The charity's income is derived wholly from voluntary donations. Sources of donations include:

(i) Cash collected by volunteers asking the public for donations in shopping areas, (ii) Cheques sent to the charity's head office, (iii) Donations from generous individuals. Some of these donations have specific clauses attached to them indicating that the initial amount donated (capital) cannot be spent and that the income (interest) from the donation must be spent on specific activities, for example, provision of sports equipment.

The rules regarding the taxation of charities in the country are complicated, with only certain expenditure being allowable for taxation purposes and donations of capital being treated as income in some situations.

Required:

Explain why the control environment may be weak at the charity.

 

"Control Environment" especially in a charitable organizations are financial management practices that are systematically used to prevent misuse and misappropriation of assets, such as occur through theft or embezzlement. A weakness in the control environment increases the risk that material errors (unintentional mistakes) and irregularities (intentional improprieties) could occur and go undetected. Also, a control environment weakness can have a detrimental effect on management's decision-making process. A charitable organization or charity is an organization whose primary objectives are philanthropy and social well-being (e.g. educational, religious or other activities serving the public interest or common good)

Internal Control Environment in a Charitable Organizations are generally described in written policies that set forth the procedures that the nonprofit will follow, as well as who is responsible. The goal of internal controls is to create business practices that serve as "checks and balances" on staff (and sometimes board members) and/or outside vendors, in order to reduce the risk of misappropriation of funds/assets.

A material weakness exists in the Control Environment over the Charity Organization. This material weakness in the Control Environment in a Charitable Organization is indicated by the type and number of problems identified.

The problems include the following issues:

Inadequate documentation / records in Income Received from Donations

Documentation provides evidence of the underlying transactions. It is the input to establishing proper financial records. Financial documents should be pre-numbered to ensure all transactions are recorded and accounted for. This will help to prevent recording of the same transaction twice, as there should not be any duplicate numbers in your system. With proper numbering of documentation, tracing documents that relate to follow up queries/claims and questions from customers or owners of prior transactions will be easy. Proper documentation would most probably provide satisfactory answers to most, if not all, financial transaction related questions. Furthermore, adequate documentation will ease the process of compiling financial records and completing tax returns.

Key business cycles on Income Reporting of Donation is not properly defined 

Managers and owners don't see the need to create written policies and procedures or just even basic flowcharts defining the key business processes, as some small business processes appear to be uncomplicated. However, this is probably one of the most unused control tools where the most value can be added with little effort. An effective procedure can align business objectives and help establish best practice operating procedures. As businesses have different focus areas, different cycles will be important to your business but for most businesses the following processes will be critical. Sales and Accounts Receivable, Cash Management, Banking Procedures, Purchases, and Accounts Payable. For a business selling goods, inventory controls will be an important cycle. Documenting key controls in each of these cycles will provide transparency and consistency. Specific roles and responsibilities in each of these cycles can easily be assigned to specific individuals. When improvements and changes are made to your processes, employees can quickly be informed, trained, and brought up to speed.

Lack of control on the receipts of Income Donation with authorization of transactions 

Authorization of purchases should occur before the commitment of resources. Depending on the size of the business, levels of authority can be introduced to better eliminate the risk of inappropriate spending. For example, with orders above a certain dollar value, say $1,000, more than one quotation should be obtained which could ultimately reduce your overall expenditure. Authorizing of transactions before placing orders provides the owners/managers the opportunity to evaluate different purchasing options, and make sure items or services obtained will support the business objectives.

No oversight and review of Donations 

Small business owners many times get so involved in the day to day operations of the business that they tend to neglect performing basic review procedures. Business owners should take some time and interest in the financial records. This is an important aspect of fraud prevention. Not a lot of time is required to review monthly revenues, expenditure reports, inventory reports, budget vs. actual amounts, and variance reports. Having a more hands on approach will give the owner invaluable feedback on how the business is performing and where any potential problem areas or poor performance areas may exist. Review of the financial records is a critical component and input for better decision making. The frequency of the review of financial data depends on the volume of transactions and type of business, however, the review of financial data should generally be conducted on a monthly basis.