Audit Process

What is an audit?

I am not an accountant, so my explanation may fall a bit short, but an audit typically has a few parts:

1. Develop a list of questions that are pertinent to the organization being audited.
2. Examine the policies and procedures of the organization and determine the answers to these questions. This should include interviewing the people in the organization since many policies and procedures may not be written down.
3. Select a sample set of data -- for instance one month's worth of transactions -- and check to see if the policies and procedures are being followed.
4. Write a report summarizing the findings.

The questions

Obviously the list of questions is the key here. (Don't ask the right questions and the audit may be less than useful.) Depending on the organization there are some standard questions that can be found and included. Assume we're taking money in at fundraising events, doing bookkeeping tasks, paying bills, etc. Example questions might be:

• Is there a central list of all the bank accounts, credit cards, and other financial assets?
• Do cashiers count the money before handing it over to someone else who also counts the money?
• Is the money counted in view of other workers? Who?
• Is the person who keeps the books able to sign checks?
• Are checks endorsed with a stamp at the time they are received?
• Who has access to the debit card?
• Who has authority to use the debit card?
• Who has access to the check book?
• Who has authority to sign checks?
• Who prepares checks to be signed?
• How are cash advances on payroll handled?
• How are IOUs handled?
• Do sales and donations paid with checks require a valid ID? Is this ID confirmed by the cashier?
• How often are the accounts reconciled?
• When paying bills are the items on the bills verified?
• If clients are invoiced and do not pay, what happens?
• Are there any reimbursements given on a regular basis (i.e. health care)? How is the amount reimbursed authenticated?

The report

Problems that can be found by an audit given the questions above could be:

• One person is being relied on to do all the "money things", including both bookkeeping and check signing. This could lead to at leasst two problems:
  1. All your chickens in one basket. If that person gets hit by a truck, what happens?
  2. Allowing someone access to account for the money (perhaps creatively) and sign checks invites an unscurpulous but trusted person to embezzle funds.
• Counting money alone and in secret also is an invitation to pocket some of the money.
• If two separate people count the cash, then they have a tendency to keep each other honest. They would have to conspire in some way to take the organizations funds from the tills.

Who conducts an audit

Audits can be external or internal. An external audit is when an outside person conducts the audit. An internal audit finds someone in the organization (who doesn't have control of the money) to conduct the audit.

Ideally people who make the policies for the organization and the workers involved with the finances (bookkeepers, cashiers, etc.) all have an awareness of these kinds of finance accountability issues. To the degree that they do, and internal audit shouldn't turn up many surprises. Likewise, if an internal audit is conducted prior to an external audit, then the external audit should turn up few surprises.

Recommendations

We should develop a list of audit questions that seem appropriate to our organization and then conduct an internal audit. The report resulting from this should be fed back into our tweaking our polices and procedures, refining them.

After the audit we should also maintain a list of audit questions that are appropriate to our organization, adding to it.

Good audits are specific and customized to each organization. They are an ongoing process that morphs as people in the organization grow in awareness about financial accountability issues.

External Links

• Audit Guide For Audit Committees of Small Nonprofit Organizations
• CC8 - Internal Financial Controls For Charities
• Controlling the Audit Process (PDF)
• Suggestions for Parish Internal Control Procedures
• Local Church Audit Guide (PDF)
• Uniform Compliance Guidelines for Examination of Entities Receiving Financial Assistance From Governmental Sources (PDF)