Florida Conference of the United Methodist Church

Guide to Auditing the Local Church

GUIDE
TO
AUDITING
THE\
LOCAL CHURCH

- -
Rev. 1, 11/25/2013 Page 1
 Florida Conference of the United Methodist Church
Guide to Auditing the Local Church

This guide is provided to you as a service of the Florida Conference of the United
Methodist Church. A significant portion of the content of this guide has been taken
directly from the "Local Church Audit Guide" written by the General Agency Office of
Internal Audit and the Committee on Audit and Review of the General Council on
Finance and Administration of The United Methodist Church.
Questions and comments should be directed to:
Anthony C. Prestipino
Treasurer, Director of Administrative Services
The Florida Conference of the United Methodist Church
450 Martin L King Jr Ave
Lakeland , FL 33815-1522
Office: 863-688-5563, Ext. 112
Direct: 863-393-1426
Cell: 863-398-5066
[email protected]

DISCLAIMER

The General Council on Finance and Administration, the Internal Audit Department and
The Florida Conference of the United Methodist Church are not responsible for the
conducting of local church audits, nor do they provide legal or financial advice to the
local church through this guide. Local churches should seek assistance and advice
from their local advisors when specific issues arise. This guide is provided to you as a
service and should be used to increase your understanding of auditing principles within
your local church.

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 Florida Conference of the United Methodist Church
Guide to Auditing the Local Church

TABLE OF CONTENTS

PREFACE (Book of Discipline 2012, 1{258.4(d)) ... .. . .... .. ...... .. . ....... .. . ..... .. .......... 4
INTRODUCTION ....... ............ .............. .. ... .. ... .. ... ..... . .. ... . .. ............... ....... .... 5
WHO CAN PERFORM THE LOCAL CHURCH AUDIT? .... ... ... ...... .. .. . ... .. .. .......... 6
UNDERSTANDING RESTRICTED ASSETS ................... .... . .... ... .. .. .. ... . ... .. .. .. .. 7
UNDERSTANDING DESIGNATED ASSETS ........... .. ... .. .. ... .... .. ... ... .... .. ......... .. 8
THE AUDIT PROCESS ....... ........ ...... ................ ...... ....... . .... .. .. ... . .. .. ........ .. ... 9
AUDIT PREPARATION .... ............ ....... . .... ............ .. .. ................ ... ....... ....... .. 11
Audit Tools .......... ..... ....... ......... ........ ....... .... ............. .............. .. ..... . .. 11
Documents .... ... .. ... .. ..... .... . ...... ... ....... ...... .... .. .......................... . .... .... 11
Confirmations ........... .. .... .... ... .. .. ....... .... ..... ........ ..... .......... ... .... ....... . .. 12
THE AUDIT .... .. ... .................. . .. .. ..... ..... ......... .. ...... ........... ..... .. .... ... .. .. ... ... . 13
Cash ..... ........ .. ... ..... .. ... ..... ... .. ........ .. ..... ............ ....................... .. .. ... 13
Income and Receipts ................. .... ........... .... ... .. ........ ..... ........ .... .. .. .... 14
Disbursements ...... .......... .... ........... .. ....... .. .............. ................. .... ... ... 14
Payroll ........ .. ......................................... ... .............. ....... ... .... .... ... .... 14
Payroll and Tax Records ... .... .... .. .. ..... . .... .. ... ..... . ............... ..... .. .. .......... 15
Internal Control Structure .......... .... ....... ........ .. ... ............. . ... ............. ..... 15
THE FINAL STEP - THE AUDIT REPORT ......... ..... .. .... .................. .... ... .......... 19
ADDENDUM$
I. TERMS .............. ............ ...... ... ...... .. ........ ........ .... .... . ....... ............. 20
II. Resource Information & Links ............... ...... ... ............................ ....... 22
Ill . Audit Check List ... ........ . .......... ............ .......... . .... ....... .. .. .. ... ...... ..... ..23
IV. Standard Form to Confirm Account Balance
V. Sample Donation Confirmation Letter

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 Florida Conference of the United Methodist Church
Guide to Auditing the Local Church

PREFACE
The annual audit of the financial records of the local church is a requirement set forth in
The Book of Discipline of the United Methodist Church, 2012; Part VI. Organization and
Administration; Chapter One, The Local Church; Section VI. Organization and
Administration; Administrative Committees, Paragraph 258.4(d).
d) The committee shall make provision for an annual
audit of the financial statements of the local church and all its
organizations and accounts. The committee shall make a full and
complete repo1t to the annual charge conference. A local church
audit is defined as an independent evaluation of the financial
reports and records and the internal controls of the local church
by a qualified person or persons.

The audit shall be conducted for the purpose of reasonably

verifying the reliability of financial reporting, determining whether
assets are being safeguarded, and determining compliance with
local law, local church policies and procedures, and the Book of
Discipline.

The audit may include: 1) a review of the cash and investment

reconciliations; 2) interviews with the treasurer, financial
secretary, pastor(s), finance committee chair, business manager,
those who count offerings, church secretary, etc., with inquiries
regarding compliance with existing written financial policies and
procedures; 3) a review of journal entries and authorized check
signers for each checking and investment account; and 4) other
procedures requested by the committee on finance.

The audit shall be performed by an audit committee

composed of persons unrelated to the persons listed in (2) above or
by an independent certified public accountant (CPA), accounting
furn, or equivalent.

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 Florida Conference of the United Methodist Church
Guide to Auditing the Local Church

INTRODUCTION
As a guideline for conducting the actual audit, The Book of Discipline, is somewhat
lacking in providing the local church with the actual methodology for carrying out the
physical audit. Thus, this guide will hopefully fill the gap, and facilitate a smoother
annual audit process.

First it should be stated that an annual audit of the Local Church's Financial Records is
MANDATORY, as set forth in the Book of Discipline of the UMC. This is a requirement
of EVERY church within the Florida Conference of the UMC and is not based on size or
attendance or some other criteria. If you are established as an active operating church
within the Florida Conference of the UMC, YOU MUST CONDUCT AN ANNUAL
AUDIT.
There are also several other good reasons for conducting annual audits, such as:

• To protect the people the local church elects to offices of financial responsibility
from unwarranted charges of careless or improper handling of funds.
• To build the trust and confidence of the financial supporters of the church in the
way their money is being accounted for (trust and confidence lead to improved
patterns of financial support).
• To set habits of fiscal responsibility to assure that when there is turnover in
personnel there will be continuity in accountability.
• To assure that gifts made to the church with special conditions attached are
consistently administered in accordance with the donors' instructions, and thus
let donors know their gifts are used as intended.
• To provide checks and balances for sums received and expended
Note, that conducting an audit is not a symbol of distrust. It is a mark of responsibility.
It is good stewardship, demonstrated for all to see. And, it is a message to your local
church donors that you care about their gifts.
Regardless of the size of the church, all areas of the Audit Process should be
completed.

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 Florida Conference of the United Methodist Church
Guide to Auditing the Local Church

WHO CAN PERFORM THE LOCAL CHURCH AUDIT?

Local churches all over the United Methodist world do a great job of fulfilling their
responsibilities to make provisions for an annual audit. It is suggested that churches
with annual receipts in excess of about $300,000 should seriously consider engaging an
outside auditing firm to perform the audit. This is a recommendation and is not binding,
but it seems to be prudent stewardship since more complexity is involved as receipts
and expenditures become larger.
There is no requirement that a CPA or other accounting professional must perform a
local church audit. This means that it is not necessary to have an audit signed off by a
professional who states "that the audit was performed in accordance with professional
standards for the performance of audits". The 2 key issues for conducting an effective
audit are that the audit must be performed by a "qualified" person or persons, and that
the auditor must be "independent".
Generally, a person who is "qualified' to perform a local church audit will have some
experience with accounting principles, such as those gained through bookkeeping,
office management, or accounting courses. Throughout the Florida Conference, audits
are handled in a variety of ways. Audits can be accomplished by:

• Outside professionals (It is suggested that churches with annual receipts in

excess of about $300,000 should seriously consider engaging an outside
auditing firm to perform the audit.)
• Accounting professional(s) in the congregation who are not serving the local
church in any of the financial offices
• A person in the congregation with financial knowledge or expertise but who do
not have the benefit of formal training in accounting or fiscal management
• A financial professional from a neighboring church i.e. A small local church will
agree with another small local church in the same locale to have the treasurer of
each audit the other.
• A committee made up of a variety people with a blend of financial skills
Secondly, the auditor needs to be "independent". Independence means the auditor must
not be subject to control or influence by anyone who has responsibility for the financial
accounts and records of the local church. There should not even be the appearance of
a relationship that may dilute the perception of the independence of the auditor.
For example:

• The treasurer, her husband, child or cousin should NOT conduct the audit. Nor
should her best friend .
• Persons who handle any of the church funds should NOT perform the audit.
• The church's pastor should NOT perform the audit.

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 Florida Conference of the United Methodist Church
Guide to Auditing the Local Church

UNDERSTANDING RESTRICTED ASSETS

Restrictions come about when a donor imposes a stipulation on a gift that limits its use
to a specified purpose. If a local church accepts a gift which can be used only for a
specified purpose, that gift must be accounted for separately from gifts given to the
organization in furtherance of its general purposes, such as money dropped in the
offering plate on Sunday Morning. The reason why it is important to account separately
for restricted funds is that if they are used for purposes other than the one (or more)
specified, the donor (or an heir of a deceased donor) may be entitled by law to ask for
the return of the gift, even years later.
Some examples of a restricted gift are:

• Member Jane Doe gives $10,000 and simultaneously delivers a letter that her gift
is to be used to help buy a new piano. If the gift is accepted, the $10 ,000 would
be a restricted gift to be accounted for in the church's records as a restricted
asset. Jane's letter should be kept in the church's financial records and the
money spent only to buy a new piano.
• Member Jack Smith gives $100,000 and writes to say that his gift is to be
invested and the income from it used to buy music for the music program. The
$100,000 is a restricted asset.
While both these examples are restricted assets, the money for the piano is "temporarily
restricted". That means that the donor-imposed stipulation can be fulfilled by the action
of the church purchasing a new piano. Assets that are "temporarily restricted" can
ultimately be spent, though they MUST BE SPENT FOR THE SPECIFIED PURPOSE.
The money given by Jack Smith is to be invested and is "permanently restricted",
meaning that the full $100,000 was stipulated by the donor to be held permanently.
Note that the income from this gift is to be used only for a specific purpose. To make a
fine point, the income is "temporarily restricted", while the gift itself is "permanently
restricted" . These two types of assets should be reported separately.
Sometimes churches do not refine their accounting records to the point of separately
reporting temporarily and permanently restricted assets in financial statements because
they don't have enough of either to warrant the time. That works if the records are clear
enough to be able to distinguish between what can ultimately be spent and what must
be held permanently. Remember that when a gift is accepted subject to a stipulation for
use in a particular way, the result is a contract to use it only in that way. Keep the donor
stipulations permanently so you will know what the church has contracted to do.
Another point to remember is that the local church cannot change any restriction without
the specific consent of the donor, which must be in writing.

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 Florida Conference of the United Methodist Church
Guide to Auditing the Local Church

UNDERSTANDING DESIGNATED ASSETS

Designated assets are those assets that have been voted by the local church 's
governing board, such as its Administrative Council, Trustees, Finance Committee or
equivalent body, to be used for a particular purpose. For example, suppose the board
decides to set aside from money on hand the amount of $5,000 to send five people the
following year to a seminar on discipleship. Following the vote, the $5,000 should be
reported as a "designated" asset.
Because the stipulation for the $5,000's particular use was made by the church itself,
that stipulation (or designation) can be changed by the action of the body that put it in
place. There is no other party involved as in the case of the receipt of "restricted" gifts.
Next year, if the board decides the $5,000 can be better used for some other purpose,
such as to buy a new van, for example, the board can vote to apply the money for that
purpose.

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Guide to Auditing the Local Church
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THE AUDIT PROCESS
Simply stated , an audit should:

• Independently verify the reports of the treasurer(s).

• Follow the money and test how it is treated at different steps.
• Document that donated and earned funds of the congregation have been used
as stipulated by the donors.
• Evaluate
o Accounting controls (systems that reduce the possibility of loss or errors)
o Segregation of duties (assurances that more than one person is involved
in critical steps in handling money so that there can be checks and
balances)
o Reasonableness of systems and procedures in the light of all factors,
including the size of the church and its budget
o Adequacy of insurance coverage
o Systems for retaining and accessing meeting minutes that have financial
implications (i.e. Finance Committee, Trustees, Charge Conferences)
o Records that show donors' stipulations for the use of gifts made to the
local church
o Loans
o Credit Card Usage
o Electronic Funds Transfers
o Electronic Payments
o IT System Controls and Securities
• Report the results
• Retain the records
o The auditor's work papers as well as all financial records should be
retained for at least SEVEN years in a secure, limited access, storage
area

A local church 's unique circumstances may suggest that additional steps should be
taken. It is important to document the financial processes of your particular church.
The audit should include not only the main financial accounts and records of the local
church , but all its organizations. That means the treasuries that are to be audited may
include:

• Memorial Fund
• Trustees Accounts & Records
• Local Church Foundation or Endowment Funds
• All other separate treasuries or bank accounts maintained by a group using the
same tax identification number as the church, including, for example, United

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 Florida Conference of the United Methodist Church
Guide to Auditing the Local Church

Methodist Men, Pastor's discretionary fund, United Methodist Youth fund, church
school, etc.

(The only exception is the United Methodist Women, which should be audited, but may
be audited separately. The Book of Discipline, ~1318 - ~1329)
The auditor must obtain access to the all financial documents and materials, both
electronic and paper.

Throughout the audit process, the auditor is working with the church treasurer and/or
financial secretary to clear up any questions or issues, as they occur.

NOTE: The auditor may obtain access to confidential information and MUST treat the
information accordingly.

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 Florida Conference of the United Methodist Church
Guide to Auditing the Local Church

AUDIT PREPARATION

A thorough audit preparation is critical to a smoothly run audit. After the books are
closed for the year but before the audit begins, it is important to ensure that all the tools,
documents, and confirmations are available to the auditor.

Audit Tools

• Paper & Pencils ©

• Church 's GCFA Number
• Computer & Printer
• Access to Internet
• Access to Church & Church Organizations Records
• Audit Checklist (ADDENDUM Ill)
• Audit Schedule
• Quiet Location to perform the audit that is free of distractions
Documents
The auditor must obtain access to the following information and materials:

• Copies of all Church policies and procedures related to finance and treasury
functions and copies of minutes approving those policies.
• Copies of all minutes from the finance committee, the trustees, the administrative
board, the previous charge conference(s), and any other entity listed on the prior
page.
• Listing of all bank and investment accounts, including the person authorized to
sign on each, and including any special use accounts under the control of the
pastor(s) and in the name of the church.
• All financial statements for each month of the year, plus December of the prior
year and January of the subsequent year (a fourteen month period).
• Bank and investment account statements for the same period.
• Bank reconciliations for the same period .
• Original books of entry, which will be the general and subsidiary journals; for
those books that are computerized, a print-out of all transactions by account for
the entire year.
• All paid invoices, payroll data and files (including 941 's, year-end W-2's, 1099's
and transmittal forms), income transmittals and deposit records for the fourteen
month period.
• The Financial Secretary's records and other income records for the same period .
• Loans

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 Florida Conference of the United Methodist Church
Guide t o Aud iting the Local Church

Confirmations

Confirmations are essential for providing the auditor with independent verification of
bank and investment account balances and authorized signatures, monies sent to the
annual conference for Apportionments, P&HB, Ministry Protection Premiums (Property
Insurance & Worker's Compensation), Benevolence Funds and Special Gifts, the
coverage level(s) and related premiums for all insurance policies and, on a test basis,
donor contributions.

Bank Confirmations: For each bank and investment account, the auditor requests the
balance, as of December 31 51, and list of the person( s) authorized to sign on that
account. (ADDENDUM IV)
Annual Conference Confirmations: The auditor should access the local church
statement on the Florida Conference Website ( www.flumc.org/monthly reports.asp ) to
obtain confirmation of payments to the various accounts held through the Florida
Conference. These include:

• Apportionments
• Pension
• Health Benefits
• Ministry Protection Premiums
• Special Gifts
Insurance Coverage Confirmation: An Annual Summary of Insurance is sent to each
church from the Florida Conference at the beginning of each year and should be part of
the church records. The Certificate of Insurance is sent to the local church directly from
AON (The Underwriters of all local church policies
Donation Confirmation: The auditor should randomly sample about 1 % of the total
number of those who give. It is suggested that not more than 10 givers need to be
sampled, but they should be selected randomly. The auditor should make the
selections and not suggest the treasurer or other local church finance officer pick the
donors to check. (ADDENDUM V). The amount in each letter should be compared to
the year-end giving statements provided by the local church to donors.

All of these confirmations are an essential piece of the auditing process. Second
requests may be required if confirmations are not responded to in a timely fashion. All
responses should be addressed directly to the auditor, not the auditor in care of the
church.

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 Florida Conference of the United Methodist Church
Guide to Auditing the Local Church

THE AUDIT

Staying organized is key to a successful audit. Begin and work through each section as
described below. Finish one area (as much as possible) before beginning on the next
area. In general, when any discrepancies are found, research the discrepancy to the
best of your ability to determine if there is a reasonable & documented explanation or if
there is an error. In all areas, ascertain suitableness and adherences to established
church policies. Take extensive notes throughout the process to facilitate the writing of
the final Audit Report.

Cash:

Every category of cash and all other invested funds must be audited at year end. This
may include:

• Checking Accounts
• Saving Accounts
• CD's held in the name of the church or church foundation
• Petty Cash Accounts held in the office of the church or elsewhere within the
church organization
To audit the cash accounts, the auditor must have:

• The list of a!! bank accounts

• The Authorized Signers to each account
• A Copy of all financial statements for each month being audited
• The bank account statements and reconciliations for each month being audited
• Bank confirmations

Using this information, the following steps should be followed, at a minimum, noting any
discrepancy, if/when they are found:

• Review the bank confirmations to see that the ending balance as stated by the
bank is the same figure used in the December statement.
• Check to see that the current authorized signers as listed by the bank are the
same names listed in the church records .
• Review the bank reconciliations to see that the beginning balance of one month
is the same as the ending balance of the previous month. Note whether the book
balance as listed on the bank reconciliation is the same balance presented on
the financial statements.
• Pick a month and actually perform a bank reconciliation for each account using
the original books of entry, the financial secretary's records and any subsidiary
journals.

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 Florida Conference of the United Methodist Church
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• The auditor should independently count cash in all petty cash accounts. The
count should agree with the books. Review expense types for their appropriate
charging to program area or administrative accounts.
Income and Receipts:

• Determine if the deposits as listed by the financial secretary and the treasurer
match those listed on the bank statements.
• Verify, on a test basis, the deposits for Sundays during the calendar year using
the following procedures:
o Test (a random sample, not to exceed 10 times; more if discrepancies are
found) the counter's documentation versus the Sunday receipt deposit
slips and bank statements.
o Review the original book of entry for correct posting of Sunday deposits.
• Using the donor confirmations, determine whether the amount paid as reported
by the donor is the same as recorded and received by the financial secretary.
• Review the original books of entry to determine if other income has been
recorded accurately (i.e. appropriate account, correct amount, unrestricted or
designated I restricted, etc.).
• Trace the entries to the financial statements.
Disbursements:
• Review the Finance Committee, the Charge Conference and other committee
minutes, as appropriate, for actions concerning disbursements, including
apportionment payments. Reconcile those actions with any actual payments
made.
• Test to ensure that all of the disbursements have been properly authorized.
• Review the original books of entry and disbursements journal to ensure that all
disbursements have been recorded appropriately.
• For the insurance premium disbursements, check to see whether the amount
disbursed are the same as that listed by the Florida Conference as premiums
due.
• Verify that income designated for special mission purposes has been distributed
or allocated accordingly.
• If there is a purchase order system in conjunction with disbursements, note
whether the purchase orders have been authorized and approved by the
appropriate person(s) and matched against the actual disbursement or invoice.
Payroll:

• Check staff-parish relations committee and charge conference records versus

payroll records to verify that correct salaries or rates have been paid .

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 Florida Conference of the United Methodist Church
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• If there are tax deferred annuities (TDA's), Section 125 or other salary reduction
agreements, verify existence of signed agreements and proper tax withholding
applied .
• Verify pension contributions with the pension board. If there is a salary reduction
agreement, review documents for accuracy and verify that agreements have
been approved in Charge Conference or Administrative Board minutes.
• Verify that housing allowance resolutions are in place and have been properly
applied to reduce clergy's reportable 941 and W-2 income.
Payroll and Tax Records:

• Reconcile all payroll with tax records and tax payments.

• Verify that the appropriate amounts have been reported on the 941 's, W-2's, and
1099's and that the forms have been transmitted to the federal , state, and local
tax authorities on a timely basis.
• Verify the existence of current W-4's and l-9's for all staff. (NOTE: The IRS
views clergy as an "employee". The church may not do Social Security
withholding for clergy but can make voluntary income tax withholdings pursuant
to a W-4 form, at the pastor's request.)
• Test that the appropriate amount of taxes that have been deducted from the
paychecks can be traced back to the W-4 as submitted by each staff person.
• If the church is not using an accountable reimbursement plan for clergy, or other
staff, the appropriate allowances need to be recorded on the W-2 form (or 1099
form, if it is still being used) issued by the church to the clergy.
• Track the payroll and tax records to the actual disbursements made and
recorded with the original books of entry.
Internal Control Structure:
The internal control structure is the process that assures the local church's
operational efficiency and effectiveness, that its financial reporting is reliable, that it
is complying with The Book of Discipline and with the local, state, and federal laws,
and that its assets are safeguarded . The internal control structure should be in
place not just on paper but in actual operation.
The following areas should be evaluated:

• Segregation of Duties
o Duties should be segregated among two or more persons, if possible.
In small churches this may be difficult, but it is rarely impossible. The
effort by small churches is to attain reasonable segregation under all
circumstances. For example:
The Financial Secretary and the Church Treasurer should not be
related. These should be separate offices occupied by different

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individuals, who are NOT related by blood, marriage or employment

relationships.
o At least two people should count the Sunday morning collections and
they should NOT be related to each other nor should either one be the
Financial Secretary or Church Treasurer.
o Receipts and Disbursements should be performed by different people.
(This may not be possible in small churches, but every effort should be
made to accomplish this, if possible.)
e Authorization for Disbursements
o Verify that everyone who approves disbursements is authorized to do
so. The auditor should look for resolutions and actions in the minutes
of the finance committee and the governing body that addresses
authorizations.
o The Check Signer should not be the Authorizer of Expenditures or the
person who performs check reconciliations. The auditor should
examine who is signing the checks and compare the results found to
bank authorizations.
• Finance Reports
o Monthly Finance and Treasurer's reports should agree with the general
ledger and subsidiary journals. Balances as of the first day of each
month should be the same as the last day of the previous month.
• Church Issued Credit Cards
o Who are the cards issued to?
o Are they being reviewed regularly to ensure there are no personal
charges to the cards?
• Electronic Banking - Policies & Procedures should be in place to include the
use of Electronic Banking. Those P&P's should include:
o Online banking and EFT activities
• With what institutions are you using EFT?
• Monitoring
• Sending Electronic Payments
• Receiving Electronic Payments
• Electronic Check Images
o Segregation of Duties
• Who is authorized to initiate electronic transaction?
• Who approves electronic transfers?
• Who transmits electronic transfers?
• Who records electronic transfers?
• Who will review and reconcile electronic transfers?
o Safeguards
• Is In-house Banking Software password protected?

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 Florida Conference of the United Methodist Church
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• Strength & Security of Passwords

• Limited access to Software
• Other Areas to Check and Questions to Answer
o Have decisions with financial implications made by church committees
and the charge conference been appropriately complied with?
o Are authorized signatures with banks up to date and complete?
o Is the correct church Employer Identification Number (EIN) on all
accounts?
o Are investments made by only authorized persons?
o Are transactions recorded in the correct year?
o Are checks and cash stored in the church safe, deposited or placed in
a bank night depository, and not taken to private homes or elsewhere
until deposited?
o Are reports such as Payroll Tax Form 941, W-2's and the like filed with
appropriate authorities in a timely manner?
o Are payroll taxes paid on time?
o Are computer software and data files backed up on a regular basis?
o Are Computer systems back-ups kept off the premises?
o Do all appropriate persons have a clear understanding of and is there
documentation on church ownership of software and data files?
o Is a current list of the contents of all safety deposit boxes maintained?
(The auditor should confirm the contents of the box with the depository
institution.)
o Is a list of persons with authorized access to safety deposit boxes
kept?
(The auditor should confirm who has authorized access to the box with
the depository institution.)
o Are reports from the treasurer, financial secretary and business
manager, if any, to the finance committee accurate, timely and
complete enough to provide necessary information for the committee
to make prudent decisions?
o Is the finance committee providing to the church 's governing body
(church council, administrative board) sufficient information to allow it
to exercise its fiduciary duties?
o Are members of the finance committee and the governing body free to
express opinions and to question management when appropriate?
o Are loan documents being read and complied with?
o Is there an inventory of fixed assets?
o Is the inventory of fixed assets kept current by entry of purchases and
dispositions?
o Has the auditor verified the list of fixed assets?

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o Is there a process in place for control of fixed assets?

o Is there a policy on record retention, and if so, is it complied with?

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THE FINAL STEP - THE AUDIT REPORT

The auditor is ready to begin the final step of the audit when he is reasonably assured
that the financial records are in order, financial policies have been complied with and
any discrepancies have been investigated and controls have been reviewed. When all
these steps are complete, the auditor should review the work done with the church
treasurer and financial secretary, endeavoring to answer any lingering questions. Now
it is time to prepare the final audit report.

The auditor should offer to meet with the Finance Committee to discuss the audit report,
incorporating any responses the finance committee may choose to add into the final
report. Per the Book of Discipline, the final audit report is required to be delivered to the
Charge Conference.
The report should be written and should include, at a minimum:

• Documentations of steps taken to complete the Audit

• Statement of Financial Position (balance sheet)
• Statement of changes in net assets (statement of activities)
• Statement of Cash Flows
• Comments, if any, on the reliability of the treasurer's financial reporting
• Comments, if any, on insurance policy coverage
• Comments, if any, on compliance with donor restrictions on gifts
• Attachment of the Auditor's Working Papers
The audit is complete, once the auditor has delivered the audit to the charge conference
with responses of the finance committee.
One final word of caution: If the auditor meets with either the finance committee or the
charge conference, be aware of The Book of Discipline, ~722. Although church
meetings generally must be open to all, discussions with accountants and matters
involving personnel issues may be held in closed meetings if confidential information is
likely to be disclosed. An example would be if there is suspicion that someone has
made off with church assets. Suspicions should not be discussed in open meetings.
Closed meetings will include only the members of the group that is meeting, plus any
invited guests, such as the auditor or the church's legal advisor. The group should be
aware of the manner in which closed meetings must be reported, as set out in 1J722. It
is suggested that you provide the legal advisor with a copy of ~722 .

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 Florida Conference of the United Methodist Church
Guide to Auditing the Local Church

ADDENDUM I
TERMS
Assets - Items owned and controlled by an entity such as cash, accounts receivable,
investments, land , building, furnishings, and vehicles.
Audit - a formal 'independent' examination of an organization's accounts or financial
situation. May include but is not limited to 1) a review of cash and investment
reconciliations; 2) interviews of treasurer, financial secretary, pastor(s), finance
committee chair, business manager, those who count offerings, church secretary, etc.,
with inquiries regarding compl iance with existing written financial policies and
procedures; 3) a review of journal entries and authorized check signers for each
checking and investment account. It is meant to be a process that provides reasonable
assurance that good stewardship is being used in handling and accounting for the funds
and other assets of the local church.
Audit Committee - A sub-committee of the church finance committee who engages the
independent auditor and to whom the auditor reports his/her initial findings.
Auditor - The person or group of people conducting the audit.
Compliance - The act or process of doing what has been asked or required by the
Book of Discipline, donors, church by-laws, and governing authorities.
Designated Assets - Those assets that have been voted by the local church's
governing board, such as its church, council or equivalent body, to be used for particular
purpose.
Disbursement - Payment made for goods or services including, but not limited to,
wages, utilities, program expenses, supplies, debt payments, and purchase of assets.
GCFA Number - A unique identifying number assigned to every church within the
United Methodist Denomination by the General Council on Finance and Administration ,
The United Methodist Church.
Independent - The auditor must not be subject to control or influence by anyone who
has responsibility for the financial accounts and records of the local church. There
should not even be the appearance of a relationship that may dilute the perception of
the independence of the auditor.
Internal Control Structure - The process that assures the local church's operational
efficiency and effectiveness, that its financial reporting is reliable, that it is complying
with The Book of Discipline and with the laws, and that its assets are safeguarded.

Rev. 1. 11/25/2013 Page 20

 Florida Conference of the United Methodist Church
Guide to Auditing t he Local Church

Qualified - Generally, a person who is "qualified' to perform a local church audit will
have some experience with accounting principles, such as those gained through
bookkeeping, office management, or accounting courses.
Restricted Assets - Those assets that are subject to an imposed stipulation or
specified use by the donor.

Rev. 1. 11/25/2013 Page 21

 Florida Conference of the United Methodist Church
Guide to Auditing the Local Church

ADDENDUM II
RESOURCE INFORMATION & LINKS
www.gcfa.org
www.flumc.org
www.cokesburv.com
(Guidelines for handling of and accountability of funds can be found in the 2013-2016
United Methodist Church Financial Records Handbook and in Guidelines for Leading
Your Congregation: FINANCE available at www.cokesburv.com )
www.YourChurchResources.com (Christianity Today)
(201_ Church and Clergy Tax Guide)
www.accountingsoftwarenews.com/church/church2.html

Rev. 1, 11/25/2013 Page 22

 Florida Conference of the United Methodist Church
Guide to Auditing the Local Church

ADDENDUM Ill
Audit Check List

Rev. 1. 11 /25/201 3 Page 23

 Florida Conference of the United Methodist Church
Audit Check List
Addendum Ill

Start Date: -------

Audit Committee Member(s): (Printed Name)

1.
----------------------
2. - - - - - - - - - - - - - - - - - - - - - -

3.
----------------------
4. - - - - - - - - - - - - - - - - - - - - - -

5.
----------------------

End Date:
Audit Committee Member(s): (Signatures)

1. - - - - - - - - - - - - - - - - - - - - - -

2.
----------------------
3. - - - - - - - - - - - - - - - - - - - - - -

4.
----------------------
5. - - - - - - - - - - - - - - - - - - - - - -
 Florida Conference of the United Methodist Church
Audit Check List
Addendum Ill

Date
AUDIT ITEM Completed Initials

Reconciliation of Bank & Investment Accounts

Operating Bank Account#

Month

Bank Account#
Month

Bank Account #

Month
Are Bank Accounts Balanced Monthly?

Verification of Beqinninq and Endinq Year Balance

BANK & INVESTMENTS

Verification of Account Siqnatories

Verification of Telephone or Other Transfer

Safe Deposit Box Access Checked
Account Balances Confirmed by Bank/Company
(Name) Confirmation Sent
Returned
(Name) Confirmation Sent
Returned
(Name) Confirmation Sent
Returned
(Name) Confirmation Sent
Returned
(Name) Confirmation Sent
Returned

Rev. 1 12/5/2013 Page2

 Florida Conference of the United Methodist Church
Audit Check List
Addendum Ill

Date
AUDIT ITEM Completed Initials

INCOME

Two Unrelated Persons Counting

Timely Deposit of Funds
Transmittals Checked Against Deposits
Transmittals Checked Aqainst Postinqs to GL
Verification Other Income Processes
Desiqnated Funds Directed to Restricted Accounts
Pledqes Recorded on Donor Records
Confirmations Sent to Donors
#Sent (Keep a List)

#Returned
Differences Researched and Cleared
Finance Secretary Records Reviewed
Finance Secretary Records Aqree with General Ledger

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 Florida Conference of the United Methodist Church
Audit Check List
Addendum Ill

Date
AUDIT ITEM Completed Initials
DISBURSEMENTS

Invoices Properly Approved

Check Number and Date Noted

Purchase Order System, if Applicable, Working

Accounts to CharQe Noted on Invoice

Any Invoices to Vendors over 30 Days in Arrears

Apportionments Paid Per Board Direction

Interest & Service Charges Recorded

Verification of Checks at Random

General Ledger Balances Equal Daily Transaction

Are Restricted Gifts Kept In Separate Account

Procedure in Place to Distribute Gifts on a Regular Basis
Designated Gifts Paid Out Timely

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 Florida Conference of the United Methodist Church
Audit Check List
Addendum Ill

Date
AUDIT ITEM Completed Initials

REPORTS

Do reports provide complete picture

Are reports helpful to committee members

Do reports include approved budQet

Over budget expenditure approvals in order

Are there controls for over expenditures

Policies for Restricted Funds reviewed
Restricted Funds used according to policy

ReQular reports on pledQe QivinQ to finance committee & pastor

GENERAL LEDGER

Appropriate separation of restricted funds

Internal controls for receipts reviewed

Internal controls for disbursements reviewed

Other asset accounts reviewed (equipment, buildinQ, contracts, etc.)
Accounts Payable reviewed
Accounts Receivable

Prepaid Expense account reviewed

Unearned Income account reviewed

Fund Balance from prior year correct
Correct Fund Balance carried into next year

Rev. 1 12151201 3 Page 5

 Florida Conference of the United Methodist Church
Audit Check List
Addendum Ill

Date
AUDIT ITEM Completed Initials

PAYROLL

Personnel files kept by individual

Personnel files safeguarded and confidential

Salaries paid accordinci to approval

Tax forms issued to clergy persons, employed persons & gov't

Payroll tax deposits made and timely remittance to gov't

Time sheets filed and approved (not by treasurer)

Employer benefits paid and current

Are there any salary reduction plans in effect

Did proper board/committee approve

Is written documentation in file

Verification of amount paid to persons on contract/honorarium

Proper approvals for persons paid on contract/honorarium

1099s filed for over $600 paid on contract

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 Florida Conference of the United Methodist Church
Audit Check List
Addendum Ill

Date
AUDIT ITEM Completed Initials

ADMINISTRATIVE

Church has Employer Identification Number (EIN)

File for EIN and tax filinqs safequarded

Incorporated papers are safeQuarded

Deed to church property and/or mortqaqe are safequarded

Insurance policies are safeQuarded

Prior year insurance policies are safequarded

Does church have separate bond for persons handling money

PROPERTY & EQUIPMENT

List all land , buildinq, vehicles, etc. that are owned by the church
Locate the title and/or deed to the land, building and vehicles

Are the title and deeds maintained in a safe place

Is adequate insurance maintained on all applicable land

Is adequate insurance maintained on all applicable buildinQ

Is adequate insurance maintained on all applicable property

Rev. 1 12/5/2013 Page 7

 Florida Conference of the United Methodist Church
Audit Check List
Addendum Ill

Date
AUDIT ITEM Completed Initials
Internal Controls
Are financial duties segregated between 2 or more unrelated
people?

Do at least 2 unrelated people count the Sunday Collections?

Are Receipts & Disbursements performed by different people?

Verify that everyone who approves disbursements is authorized to
do so
Verify the Check Signer is not the Authorizer of Expenditures or the
person who performs check reconciliations.
Monthly Finance and Treasurer's reports should agree with the
general ledger and subsidiary journals. Balances as of the first day
of each month should be the same as the last day of the previous
month.

Does church have separate bond for persons handling money

Verify that only authorized personnel use church-issued credit cards.

Verify that there are no personal expenses on church-issued credit
cards.

Are Policies & Procedures in Place for Electronic Banking?

Are the Policies & Procedures being followed?
Verify only authorized users can initiate electronic transactions

Are Electronic transactions undergoing a formal approval process?

Verify only authorized users can transmit electronic transactions
Are Electronic transactions being recorded properly?
Verify that Electronic Transactions are being reviewed and
reconciled as appropriate.
Are Banking Passwords Protected?
Verify the strength & security of passwords.
Verify limited access to Banking Software
Have decisions with financial implications made by church
committees and the charge conference been appropriately complied
with
Are authorized signatures with banks up to date and complete?

Rev. 1 12/5/2013 Page 8

 Florida Conference of the United Methodist Church
Audit Check List
Addendum Ill

Date
AUDIT ITEM Completed Initials
Is the correct church Employer Identification Number (ElN) on all
accounts?

Are investments made by only authorized persons?

Are transaction recorded in the correct year?
Are checks and cash stored in the church safe, deposited or placed
in a bank night depository, and not taken to private homes or
elsewhere until deposited?
Are reports such as Payroll Tax Form 941, W-2's and the like filed
with appropriate authorities in a timely manner?
Are payroll taxes paid on time?

Are Computer software and data files backed up on a regular basis?

Are Computer systems backups kept off the premises?

Do all appropriate persons have a clear understanding of and is
there documentation on church ownership of software and data
files?
Confirm the contents of the box with the depository institution.
Is a list of persons with authorized access to safety deposit boxes
kept?
Confirm who has authorized access to the box with the depository
institution
Are reports from the treasurer, financial secretary and business
manager, if any, to the finance committee accurate, timely and
complete enough to provide necessary information for the
committee to make prudent decisions?
Is the finance committee providing to the church's governing body
(church council, administrative board) sufficient information to allow
it to exercise its fiduciary duties?
Are members of the finance committee and the governing body free
to express opinions and to question management when
appropriate?

Are loan documents being read and complied with?

ls there an inventory of fixed assets?

Is the inventory of fixed assets kept current by entry of purchases
and dispositions?

Has the auditor verified the list of fixed assets?

Is there a process in place for control of fixed assets?
Is there a policy on record retention , and if so, is it complied with?
Rev. 11 2/5/2013 Page9
 Florida Conference of the United Methodist Church
Audit Check List
Addendum Ill

Date
AUDIT ITEM Completed Initials

Rev. 1 12/5/201 3 Page 10

 Florida Conference of the United Methodist Church
Standard Form to Confirm Account Balance Information with Financial Institutions
Addendum IV

(NOTE: Every occurrence of [)should be replaced with the data appropriate for the Local Church.)

[Local Church's Letterhead)

[Financial Institution Name]

[Address Line 1]
[City, State ZIP)

To Whom It May Concern: [Current Date]

We have provided to our auditors the following information as of the close of business on [mm/dd/yyyy)
regarding our deposit and loan balances. Please confirm the accuracy of the information, noting any exceptions
to the information provided. If the balances have been left blank, please complete this form by furnishing the
balances in the appropriate space below. Although we do not request or expect you to conduct a
comprehensive, detailed search of your records, if during the process of completing this confirmation additional
information about other deposit and loan accounts we may have with you comes to your attention, please
include such information below. Please use the enclosed envelope to return the form directly to our
auditors.

1 . At the close of business on the date listed above, our records indicated the following deposit account
balance(s): (Add rows to table as necessary to accommodate all accounts.)

Account Name Account Number Interest Rate Balance

2. At the close of business on the date listed above, our records indicated we were directly liable to [the
financial institution) for loan(s) as follows: (Add rows to table as necessary to accommodate all accounts.)

Date Through
Account# I Which Description Of
Balance Date Due Interest Rate
Description Interest Is Collateral
Paid

The information presented by [The Local Church] is in agreement with our records. Although we have not
conducted a comprehensive, detailed search of our records, no other deposit or loan accounts have come to our
attention except as noted below:

Exceptions and/or Comments

[Financial Institution] Authorized Signature: - - - - - - -- - -- - - - Date:

Printed Name:

Title: - -- - - -- - -- - -- -

Rev. 1, 11 /25/2013 Page 1

 Florida Conference of the United Methodist Church
Donor Confirmation Letter
Addendum V

{NOTE: Every occurrence of [] should be replaced with the data appropriate for the Local Church.)

[Local Church's Letterhead]

[Current Date]

[Donor Name]
(Address Line 1]
[City, State ZIP]

Dear [Mr. and/or Mrs./Miss Donor Name],

In connection with an examination of our accounts, [either outside firm or auditor's name] desire confirmation of
your donation to [insert recipient organization's name within the Local Church or just the Local Church name] as
of December 31 , 20_.

Donation in the Amount of$ _ _ _ _ _ _ _ intended for use in [insert appropriate fiscal year) not restricted
[or restricted, if appropriate} as to use.

If the above information is consistent with your records, please sign the confirmation below and return it directly
to [Audit firm 's address or auditor's address], not to the church. If your records do not confirm the above
information, please note your exceptions below. A business reply envelope is enclosed for your convenience in
replying.

Thank you.

[Name of Financial Secretary or Church Treasurer]

[Appropriate Title]

Name Date

Exceptions, if any:

Rev. 1, 11/25/2013 Page 1