Question

CASE STUDY – INTERNAL CONTROL

Honkydory Musical School wants to raise money for a new sound system for its auditorium. The primary fund-raising event is a dance at which the famous disc jockey, John Henry will play funky hip-hop and not so funky hip-hop dance tunes. Mr Bishop, the music and theater instructor, has been given the responsibility for coordinating the fund-raising efforts. This is Bishop’s first experience with fund-raising.

Bishop had 500 unnumbered tickets printed for the dance. He left the tickets in a box on his desk and told the choir students to take as many tickets as they thought they could sell for $10 each. In order to ensure that no extra tickets would be floating around, he told them to dispose of any unsold tickets. When the students received payment for the tickets, they were to bring the cash back to Mr. Bishop, and he would put it in a locked box in his desk drawer.

Some of the students were responsible for decorating the gymnasium for the dance. Mr. Bishop gave each of them a key to the money box and told them that if they took the money out to purchase materials, they should put a note in the box saying how much they took and what it was used for.

After 2 weeks the money box appeared to be getting full, so Mr. Bishop asked Luke Wilson to count the money, prepare a deposit slip, and deposit the money in a bank account that he had opened for this fundraising event. On the day of the dance, Bishop wrote a check from the account to pay the DJ, however the DJ said that he accepted only cash and did not give receipts. So Bishop took $ 500 out of the cash box and gave it to him. At the dance Bishop saw Sally working at the entrance to the gymnasium, collecting ticket from the students and selling tickets to those who had not pre-purchased them. Bishop estimated that 400 students attended the dance.

The following day Bishop closed out the bank account, which had $450 in it, and gave that amount plus the $ 300 in the cash box to the Principal of the school. He seemed surprised that after generating roughly $ 4000 in sales, the dance netted only $ 750 in cash. Bishop did not know how to respond.

Required:

1. List the internal controls that were ignored by Mr. Bishop during this fundraiser. (There are at least six)

2. Create an internal control policy that will provide all needed guidelines for the School to follow for every subsequent fundraiser.

3. Do you believe that the Principal should investigate whether fraud has occurred by Mr. Bishop?

4. Do you believe the students have committed fraud?

5. Who could help this principal develop the proper policy and controls?

Answer 1

1. Internal Controls that were ignored by Mr. Bishop during fund raising:-

• Transparency and communication: - The duties were assigned to the students in a haphazard manner, where in there was no control on the amount collection, no control on the number of tickets taken by each student.
• Segregation of duties: - Each student or a group of student should have been assigned a specific task rather than every student doing every task.
• Cash Payment and receipts: - Mr. Bishop should have discussed on the terms of payments in advance with the DJ to avoid last minute payment in cash and no receipt. This could also lead to disallowance of expense as per Income Tax laws.
• Reconciliation: - The cash balance should be reconciled with all the revenue and expenses and then deposited in the bank. This check would have ensured a proper check on the fraud.
• Giving keys to all the students: - This would have led to the fraud as the students either knowingly or unknowingly commit a fraud with the money kept in the drawer.
• Documentation:- Every expense and revenue should have been documented in order to know the exact income and revenue.