Internal Control and Sunshine Center

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

2. Why is accountability important to the Sunshine Center Committee? The director? Cli?ents 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.

3. 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 entitys 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

4. 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
entitys people; managements 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 entitys
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 monitoreda process that assesses the quality of the systems 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.

5. 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 churchs administrative board? Barb: she

6. 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.

7. What are the weaknesses in the Centers 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 dont 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 managements general or specific approval. They
can keep important documents in fireproof vaults.

8. 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 its 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.

9. 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.

10. 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.

11. 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.

12. 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.

1. They have lack of budget and financial information, segregation of duties in organization
and the church is not clear (rent,employee)
2. The accountability is important to all organization, to know the activity of this organization
is going well or not. Moreover, its ministry have more obligation to stakeholder than
propiatorship.

What used for committe : is to check that all their balance is still okay

What used for director : to supervise wheter comitte is work well or not

What used for client : they have to know worthness from their paid, and make sure its fair

What used for church member : to know that this activity is not corrupt or wrong used church
asset

7. They dont have clear from church and sunshine center

They dont have accounting report and financial information , make sure that its transaction its
valid

They dont have control for committe and orgranization