How Does Our Club Conduct an Annual Audit?
by Douglas Gerlach

Q. What is the recommended method of conducting an audit on an investment club's books? The club is using NAIC Club Accounting software for record keeping. I am not an accountant and need to know what records I need to have printed for audit.

A. It's a good idea for an investment club to conduct an audit of its records and bookkeeping each year. If you are insured under the Fidelity Bond offered by NAIC, then you are required to conduct this audit annually. Typically, the audit is carried out by an audit committee made up of members of the club shortly after the close of the club's fiscal year.

So what's the purpose of the audit? Like in a corporation's audit, a club audit is intended to ensure that the club's income and expenses were recorded properly on the club's books -- and that no sums were under- or over-reported. The audit committee should examine the statements received from the club's broker and bank and make sure that all monies received by the club were deposited properly, that all expenses were paid properly. The committee should also check to make sure that all securities held by the clubs are accounted for, whether they are held in dividend reinvestment accounts, or brokerage accounts, or directly in certificate form.

The Club Treasurer should provide a copy of each monthly valuation statement and a report of all the transactions carried out on the club's behalf during the course of the year, as well as all the original statements from the club's financial institutions. The audit committee needs to be able to see the inflows and outflows of cash throughout the year in order to reconcile these transactions with the club's records.

The audit is not necessarily intended to make sure that your Club Treasurer is not embezzling funds -- though it would likely reveal that situation if it were in fact occuring -- but rather to catch any mistakes that might cause further problems down the road.

NAIC publishes an Annual Verification Report form on their site that provides some more recommendations on the substance of your club's annual audit.