There Are Two Different Questions About The Board Of Trustee

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Question 1: The board of trustees of a local church is concerned about the internal accounting controls pertaining to the offering collections made at weekly services. They ask you to serve on a three-person audit team with the internal auditor of the university and a CPA who has just joined the church. At a meeting, you learn that the church’s board of trustees has delegated responsibility for financial management and auditing to the finance committee, which prepares the budget and approves major disbursements but does not handle collections or recordkeeping. No recent audits have been conducted because the same trusted employee has kept records and served as financial secretary for 15 years. The church does not carry fidelity insurance. The collection process involves ushers volunteering monthly to collect offerings, which they hand to the head usher. The head usher counts and safes the cash, noting the amount. The next day, the financial secretary recounts the collection, withholds $150-$200, and deposits the remainder in the bank, asking contributors to make checks payable to “Cash.” The secretary reconciles the bank statement monthly. Based on this, what church policies should be changed to improve internal control?

Question 2: Culotti’s Pizza operates strictly on a carryout basis. Customers pick up their pizza orders at a counter where a clerk exchanges the pizza for cash. Customers can observe employees making pizzas and baking them in large ovens. Identify the six principles of internal control and provide an example of each principle based on the pizza pickup scenario, noting that not all principles may be observable at the counter.

Paper For Above instruction

Ensuring robust internal controls is critical for organizations, including churches and food service providers like Culotti’s Pizza, to protect assets, ensure accurate financial reporting, and promote operational efficiency. Addressing the specific questions related to internal controls, this paper discusses the policies necessary to improve church financial management and the principles of internal control exemplified in a pizza takeout setting.

Improving Internal Control Policies in the Church

The church’s current system exhibits several weaknesses that could lead to misappropriation or loss of funds. To enhance control, the church should implement policies such as segregation of duties, documentation, and independent verification. First, segregation of duties should be enforced by ensuring that different personnel handle cash collection, recording, and deposit processes to prevent opportunities for theft or errors. For instance, appointing an independent individual to oversee collections and deposits would provide checks and balances.

Second, adopting comprehensive written policies for cash handling and safeguarding collections is essential. These policies should specify how collections are to be counted, documented, and deposited, with detailed procedures documented to serve as a standard operating procedure. Such policies mitigate inconsistencies and errors resulting from ad-hoc practices.

Third, the church should secure fidelity insurance that covers theft or loss of cash, which is currently lacking. This insurance provides a financial safety net should dishonesty or errors occur. Additionally, implementing mandatory periodic independent audits, even if internal checks are routine, will help ensure the integrity of records and adherence to policies. The audit team should also verify that physical controls—such as safes and restricted access—are properly maintained.

Moreover, the church’s practice of asking contributors to make checks payable “Cash” undermines accountability and complicates recordkeeping. Policies should be changed to require contributors to make checks payable to the church, with proper recording of each contribution. This facilitates tracking and reconciliation, reduces the risk of misappropriation, and aligns with standard accounting practices.

Finally, the church’s reconciliation process should involve independent review. It might include the treasurer or an independent committee reviewing bank reconciliations and cash counts to ensure accuracy. The church could also consider installing surveillance cameras at collection points and safes, further strengthening internal control measures against theft or misconduct.

Principles of Internal Control and Examples in a Pizza Carryout Business

The six principles of internal control, as established by COSO (Committee of Sponsoring Organizations), provide a framework for safeguarding assets and ensuring reliable financial reporting. These principles include the establishment of control environment, risk assessment, control activities, information and communication, monitoring activities, and segregation of duties. In the context of Culotti’s Pizza, we can observe some of these principles at play at the pizza pickup counter.

The first principle, the control environment, sets the tone for the organization’s attitude toward controls. An example at Culotti’s could be the visible role of the clerk managing the cash register, demonstrating accountability and seriousness about procedures. The second principle, risk assessment, involves identifying and analyzing risks—such as theft or errors in cash handling. The open view of employees making pizzas could serve as a deterrent to dishonest conduct, indirectly addressing risk.

Control activities are policies and procedures designed to mitigate risk. At Culotti’s, the cash register acts as a control activity in that it records sales and cash received, providing a documentation trail. An example of a control activity here could be the clerk ringing up each pizza, ensuring that cash received matches the sale, and safeguarding cash in cash registers or secure drawers.

Information and communication involve timely and accurate flow of information. The clerk communicating or recording each transaction ensures data integrity, which is vital for accurate sales and revenue reporting. Monitoring activities are ongoing assessments to ensure controls work as intended. Supervision of cash procedures and periodic reconciliations of sales and cash collections function as monitoring activities at Culotti’s.

Segregation of duties, a core control principle, involves dividing responsibilities to prevent fraud or errors. At the pizza counter, ideally, different employees should handle order taking, cash collection, and cash counting. However, in a typical pizza outlet, these duties may be combined, potentially reducing internal control efficacy. Recognizing this, managers should implement compensating controls such as surveillance cameras or periodic reviews of cash transactions.

Overall, although some internal control principles are observable at Culotti’s Pizza, like control activities and communication, others such as segregation of duties may be limited by operational realities. Nonetheless, understanding these principles helps identify areas where controls can be strengthened, such as introducing independent cash audits and restricting access to cash drawers to prevent theft.

Conclusion

Implementing and maintaining effective internal controls is vital for both non-profit organizations and commercial enterprises. For the church, specific policies including segregation of custody and recordkeeping, securing fidelity insurance, and enforcing strict procedural documentation can significantly reduce risks. In the case of Culotti’s Pizza, adhering to the six principles of internal control—especially segregation of duties and robust documentation—can enhance the reliability of financial operations. Both scenarios exemplify how internal control principles serve as foundational tools to safeguard assets and promote operational integrity.

References

• CosO. (2013). Internal Control—Integrated Framework. Committee of Sponsoring Organizations of the Treadway Commission.
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• Whittington, R., & Pany, K. (2019). Principles of Auditing & Assurance Services. McGraw-Hill Education.
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