Statement of Church Auditing Procedures

Role of the Audit Committee
The Audit Committee represents the interests of the membership of the church, as well as those of the clergy, the church governing body, and even those of the regional or national church body. The Audit Committee is entrusted to perform a task that none of these individuals or groups can perform, primarily because they do not have access to the financial information and transactions of the church on a daily basis. The members and other interested parties are not in a position to judge the accuracy and fairness of any summarized financial reports which the church produces.

The Audit Committee has the task of attempting to verify the truth and accuracy of the information contained in the church’s financial reports, and by expressing an opinion on such information, make them more believable and acceptable to all interested parties. Such credibility can be achieved only if the Committee itself is believable. It is often said that the cornerstone of any audit is independence, meaning that the auditors must be unbiased and impartial regarding the material which is the subject of their audit. Only then can they offer a fair opinion on what they have examined. Perception can be just as important as reality in meeting this test, for an
individual may be the most honest and objective person alive, but if the membership of the church perceives that person to be biased or to have a vested interest in the subject matter of the audit, any report they might give will not be credible. Thus it is not appropriate for a church’s treasurer or financial secretary to serve on the Audit Committee. Certainly these individuals will play a central role in the audit, and they must be readily available to the Committee. The audit and the audit report, however, must be produced by individuals who are not now, and have not been, involved in the accounting or record keeping for the church during the year under audit.

The church and its leadership have a stewardship responsibility to see that the resources made available are used in the service of Christ and in the manner designated by the church leadership and the membership. This responsibility also extends to managing special gifts which may be restricted by the donor, and thus are available only for a specific purpose. A properly functioning Audit Committee will help the church to fulfill it stewardship responsibility by helping to assure that resources have been used in the proper fashion.

The church Audit Committee has a uniquely challenging task because of the environment in which it must operate. Churches are typically, and appropriately, characterized by a high degree of trust among the staff and employees. Nonetheless, prudence dictates that the church leadership must remain ever vigilant in order to fulfill the responsibilities given to it. No individual is above temptation. Jesus Himself was tempted by Satan. And yet who among mortals has the strength of Christ to withstand all such assaults? The Audit Committee is sometimes perceived as superfluous or unnecessary because of the trust placed in the church’s treasurer and/or financial secretary. In the vast majority of cases that trust is well deserved. In other cases, the Committee is viewed by those whose work comes under scrutiny as an attempt to discredit or devalue their work. Indeed, the treasurer or financial secretary should not view the Audit Committee as a vehicle by which the church is expressing distrust or suspicion. On the contrary, the Audit Committee in a church should celebrate the good work of the treasurer and financial secretary and hold it up high for all the membership to see!

The Committee’s Objectives
The objectives of the church Audit Committee are somewhat narrower than those of a public accountant auditing financial statements of a business. Most businesses must conform to a set of required accounting principles when presenting financial statements to the public, and auditors therefore gear their work toward reporting on whether the business’ statements are in conformity with such acceptable accounting principles.

For many churches, especially smaller ones, generally accepted accounting principles (GAAP) are usually a non-issue. Compliance with such principles would only become important if the church had a need to publish its financial statements to outside parties, such as a lending institution, and was therefore required to have the statements audited by an independent outside auditing firm. Statements prepared for internal use by the church and its members need not conform to generally accepted accounting principles, although they certainly can be so prepared if the church wishes. It is usually much simpler for the church to prepare just those statements and schedules which it finds most useful, however.

Since most churches find that the information they need most often revolves around cash receipts and cash payments, the reports they have developed focus on these aspects of the church’s operations. Accordingly, the principal objectives of the church Audit Committee will also concentrate on these areas. In general terms, the Committee must be able to satisfy itself that all cash received by the church has been recorded properly and deposited into a bank account where access is limited. Similarly, it should be satisfied that all cash payments have been properly authorized by the appropriate body within the church, properly documented and recorded.

Finally, the Committee must be satisfied that all of these receipts and payments are correctly summarized and reported in the annual financial reports of the church, and that the information contained therein agrees with the underlying records of the church. The Audit Committee’s responsibilities will extend to other areas as well. For example, if the church has investments in securities such as stocks and bonds, the Committee will seek to assure itself that any purchase or sale transactions during the year have been properly authorized and recorded, and that the list of investments in the year-end financial reports is complete and accurate, properly representing what the church owns at year-end. On the other hand, if the church has any outstanding debts such as mortgages or loans, the Committee will want to assure itself that all required payments have been made during the year, and that the balances reported in the church’s financial statements are accurate as of the date of the statements.

There are other areas which should get the Committee’s attention too. These include the payroll area where the Committee will want to make sure that all employees and staff are being paid at the rate approved by the church governing body. Additionally, the Committee should satisfy itself that the church has adequate insurance coverage for all of its property and potential liabilities. Also, the Committee may wish to conduct a periodic inventory of the church’s property such as office equipment, audiovisual equipment, furniture, and similar items, comparing results with previous inventories to make certain that no assets have become missing.

One final area which should be of concern to the Audit Committee is often overlooked in the rush to “crunch the numbers” in the church’s annual financial reports. This area is the daily, weekly, and monthly accounting practices and procedures employed in the church, and it is vital to the accuracy of the ultimate financial reports. If the procedures and practices used on an ongoing basis are not sound, there may be errors which will be beyond the ability of the Audit Committee to discover. Items may be overlooked and never recorded, or they may be lost. It is the validity of the ongoing practices and procedures that will provide some assurance that all events get recorded and nothing is lost along the way. The Audit Committee can be helpful here by reviewing the practices and procedures in use and making constructive suggestions when necessary. To assist in this function, the section of this handbook on practices and procedures contains a questionnaire which will help the Committee to identify potential weaknesses in the church’s accounting practices and procedures.

Throughout the process, the Audit Committee should document its work. All good auditors do this in the form of audit schedules or work papers which for m the basis and provide the evidence for the auditor’s conclusions. Church auditors should be no different in this regard.

You are ultimately going to issue a report on the soundness of the annual financial reports, so you should have a well documented basis for doing so.