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 responsible for keeping church records and serving as the financial secretary for 15 years. This creates a potential risk of fraud or misappropriation of funds, as there is no independent oversight or verification.
2. Lack of oversight for collection counting: The head usher is solely responsible for counting the cash collected, with no witnesses or supervision. This increases the risk of miscounting or theft going unnoticed.
3. Lack of control over cash withholding: The financial secretary decides on the amount of cash to withhold from the collections, with no clear guidelines or controls. This lack of control increases the risk of misappropriation of funds.
4. Lack of documentation for check contributions: Church members are asked to make their checks payable to "Cash," which makes it difficult to track and ensure proper recording of contributions. This lack of documentation increases the risk of errors or fraudulent activities.
(b) Improvements in internal control procedures that can be made are as follows:
1. Ushers:
- Implement a rotation system for ushers, where different individuals serve on a monthly basis, instead of a 3-month term for the head usher.
- Provide training to ushers on proper procedures for handling collections, including counting, recording, and secure transport to the office.
- Implement a system of dual control, where two ushers count and verify the cash collected together to reduce the risk of miscounting or theft.
2. Head Usher:
- Assign a separate individual as a supervisor or witness during the counting process.
- Implement a sign-off process where the head usher documents the amount counted and obtains a signature from the supervisor or witness.
3. Financial Secretary:
- Separate the duties of recordkeeping and financial secretary to different individuals to create segregation of duties.
- Establish clear guidelines for the amount of cash to withhold from collections, based on actual cash expenditures and with proper documentation.
- Implement a reconciliation process where the financial secretary reconciles the collections with the head usher's count and any discrepancies are investigated and resolved.
4. Finance Committee:
- Implement regular financial audits conducted by an independent auditor to provide oversight and ensure compliance with internal controls.
- Review and update the church's financial management policies and procedures to include specific guidance on collection handling, recordkeeping, and segregation of duties.
(c) The following church policies should be changed to improve internal control:
1. Segregation of Duties: The church should adopt a policy that clearly defines and enforces segregation of duties, ensuring that no single individual has control over all aspects of the financial management process.
2. Rotation of Duties: A policy should be implemented to rotate responsibilities among different individuals within the ushers, financial secretary, and other relevant roles to prevent any single person from having prolonged control over the collection process or recordkeeping.
3. Documentation of Contributions: The church should establish a policy requiring members to provide clear documentation for their contributions, such as specific checks made payable to the church or offering envelopes with member information. This will enhance transparency and accountability in tracking and recording contributions.
4. Regular Audits: The church should implement a policy mandating regular financial audits conducted by an independent auditor to ensure compliance with internal controls and identify any potential weaknesses or discrepancies.
5. Fidelity Insurance: The church should consider obtaining fidelity insurance to protect against potential losses resulting from fraud or misappropriation of funds.
6. Review and Approval Process: The finance committee should establish a policy requiring review and approval of major disbursements to ensure proper authorization and prevent unauthorized expenditures. This will provide an additional layer of oversight and control.
By implementing these changes to internal control procedures and church policies, the church can enhance its accountability, reduce the risk of fraud, and ensure the accurate handling of collections.
(a) Weaknesses in internal accounting control in the handling of collections:
1. Lack of segregation of duties: The trusted employee serving as the financial secretary has had sole responsibility for keeping church records and handling collections for 15 years. This lack of segregation of duties increases the risk of errors or fraudulent activities going undetected.
2. Lack of oversight: The finance committee, which is responsible for financial management and audit of the financial records, does not have direct involvement in collections or recordkeeping. This lack of oversight increases the risk of errors or fraudulent activities going unnoticed.
3. Lack of fidelity insurance: The church does not carry any fidelity insurance, which could protect against losses resulting from employee dishonesty or fraud.
(b) Improvements in internal control procedures:
1. Ushers:
- Implement a system for each usher to document the amount of cash collected in their respective collection plates.
- Require ushers to sign and date the documentation to create a paper trail.
- Implement a system for ushers to turn in their collection plates directly to the financial secretary or another designated individual, rather than to the head usher.
2. Head usher:
- Implement a system for the head usher to document the total cash collected, including individual amounts from each usher.
- Require the head usher to sign and date the documentation to create a paper trail.
- Implement a system for the head usher to hand over the cash and documentation directly to the financial secretary or another designated individual for safekeeping.
3. Financial secretary:
- Establish a dual-control system for counting and recording the collections, with another trusted individual present during the counting process.
- Document the count and any cash withheld for expenditures in a register, and have the financial secretary sign and date the entries.
- Implement a system for the financial secretary to deposit the collections intact without withholding any cash.
4. Finance committee:
- Increase their involvement in the handling of collections, including periodic reviews of the collection process and related financial records.
- Establish a system for the finance committee to review and approve the monthly bank reconciliations submitted by the financial secretary.
(c) Church policies to improve internal control:
1. Segregate duties: Assign different individuals to handle the various aspects of collections, such as counting, recording, and depositing cash, to ensure proper segregation of duties and reduce the risk of errors or fraudulent activities.
2. Mandatory fidelity insurance: Implement a policy requiring the church to carry fidelity insurance to protect against losses resulting from employee dishonesty or fraud.
3. Regular audits: Establish a policy requiring regular audits of the church's financial records by an independent internal auditor or an external CPA to ensure transparency and detect any irregularities.
4. Mandatory reporting: Implement a policy requiring prompt reporting of any suspected financial irregularities or misconduct to the finance committee and appropriate authorities for investigation.