Internal Controls Quiz For each of the following questions on internal controls please answer true or false as to whether they represent a good internal control. TRUE 1. An accounting procedure and policies manual should be reviewed and revised annually. The Board of Directors should have oversight and as the board members change, organizational knowledge is lost. It is mandatory that policies and procedures are approved and followed as they were written, so the manual must be kept current at all times and changes must be approved.

X

2. The Fiscal Manager is an appropriate check signer. This is a generalization to make a point. Appropriate control requires segregation of duties so that one person does not have control of a process from beginning to end, which creates opportunity and possibly temptation to embezzle funds. If a bookkeeper produces the checks, they may be given to the fiscal manager for signature. More than one signature may be required. 3. Organizations are required to have a document retention policy. This is a part of the Sarbanes-Oxley legislation that applies to all corporations. The bill was enacted when there were some large cases of corporate fraud that caused overvaluation of stocks and job losses when corporations went through bankruptcy.

X

X

4. To create efficiency, the same person may authorize an expense and sign a check. If a bookkeeper produces the checks, they may be given to the fiscal manager for signature. More than one signature may be required for an internal control. 5. Employment records for each employee should include detail wage rates, benefits, tax rates, and other pertinent information. In case of an error (over or underpayment) fiscal staff need to be able to use an audit trail to follow an error through transactions that were affected and determine how corrections can be made. This is also an audit requirement, and a control for employees to monitor their compensation and benefits.

FALSE

X

X

This project was supported by Grant No. 2010-ET-S6-K008 awarded by the Office on Violence Against Women, U.S. Department of Justice. Points of view in this document are those of the author(s) and do not necessarily represent the official position or policies of the Department of Justice.

TRUE 6. All mail should be opened by the Fiscal Manager. This is another generalization to show that no one person should have unchecked knowledge and control of the flow of funds. Bank mail may always be opened by the E.D. or the Treasurer, so that the transactions and canceled checks can be reviewed before any other employee has a chance to alter the contents. 7. Checks should never be signed before they have been completely filled out. This is true because the ability to fill in any part of a check creates opportunity (and therefore temptation) for embezzlement.

X

X

8. While the accounting staff takes annual vacations, their basic duties can wait to be completed upon their return. An organization must have cross training or another back up plan in case accounting staff are unable to work. Although you may be able to wait for a particular person to return, the backup plan should be tested regularly and when someone else takes over for a while (2 weeks would be a good time period) they have a greater chance to find weaknesses and/or irregular transactions. 9. There is a limit to the amount of cash that can be reimbursed through the petty cash account. Petty cash must be subject to controls because it is your liquid asset! An employee can take the money. Without internal controls such as locking up cash, periodic audits of the receipts, and counting of the cash, proving the crime would be very difficult.

X

X

10. Approved invoices can have checks signed and waiting for better cash flow before being mailed. There is no reason that checks should be signed and waiting. Unlocked check stock can be fraudulently changed and cashed. 11. Unpaid invoices should be maintained in a separate unpaid invoice file. Government funders will want to see paid invoices that match canceled checks, and they do not want to see an invoice that was paid more than once. Keep unpaid separate until processed. 12. After the mail is opened, checks should be entered into the accounting system, acknowledged, and then stamped “for deposit only.” Checks should be stamped for deposit only

FALSE

X

X

X

This project was supported by Grant No. 2010-ET-S6-K008 awarded by the Office on Violence Against Women, U.S. Department of Justice. Points of view in this document are those of the author(s) and do not necessarily represent the official position or policies of the Department of Justice.

TRUE

FALSE

immediately. The check received should be logged to show the date received, amount, payer, and other pertinent information. Another person will have receive the checks and ensure that the payments are entered into the accounting system accurately. 13. The statement of financial position is prepared monthly and reviewed by the management and the finance committee. This statement also called the balance sheet shows assets and liabilities as of the end of the month. In general, the finance committee would receive it monthly, but the timing may vary from agency to agency. The executive director may review it monthly and the finance committee review quarterly, as long as there are no problems. The E.D. has a responsibility to take severe problems, such as a dwindling cash account, to the finance committee when it becomes serious, which may be prior to the next meeting.

X

14. All time sheets should be signed by employees, reviewed, and signed by their immediate supervisors. Employees and a supervisor familiar with their work and accomplishments should both attest to the accuracy of a timesheet for internal control that ensures accurate compensation and benefits. The timesheet is also the means of determining sources of funding, so they must be accurately recorded to allocate income appropriately.

X

15. Pin numbers for bank accounts should be kept in the file cabinet under “P” Password protection is essential for internal control and protection against theft from outside the organization. Access to the bank account should be limited to a small number of people, but at least two. Never share passwords! In case a password becomes known, the Executive Director or Board Treasurer (someone with appropriate authority) can call the bank and revoke access for that ID and password, or limit access in any number of ways to protect funds. 16. Reimbursement forms from the Executive Director should be reviewed and approved by a board member. No employee should approve reimbursement and/or issue a check to themselves. The E.D. reports to the board so their review for approval is appropriate.

X

X

This project was supported by Grant No. 2010-ET-S6-K008 awarded by the Office on Violence Against Women, U.S. Department of Justice. Points of view in this document are those of the author(s) and do not necessarily represent the official position or policies of the Department of Justice.

TRUE

FALSE

17. The board of directors does not need to review the IRS Form 990 if they have reviewed the audit. The Form 990 part VI includes information about governance, including board functions. The board should review the information for accuracy. Remember written policies and procedures must be followed. Policies and procedures should also be accurately represented on information that is shared outside the organization.

X

18. The chart of accounts should not permit unallowable expenses according to federal guidelines to be entered. The chart of accounts for your accounting system needs to accurately classify income and expenses. Expenses may be incurred that are unallowable for Federal reimbursement, but they must still be paid.

X

19. A clean audit opinion does not necessarily mean that the organization has strong internal controls. Audit opinions vary because the types of audits vary. In certain cases, internal controls will not be within the scope of the audit. In addition, quality of the audits will vary. It is important to choose auditors well.

X

20. Fixed assets should be reviewed and adjusted every other year. Federal guidelines require a physical inventory or assets and adjustments to the ledger based on actual inventory at least every two years. Other funder requirements may be more or less restrictive.

X

This project was supported by Grant No. 2010-ET-S6-K008 awarded by the Office on Violence Against Women, U.S. Department of Justice. Points of view in this document are those of the author(s) and do not necessarily represent the official position or policies of the Department of Justice.

IS IT PROGRAM OR SUPPORTING? Categorize the following expenses based upon the purpose of the activity for which it was spent:

Expense Refreshments for an outreach workshop. The outreach

Program

Supporting

X

workshop is a programmatic activity and therefore this expense would be program.

X

Food for a board meeting Even though the account code would be the same as the previous answer, “Meals,” this food is for the board and by definition all board activities are supporting activities.

X Salaries for victim advocates. Program related salaries. Consultant fee for a grant writer Similar to the second answer

X

above, since this is for fundraising it is a supporting activity, even though the account code is professional fees.

X Stipends for support group leaders. Program expense

Mileage and parking for client home visits Program expense

X

Airfare and travel expense for program director to attend national sexual assault conference Even though this is a

X

national program, it is for program development, which directly helps to accomplish the mission and is considered a program expense.

Fees for outreach staff to attend database and computer skills training. This depends on the purpose of the database.

X

Assuming the database tracks programs, it would be a program

This project was supported by Grant No. 2010-ET-S6-K008 awarded by the Office on Violence Against Women, U.S. Department of Justice. Points of view in this document are those of the author(s) and do not necessarily represent the official position or policies of the Department of Justice.

expense. If it tracked fundraising or donors, it would be a supporting expense.

This project was supported by Grant No. 2010-ET-S6-K008 awarded by the Office on Violence Against Women, U.S. Department of Justice. Points of view in this document are those of the author(s) and do not necessarily represent the official position or policies of the Department of Justice.

IS IT SPECIFIC OR COMMON? Categorize the following expenses based upon the purpose of the activity for which it was spent:

This project was supported by Grant No. 2010-ET-S6-K008 awarded by the Office on Violence Against Women, U.S. Department of Justice. Points of view in this document are those of the author(s) and do not necessarily represent the official position or policies of the Department of Justice.

Specific Program

Expense Salary for an Outreach Coordinator:

Specific Supporting

Common

X

Program staff person in outreach.

Salary for the bookkeeper By IRS

X

definition all finance related activities are supporting activities because they maintain the legal status of the organization.

Salary for the Office manager Similar to

X

occupancy related costs, the office manager benefits directly multiple cost centers (objectives) and therefore is split between all as a common cost.

Office supplies for the main cabinet

X

The office supplies in the main cabinet are used by everyone and therefore are common to all cost centers.

Office supplies for the education dept.

X

These supplies are used specifically by the education department and therefore can be directed to program.

Annual auditing expense . By definition all

X

finance related expenses are listed as supporting activities. They may be paid in part by a government grant, but for the 990 and the financial statements they should be classified as a supporting activity since they are about keeping the organization legally sound.

Site liability insurance. Like occupancy

X

costs, since each department utilizes space each should share a portion of this common cost.

This project was supported by Grant No. 2010-ET-S6-K008 awarded by the Office on Violence Against Women, U.S. Department of Justice. Points of view in this document are those of the author(s) and do not necessarily represent the official position or policies of the Department of Justice.

Directors & Officers Insurance : D&O

X

insurance relates to the Board of Directors and therefore, by definition, it is considered a supporting activity as a way of keeping the organization operating.

Annual Staff Retreat : Retreats that entail

X

programmatic strategy may be considered partly program. Therefore, this would be a shared expense since it covers both program and supporting.

This project was supported by Grant No. 2010-ET-S6-K008 awarded by the Office on Violence Against Women, U.S. Department of Justice. Points of view in this document are those of the author(s) and do not necessarily represent the official position or policies of the Department of Justice.