2. Section 1 Internal Control

3. Quiet Town SDA Church Internal Control dilemma (1)What is the problem? (2) How can it be prevented? (3) Who could prevent the problem? (4) What steps could have been taken to avoid the problem? Discuss the above questions and share with the group

4. Description Internal control is a system of checks and balances established to: (1) Protect the church treasurer from false accusations. (2) Improve the accuracy of the financial records. (3) Remove unnecessary temptation. (4) Minimize the possibility of misuse of church funds.

5. Video 1

6. Internal control is a system of checks and balances established to: Discuss why internal control is important to the treasurer

7. Components of Internal Control (1) Control environment (2) Control procedures (3) Independent checks and evaluation The following components are the most relevant to a church organization

8. Video 2

9. What problems are you having in your church?

10. Section 2 Control Environment

11. Control Environment An active church board, an adequately staffed and equipped treasury department, and direct leadership engagement would suggest that the church is committed to effective internal control.

12. Control Environment Empirical data shows that churches with disengaged leaders are significantly more susceptible to financial irregularities than churches with involved leadership.

13. Case Scenario 1

14. Section 3 Control Procedures

15. (2)Control Procedures Control Procedures: are all the policies and regulations over the church’s transactions and assets. Generally, control procedures are categorized as:  Transaction authorization  Segregation of duties  Adequate documentation  Access to assets and records

16. Control Procedures Transaction Authorization: All transactions should be authorized by a responsible person or body. Without a formal system of transaction authorization, any person could commit resources to an unintended purpose.

17. Example: Sabbath School should only authorize their own activities and expenses

18. Control Procedures Segregation of Duties: Optimum segregation of duties exists when collusion (a fraud perpetrated by two or more persons) is necessary to circumvent controls.

19. Control Procedures Segregation of Duties: To achieve optimum segregation of responsibility, an entity’s management, custodial, accounting, and monitoring functions should be performed by different individuals.

20. Example: Treasurer – Write Checks, Report and approve the bank reconciliation Assistant Treasurer – Data entry, Validate the offering and bank reconciliation Deacons – Validate the offering

21. Control Procedures Adequate Documentation: Documents and records are evidence of executed transactions and collectively represent the audit trail that is so critical to an auditor or the treasurer when tracing transactions through an accounting system.

22. Control Procedures Access to Assets and Records: Only authorized personnel should have access to assets and records.

23. (3) Independent Checks and Evaluation It is very important for the church treasurer to submit the church records to the Conference Auditor for the annual audit on time. Avoiding the annual audit can be perceived as the existence of serious problems or irregularities.

24. Fraud Fraud is the non-authorized use of the financial resources of the church. Fraud is committed to: 1. Benefit the individual who has committed it. 2. Benefit another individual or entity without the consent or authorization of the church board.

25. Case Scenario 2

26. Section 4 Cash Receipts

27. Internal Control Over Cash Receipts  Collection  Validation  Deposits  Bookkeeping  Reporting

28. Internal Control Over Cash Payments  Issuance of checks  Authorization  Documentation  Bank Reconciliation  Bank Statements

29. Legitimate and/or Non-Legitimate Receipts

31. February 17, 2013 I purchased a lawn mower in the amount of $345.85 from Home Depot and I am requesting full reimbursements from the church maintenance department. Thank you, xxxxxxxx

32. Helping the Poor Assistance to the needy is part of the mission of the church. However, only the church board should authorize any amount given for such aid. The Community Service director coordinates such aids, not the treasurer.

33. Role of the Church Auditor The role of the church auditor is to attest to the fairness of the church’s financial statements and to report any discovered fraud or irregularities to the church board.

34. The End Now give it some thought. Why do you think this church would need internal control?