Nonprofit Church Audit Checklist

Hearing the word audit can send shockwaves through many people’s spines; however, audits are a crucial element of running an efficient nonprofit organization.

An independent audit verifies whether your accounting practices comply with generally accepted accounting principles, making the audit easier for both you and your auditor. By having all the relevant documents ready, this should help them complete it smoothly.

1. Financial Statements
Your church organization’s financial statements provide a clear picture of funds coming in and going out. Whether your accounting follows generally accepted accounting principles with an accrual basis or uses cash basis accounting methods, your statements should be accurate, detailed, and timely.

Transparent financial statements provide congregants with an opportunity to be actively engaged in overseeing monetary activities and foster a culture of responsible fiscal stewardship. Furthermore, they help protect the integrity of an organization’s finances by discouraging fraudulent practices like embezzlement.

A Statement of Activities, or Profit and Loss Statement, details sources of income such as tithes and donations alongside expenses such as utilities, salaries and mission-related costs. Additionally, this report contains a Budget to Actual comparison section which compares actual results against budgeted goals.

2. Financial Summary
Financial Summaries are an integral component of nonprofit church audits. They outline how much money was earned and spent during an accounting period; such metrics should include total revenue and top expenses; as well as whether or not your church is profitable.

Churches should also include an expense statement that expands on their income statement by further breaking down each item, so their congregation members understand exactly where their tithes and donations are going. This will allow them to assess how their financial support is being allocated within their community.

Accurate statements not only benefit your church when reporting back to donors, but can also protect it from IRS audits. Typically, nonprofit organizations only attract IRS scrutiny if there are indications they are violating applicable laws or regulations.

3. Balance Sheet
An audit might send chills down your spine, but they are an integral part of managing a nonprofit organization. With some planning and organization, audits can become less of an anxiety-inducing process.

Begin by gathering all relevant documents – both digital and hard copies. Make an organized binder of this documentation that you plan on presenting for review by an auditor.

Balance sheets generally display assets on the left-hand side and liabilities and equity on the right-hand side. Assets include tangible items like cash, inventory and property and equipment while liabilities could include accounts payable or pre-paid expenses as liabilities.

Balance sheet should always be in balance; if not, churches must strive to correct their position by instituting improved internal controls and accounting procedures.

4. Cash Flow Statement
Statement of Cash Flow of Nonprofit

Transparency is crucial because it fosters community trust. Church communities should feel they’re part of a successful organization and that their efforts have an effect on local communities.

Statement of Cash Flows provide evidence that a church is handling its finances responsibly, which is especially crucial if donations are collected for specific causes or funds. Donors can then rest easy knowing their funds are going where intended and to ensure no private use occurs, the statement can also help the church monitor how funds are being dissipated through personal accounts or embezzlement schemes.

5. Management Letter
The Management Letter is a document created by auditors when reviewing the internal systems of churches. It lists any issues discovered during auditing that must be taken care of by church committee and protect financial accounts against mistakes and fraud.

In addition to identifying significant deficiencies in internal controls, the management letter may provide innovative suggestions based on best practices for tightening controls, streamlining operations, and cutting expenses. This can help both boards of directors and management avoid the embarrassment and potential loss of funding that comes with poorly performing audits.

Management letters aren’t required in reviews, but an auditor may include them when there is an issue to communicate in writing – consistent with ASA standards on communicating deficiencies in internal control to those charged with governance.