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2007 Internal Audit Report

Internal Audit Report
July 21, 2007
Prepared by Bob Gaines and Peggy Giltrow

Summary

An internal audit committee consisting of Bob Gaines and Peggy Giltrow was appointed by the Finance Committee in November 2006 primarily to conduct an audit of the Meeting's financial procedures and to develop a written manual of procedures. The new "Responsibilities and Procedures of the Finance Committee and Treasurer" was accepted by the Meeting at the May 2007 business meeting. The 13 recommended procedural changes (see "Recommendations" below) can be carried out by the Finance Committee and treasurer and do not require specific action by the business meeting. Anticipating a change of treasurers, we also conducted an audit of the books, which we found to be in order with only one exception (see "Findings" below).

Objectives of a Church Audit

(Adapted from The Work of the Church Treasurer)

1 . To determine that adequate internal control procedures exist, and that such procedures are being followed.

2. To determine that all donations to the church were deposited and recorded correctly.

3. To determine that disbursements were properly authorized -- i. e., that the budget (including any adjustments during the year) was followed or that changes were approved and that authorized members approved payment of invoices.

4. To determine that records were maintained on plant and equipment items, and that adequate insurance coverage was obtained.

5. To determine compliance with federal and state regulations, including properly and timely paid employment taxes and income taxes, if applicable.

6. To recommend improved procedures and practices.

Findings

(This checklist is adapted from Friendly Audits - Guidance for Those Asked to Review Quaker Accounts and for Those Who Keep Them, by Elizabeth Muench, The Work of the Church Treasurer, by Thomas E. McLeod, and Zondervan Church and Nonprofit Tax and Financial Guide: 2006 Edition, by Dan Busby)

The Records in General

• Does the way in which the records are kept provide for the efficient accumulation of entries and avoidance of unnecessary or duplicate work?

The receipt and payment accounts are kept in a paper journal. Data for financial reports are entered in a spreadsheet. The procedures do not appear to be optimal to minimize the treasurer's work or provide information in a form most helpful to the business meeting. Donations are entered in a program designed to track donations and produce appropriate reports.

• Are the records up to date, with entries made soon after events occur?

Yes, entries are generally made within a week of a transaction.

• Is the arithmetic accurate? Do sub-totals actually add up to the grand totals in the records and financial reports?

The financial reports using spreadsheets with formulas are accurate. There have been arithmetic errors in proposed budgets which a spreadsheet with formulas would avoid.

• Are financial reports prepared and presented often enough to catch any abnormalities while there is hopefully still time to do something about them?

Reports are presented in business meeting each month but without having been reviewed first by the Finance Committee.

• Do the financial statements include a statement of financial condition (“balance sheet”) and statement of income and expenses?

The treasurer does not normally present a standard balance sheet; the normal monthly report of income and expenses includes the balances in funds but does not show all assets, such as a CD.

• Does the treasurer keep a special file of the minutes that relate to the meeting’s financial affairs— i.e., budget approvals, budget changes, general financial policies, opening and closing bank accounts, accepting earmarked contributions, etc.—so that they can be easily referred to?

The treasurer maintains a file, but it is not arranged for easy reference.

• Are the records kept in a safe place? How long are old records kept and where? Has the yearly meeting set up a central archive for important records and are key financial records sent there after an appropriate period?

The records required for regular use are kept in the treasurer's home; the most important documents are kept in a safe deposit box. The Meeting recently approved financial procedures which include retention and disposition directions.

• If the meeting has property, furniture or equipment, is there an inventory listing all the assets of significant value and stating briefly when and how they were acquired and what their value was at the time of acquisition? Is this inventory kept with the rest of the financial records and updated annually?

No general inventory is kept, but an inventory of the art in the meetinghouse -- which is most of the valuable objects -- was recently prepared.

Receipts

• Are cash handling procedures in writing?

Not at the time of the audit, but written procedures are now in place.

• Are procedures established to care for offerings and monies delivered or mailed to the church office between Sundays?

Yes, the resident secures them until a member of Finance or the treasurer collects them.

• Are all checks and cash received recorded promptly and deposited in their entirety?

Yes. The resident may write a check for the cash which she has collected and then use the cash for personal use, but apart from that no collected cash is used before it is deposited.

• Most unprogrammed meetings do not “pass the plate” on a weekly basis but instead receive individual contributions in one or more annual installments. Is there a confidential, detailed listing of these contributions as they are received? Does the treasurer acknowledge them by means of annual letters or individual receipts? If the records are not in order it may be necessary to check with individuals to be sure that contributions have been properly recorded and attributed.

Yes. Donations are tracked in a program designed for that purpose.

• In the case of meetings that do pass a collection plate—or otherwise receive multiple cash contributions—are such receipts always counted and deposited by a committee, not by one person alone, and does the membership of this committee rotate two or three times a year?

No. Because the Meeting is small and donations and payments for use of the building arrive through the week, it has not been possible to design a method for having two persons handle collections. A new procedure for handling collections is included in the new financial procedures, and it provides for two members of the Finance Committee to rotate responsibility for the weekly collection and deposits.

• How are earmarked contributions and funds handled? How does the meeting assure that they are spent for the purpose for which they were contributed? If the treasurer is authorized to receive contributions for transmission to another organization, this needs to be minuted by the meeting. Has this been done?

Earmarked donations and funds are tracked and reported on regularly to the business meeting.

• If no goods or services were provided (other than intangible religious benefits) in exchange for a gift, does the receipt include a statement to this effect?

No, this statement has not been included.

• Are the donations traced from the weekly counting sheets to the donor records for a selected time period by the audit committee?

No. Weekly counting sheets have only been in use since this spring, and they have not been used consistently (but a weekly counting sheet has been developed and in future auditors will be able to make this check).

Expenditures

• Are all expenditures made in accordance with an approved budget? Has the meeting minuted its approval, preferably beforehand, for any expenditures not budgeted?

Almost all expenditures have prior approval by the business meeting, but occasionally the treasurer must pay bills for which no specific authorization is available until the next business meeting; in these cases the treasurer usually consults with the clerk or Finance Committee. There has not been an annual budget for most of the expenditures from the Maintenance Fund.

• Are all expenditures, except small ones from petty cash, made by check? Are all expenditures from petty cash funds supported by written vouchers?

Yes.

• Are expense accounts submitted promptly, adequately supported and, if necessary, approved by a committee clerk before payment?

Yes, although occasionally a request for payment is received long after the fact.

• Are supporting documents (bills, etc.) for checks marked in some way to avoid duplicate payments and facilitate identifying which check paid which bill?

No. Duplicate payments have not been a problem because so few checks are written. However, in future bills will be marked as paid.

Bank Accounts

• Are personal funds and meeting funds kept strictly segregated from each other?

Yes.

• Are all checks prenumbered and all numbers accounted for?

Yes.

• Are all checks recorded when issued?

Yes, in the check register and in the ledger.

• Are all unused checks kept in a safe place?

Yes.

• Are blank checks ever signed in advance? This should never be done.

No.

• Are all voided checks retained and mutilated?

No, they have not been retained.

• Are bank reconciliations prepared whenever a statement is received? Differences between the bank balance and the book balance should be infrequent and promptly resolved.

The treasurer reconciles the receipts and expenditures journal with each statement, but he has not been able to reconcile the bank balances with the treasurer's reports since taking over two years ago (the current treasurer reports that they were not reconciled when he received them from his predecessor).

• Are there many outstanding checks? If so, why? Checks that have been outstanding for six months should probably be voided and those out standing for a year certainly should be.

No.

• When a check is voided is a corresponding adjustment made in the expenditure accounts?

Yes.

• Look at the backs of the returned checks: have they been cashed by the person or business that they were made out to? If not, why not?

Checks are not returned by the bank; however, there is no indication that any check was not cashed by the person to whom it was written.

• Are meeting bank accounts provided with alternate signers in case of illness or vacations?

Yes.

• Do at least two of the meeting’s officers have an up-to-date list of all the meeting’s bank accounts, with the names and addresses of the authorized signers? Are all changes of authorized signers or the opening and closing of bank accounts made only after being properly minuted by the monthly meeting?

Yes.

• What taxpayer identification number is used on the meeting’s bank accounts? If the meeting does not have its own number, should it?

The Meeting has a TIN.

Information Reporting

• Has the church filed Form 990-T for gross unrelated business income over $1,000 per fiscal year, if required?

There is no unrelated business income, so no 990-T has been filed.

• Did the church make payments to recipients (other than corporations) of at least $10 in royalties or at least $600 in rents, payments for services, prizes and awards, or medical and healthcare payments?

Yes, primarily for cleaning and repairs.

• Did the church obtain W-9 for all applicable recipients and file Form 1099-MISC?

No.

General

• Is the church in full compliance with restrictions imposed by the church property deed?

Yes.

• Did the church refrain from participating in or directly opposing a particular candidate’s political campaign?

Yes.

Test of Transactions and Audit of Cash

 

The purpose of the test of transactions is to determine that the church's established procedures are being followed, and that the procedures can be relied upon to produce financial statements presenting fairly the cash transactions of the church and the assets, liabilities, and fund balances resulting from cash transactions. The objective of the test of cash is to determine that cash as shown by financial statements is stated properly and that cash is under the church's control.

 

1. Obtain:

a. A list of individuals authorized to sign checks.

b. Beginning and ending bank reconciliations for the test period, including lists of outstanding checks.

c. Bank statements and canceled checks for both the test months and subsequent months.

d. Cash receipts and disbursements records.

2. Select test months -- The last month of the fiscal year and at least one other month.

a. Trace transactions between the bank and the books for timeliness and completeness.

b. Are there any unusual transactions in the bank statement immediately following year-end?

c. Are there any checks that have been outstanding over three months?

d. Compare monthly statements to the books and to financial reports.

The audit committee traced the bank and the books transactions in January and June and compared the available collection records to the receipt journal entries (the treasurer and Finance members only recently began using a collection record). No discrepancies were found.

The one exception noted was that the treasurer reported being unable to reconcile the monthly bank statement with his monthly reports to the Meeting, which the audit committee verified. Because the bank statement consistently showed that cash in Meeting accounts was greater than the treasurer's records indicated, the audit committee did not believe the discrepancy should concern the Meeting (see Recommendation 10 for a way to correct this in future reports). The discrepancy is most likely to have arisen from the fact that no reconciliation was made when the current treasurer took over from the previous treasurer, as well as the difficulty of working with the paper records and report formats used by both treasurers.

Recommendations

1. At the time of the audit, there were no written procedures. Written procedures are now in place. These procedures should be reviewed after one year and again each time an audit is conducted (preferably annually, but at least as frequently as the change of treasurers).

2. Currently the accounts are kept in a paper journal and the data for financial reports are transferred to a spreadsheet. A church-specific bookkeeping program with financial report capabilities should be implemented to increase efficiency and reduce errors. The new bookkeeping program should provide the same functions as the existing donation tracking program, so entering data again into a separate program would not be necessary.

3. Financial reports are typically presented in business meeting without having been reviewed by the Finance Committee. The treasurer should submit all reports to the Finance Committee in advance of business meetings, and the Committee should note in its report to business meeting that it has reviewed the treasurer's reports.

4. The treasurer has not presented a standard balance sheet. The normal monthly report does include the balances in each fund but does not show all financial assets, such as a CD and a small account required by the credit union, or any fixed assets, such as the value of the art donated to the Meeting. The treasurer should present a separate standard balance sheet and a statement of income and expenses, such as described in the PYM Treasurer's Guide.

5. No general inventory is kept, although an inventory of the art in the meetinghouse -- which is most of the valuable objects -- was recently prepared. However, there are also other objects of significant value, and the Finance Committee should insure that an inventory is conducted and that the insurance is adequate.

6. At the time of the audit, the treasurer normally collected, recorded, and deposited all donations and other receipts, usually with some assistance from the resident. New procedures are in place for members of the Finance Committee to handle this function. Since it is new and relies on close cooperation between the resident and the committee, the procedures should be reviewed regularly.

7. A statement should be included in the annual acknowledgement that no goods or services were provided (other than intangible religious benefits) in exchange for a donation.

8. There has not been an annual budget for most of the expenditures from the Maintenance Fund. The Finance Committee should prepare a formal Maintenance Fund budget and make regular reports on income and expenditures in regard to that budget, just as is done for the General Fund. For the current year the committee should use the expenditures already authorized this year by business meeting to develop the budget.

9. Supporting documents (bills, etc.) for payments should be marked in some way to avoid duplicate payments and facilitate identifying which check paid which bill.

10. The treasurer has not been able to reconcile the bank balances and the treasurer's reports since taking over two years ago. To resolve the discrepancy between the balances shown by the treasurer's reports and the bank statements, the new treasurer should use the beginning balance in the January 2007 bank statement as the beginning balance for the remaining 2007 financial reports (in order to provide reports with a software bookkeeping program, it will be necessary to enter all prior 2007 transactions).

11. All voided checks should be retained and mutilated.

12. The treasurer should obtain W-9 for all applicable recipients and file Form 1099-MISC.

13. The treasurer has a supply of Gross Receipts Tax exemption forms. However, according to the NM Taxation and Revenue Department's FYI 103 Information for Nonprofit Organizations, we are not eligible for exemption from the GRT for any purchase because we are not a 501(c)(3) organization.  Unless further investigation shows that we are eligible for exemption, these forms should not be used.

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