Internal Control and Sunshine Center

What do you think is the primary problem at the Sunshine Center? There where no financial reports or summaries of the cash flows. Probably, Barb wasn’t fare about the payments. Because there was no financial report it was not clear where all the money went to.

Why is accountability important to the Sunshine Center Committee? The director? Clients of the Sunshine Center? Church members? It is so important to the committee so they can check if the cash balance is still okay. The director can check if everybody does his work well and if there are no financial problems. The clients need to know if Sunshine is fair and the church members are maybe willing to serve the committee if they know it is fair.

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The Committee of Sponsoring Organizations of the Treadway Commission COSO in- ternal control framework COSO 1992 is an excellent tool for understanding and imple- menting internal control. How is internal control defined in the COSO framework? Internal control is broadly defined as a process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:  Effectiveness and efficiency of operations. Reliability of financial reporting. Compliance with applicable laws and regulations

Internal control may need to be applied selectively in a small organization. What are the components of the COSO framework, and what components do you think should be used at the Sunshine Center? Internal control consists of five interrelated components. These are derived from the way management runs a business, and are integrated with the management process. Although the components apply to all entities, small and mid-size companies may implement them differently than large ones. Its controls may be less formal and less structured, yet a small company can still have effective internal control. The components are: Control Environment — The control environment sets the tone of an organization, influencing the control consciousness of its people.

It is the foundation for all other components of internal control, providing discipline and structure. Control environment factors include the integrity, ethical values and competence of the entity’s people; management’s philosophy and operating style; the way management assigns authority and responsibility, and organizes and develops its people; and the attention and direction provided by the board of directors. Risk Assessment — Every entity faces a variety of risks from external and internal sources that must be assessed.

A precondition to risk assessment is establishment of objectives, linked at different levels and internally consistent. Risk assessment is the identification and analysis of relevant risks to achievement of the objectives, forming a basis for determining how the risks should be managed. Because economic, industry, regulatory and operating conditions will continue to change, mechanisms are needed to identify and deal with the special risks associated with change. Control Activities — Control activities are the policies and procedures that help ensure management directives are carried out.

They help ensure that necessary actions are taken to address risks to achievement of the entity’s objectives. Control activities occur throughout the organization, at all levels and in all functions. They include a range of activities as diverse as approvals, authorizations, verifications, reconciliations, reviews of operating performance, security of assets and segregation of duties. Information and Communication — Pertinent information must be identified, captured and communicated in a form and timeframe that enable people to carry out their responsibilities.

Information systems produce reports, containing operational, financial and compliance-related information, that make it possible to run and control the business. They deal not only with internally generated data, but also information about external events, activities and conditions necessary to informed business decision-making and external reporting. Effective communication also must occur in a broader sense, flowing down, across and up the organization. All personnel must receive a clear message from top management that control responsibilities must be taken seriously.

They must understand their own role in the internal control system, as well as how individual activities relate to the work of others. They must have a means of communicating significant information upstream. There also needs to be effective communication with external parties, such as customers, suppliers, regulators and shareholders. Monitoring — Internal control systems need to be monitored–a process that assesses the quality of the system’s performance over time. This is accomplished through ongoing monitoring activities, separate evaluations or a combination of the two. Ongoing monitoring occurs in the course of operations.

It includes regular management and supervisory activities, and other actions personnel take in performing their duties. The scope and frequency of separate evaluations will depend primarily on an assessment of risks and the effectiveness of ongoing monitoring procedures. Internal control deficiencies should be reported upstream, with serious matters reported to top management and the board. Sunshine could use monitoring, information and communication, control environment, and control activities.

One factor of the control environment component is “integrity and ethical values. In what ways were integrity and ethical values slighted by Barb? The Sunshine Center Committee? Rev. Andrew? The church’s administrative board? What constraints are encountered in designing internal control procedures for an organization such as the Sunshine Center? It is complex to set up an internal control procedure. When two or more people work together they can beat the internal control. They can conspire with each other and split the take. Also the stricter the internal control system, the more it will cost.

What are the weaknesses in the Center’s internal control? Make recommendations for changing the accounting and reporting system. Additionally, what constitutes a minimum set of records for a small organization like the Center? Weaknesses are that they don’t have an overview of the financial reports. Nothing is reported and there is no summary. There is also not a good control of monitoring. I would recommend them to use operating budgets and cash budgets. They can also use accounting records, these provide the details of business transactions. All major groups of transactions should be supported by either hard copy documents or electronic records. No transaction should be processed without management’s general or specific approval. They can keep important documents in fireproof vaults.

Identify the elements of the fraud triangle. Which elements of the fraud triangle do you see in this case? The fraud triangle consists of motive, opportunity, and rationalization. The first element is motive. This usually results from either critical need or greed on the part of the person who commits the fraud. Sometimes it’s a matter of just never having enough or sometimes it is about psychological satisfaction, proving that one can beat the system. The second part is opportunity.

The opportunity to commit fraud usually arises through weak internal controls. The third element is rationalization. It results from distorted thinking, like ‘I need this’. I can see the elements of opportunity. There are weak internal controls in Sunshine.

What types of fraudulent activities could Barb have perpetrated? Do you think it is possible that Barb did not commit fraud? Why? Probably fraudulent financial reporting. But it is also possible that the excuses she says are true. There is no direct evidence that she committed fraud because there are no guidelines how the financial reports should be.  How would you determine if a misappropriation of funds occurred? Checking the receipts of cash flows and ask for more information about the transfer when I think something is not correct.

What are the primary strengths of the Sunshine Center for its clients? They have a good child care program and are a ministry of the church. This could be a important reasons for parents to put their child to Sunshine Center.  What must happen for this child care program to remain a viable ministry of the church? They need to get a good financial system where every transaction is reported and all bills are paid.

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Internal Control and Sunshine Center. (2016, Nov 18). Retrieved from