In: Accounting
Background
The Internal Audit Department of a state-supported university was in the process of performing a scheduled audit of a school within the university that had several academic departments. The internal auditor developed an audit program, which included academic auditing departments within the school having potentially higher risk levels, based on factors such as funding levels, number of funding sources, and number of students. Internal Audit performed this type of audit each year rotating between the various schools within the institution. Audit objectives routinely included evaluating compliance with university policies and procedures relating to procurement, payroll, and cash collections and deposits.
Selected Department
Departments were selected based on the criteria of the audit objectives and discussions with school management. One of the academic departments selected had approximately 30 faculty members, seven administrative staff members, and a nationally recognized graduate program. In addition to being responsible for the academic programs, the department also conducted several functions that provided contract services to the community on a fee basis. Each fund source was recorded in a separate account, and the department had more than 90 accounts. The fund types included state funding, private donations, state and federal grants and contracts, and industry-sponsored contracts. Fund amounts ranged from a low of $1,500 to several which exceeded $100,000. Each type of fund had different requirements relating to how and for what the funds could be expended.
Participants
Faculty members were paid a salary for providing teaching, research, and performing community service in the name of the university. Their contracts were typically for nine months each year. They were allowed to supplement their salary for the remaining three months of the year through various types of grants and contracts. Faculty members were also allowed to work, usually as consultants, up to one day per week outside of the university and were paid directly by the party with whom they were consulting. The consulting fees were personal income for the faculty member and were not processed through the university in any manner.
The department chair had been at the university for more than ten years and was recognized as a faculty leader through various programs at the university. He had held the chair position for five years and was classified as an instructional faculty member with an administrative appointment. Under the guidelines of the university, he received additional compensation for the extra administrative duties he performed as the chair. He was considered a 12-month employee. Therefore, he was not allowed to supplement his university salary in any manner, including summer school teaching or additional funding through a grant.
The university policy stated that department chairs reported to the Dean of the academic college or school. However, in this case, there had historically been little or no review of the department’s finances by the Dean or his representative.
The core administrative staff had been in the department for a number of years. The staff consisted of the chair’s secretary (three years in the department), a business manager (more than 10 years in the department), and a fiscal tech (more than 20 years in the department). The business manager was responsible for the fiscal management of the department and the fiscal tech prepared the financial transactions at the direction of the chair and the business manager.
The financial transactions of the department were initiated using the university’s on-line financial accounting system. In order to provide the chair and appropriate faculty members with timely management data, the fiscal tech also used a series of spreadsheets to manage each account. These spreadsheets provided up to the minute information regarding each account rather than the reports from the university system, which were usually received about ten days after the end of each month.
The fiscal tech prepared the financial transactions based on direction from the chair, appropriate faculty members, or the business manager. The business manager was responsible for approving all financial transactions. However, the business manager shared her password with the fiscal tech as she believed that she didn’t have time to approve each transaction. The fiscal tech then had the ability to approve and enter transactions, despite the fact that she only had the on-line authority to initiate transactions.
Within the last year, the administrative staff had received salary increases for exemplary performance. The raises were given at the direction of the chair.
Situation
The institution had numerous financial policies and procedures that were fragmented and not well communicated. These procedures were available on-line. Training was available, but it was not required. The department personnel had received the training. Implementation of the financial policies and procedures was delegated to the departmental level with minimal review by central organizations to ensure adherence to these policies and procedures.
The internal auditor performed the review. The major finding resulted in a recommendation that monthly reconciliations of each departmental account be performed and documented and that each account be signed by the business manager, signifying certification that each expenditure was made in accordance with university policy and for university related purposes. The recommendation was fully supported by the Dean, and he ordered all departments to immediately implement the recommendation.
Allegations
When the audit was completed and the above finding was being implemented, university management received an anonymous tip. The caller alleged that a department chair had been paying personal bills from university accounts and that other irregularities had occurred within the chair’s department.
Required. Answer the questions in paragraphs. Refer to any or all Audit regulations, i.e., AU and SAS
1) Upon receiving notification of the anonymous tip, outline the actions that you would take as the university’s auditor.
2) What controls would you look for to determine where the potential weaknesses were located?
3) How would you strengthen controls at the university level to decrease the likelihood of this type of occurrence?
A) GENERAL:
1. Examination of the basic documents: Verify the Trust Deed or
Regulations in the
case of school or college and in the case of a university, refer to
the Act of Legislature
and the Regulations framed there under.
2. Reading the minutes: Read through the m.·n f the meetings of the
Managing
Committee or Governing Body, noting resoluti ~ ecting accounts to
see
• that these have been duly complied With
• specially the decisions as regards the operation of bank accounts
and sanctioning
of expenditure.
B) FEE RECEIVED FROM STUDENTS·
1. Check names entered in the ts' Fee Re ister for each month or
term, with the
respective class registers, showi g names of students on rolls and
test amount of fees
charged.
2. Check fees received by comparing counterfoils of receipts
granted with entries in the
cash book and tracing the collections in the Fee Register to
confirm that the revenue
from this source has been duly accounted for.
3. Total up the various columns of the Fees Register for each month
or term to ascertain
that fees paid in advance have been carried forward and the arrears
that are
irrecoverable have been written off under the sanction of an
appropriate authority.
4. Check admission fees with admission slips signed by the head of
the institution and
confirm that the amount had been credited to a Capital Fund, unless
the Managing
Committee has taken a decision to the contrary.
5. See that free studentship and concessions have been granted by a
person authorized
to do so, having regard to the prescribed Rules.
6. Verify that there operates a system of internal check which
ensures that demands
against the students are properly raised.
7. Confirm that fines for late payment or absence, etc., have
either been collected or
remitted under proper authority.
8. Confirm that hostel dues were recovered before students'
accounts were closed and
their deposits of caution money refunded.
9. Report any old heavy arrears on account of fees, dormitory
rents, etc, to the Managing
Committee.
10. Confirm that caution money and other deposits paid by students on admission havebeen shown as liability in the balance sheet and not transferred to revenue.
C) LEGACIES. GRANTS AND DONATIONS:
1. Verify any Government or local authority grant with the relevant
papers of grant. If any
expense has been disallowed for purposes of grant, ascertain the
reasons and
compliance thereof.
2. Vouching the amount received with the relevant correspondence,
receipts and minute
books.
3. Vouch donations, if any, with the list published with the annual
report. If some
donations were meant for any specific purpose, see that the money
was utilized for the
same purpose.
D) INCOME TAX REFUNDS: confirm that the refund of taxes deducted
from the income from
investment (interest on securi tc.) has been claimed and recovered
since the
institutions are generally exempte from the payment of
income-tax.
G) EXPENDITURE:
1. Vouch all capital expenditure in the usual way and verify the
same with the sanction for
the Committee as contained in the minute book.
2. Vouch in the usual manner all establishment expenses and enquire
into any unduly
heavy expenditure under any head.
3. See that increase in the salaries of the staff have been
sanctioned and minuted by the
Committee.
4. Ascertain that the system ordering inspection on receipt and
issue of provisions,
foodstuffs, clothing and other equipment is efficient and all bills
are duly authorized and
passed before payment.
5. Verify the annual statements of accounts and while doing so see
that separate
statements of account have been prepared as regards Poor Boys Fund,
Games Fund,
Hostel and Provident Fund of Staff, etc.
6. Verify the inventories of furniture, stationery, clothing,
provision and all equipment, etc.
These should be checked by reference to Inventory Register and
values applied to
various items should be test checked.
Verification:
Confirm that every expenditure which is material is authorized.