8/11/2019 Internal Controls and Fraud - Case Study - Tools 2012

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INTERNAL CONTROLS – CASE STUDY #1

  Identify the risks and

  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.