Question

Seaside Village is a retirement community, and many residents work together on a local charitable auction to raise money to support community endeavors. Basically, volunteers solicit residents and local merchants to donate items for the auction. The night of the auction, volunteers bring their donated items for display on tables placed around the floor of the town's school gymnasium. Virtually the whole town turns out to bid on items that are up for sale. The lucky purchaser makes payment at a collection booth that is staffed by two of the volunteers. At the end of the evening, the buyers collect their items. A volunteer takes the money home to count. The money is deposited to the charity's bank account on the following day. Following last year's auction, many complaints were heard. One merchant complained that he had donated an expensive LCD television, but it was not offered for sale at the auction. One of the buyers complained that the item she paid for was not to be found at the end of the evening. Another donor complained that he needed a receipt for tax purposes, and another person complained that some people were making up receipts for donations that were never made. The charity's board is considering expanded controls for next year's event, and is considering ten specific proposals received from various volunteers. Which five of these proposals are the most valid strengthening of the control structure? Donors will be sent a thank you letter, which will include a paragraph asking them to confirm that their donated item was present at the auction. Proceeds should be counted and recorded by two or more people immediately fol- lowing the auction, and taken directly to the bank for deposit in the night depository. The person taking the money to the bank will be required to perform a bank reconcili- ation at the end of the month to verify the deposit's posting. All volunteers should be emailed a blank receipt form. Volunteers are encouraged to reprint a generous supply and be sure to issue one to each donor. Prenumbered receipt books (with carbon copy film) should be used for donated items, and a log should be maintained of who received a receipt book. The receipts should be reconciled to donated items. A paid receipt prepared by collection booth volunteers must be presented by a pur- chaser before being allowed to leave the gym with an item of merchandise. An advertisement will be run in the local paper asking for support of the upcoming auction. The advertisement will include instructions to donors reminding them to always ask for a receipt for their gift, and encouraging them to call in to a special phone number to register to be eligible for a special prize drawing for donors! Only one person at a time will be allowed in the collection booth. Each collection booth volunteer will be limited to a one-hour shift. No volunteer is to remove funds from the booth. The charity's president will be required to perform an audit of the books and records related to the annual event. The president must issue a written audit report. Donated items must be taken to a local storage facility upon receipt. A warehouse custodian volunteer will log the items, and another volunteer will be authorized to lock and unlock the warehouse.

A). The strengths are as follows:

B). Use this problem as an opportunity to generally consider the benefits of limited access to assets, separation of duties, authorization, use of prenumbered documents, and proper independent verification/audit. Consider how the "other five" suggestions might be ineffective or harmful to the control environment. Be prepared to discuss other ideas (there are many -- e.g., logging the bid price and matching with payments, etc.) for improving controls at the auction

Answer 1

The below five proposals are the most valid strengthening of the control structure, please see the reasoning with each pointer.

1. Proceeds should be counted and recorded by two or more people immediately following the auction, and taken directly to the bank for deposit in the night depository.The person taking the money to the bank will be required to perform a bank reconcili- ation at the end of the month to verify the deposit's posting.(if two persons are involved that would reduce the chances of counting or recording errors,asset (Cash) would be safe and since the money would be deposited in the Bank account same day there would be limited access to cash,also since reconcilliation needs to be performed by depositor chances of Cash theft are reduced.)
2. Prenumbered receipt books (with carbon copy film) should be used for donated items, and a log should be maintained of who received a receipt book.The receipts should be reconciled to donated items.(This will avoid duplications of receipts like for Tax saving purpose in the above instance, carbon copy film will act as an evidence with the community of the assets received,log would help to identify the responsible person in case any assets are stolen and recon would ensure controls on the assets received and sold.)
3. A paid receipt prepared by collection booth volunteers must be presented by a pur- chaser before being allowed to leave the gym with an item of merchandise. (This would ensure no asset is taken out of the gym before making payment of the same, this will ensure each asset sold has a payment receipt attached to it)
4. The charity's president will be required to perform an audit of the books and records related to the annual event.The president must issue a written audit report (The Audit of the books and records will give a report of recipt of goods, auction and proceeds from auction, this report would also highlight the deficit in cash account/assets stolen etc, persons responsible and suggest areas of improvement/controls which can be considered from following year)
5. Donated items must be taken to a local storage facility upon receipt. A warehouse custodian volunteer will log the items, and another volunteer will be authorized to lock and unlock the warehouse.(This would ensure that all the items donated are recorded in books, and are kept in safe locker.)

The below five suggestions might be ineffective or harmful to the control environment along with the explanations for the same:

1. Donors will be sent a thank you letter, which will include a paragraph asking them to confirm that their donated item was present at the auction.(This can be a good control to ensure all the assets are considered in auction, however it can be ineffective because it is dependent on Donors attend the auction and donors responce to the thank you letter.)
2. All volunteers should be emailed a blank receipt form.(Receipt form should always be with pre-numbered receipts with carbon copy film, if not there are chances that assets can be stolen easily as the volunteers can tear and scrap the receipt issued to the donors and there is no way the number of receipts can be tracked to each volunteer if there is no pre-numbered receipts issued.)
3. Volunteers are encouraged to reprint a generous supply and be sure to issue one to each donor.(This will lead to people making up receipts for donations which were never made, Hence a Single receipt should be issued and re-print should be avoided)
4. An advertisement will be run in the local paper asking for support of the upcoming auction.The advertisement will include instructions to donors reminding them to always ask for a receipt for their gift, and encouraging them to call in to a special phone number to register to be eligible for a special prize drawing for donors! Only one person at a time will be allowed in the collection booth. (This can be a good control, however it can be in effective as it will inlolve cost for advertisements, prize cost and if Only one person allowed at a time it will need more number of volunteers as well)
5. Each collection booth volunteer will be limited to a one-hour shift. No volunteer is to remove funds from the booth.(This will lead to ineffective utilisation of volunteers work hours, and funds needs to be removed at day end by the volunteers responsible if not then it will lead to cash theft.)

Additional recommendend controls:

1. There can be a automated system to record the receipt of Assets from Donors and receipts can be printed electronically from that system and when the Assets are sold same system can be used to record for sale of asset. This will ensure effective records for the Assets.
2. There can be a control to recon daily bank deposit slip with the cash receipts of assets sold.
3. There can be a control to verify the Bid price for the asset with the cash receipt issued for the same asset, This will ensure Cash received is equal to the Bid amount of the Asset.