Instructions
Identify the internal control principles and their application to cash disbursements of
Marais Company.
P7-2B The board of trustees of a local church is concerned about the internal accounting
controls pertaining to the offering collections made at weekly services. They ask you to
serve on a three-person audit team with the internal auditor of the university and a CPA
who has just joined the church. At a meeting of the audit team and the board of trustees
you learn the following.
1. The church’s board of trustees has delegated responsibility for the financial management
and audit of the financial records to the finance committee. This group prepares
the annual budget and approves major disbursements but is not involved in collections
or recordkeeping. No audit has been made in recent years because the same
trusted employee has kept church records and served as financial secretary for 15
years. The church does not carry any fidelity insurance.
2. The collection at the weekly service is taken by a team of ushers who volunteer to
serve for 1 month. The ushers take the collection plates to a basement office at the
rear of the church. They hand their plates to the head usher and return to the church
service. After all plates have been turned in, the head usher counts the cash received.
The head usher then places the cash in the church safe along with a notation of the
amount counted. The head usher volunteers to serve for 3 months.
3. The next morning the financial secretary opens the safe and recounts the collection.
The secretary withholds $150 – $200 in cash, depending on the cash expenditures expected
for the week, and deposits the remainder of the collections in the bank. To facilitate
the deposit, church members who contribute by check are asked to make their
checks payable to “Cash.”
4. Each month the financial secretary reconciles the bank statement and submits a copy
of the reconciliation to the board of trustees. The reconciliations have rarely contained
any bank errors and have never shown any errors per books.
Question: Indicate the weaknesses in internal accounting control in the handling of collections
To identify the weaknesses in the internal accounting control in the handling of collections for Marais Company, we can analyze the information provided and compare it to the principles of internal control. Let's break down the information and analyze each aspect:
1. Lack of segregation of duties:
- The trusted employee who has kept church records and served as financial secretary for 15 years indicates a lack of separation of duties. This means that one person has control over both the recordkeeping and handling of cash collections, increasing the risk of fraud or errors.
2. Absence of independent audit:
- The fact that no audit has been conducted in recent years suggests a lack of oversight and verification of the financial records. Regular audits are essential in identifying and preventing irregularities or fraudulent activities.
3. Lack of fidelity insurance:
- Not having fidelity insurance exposes the church to potential financial losses if any misappropriation or theft of cash collections were to occur.
4. Inadequate control over cash collections:
- The collection process is handled by ushers who volunteer for a month, which may not provide sufficient accountability or consistency in the handling of cash.
- The head usher counts the cash received, but there is no mention of any verification process or supervision to ensure accuracy.
- After counting the cash, it is placed in the church safe with only a notation of the amount counted. This leaves room for potential errors or manipulation.
5. Lack of proper documentation and internal controls:
- Withholding cash from the collection for cash expenditures without proper documentation or approval can lead to misuse of funds.
- Accepting checks made payable to "Cash" instead of individual names increases the risk of mishandling or misappropriation.
6. Inadequate reconciliation and review:
- Although the financial secretary reconciles the bank statement and submits it to the board of trustees, the fact that there have rarely been any bank errors or errors per books suggests a lack of thorough review. This could indicate complacency and a failure to detect potential discrepancies or irregularities.
Overall, the weaknesses in the internal accounting control for the handling of collections in Marais Company include the lack of segregation of duties, absence of independent audits, inadequate control over cash collections, lack of proper documentation and internal controls, and insufficient reconciliation and review processes. These weaknesses increase the risk of fraud, errors, and misappropriation of funds.
Based on the information provided, the following weaknesses in internal accounting control can be identified in the handling of collections:
1. Lack of segregation of duties: The trusted employee has been keeping church records and serving as the financial secretary for 15 years. This arrangement allows for the potential of improper handling of funds or manipulation of records without detection.
2. Lack of oversight and independent audit: No audit has been conducted in recent years, and the finance committee is not involved in collections or recordkeeping. This lack of oversight and independent verification increases the risk of errors or fraud going undetected.
3. Lack of fidelity insurance: The church does not carry any fidelity insurance, which protects against losses resulting from dishonest acts. This increases the financial risk to the church in the event of theft or embezzlement.
4. Inadequate control over cash handling: The collection plates are taken to a basement office by ushers who volunteer for 1 month. The head usher then counts the cash and places it in the church safe. This process lacks sufficient checks and balances, as there is no independent verification of the amount counted or oversight during the counting process.
5. Lack of documentation for cash disbursements: The financial secretary opens the safe the next morning and withholds a portion of the cash for cash expenditures. However, there is no information provided regarding the documentation or approval process for determining the amount to withhold. This lack of documentation and oversight increases the risk of misappropriation or mismanagement of funds.
6. Inadequate control over check contributions: Church members who contribute by check are asked to make their checks payable to "Cash," which can be easily manipulated or misappropriated without proper documentation or verification.
7. Insufficient reconciliation process: While the financial secretary reconciles the bank statement each month, there is little mention of any other control procedures or practices for ensuring accuracy and completeness. Additionally, there is no indication of any independent review or oversight of the reconciliation process.