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.
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?
What are your answers to these questions?
We'll be glad to comment on them.
(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 kept church records and served as financial secretary for 15 years. This means that one person has control over collection records, counting the cash, making bank deposits, and reconciling the bank statement, which increases the risk of fraud or errors going undetected.
2. Lack of oversight: No audit has been conducted in recent years. This lack of independent oversight allows for potential misuse of funds without detection.
3. Lack of fidelity insurance: The church does not carry any fidelity insurance, which means there is no financial protection in case of theft or fraud.
(b) The improvements in internal control procedures that can be made are as follows:
1. Ushers: Rotate the ushers on a more frequent basis, such as weekly instead of monthly, to reduce the likelihood of collusion. Provide clear instructions on the proper handling and securing of the collection plates. Implement a system where ushers sign off on the amount of cash they are turning in to ensure accountability.
2. Head Usher: Rotate the head usher every month to prevent the accumulation of trust and potential abuse of authority. The head usher should count the cash in front of at least one other person, who can serve as a witness.
3. Financial Secretary: Remove the financial secretary from the process of counting and depositing the funds. Instead, assign this responsibility to another trusted individual who is independent from the financial secretary. This will ensure segregation of duties and reduce the risk of misappropriation.
4. Finance Committee: The finance committee should take a more active role in the oversight of the church's financial management and control. They should conduct regular internal audits or engage an external auditor to review the church's financial records. The committee should also review and approve all major disbursements.
(c) The following church policies should be changed to improve internal control:
1. Implement a policy of mandatory rotation of responsibilities for individuals handling collection and financial matters. This will prevent the accumulation of trust and reduce the risk of fraud.
2. Establish a policy of conducting regular independent audits of the church's financial records to ensure accountability and detect any potential fraud or errors.
3. Consider obtaining fidelity insurance to protect against potential losses resulting from theft or fraud.
4. Enhance the church's budgeting process, ensuring that the finance committee is actively involved in the preparation and approval of the annual budget. This will provide better financial oversight and control over major disbursements.