Question

Blue Bayou Middle 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 Kray Zee will play classic and not-so-classic dance tunes. Grant Hill, the music and theater instructor, has been given the responsibility for coordinating the fund-raising efforts. This is Grant’s first experience with fund-raising. He decides to put the eighth-grade choir in charge of the event; he will be a relatively passive observer.

Grant 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 $5 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 Grant, 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. Grant gave each of them a key to the money box and told them that if they took 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 Grant asked Lynn Dandi to count the money, prepare a deposit slip, and deposit the money in a bank account that Grant had opened.

The day of the dance, Grant wrote a check from the account to pay Kray Zee. The DJ said, however, that he accepted only cash and did not give receipts. So Grant took $200 out of the cash box and gave it to Kray. At the dance, Grant had Dana Uhler working at the entrance to the gymnasium, collecting tickets from students and selling tickets to those who had not pre-purchased them. Grant estimated that 400 students attended the dance.

The following day, Grant closed out the bank account, which had $250 in it, and gave that amount plus the $180 in the cash box to Principal Sanchez. Principal Sanchez seemed surprised that, after generating roughly $2,000 in sales, the dance netted only $430 in cash. Grant did not know how to respond.

Identify as many internal control weaknesses as you can in this scenario, and suggest how each could be addressed.

Answer 1

An efficient Internal control system is an essential part of an organisation which helps in timely detection of frauds or errors while conducting the business. Following are some of the Internal control weaknesses found in this scenario:-

1. The 500 tickets printed for the dance were unnumbered. The tickets printed should be serially numbered so that reconciliation of cash collected with the number of tickets sold and left unsold can be done.
2. Grant has asked the students to take as many tickets as they think they can sell from the box on his desk. This is wrong as there is no record being maintained and students might not give back the amount collected by them from the sale of tickets. It should be the responsibility of Grant to maintain a track record of the number of tickets given to each student for sale and how many tickets out of the given tickets have been sold and how many remain unsold against the cash received from the students from the sale of tickets.
3. Grant asked the students to dispose of any unsold tickets. This is wrong as the unsold tickets should be collected by grant in order to verify that the
   Total number of tickets = Total Number of tickets sold + Total number of tickets unsold.
   It shall also help in verifiying the amount of cash that should have been collected against the number of tickets sold and the amout actually collected.
4. The cash collected should be deposited in the bank account as soon as possible and the money box getting full should not be the criteria for depositing the cash in bank. Normally, the cash collected is deposited by the end of the day or the next day in the banks.
5. Grant gave the key of the money box to each student for the purchase of materials with unlimited access to cash.There should be a limited access to the amount of cash as well as the access to the money box should be limited to one or two persons.
6. Instead of leaving of notes by the students regarding the amount taken and the purpose for which it is taken, Grant should himself provide the amount to the person responsible for the purcahse of materials and further take note of all the bills , invoices and the budgeted amount with the actual amount spent. Proper authorisation needs to take place.
7. A proper system of collecting the tickets that are pre-purchased and selling the tickets to those who have not pre- purchased should be put in place at the entrance in order to conduct a proper reconciliation of the amount collected with the number of tickets sold and unsold.
8. As Grant is not experieneced and this was his first time to organise an event the principal should have assigned a supervisor to guide him and also from whom Grant can discuss any queries.
9. Segregation of duties is not present and no one person can be held accountable for the fraud if any that might take place due to the weakness in internal control. Different persons should have been assigned different tasks and no student should have been allowed unlimited access as has been provided in the given scenario in order to fix the accountability as well as avoid the possibilities of frauds.
10. Grant should have properly reconciled the accounts along with the detail of expenses and the materials bought , amount of cash deposited in bank, cash collected , cash balance remaining before submitting the amount to the principal.