Question

The following information has been identified by the audit team thus far during preliminary engagement activities of RSAA. RSAA provides youth support services for children ages 5 to 12, including education support, physical development opportunities, and counselling. RSAA has the following personnel: • Office manager, who performs the accounting and has been with RSAA for over five years. Your audit firm has a good rapport with the office manager. • Executive director, who has also worked at RSAA for over five years. Your audit firm also has a good rapport with the executive director • Resource development manager, who started at the end of the previous fiscal year • Mary, a program manager, who has been at the organization for just over three years • Sam , the other program manager, who had been at the organization for almost two years • Certified counsellor, who works as needed based on client needs. The counsellor also works for a nearby city school district. The counsellor is considered an employee for insurance coverage purposes, based on legal advice. During the year, Sam was let go due to budget concerns, and his work was moved to Mary. The office manager's hours were cut to part time. RSAA receives about 50 percent of its support from individual donations, most of which come from an annual dinner and silent auction. Revenue from the annual dinner was down about 20 percent from the prior year. RSAA receives the other 50 percent of its support from corporate and foundation grants. The grants are for general purposes, and the only requirement is an annual report explaining what the organization accomplished. The organization includes in its report how many clients were served and a spotlight on the story of one client. The reports are prepared by the resource development manager, and the executive director receives copies. The assets of the organization consist of cash, a small inventory of program supplies (for example, books, athletic equipment, and art supplies), office equipment (for example, computers and a copier), program equipment (such as computers), and office furniture. The liabilities of the organization consist of accounts payable and payroll related liabilities. The significant expenses of the organization are payroll, employee benefits, facility lease, program supplies, office supplies, and insurance. RSAA no temporarily restricted or permanently restricted net assets. Supplies are ordered or purchased for reimbursement by the various managers. Invoices are approved by the executive director for payment. Disbursements are made weekly for approved invoices. Rent is the only nonpayroll exception for which the organization receives no invoice. The office manager pays rent for the following month during the last week of the current month. Cheques are attached to the supporting documentation when submitted to the executive director for signature. The executive director and the board president are the only authorized personnel to sign cheques. The office manager mails payments once the cheques have been signed. Payroll is semi-monthly, and employees are paid the last day of the pay period. Time sheets are turned in the day before the last day of the pay period with estimated hours for the last day. The counsellor is the only exception. If she has hours on the last day of the pay period, they are included in the next pay period. If time sheets are for other than four or eight hours per day, inclusive of all time such as for vacation, the office manager has the executive director approve the time sheet. The executive director approves all of the counsellor’s time sheets. The payroll cheque register is submitted with payroll cheques to the executive director for signature. The executive director distributes payroll cheques to the employees. Dinner tickets are sold by all personnel and board members. Unsold tickets are returned to the Resource Development Manager (RDM). The RDM provides the office manager Page 6 of 6 with a schedule of tickets sold reconciled to funds received on a weekly basis starting two months before the dinner, with increasing frequency within the last two weeks of the event. Items donated for the silent auction are inventoried by the RDM, with every donor receiving a thank you letter listing the item(s) donated. Payment for auction items won must be made at time of the auction. The RDM and one of the program managers accept the cheques or complete credit card charge slips for the amounts of the winning bids and then attach them to the bid slip. Some items are paid for with cash, and there are a few cash donations. In both circumstances, the payer receives a receipt for payment. A duplicate receipt is attached to the bid slip, and general donation receipts are put in a separate envelope. The day after the dinner, the office manager copies the checks and prepares deposits. The office manager likes to have a separate deposit for auction money and general donation money. Either that day or the next, the office manager processes the credit card charges. Grant funds are received annually or quarterly, depending on the grant. Grant correspondence and copies of checks are provided to the RDM. Contribution revenue is recorded when the organization is notified that the grant is approved, which may be when the grant funds are received or the first quarter funds are received. Deposits are written up by the office manager and taken to the bank by whoever is available to do so. Bank statements are opened by the executive director. The bank does not return cheques or provide copies of cheques. However, the executive director does have online access to the bank account and checks the bank balance at least twice a week. If she does not recognize the amount of a cheque that has cleared, she views the cheque online. The bank reconciliation is performed by the office manager on a timely basis. Costs are allocated on a functional basis as follows: • Program services include payroll and related costs for program managers and 90 percent of payroll and related costs for the executive director; 70 percent of the facility lease and property insurance; program supplies; liability insurance; and other direct costs. • Management and general costs include payroll and related costs for the office manager; half of the payroll and related costs for the resource development manager; 10 percent of the payroll and related costs for the executive director; 30 percent of the facility lease and property insurance; office supplies; errors and omission insurance; and audit fees. • Fundraising costs include half of the payroll and related costs for the RDM; office supplies and postage directly for the dinner or grant reports; and the cost of the dinner, including facility rental, catering, and more. Subsequent to year-end, one of the foundations gave notification that it will not be able to provide a grant for the next fiscal year due to the poor performance of the foundation's investments. The executive director laid off the RDM and is currently performing the RDM's tasks.

Required

a) You are part of the audit team for RSAA. What are the fraud risk factors you will identify in the audit team discussion?

b) Auditing standards requires the auditor to presume that risks of fraud in revenue recognition exist. What procedures could the audit team perform to address this risk?

c) What procedures could your audit team perform to address the fraud risk of management override of controls?

Answer 1

Purchase system and it's audit strategy-

-RSAA has no separate purchase departments for purchase of supplies. The purchases are done by various managers who ultimately gave the invoice to the executive director for sanction of the payment.

Audit strategy-

Auditor to check---

-- whether purchases are being made as per the requirements.

-- after purchase being made, the supplies are entered into the stock register

-- check whether any bogus invoice has been passed

-- check the system of counter check by the executive director before signing the cheque

-- check the whether proper accounting has done

payroll system and it's audit strategy

payments once the cheques have been signed.
Payroll is semi-monthly, and employees are paid the last day of the pay period.

Time sheets are turned in the day before the last day of the pay period with estimated hours for the last day.

The counsellor is the only exception. If she has hours on the last day of the pay period, they are included in the next pay period. If time sheets are for other than four or eight hours per day, inclusive of all time such as for vacation, the office manager has the executive director approve the time sheet. The executive director approves all of the counsellor’s time sheets.

Audit strategy

-check the time sheet for checking the auctal present

- particularly check that for those employees for whom presence has been for the last day of the pay period have actually present in that day

- check that adequate provision has been provided for councillor payment

- check compliance with applicable FRF and laws

Sales System and it's audit strategy

Dinner tickets are sold by all personnel and board members.

Unsold tickets are returned to the Resource Development Manager (RDM).

The RDM provides the office manager with a schedule of tickets sold reconciled to funds received on a weekly basis starting two months before the dinner, with increasing frequency within the last two weeks of the event.

Audit strategy

- check whether tickets are propely serial numbered

- check sampling wise the control over the issue of the tickets

- check and consider the management fraud in this.

- check how RDM checks the tickets issued and unsold with the fund

- check that the unsold tickets are stored with proper authorization

Donation received system and it's audit strategy

RSAA receives about 50 percent of its support from individual donations, most of which come from an annual dinner and silent auction.

RSAA receives the other 50 percent of its support from corporate and foundation grants.

Items donated for the silent auction are inventoried by the RDM, with every donor receiving a thank you letter listing the item(s) donated. Payment for auction items won must be made at time of the auction.

The RDM and one of the program managers accept the cheques or complete credit card charge slips for the amounts of the winning bids and then attach them to the bid slip. Some items are paid for with cash, and there are a few cash donations. In both circumstances, the payer receives a receipt for payment.

A duplicate receipt is attached to the bid slip, and general donation receipts are put in a separate envelope.The day after the dinner, the office manager copies the checks and prepares deposit.

Audit strategy

-Check the thankyou letter issued and reconcile it with the items received.

- check the proper record and control over the cash received.

- check the proper accounting system.

Cash recording system and it's audit strategy-

Deposits are written up by the office manager and taken to the bank by whoever is available to do so.Bank statements are opened by the executive director. The bank does not return cheques or provide copies of cheques. However, the executive director does have online access to the bank account and checks the bank balance at least twice a week. If she does not recognize the amount of a cheque that has cleared, she views the cheque online. The bank reconciliation is performed by the office manager on a timely basis.