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Annual Audit: How and Why

A yearly audit is a key safeguard for your money and a planning tool for the year ahead. Think of it as a "year in review" for your finances.

by Christy Forhan

Do you cringe when you hear the word "audit"? Perhaps it brings to mind accountants with green eye shades, sharp pencils, and large ledger sheets. Or maybe you think of a surly IRS agent poring over your books to find a 20-cent tax error so he can fine you thousands of dollars.

But it doesn't have to be that way. The audit is one of those misunderstood, often-frightening terms that can make PTO treasurers quiver. In fact, an annual audit is an important and irreplaceable tool to keep your financial house in order. And in practice, it is not at all as bad as you might think.

Every year, thousands of dollars likely move in and out of your PTO's bank account. The treasurer oversees all of this activity, but the entire executive board is responsible for the care of the money and to ensure that it is being handled properly. At the end of every school year, you all can ease your minds by facilitating an audit of your PTO's financial records. In this context, an audit is simply a detailed review of your financial records rather than the formal legal certification of books that major corporations run.

Annual financial review guidelines (downloadable)

The primary benefit of an annual audit is the confidence it gives you and your members that the PTO's financial house is in order. Basically, the audit verifies the numbers, ensures accuracy, and assesses procedures. A comprehensive audit also identifies internal controls that should be implemented to improve the integrity of your financial systems. Furthermore, the audit gives closure to the treasurer and sets a starting point for the new year's activity. An audit is also the primary tool for uncovering financial mismanagement. Hopefully you won't need to conduct an audit for this reason, but an annual audit can uncover problems before they become significantly more serious. Your PTO might also choose to include in your audit a review of how closely your group's income and expenditures matched the year's budget. This type of review can be a strong planning tool.

Who Does The Audit?

There are several options for who might conduct your audit. Some PTOs form an audit committee, some recruit a volunteer from the parent community, and some groups hire a professional certified public accountant. When using volunteer labor, it is important that the executive board communicates clearly the requirements, responsibilities, and time commitment expected of the volunteers so they are prepared for the task ahead.

Audit Committee. An audit committee should consist of three to five people who have not had access to the PTO checkbook or bank account. Because questions might arise about the details of PTO operations, it can be helpful to include an officer, perhaps the vice president or secretary, as a member of the audit committee. The others should be volunteers from the general PTO membership. The treasurer should be available to answer questions but should not sit on the committee.

As a group, the volunteers must be willing and able to meet at least twice during the "off season," usually summer. While individual audit tasks can be delegated, the committee will need to discuss the objectives and conclusions as a group.

The audit can also be done by a single volunteer, especially if your group has tight financial controls and good records that will streamline the audit process.

CPA. Some large PTOs choose to hire a CPA to conduct their annual financial review. The professional will have insight, ideas, and experience that the typical volunteer does not. When considering hiring a professional, be prepared to spend $200 or more. Search for a firm that specializes in nonprofit organizations.

Regardless of who conducts your PTO's audit, you should organize the year's financial records. This preparation alone can highlight areas for improvement in record-keeping and reporting. If you use good financial controls throughout the year, you should be able to gather the necessary information rather easily. On the other hand, if recordkeeping has not been a priority this year, be prepared to spend some time organizing your files.

Here is a checklist of records that are typically used for a comprehensive annual review. Providing these records makes the auditor's job easier. However, don't avoid an audit just because you don't have any of these.

  • Bank statements for the year
  • Bank account reconciliation reports
  • Check register (remove it from your checkbook and keep the blank checks in your possession)
  • Canceled checks
  • A list of transactions (the transactions journal if you use a computer-based bookkeeping system)
  • Reimbursement and check request forms, including receipts/invoices for all expenditures
  • Deposit slips
  • Monthly treasurer reports and annual budget
  • IRS Form 990 if your PTO has formally registered as a 501(c)(3) organization
  • Any written treasurer procedures or training materials

If the scope of your review includes the PTO's performance to budget, then you should also include your current bylaws, minutes from all meetings at which spending decisions were approved, and your budget category balances at year's end, which are typically included in the monthly treasurers report.

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When To Audit

Your regular annual audit should be conducted at the end of the PTO's fiscal year, after the bulk of the school years activity has been completed. For most PTOs, that is in mid- to late summer. Inevitably, you may still have a few checks outstanding, but there should be very little other financial activity at this time. Even if your current treasurer will continue in the position next year and even if she has done a stellar job and even if the task of auditing seems too difficult, complete the audit anyway. It is an essential step in managing the groups financial resources and should be taken seriously, even when everything is obviously in order. Set the precedent now and the audit will become a must-do into the future.

An audit should also be considered when the office of treasurer changes mid-year. In this case the audit is conducted as of a specific cut-off date. The audit will give your new treasurer confidence that she is taking over a clean house.

Finally, if there is ever the suspicion that there has been financial mismanagement, an audit should be conducted immediately.

What the Auditor Does

You can facilitate the audit by providing a checklist of steps and a worksheet for the auditor. These guidelines can make the whole process much easier to grasp, especially if your auditors are volunteers unfamiliar with public accounting. These are the basic audit steps.

  • Verify that all checks written during the year are accounted for, approved, signed, substantiated, and not defaced, and that they have been posted to the proper budget category.
  • Verify that all deposits made during the year have been logged accurately and assigned to the proper budget category.
  • Review the bank statements for any unusual fees or withdrawals (check printing fees, for example). Verify proper recordkeeping for these items. Ensure the account was reconciled each month.
  • Verify that IRS Form 990 and any state forms (incorporation renewal or state tax forms, for example) have been filed as necessary.
  • Verify that the treasurer reports add up from month to month.
  • Complete a worksheet that summarizes the year's financial activity, including beginning cash balance, total receipts during the audit period, disbursements, and ending cash balance, among others. This is often called the financial review worksheet.
  • Suggest improvements to internal controls such as record-keeping and cash-handling, if needed.
  • Assess the group's performance against its budget, if requested.

The Auditor's Report

The report from the auditor will mark the completion of the review. If you are using volunteers, you should clearly itemize what you expect back, so your auditors know when they have completed their job.

At minimum, the auditor should submit a signed statement that the review has been completed and the books have been found to be in order. If the auditor found any exceptions during the course of the review, such as an unrecorded check or a mathematical error, those should be noted and included in the report, along with the steps taken to correct the exception. The report should also include the completed financial review worksheet.

A more robust report would also include a list of financial control recommendations. Your auditor might recommend that all PTO checks be signed by two officers, for example. Finally, the auditor's report might also highlight unusual financial risks the PTO is taking and suggest ways to mitigate the risk. For example, your auditor might recommend that the PTO use a locking cash box for collecting fundraising checks rather than an open, unsecured basket.

Ensure that your auditor has returned the files you provided, and file the original report in the PTOs permanent archives. At the first meeting of the new school year, you should present the auditors report and move that it be adopted. According to Robert's Rules of Order, once the annual report of the auditor is adopted, it is no longer necessary to move to adopt each month's treasurer's report. The reports are presented and then simply filed for next year's audit.

Making Things Easier

If your PTO implements basic financial controls, your annual audit can be almost automatic. Simple things like keeping your paper files organized, using only pencil in the check register, sequentially ordering your canceled checks, and stapling receipts to the authorizing forms can ease the workload on the auditor.

With poor controls, it is difficult for an auditor to determine that all transactions have been properly substantiated and recorded. If you expect your volunteers to dig through stacks of crumpled receipts, boxes of disorganized bank statements, and pages of messy transaction journals, you probably are expecting too much. The audit will be compromised and its reputation as a difficult and unwelcome activity will persist, to the detriment of the PTO. In that case, you should make the commitment to hire a professional auditor.

Getting your books audited is an important step. Don't put it off.

Christy Forhan is a veteran PTO leader who has served as president and treasurer, among other roles, at schools in West Bloomfield, Mich.

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Comments

  1. Posted by - Mary Stouffer on Apr. 16, 2013

    Please introduce me to a CPA who will do an audit for $200 - please talk to a CPA and get the terms straightened out, then reprint the article...
  2. Posted by - April Everett on Mar. 19, 2012

    I would like to know if all PTO's need to file Form 990 regardless of status. As we are not incorporated, do not have our 501c3 and have not applied for tax exempt status. We do have an EIN#.

    Thank you, April
  3. Posted by - David on Apr. 30, 2011

    I see one CPA criticized the article because of the $200 for an audit. Yes, the true cost might be $10,000, yet this is still a very good article. The only part that I question, and hopefully the expert CPA will chime in too, is "Simple things like keeping your paper files organized, using only pencil in the check register, sequentially ordering your canceled checks, and stapling receipts to the authorizing forms can ease the workload on the auditor." Gosh, alarm bells go off when I think someone is using a pencil for anything other than a standardized test. So I disagree that a pencil is correct, and if there are also smudge marks, yikes.
  4. avatar

    Posted by plus on Mar. 11, 2009

    Regarding the netting of income and expenses in Finance Manager. The software is very basic, and for good reason. 99% of the users aren't accountants, and frankly the other 1% would probably use Quickbooks anyway. I like the netting. It makes it way easier for me to explain how a fundraiser did, or whether or not the Teacher Appreciation committee went over budget. I can show the members one number, the net figure, and the information is very useful. If you separte the transactions into Income and Expense, I have to do the math on the spot in order ot see the net result of any project. I know I need to track income and expenses separately for the 990 and since i have all the individual transactions still there in Finance Manager, I can just extract and sort as needed. I use the reports to communicate with other non-accountants and it seems to work for us, even for budgeting.
  5. avatar

    Posted by plus on Mar. 11, 2009

    Yes, it is great if a PTO can get an accountant to volutneer his/her time to manage the PTO's finances. That woudl be the best of all possible scenarios. Lacking that, however, it is better to teach non-accountants the basics than to just assume everyone can figure it out on his/her own. The use of the word "audit" in this website may be oversimplification for a CPA. Clearly, a CPA would take exception with the term being used informally. But most readers here arent' approaching their PTOs with a CPA background. The word "audit" is short and to the point and evokes the notion of an annual financial review. I don't think this website is trying to minimize the importance of a real CPA-led audit, simply by using the shorthand word. I suppose the folks who make Kleenex sigh every time their name is used to refer to any old tissue. No one is trying to mislead anyone. It's just a quick way to communicate.
  6. Posted by - Lauralynn on Oct. 11, 2008

    Kudos Becky on explaining the differences on what we do! In addition, the problem I found is not with fraud but lack of knowledge of accounting practices. If you net out income to expense accounts it can cause under reporting on Form 990. Not to mention it doesn't give you a clear vision of the financial history for effective budgeting. Looking at the PTO Finance Manager software manual they suggest doing exactly this to treasurer's who may not have any accounting experience or knowledge to know it is not good practice. The software appears to be very basic and helpful but as they say" garbage in equalls garbage out". Transparent financial reporting and an outside review is what the PTO needs each year to obtain professional guidance. I would suggest polling the membership to find those accountants willing to offer their support.
  7. Posted by - Craig Bystrynski from PTO Today on Oct. 10, 2008

    Hi Newbie -- There's no simple answer to your question. I'd suggest posting it on the message boards, where I'm sure you'll get some good advice from folks who have been there. http://www.ptotoday.com/boards/ -- Craig
  8. Posted by - Newbie on Oct. 10, 2008

    Old to the group, new as Treasurer. Wondering who can order an audit. Have conducted my own simple one, matching receipts from last three years to entries and many are missing. Would like a formal & complete audit on fiscals AND procedures, need one from an outside vendor as former Treasurer works for the firm doing our books. Last year's officers made a number of questionable expenditures with no vote, have not kept attendance, often don't keep minutes, tried voting by email, tried limiting the vote, and on and on. Tried to address at general meeting (not run by Robert's Rules BTW) and asked questions about a request for an expenditure, but received no answers and was shut off by chair, who told me "we'll talk about this later in private". Where do I turn? Not sure administration will get involved/not tell this co-chair as she's a former teacher in the system.
  9. avatar

    Posted by Craig Bystrynski from PTO Today on Jul. 07, 2008

    Start with the bank. They will be able to give you duplicate records--checks written, plus deposits and withdrawals. If there is large-scale fraud, it probably will be apparent fairly quickly. Get committee chairs to piece together their expenses--if they didn't keep their own records, they should at least remember the major items. Communicate your concerns to the principal; she may be able to help. And act now -- in any fraud situation, matters only get worse as time goes on. You might also be interested in this story, a profile of a group that suffered a situation similar to yours and how they handled it. http://www.ptotoday.com/pto-today-articles/article/349. Good luck! -- Craig
  10. Posted by - Frustrated on Jul. 02, 2008

    I have just become the VP of our PTO our Pres is last years treasurer. It is early July and she will not turn over the books saying that she does not have time or that they are not ready. We are short thousands of dollars and are getting ready for a review of the books. not an official audit. But as far as we can tell their are no real records that have been kept. Cash that came in was not always deposited. Many times she would hand it back out for other expenses, before it could be accounted for. Some members are beginning to suspect fraud. What can we do? I don't know how anyone can even review the books, since it seems as if none exist. I am very nervous about participating with this PTO, but also feel like if I don't nothing will ever change now that she is President. Any advise would be appreciated.
  11. Posted by - retired on Jun. 18, 2008

    As a past president and past treasurer, I'd like to add another suggestion for overall finacial soundness. Rather than relying on an end of year review, have your non-check-signing officers review your treasurer's records on a monthly basis. Two officers can pick three or four deposits or check requests for that month and follow the paper trail to see if it occured, was it a budgeted item, are receipts in order and so on. This will catch problems earlier on and also makes a summer review much easier because your treasurer can't be sloppy or get behind in filing things if it is being looked at every month. Becky is right-on about good controls.
    PS - as the wife of a CPA, I can confirm that the term "audit" means something very specifc in their world and no, most PTO's don't need an audit but rather a review.
  12. Posted by - Helen Powell on Jun. 17, 2008

    Dear HELP!,
    Approach your principal one more time and make it clear that you will not let go of your principles or responsibilities. If that doesn't work then take it a step up to your district superintendent or CFO. I'm sure the insurance company that protects you would be very interested to know the situation. What do the other board members think? Kudos to you for wanting to do the right thing; don't give up!
  13. Posted by - Kathryn Lagden from PTO Today on May. 20, 2008

    Hi Help! - Your bylaws should spell out the procedures for removing an officer. The president can't remove you unilaterally, he/she needs to follow the bylaws. If no procedures are spelled out in the bylaws, you can only be removed for extreme negligence -- like theft. Like you, we think sharing financial information is the right thing to do. Suggest you check out our message boards, lots of folks that can help with ideas and experience on dealing with your president - www.ptotoday.com/boards
  14. Posted by - Help! on May. 20, 2008

    My PTO president has had sole control of everything, including finances for about 3 years. This year when I came on as treasurer, I insisted on the information being shared. Since that time, he has repeatedly tried to remove me from the office. I have gone to the principal and other admin. but no one wants to touch it. Do I have recourse?
  15. Posted by - Craig Bystrynski on Mar. 12, 2008

    Hi Becky -- Thanks for sharing your insights. I agree that creating proper financial controls is the most important step a parent group can take. See the article Preventing Theft: Why It's Crucial (linked from the Related Links box above) for information on that topic. One of those controls is a very basic annual audit which, as you point out, is referred to by other names among accounting professionals. And to clarify, these services for the average parent group can be obtained for hundreds, not thousands, of dollars. -- Craig Bystrynski, Editor in Chief
  16. Posted by - Becky on Mar. 12, 2008

    An audit is a very specialized process, performed by highly trained professionals, and quite frankly, most PTO's fall well below the need for an audit. Perhaps you should have explained the difference between compilations, reviews, and audits. Most organizations perhaps only need a trusted, unbiased person looking things over. However, whenever you have untrained people looking at financial information, they often do not understand accounting concepts, let alone how to spot indications of improprieties. The biggest risk factor of fraud or embezzlement is not the lack of an "audit", but rather a lack of good "controls" (for example, treasurer is NOT a check signer). If good controls are in place and followed, the risk of fraud is greatly reduced. I suggest that the best use of time and effort is not preparing for an audit, but rather going over policies, procedures, and controls, and updating where needed.
  17. Posted by - Becky on Mar. 12, 2008

    Being a treasurer of a PTO and also a CPA, I think you did many members of this forum a disservice. To state that you can get an "audit" for $200 and up is irresponsible. Perhaps you should explain what an "audit" actually is when you mention that in conjunction with a CPA. An audit involves extensive testing of financial data, transactions and controls, and direct confirmations from third party institutions are required. Management's (board members) estimates and assumptions are analyzed and client procedures are observed. Not to mention many checklist dealing with a whole range of topics. The list goes on. If you want a CPA to perform and "audit" and express and "opinion" on the financial information presented by the organization, then the organization should be prepared to spend thousands of dollars.
  18. Posted by - Kathryn Lagden from PTO Today on Mar. 07, 2008

    Also wanted to add that we're in the midst of putting up more information about the toolkit so for now I'll cut/paste the list of additional resources it includes:

    # Audit Guide - Generic (doc)
    # Auditor Cover Letter - Generic (doc)
    # Sample Annual Budget (xls)
    # Sample Annual Budget Detailed (xls)
    # Category Transaction (xls)
    # Miscellaneous Charge (doc)
    # Cash Box Request (doc)
    # Sample Reconciliation (xls)
    # Sample Bounced Check (doc)
    # Financial Activity Rep (xls)
    # Performance to Budget (xls)
    # Risk Assessment Checklist (pdf)
    # Sample Categories (xls)
    # Actual History (xls)
    # Budget Comparison (xls)
    # Proposed Budget (xls)
    # Reimbursement Request (doc)
    # Check Request (doc)
    # Deposit Notice (doc)
    # Deposit Split (doc)
    # Form 990ez (pdf)
    # Form 990sa (pdf)
    # Form 990 Line by Line (doc)
    # Form 990 Support (xls)
  19. Posted by - Kathryn Lagden from PTO Today on Mar. 07, 2008

    Hi Julia - an excellent question. A couple of suggestions:

    You'll find some financial docs in the treasurers/financial section of the file exchange - http://www.ptotoday.com/filesharing?task=cat_view&gid=12

    In our store you'll find a Treasurer's Toolkit and it has tons of helpful information and sample forms. Details here - http://forms.ptotoday.com/store/product.html?id=1002
  20. Posted by - Julia Wilson on Mar. 07, 2008

    you mentioned report names "Banks account reconcilation reports, "Financial review worksheet", and "Performance to Budget". Can any or all of these forms be found and printed from the PTO today website? It would be very helpful to have attachments with this article or be directed to where to find all of these reports/forms.

    Regards, Julia

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