Question

1. Identify the risks and

2. Internal control procedure(s) to mitigate the risk

Characteristics of the Organization

- A small non-profit organization that provides housing for youths with revenues of approximately $700,000. The organization also provides counseling and offers other services to assist the youths.

- There are 2 funding agreements with the Municipality – 1) for purposes of the housing operations and 2) for community development. The funding agreements are signed annually. Any excess funding at the end of the Organization’s fiscal year-end has to be repaid to the Municipality. The agreements stipulate that an annual financial statements audit is required.

- Youths are charged for housing and there is a nominal fee for the other services

- 2 paid staff members, a housing manager and community development worker

- The contracted bookkeeper moved down south two months ago

- The Board of Directors is made up of 6 members from the community. Members have varying degrees of expertise such as social work, fundraising, operations manager, teacher, nursing and a computer programmer

The Organization just hired a new housing manager, Carole. Carole has limited experience in overseeing the operations of a housing organization. Several years ago Carole took a bookkeeping course and has told the Board of Directors that she could also do the bookkeeping. Carole did not inform the Board of Directors that she does not have experience with the Organization’s accounting system.

Since the bookkeeper’s position has been vacant for several months the Organization’s receivables have increased. In addition, during the recent months the Organization has not been operating at capacity.

The Organization accepts cash for rents payments and Carole keeps the cash in the office’s top desk drawer until she is able to deposit it. Carole makes two deposits a month.

Since Carole has a part-time job in the evenings working at a dry-cleaner’s she requests that the Organization consider her contract rather than an employee.

Work was required on the vacant units, such as new carpeting and painting so Carole hired her son and paid him cash from the rent payments she received.

The Organization purchased a new boiler during the year and it was expensed in operations. The Organization’s accounting records showed a large surplus and since the Organization is required to repay surpluses from both housing and community development funding back to the Municipality Carole decided to renovate the community centre and install new cabinets and purchase new appliances in the amount of $15,000.

The board met monthly to discuss issues affecting the Organization but have not received monthly financial reports in at least six (6) months to review.

Answer 1

RISK 1:- RISK OF INAPPROPRIATE SEGREGATION OF DUTIES

In the given Non-Profit Organisation, Carole, who is hired as housing manager is responsible for authorising transactions like purchasing assets, incurring operation expenses, etc; recording/book keeping of transactions; handling cash of the organisation; managing receipts and payments, etc. All the dealings are done by only one person, which poses risk of frauds by making unauthorised transactions causing loss to the organisation.

RISK 2:- RISK OF NON-COMPLIANCE OF MAINTAINING STATU - TORY BOOKS OF ACCOUNTS

In the given Non-Profit Organisation, books of accounts are not updated and maintained since last 6 months. The organisation needs to conduct annual audit of books of accounts, which might not get complied due to non-maintenance of books of accounts.

RISK 3:- RISK OF THIRD PARTY IN CHARGE OF OPERATIONS AND ASSETS OF THE ORGANISATION

In the given Non-Profit Organisation, Carole, who is handling all transactions, book keeping, cash, purchase of assets, receipts and payments, is hired as contractor rather than an employee. Thus, all the most important financial and operational activities are performed by a third party/outside party and the third party is overly trusted.

RISK 4:- RISK OF THEFT OF CASH

In the given Non-Profit Organisation, Carole, the housing manager, keeps the cash received in the top desk of office and accumulate the same till 15 days. Cash is deposited in bank account twice a month. Thus, there is a risk of theft of cash accumulated till approx 15 days till the same is deposited in bank account.

RISK 5:- RISK OF UNAUTHORISED USE OF CASH FUNDS AND NON PAYMENT OF SURPLUS TO MUNICIPALITY ATTRACTING LEGAL CONSEQUENCIES

In the given Non-Profit Organisation, Carole, the housing manager, decided to renovate the community hall and install new cabinets, purchase new appliances of 15000 as large surpluses were shown in accounting records. Instead of returning the unused funds to municipality such expenses were planned without considering whether the same was needed or not. Also, no proper accounting for purchase of appliances, etc is maintained. Renovation is also planned and expensed by only one person i.e. Carole. It is possible, even though large surplus is seen in books of accounts, there is no actual cash to refund to the municipality which can attract penalities for non-compliances and other legal consequences

RISK 6:- RISK OF INCORRECT ACCOUNTING AND SAFEGUARDING OF ASSETS

In the given Non-Profit Organisation, Carole, expensed out the boiler puchased in the books, instead of capitalising the same and showing it in the fixed assets. Thus, there wont be any proper tracking of fixed assets. Fixed assets can be misused.

RISK 7:- RISK OF FRAUDS BY RELATIVES IN SAME ORGANISATION/CONFLICT OF INTEREST:

In the given Non-Profit Organisation, Carole, appointed her own son for job work of carpeting and painting and paid cash to him for the job. There is a risk of conflict of interest i.e. for example excessive payments/unauthorised payments for the job done, as excessive payments will benefit the son of Carole, which ultimately benefit Carole herself.

INTERNAL CONTROL PROCEDURES TO MITIGATE THE ABOVE RISKS ARE AS FOLLOWS:

1. There should be proper segregation of duties in the organisation. The persons who authorise transactions should be differenct from persons who record the transactions and maintain books of accounts. The persons who record the transactions/maintain books should be different from persons receiving cash/funds. The person receiving cash/funds should be different from person incharge of payables. Person responsible for fixed asset accounting should be different.
2. Statu-tory records to be strictly maintained and reviewed in Board of Directors meeting every month. Quarterly audit should be conducted instead of only yearly audit.
3. Persons responsible for transactions of the organisation should be hired on pay roll instead of contractual workers
4. No two relatives should be hired in the organisation as employees or as contractors in order to avoid conflict of interest
5. Cash receipts should be deposited in bank account at the end of the day daily, in order to avoid any risk of theft and know proper funds balance of the organisation
6. Proper/Regular reporting of funds received from municipality, used and outstanding payable to municipality should be done to top manangement, in order to avoid risk of any irregularities and legal consequencies.
7. Proper fixed asset accounting should be carried out including installation of physical tracking system of fixed assets in order to safeguard assets
8. Monthly and Yearly accounts closing activities to be installed and followed strictly.