Rhythm on the Vine is a concert series that is run on a charity basis by the Shriner's Hospitals for Children. Rhythm is a concert series and the size of the events is growing rapidly, so there is a need for the Shriners to implement proper procedures for financial management and cash handling at these events. Members of the public pay for their tickets with credit cards or online, but there are some ticket purchases at the events, and in some instances there are cash purchases of food and beverages available. There are several different ticketing tiers, with the highest level of sponsorship at $5,000 and lower levels down to $35 tickets at the picnic area. The picnic area generates cash sales of food and beverages in particular, as many picnic guests rely on ad hoc food purchases. In addition to ticket sales, there are silent auctions as well.
There are considerable risks associated with this event, and these risks grow as the event does. The larger the event, the more difficult it is for one or two key individuals to exert control over it. Ultimately, the event will require controls to be put into place in order to ensure that the cash collected is properly accounted for and remitted back to the Shriner's Hospitals. The email thread between Sharon Russell and Vicky Vu illustrates that perhaps there are insufficient controls, even on the credit card receipts. . Vicky Vu is the accountant for the Shriner's Children's Hospitals of Los Angeles. The work is booked using paper records, as well as spreadsheets, which allows for reconciliation but also makes the task of managing the finance for ROTV more complex Further adding to the complexity is that ROTV is a separate unit within Shriner's, but uses the same accountant as Shriner's.
There are a couple of different risks associated with cash handling. The basic best practices for cash handling are a separation of duties, so that the person disbursing the cash is not the same person who is recording the transaction. The people who are involved in cash handling should also be granted specific permission to do so, and have specific duties that they perform. This way, the organization can maintain separation of duties and can more easily track transactions (Gustafson, 2015). Disbursement in particular should be subject to authorization, and authorization for larger transactions should have to come from someone who is not the person disbursing the cash. Every cash transaction should be recorded -- ideally the organization would have an app so that it can be recorded in real time on a tablet, and this record can then be verified later against actual cash holdings. Inventory should also be evaluated, to ensure that the inventories used align with the cash payments received for those goods (Cantoria, 2011). While the records available for ROVL do not indicate that any cash was handled, these policies and procedures should nevertheless be in place, in the event that any cash handling is required.
Planning Best Practices
There are several best practices with respect to planning an audit. The audit team must endeavor to understand the organization and its industry to the best extent possible, as familiarizing with both the internal and external environments will help provide the audit team with the context that it needs to make subjective judgments about issues such as materiality, and certain aspects of the financial statements such as debt or cash flow levels. So understanding the organization is an essential component of the audit preparation process. Another best practice in audit preparation is to examine the prior year's financial records and audit reports, and if possible to be in contact with the former auditing team. This is part of the familiarization process, can help to speed up the audit process, and can help the audit team to identify key areas for investigation. Having access to the current financial statements will also help in this regard. Lastly, the audit team should be in contact with the management team at the company being audited, in order to at the very least explain how the audit will work, what its timeline will be, and what expectations the audit team has for both members of senior management as well as for junior staff. If there is specific information/documentation that the team knows it will need, this is the time to communicate that (Allen, 2014). One of the objectives of pre-audit preparation is to minimize fieldwork.
The first element of internal control is to have effective written policies and procedures in place. With respect to handling donations, ROTV seeks to do this in an organized and timely fashion. There are specific types of donations that are allowed, and the procedure for handling each is noted. There is a separation of duties for donations that have been received by mail. The accounts payable staff receives the donation, which is then recorded. There are two individuals at least within accounts payable who handle the donation. Every envelope is accounted for. There is also managerial oversight to this part of the task. Donations are then reconciled by a member of accounts payable. The next step is to enter the amount of the donation, a task performed by a different department, Administrative Services. There are thank you slips issued, but strangely to tax forms. There is no system by which the thank you slips are reconciled against incoming envelopes, so if an envelope goes missing it may not be noticed until the donator self-reports the lack of a tax form at year end. There is also sufficient separation of duties with respect to material donations, including an extra layer of protection on larger material donations.
One issue is that the bank deposit is handled by the second accounts payable clerk, who is also the person responsible for processing the payment - the same person should not be processing deposits and taking them to the bank, as that represents insufficient separation of duties. An additional issue is that the use running tape is archaic, and the use of outmoded technologies is not aligned with best practice. It is much more difficult to secure this tape, and the ink may fade over time. A third issue is that inquiries about small material donations are directed to public relations. An auditor is not "public" and should never be directed to public relations. The auditor must be directed to the people who are actually responsible for forming policy about such donations, and those who are involved in handling and recording them.
In addition to analyzing the internal controls that the company has, the auditors must observe these procedures to ensure that they are being practiced according to how the specs are written. Observation is one of many different techniques for gathering information in the course of an audit. The financial statements and all of the financial records are another important component of the evidence that is gathered during an audit. ROTV, for example, has the tapes, the different batches that were cleared, deposit receipts, accounting files, and different slips to log the various transactions that occur. All of these are valuable sources of information that can be used in the course of an audit. Both observation of activities and verification of records are critical elements in audit information gathering.
Some of the sources of information in this audit are managerial accounting statements. These are not necessarily great sources because the accounting is not consistent, but they can provide some insight and certainly can raise some red flags. For example, the latest ROTV had an expense ratio of 95.36%, versus an allowable expense ratio of 35%. There were several line items for which no money was budgeted, but expenses were recorded. Some of these make sense, like invitations, but others are a red flag. It is no concern of the auditor how poorly the client manages money, but any deviation of this size is definitely cause for further investigation. The forms and documents provided are one key input in the audit, but the intuition and inquisitiveness of the auditor is another.
Part 3. A significant issue arises immediately when seeking to audit the cash and liquid assets -- no balance sheet has been provided. The controls with respect to intake of donations were discussed above, but without some sort of financial statements, the auditor cannot even begin to evaluate the cash and liquid assets. If the organization does not have GAAP financial statements, this is an unforgiveable offense and the company cannot receive a failing grade. Financial statements produced to an accepted, consistent format are an essential internal control and an essential part of the audit.
The internal financials are actually a mess, to use the technical term. As an example, the budget accounts for food and beverage for 140 people at a rate of $60 per head, for a total of $8,400, but the amount spent was $14,500. There was no budget for renting the space, which cost $17,000.…
Sources Used in Document:
Allen, J. (2014). Audit preparation best practices. Maner Costarian. Retrieved November 23, 2015 from http://www.manercpa.com/images/uploads/AutitPreparation-2014NonprofitUpdateMaterials.pdf
Cantoria, C. (2011). What internal controls should be in place for handling cash? BrightHub.com. Retrieved November 23, 2015 from http://www.brighthub.com/office/finance/articles/119173.aspx
Gustafson, F. (2015). Best practices for handling cash. eHow. Retrieved November 23, 2015 from http://www.ehow.com/info_10052406_practices-handling-cash.html