The Importance of Independent Financial Audits

January 15, 2013 - 3 minutes read

accountant-istockSimply stated, a financial audit is an examination and verification of the financial management and reporting of a legal entity. This is an important task for churches to undertake just as it is for commercial operators, as it provides an independent view of the church’s finances, and also assures members that church leaders are practising ‘good stewardship’ with funds and other assets.

What does an auditor do?

A financial auditor might do the following:

  • Examine and verify the accuracy of financial statements.
  • Review the accounting systems and controls that are in place. As an example, auditors might examine how many signatures are required on cheques and online payments, or whether duties are segregated to prevent collusion.
  • Track donated funds to ensure they are being used as directed.
  • Ask questions of managers and staff regarding financial processes.
  • Observe some financial activities as they are being performed.
  • Provide advice regarding GST, FBT and other taxation matters.
  • Make recommendations regarding procedures and controls.

What documents might an auditor examine?

As well as financial reports, the auditor might examine asset registers, bank and loan statements, payment and receipt journals, invoices, bank reconciliation reports, payroll reports, insurance certificates and other reports and papers.

An audit is not:

  • An investigation into individual employees or volunteers of the organisation.
  • An attack on the capabilities or integrity of the treasurer or bookkeeper.
  • An examination of the organisation’s management systems or decision process.
  • An exercise that examines every single financial transaction throughout the year.

How can audits be done?

In a church-setting the audit can be done internally or externally. In the case of internal audits, the church might decide to use someone from within the congregation who is a qualified accountant or financial manager to perform the annual audits.

External audits involve the use of an independent outside party to examine the finances. CCI’s recommendation is that audits are done externally as this ensures a more independent view. When appointing an external auditor, it’s important to find one who understands your organisation and is sensitive to its ethos.

The effect of internal audits on insurance claims:

CCI also wishes to advise that while your church is free to conduct internal audits if desired, any claims made against the church from a member will not be covered by insurance in such cases. This is also another good reason to consider having audits done by an external party.

For more information on this or other insurance matters, contact the CCI team. See the CCI website for general information on insurance as well as articles and videos on risk management, and online training modules for staff and volunteers.

Written by Tess Oliver