and end with the balance on the year-end financial statements. If the churches’ books weren’t audited last year, reviewing the beginning balances for the fiscal year is also important. Repeat the procedure for all bank and investment accounts. Investment accounts may be reported at fair market value or at historical costs. (Whichever method your organization chooses, the two values should be reconciled as well.) When large, or frequent, transfers exist between accounts, confirm that the amounts and dates are consistent.
  2. Pick a random sample of the weekly counting committee reports throughout the year and trace the balances to the equivalent bank deposits. Five to 10 percent of those reports should be a sufficient sample.
  3. Review the expense accounts for the year and compare them to the budget. Investigate any expenses over budget and determine why the overage occurred. Exceeding a budget isn’t wrong, but the audit committee should be concerned if the practice represents disregard for the approval process of committing church funds.
  4. Sample random vendor invoices to ensure they were properly approved, charged to the correct expense account and paid timely.
  5. Review a sample of cancelled checks to see that they were properly signed by approved signers and with the correct number of signers. If you can’t review the checks because they haven’t been returned from the bank or available online, consider using two part checks with the signatures shown on the copy.
  6. Review petty cash ledgers to check that expenses were properly approved, charged to the correct account and reimbursements accurately reflected. A large sample of these reimbursement reports should be examined, as they are an easy source of fraud and not too many instances should exist in a year. We recommend conducting a surprise count of the petty cash funds to ensure what is supposed to be there is truly there. We find that many petty cash accounts are replenished but the expenses being reimbursed are not reflected in the books. Petty cash is not an expense. It’s an asset used for expenses and the reimbursement should be charged to the appropriate accounts.
  7. Trace several employee time cards—or approved salary rates—to the gross payroll amounts and test that the amounts withheld for taxes, insurance, or added for expense reimbursements are appropriate and properly documented. Confirm that all payroll taxes and returns are paid and filed timely. The W-2 amounts should agree with the Forms 941 for the year.
  8. Read the declaration pages of the insurance policies to ensure you own the coverage you expect, that the policy is current and appropriate risks are covered, and that the limits and deductibles are consistent with the amounts approved by the committee. This area may need some specific expertise.
  9. Assess whether or not those with management responsibility are sensitive to the budget preparation process and its use as a tool to manage costs. Verify the new budget is realistic by comparing it to actual expenses of the year just ended.
  10. If you maintain any designated funds, review the ledger for each of those funds to determine what restrictions should exist. Also, determine whether these restrictions are being complied with (i.e. segregation from other funds, invested in a particular way, income is distributed appropriately, etc.).
  11. Review the documents related to any debt that is owed. The balances on the books should agree with the documents provided by the lender. Reconcile any differences. Often restrictive covenants exist that must be complied with. Be aware of upcoming rate reviews or balloon payments.
  12. At this time, any personnel who recorded and reported the financial activity for the last year should leave the room. Review the results of what you learned in these steps and discuss whether or not you’re comfortable with the overall accuracy and controls of the church financial transactions. Assess any feedback or reasoning for errors or deviations from church policy. Decide if you need to do more testing, need guidance from church leadership, or worst case, need to call in the professionals (auditors, human resource consultants, insurance agents, or the authorities regarding your employee theft policy). This specific issue is particularly problematic for non-profit organizations. Many are too trusting and generally lax in oversight due to overworked leadership and/or volunteers with limited engagement in these matters.

An internal audit can be an arduous process, especially when no one holds much experience in these procedures. Once again, we remind you that this process is not to be considered an audit based on the legal definitions in the business community, but rather a beginning to a routine of fiscal accountability.

If you do find areas of concern, we encourage you to consult with professionals to assist with your next course of action. As always, for any questions or assistance, feel free to contact Online Stewardship at 904-398-4747, or email us at lynn@onlinestewardship.com.

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