Annual financial statements that are prepared by an organization are normally prepared in accordance with generally accepted accounting principles (GAAP) and normally include:
- a balance sheet, which shows assets and liabilities as at the end of the fiscal year end of the organization
- a statement of activities (also known as an income statement) that shows the results of operations for the year
- a statement of cash flows, which shows operating, investing, and financing activities and how these activities effect the cash position (unless these items can be readily determined from the balance sheet and statement of activities noted above, in which cash this statement is not provided)
- notes to the financial statements, which provide additional explanations and details concerning financial statement items (eg. If there is a mortgage, there would be disclosure around the terms of the mortgage, the interest rate etc)
As well, there may be schedules attached which can provide even more detailed information relating to items disclosed in the financial statements.
GAAP are independent standards set by the CA profession for both for profit and not-for-profit organizations.
It is recommended that an audit/review of the annual financial statements noted above be done annually.
Auditor assurance levels
There are 3 types of engagements for which Chartered Accountants provide services in association with financial statements:
- compilation engagements
Each of these services provide a different level of credibility to the financial statements, and a different prescribed report, which communicates the extent of work performed and the degree of responsibility that the Chartered Accountant accepts.
Nature of Engagement
|Nature of Involvement||Report Provided||Level of Assurance Provided|
|Audit||Application of generally accepted auditing standards in support of each significant financial statement item||Auditor’s Report||Reasonable Assurance|
|Review||Application of generally accepted standards for review engagements (enquiry, analytical procedures and discussion with management)||Review Engagement Report||Plausibility|
|Compilation||Limited to compiling, in the form of financial statements of data provided by management||Notice to Reader||Not false or misleading|
A Chartered Accountant’s involvement with financial statements lends a different level of credibility to the financial statements, depending on the nature of the CA’s involvement. Standards and procedures for audits, reviews, and compilations are established by the Canadian Institute of Chartered Accountants (CICA). The CICA Handbook prescribes generally accepted accounting principles and generally accepted audit and review standards for profit oriented and not for profit oriented organizations.
As the amount of work performed for each service is different, the cost to perform these services varies accordingly (ie. a review is generally less costly than an audit). A local church can choose to have either an Audit engagement or Review engagement performed annually in order to comply with the Manual.
Below are references from the Manual which would indicate that each church should have an audit or review completed annually. If there are individuals within the local church that have formal training as a Chartered Accountant and can issue the audit report or review engagement report referred to above then certainly those individuals can be engaged to perform these services. Otherwise an external accounting firm should be engaged.
Manual references to audits
320.4.2 Auditors: The society, or in its place, the official board, shall elect an auditor who will have the responsibility of auditing the accounts of all organizations or groups within the local church. The auditor shall report in writing to the annual meeting of the society. External auditors may be used.
322.214.171.124 Auditor: 320.4.2 requires the society, or in its place the official board, to appoint an auditor. The society may choose to employ an external professional accountant or accounting firm, or may use the services of a volunteer auditor. This volunteer may be a member of the church congregation, who has accounting or auditing qualifications, or a volunteer with such qualifications from outside the church.
The audit provides a number of benefits:
- It assures Canada Customs and Revenue Agency and the public that the church is managing its financial assets and keeping financial records that are in keeping with the requirements of the Income Tax Act, and generally accepted accounting principles.
- It assures the church and board that its financial records are accurate and correctly represent its financial status.
- It protects the reputation of the treasurer and/or bookkeeper against any potential negative accusations.
- It limits the potential for misappropriation of funds.
Most churches do not require a full audit. In most cases a review statement is sufficient.