Question

The treasurer of a local not-for-profit organization was found guilty today of defrauding the organization of thousands of dollars. Among the individual’s many responsibilities were the recording of cash deposits, the writing of cheques, and the preparation of the bank reconciliation. A member of the organization suspected wrongdoing when the treasurer reported total cash collections of $2,800 regarding the sale of non sequentially numbered raffle tickets; the member submitted $1,600 to the treasurer and knew that other members had collectively sold in excess of $3,000. The police were consulted and an investigation revealed that not only had the treasurer pocketed an undisclosed amount of cash over a two-year period but he had also made cash withdrawals from the bank and destroyed the debit memos when returned with the bank statement.
a. What three basic guidelines regarding a good system of internal control for cash were not observed?
b. What corrective action should the organization take in the future?

Answer 1

a. Three basic internal control guidelines that have been violated are:

1. Segregation of duties (accountability for cash): The treasurer handled many conflicting duties and hence could plan a fraud.

2. Establishment of responsibility : There were no specific personnel to handle various activites such as a cashier for cash receipts, limiting access to only authorized personnel.

3. Documentation procedures: The treasurer having control over all the cash activities could destroy the debit memos and since he did the bank reconciliation to conceal the fraud.

b. The corrective actions that the organization can take in the future are:

1. Segregation of duties is an indispensable part of internal control. Conflicting duties must be assigned to different individuals. The physical custody of cash must be kept separate from the individual who is responsible for book keeping.

2. Control for a given task mut be entrusted only with one individual to ensure establishment of responsibility. It also includes authorization and approval of transactions.

3. All documents relating to cash payments and receipts must be on record with checks being prenumbered and must be accounted for in sequence. An each check must have an approved invoice.