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.
Instructions
(a) Indicate the weaknesses in internal accounting control in the handling of collections.
(b) List the improvements in internal control procedures that you plan to make at the
next meeting of the audit team for (1) the ushers, (2) the head usher, (3) the financial
secretary, and (4) the finance committee.
(c) What church policies should be changed to improve internal control?

(a) The weaknesses in internal accounting control in the handling of collections are as follows:

1. Lack of segregation of duties: The same trusted employee has been keeping church records and serving as the financial secretary for 15 years. This lack of segregation of duties creates an opportunity for fraud or errors to go undetected.

2. Lack of oversight: The finance committee, responsible for financial management and audit of the financial records, has not conducted any audits in recent years. This lack of oversight increases the risk of irregularities and misappropriation of funds.

3. Lack of fidelity insurance: The church does not carry any fidelity insurance, which could provide protection against losses due to dishonest acts of employees.

(b) The improvements in internal control procedures that can be made are as follows:

1. Ushers:

- Implement a system of checks and balances where two ushers count the collection together to ensure accuracy and discourage individual wrongdoing.
- Enforce a standard operating procedure for handling collections, including secure transportation to the basement office and proper documentation.

2. Head usher:

- Implement a rotation system for the head usher position, as serving for three months consecutively creates a potential for misconduct or collusion.
- Implement a dual custody policy for the keys to the church safe, so that it requires two authorized individuals to access the cash.

3. Financial secretary:

- Implement a segregation of duties by assigning a different employee or volunteer to manage the record-keeping aspect, separate from the financial secretary's role.
- Enforce strict documentation procedures for the withholding and depositing of cash, ensuring transparency and accountability.

4. Finance committee:

- Conduct regular and independent internal audits to ensure financial records are accurate and reliable.
- Provide proper training and resources to the finance committee members to enhance their understanding of financial management and internal controls.

(c) The church policies that should be changed to improve internal control are as follows:

1. Mandatory rotation of financial roles: Implement a policy that requires rotation of employees or volunteers in key financial roles, such as financial secretary or head usher, to prevent the accumulation of unchecked power and potential fraudulent activities.

2. Mandatory annual audits: Implement a policy that mandates annual audits of the financial records by an independent auditor to provide objective assurance and detect any irregularities or fraud.

3. Fidelity insurance: Update the church policy to include the requirement of fidelity insurance to protect against losses due to fraud or dishonest acts of employees.

4. Clear policies and procedures: Develop and communicate clear policies and procedures for handling collections, documenting cash withholding, depositing, and reconciling bank statements to ensure consistency and transparency in financial transactions.