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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 Organizations 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 Organizations accounting system.
Since the bookkeepers position has been vacant for several months the Organizations 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 offices 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-cleaners 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
Organizations 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.