03.3 - Local Church Audits

by Scott Selman

We intend that no one should blame us about this generous gift that we are administering, for we intend to do what is right not only in the Lord’s sight but also in the sight of others.
2 Corinthians 8:20-21 (NRSV)

Does your local church have an annual audit?  Here is some information about the denomination’s local church audit requirement and a few suggestions related  to compliance.  Paragraph 259.4.c) in The Book of Discipline of The United Methodist Church states, “The committee (on finance) shall make provision for an annual audit of the records of the financial officers of the local church and all its organizations and shall report to the charge conference.”

What is an audit?

The second edition of The Local Church Audit Guide prepared by the Internal Audit Department and the Committee on Audit and Review of the General Council on Finance and Administration provides the following definition of a local church audit:

A local church audit is an independent evaluation of the financial reports and records and the internal controls of the local church by a qualified person or persons for the purpose of reasonably verifying the reliability of financial reporting, determining whether assets are being safeguarded, and whether the law, the Discipline and policies and procedures are being complied with.

Why have an audit?

It is important to remember that an audit has little to do with distrust.  Certainly, most church treasurers are honest, hardworking servants of the Church.  An audit is simply good stewardship! A local church audit helps ensure that local church funds are used as designated (by the finance committee or by donors), promotes confidence in local church financial reporting, encourages greater giving, and protects the treasurer from false accusation.  In addition, our Book of Discipline makes it mandatory that local churches have an audit.

Who should conduct the audit?

An individual or firm that is independent of the local church’s financial accounts and records should conduct the local church audit.  Independence, for example, would preclude the local church treasurer, finance committee members, or pastor from conducting the audit.  In addition, spouses or other relatives of these persons should not conduct the audit.  Independence should be considered both in fact and in perception.

While the audit does not have to be conducted by a Certified Public Accountant, the auditor should have knowledge of accounting principles and internal control. Local churches frequently have someone in the congregation who meets these qualifications through practical experience, and who may be willing to conduct the audit without charge. However, churches with annual operations of several hundred thousand dollars or more should probably obtain the audit services of an independent auditing firm due to greater risk and complexity.

What does an auditor actually do?

Basically, an auditor verifies the financial reports of the local church treasurer  and determines the proper recording of cash receipts and disbursements.  Specifically, auditors usually do the following:

  • Evaluate internal accounting controls;
  • Review minutes of meetings that affect church finances;
  • Review bank reconciliations, and confirm bank and investment accounts;
  • Test a sample of cash receipts and disbursements for proper accounting treatment, including confirmation with outside parties;
  • Test certain payroll transactions;
  • Compare revenue and expense account balances in the current year with corresponding balances in the prior year for reasonableness; and
  • Issue an audit report.

The preceding list is not all-inclusive and will vary based on a church’s size.

What kind of audit report is usually issued?

The auditor should issue a written report.  The report should generally include   the audit procedures followed, the local church year-end financial statements, and any comments or recommendations about financial matters noted during the audit.

The Local Church Audit Guide includes a checklist that will be especially helpful for local churches that wish to have an audit without engaging an independent, professional auditing firm.  Here are two suggestions:  (1) clergy may want to consult with their district superintendent concerning the role of audit reports at charge conference, and (2) local church treasurers, ask for an audit!

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