Internal controls are an integral part of an organisation’s policies and procedures designed to help accomplish financial goals and objectives.
Internal controls incorporate five key components:
- Control Environment
- Information and Communication
- Risk Assessment
- Monitoring; and
- Control Activities
a) Control Environment
Management philosophy and operating style is essential in setting the “tone at the top” and the foundation for effective internal controls in the Surf Life Saving Clubs. The elected Committee should be actively involved in the control environment design including:
- commitment to competence
- communication and enforcement of integrity and ethical values; and
- assignment of authority and responsibility
By implementing these it will ensure that all Club members (not just the Committee members) are aware of the importance of internal control and develop a positive attitude in maintaining a high standard of compliance with these controls.
b) Information and Communication
Club Committees must be able to obtain reliable information to determine their risks and communicate policies and other information to those who need it. Committees must ensure that they effectively communicate and provide quality information to all Committee members to ensure there is consistent application of internal controls. The communication should also be provided to key personnel within the Club such as volunteers, bar/bistro/kiosk staff and administration employees.
c) Risk Assessment
The risk assessment process includes a Club’s process for identifying and responding to organisation risks, how the Committee’s identify risk and what actions are taken in the occurrence of such risks occurring. The identification of risks allows each Surf Life Saving Club to develop an appropriate internal control environment.
d) Monitoring
Club Committees need to continuously monitor (it is suggested on a yearly basis) the effectiveness of the design and operation of internal controls that the Club has in place and take any necessary corrective action to modify for the controls for changes in conditions. By monitoring the internal controls in place on a yearly basis, it further reinforces compliance with controls.
e) Internal Control Objectives
The main objectives of internal control include the following:
(i) Reliability/Validity
To ensure that all financial transactions incurred by the Club are recorded and are supported by appropriate documentation. This will ensure that the accounting records report the true financial position of the Club in a clear and concise manner. By implementing controls around the reliability, it will ensure that the financial results can be relied upon with confidence and provides a basis for informed financial decision making from the Committee.
(ii) Timeliness
To ensure that all transactions are recorded as close to the time of occurrence as practical so that the financial report reflects the actual financial situation at any point in time. This objective will allow Committees to make more informed financial decisions based on current and relevant financial information.
(iii) Authorisation
To ensure that all transactions are being properly authorised by an appropriate person acting within their designated authority level. These authority levels should be set by the Committee.
(iv) Completeness
To provide assurance that all transactions have been included in the financial information and that it accurately reflects the financial position. That nothing is omitted either purposely or by mistake and that the financial information represents the whole picture of the Club’s financial position at any point in time.
(v) Security
To provide assurance of the safe keeping of assets and financial records, these objectives will ensure that all physical assets (particularly cash) are secure, and all the financial records are maintained and easily accessible.
(vi) Physical Existence
To ensure that all assets are recorded accurately and maintained regularly on the Club’s asset register. Clubs should be reviewing their asset registers on an annual basis at a minimum.
f) Types of Internal Controls
There are many different types of internal controls that provide assurance as to the security and proper functioning of the accounting system. The major controls relevant to the Clubs can be broadly classified under the following headings:
(i) Segregation of Duties
The prime method of maintaining this safeguard is to separate those responsibilities or duties which, if combined, would enable an individual to process and record a complete transaction, such as ordering, receiving, approving, and paying for goods.
Segregation of duties may appear difficult to implement in the Clubs, especially where there is a limited number of Committee members and volunteers available for the accounting and finance functions. However, it can be implemented, by alternating sequential tasks, so that no one person has complete responsibility for the entire transaction.
Key functions that should be separated within a Club include:
- authorisation
- payment
- custody; and
- recording
In the very small Clubs, it is recognised that this will be hard to implement, but as a minimum at least some of the functions should be separate to maintain some segregation of duties.
(ii) Authorisation and Approval
All transactions should be authorised and approved by a Committee member who is competent and familiar with the type of transactions that occur within the Club. This will prevent irregularities from occurring in the financial information. It will also ensure that Club expenditure is in line with the Committee’s budgets and expectations. Limits to amounts that can be authorised should be set, with the President being given the highest authority.
(iii) Physical Controls
These are measures that are taken to safeguard physical assets. These assets include items such as:
- Cash
- Inventory (i.e. bar stock and merchandise)
- Equipment; and
- Vehicles
Examples of a physical control is the storing of cash in a safe each night, limiting access to the Club’s buildings and ensuring that the Club’s inventory is secure at all times with limited access.
(iv) Organisation
Administrative policies shall be made within the Clubs by the appointed Committees, and written position descriptions that define and allocate responsibilities should be developed. These should define to the holder of each position their responsibilities and the inter-relationship between job functions. This will prevent inefficient overlapping of functions and the avoidance of responsibility in some circumstances.
When developing administrative policies and organisational charts, care should be taken to ensure that the accounting function is kept separate from other functions so that the accounting records provide a more independent and reliable reflection of the Club.
By implementing organisation charts and written position descriptions, it will allow the more effective hand over of positions as Committees are elected each financial year.
(v) Arithmetical and Accounting Controls
These are the controls within the record keeping function and include:
- Ensuring that all transactions have been properly authorised
- Accurately recording all data and ensuring that no transactions are omitted
- Reconciling the accounting records with independently provided information, such as the bank statements and supplier statements
(vi) Supervision
This includes supervision of the accounting function. An example is an internal checking system such as a person receiving goods may check that they were properly authorised when the goods were originally ordered, and that the transaction was accurately recorded. Overall supervision rests with the elected Committee as they should be reviewing the financial information presented at each of the Committee meetings.
g) Internal Control Sub-Systems
Internal controls can be broken down further into sub-systems. These sub-systems ensure that all aspects of the financial process are operated consistently in a secure environment, and each has specific implications for internal control.
For a Club, the following individual sub-systems have been identified as requiring specific internal control processes and Clubs should use this information for control and planning purposes. Each of these processes is an individual sub-system of the main accounting function.
(i) Computer Systems
To ensure data integrity, passwords are necessary to access the Club’s accounting software. It is essential that staff / Club members are aware of the importance of maintaining a secure password and of the level of access their password allows. Passwords should not be disclosed to another person, as security of the system may be breeched and data integrity jeopardised. Staff and members of the Club should be aware that access to the computer system by a password or log-on indicates that the person logging on is responsible for the data entered and that approval has been given for that staff or Club member to perform the functions available to them at the particular access level. It is recommended that passwords are changed regularly and data is backed up daily and a copy is stored off the Club premises each week.
(ii) Bank Accounts
All bank accounts held must be in the name of the relevant Surf Life Saving Club. Clubs are able to access electronic banking through most banks and this should be maximised where possible.
Bank signatories are usually defined in the Club Constitution and must it be two signatories appointed in writing for the purpose by the governing body of the organisation Therefore it is recommended that as a minimum, there is at least two signatories for all bank accounts (for larger Clubs with larger expenditure, this will increase) including two members of the Executive Committee.
All major banks offer a facility where payments can’t be made unless they are authorised by two signatories and this can be done at separate locations and at separate times. Banks also offer the option of allowing a Club member to upload accounts and then have them signed off by two signatories. If utilising this option, Clubs need to ensure the transactions can be tracked by their accounting software.
It is recommended that limits for approvals should be implemented so that there are effective controls in place to limit the expenditure. The limits set in place shall be determined by the Club based on their size. Bank Accounts are to be maintained on the accounting software and monthly financial reports should be provided to the Committee.
Detailed records of payments and receipts must be maintained for each bank account. The nature of these records depends on the type of accounting system maintained (computerised or manual), and may take the form of a manual cash book, or a computerised transaction record. Either way, it is imperative that:
- Sufficient details are maintained of the transaction (date, amount, payee or payer, type of transaction, GST if applicable, source reference, General Account)
- The records are updated promptly (to ensure that inconsistencies or missing information is addressed immediately)
- Bank reconciliations on all accounts are carried out monthly
- Where more than one operating account exists, controls are exerted equally over all accounts
Clubs should also utilise high interest bearing accounts. As the cash flow of Clubs is seasonal, there are often periods where large amounts of funds are held for an extended period of time. With electronic banking, it is now easy to hold these funds in an account that yields high interest and transferred to the everyday (operational) account when needed.
(iii) Banking
All cash and cheques must be banked intact and where possible daily, to avoid monies being left on Club premises throughout the night. Small Clubs with small amounts of money may opt to bank once a week. Money kept on the premises overnight must be secured in a locked safe.
A banking checklist that may be applied in order to improve the internal controls surrounding cash could include:
- All cash and cheques collected are banked intact daily (weekly may be more appropriate for the smaller Clubs) by a person other than the one who is initially collecting the cash
- Bank deposit slips can be prepared in duplicate to provide an additional check on the accuracy and completeness of the deposit
- Depositor signs the bank slip to ensure accountability for deposits made
- Cash must be stored in a safe with controlled and limited access
- Dishonoured cheques must be followed up as soon as possible
(iv) Petty Cash
The purpose of petty cash is to have a small amount of cash on hand to pay for minor expenses up to an agreed limit on any one item. It is recommended that Clubs holding petty cash limit this to $200 or less and ensure that the limit is maintained.
Best practice management of petty cash requires establishment of basic petty cash guidelines (e.g. maximum amount to be held, float, maximum amount that can be paid, who authorises the use of cash funds), and record keeping or monitoring to ensure that money in and money out is accounted for. All petty cash payments should be supported by a voucher written in ink, and approved by an authorised person.
Petty cash should be reconciled regularly, and replenished as required, or banked if the amount is too high. It is normal to maintain a petty cash journal, to record details of each transaction, or to use petty cash dockets, both appropriately supported by receipts (which are required to claim GST paid).
Tips for good Petty Cash practice:
- When money is removed from petty cash a docket should be filled out detailing who took the money and why
- The receipt should be returned (along with any change) and stapled to the petty cash docket
- When money is added to the tin (e.g. drink sales for the day), a docket should be filled out detailing the source of the money and the amount (e.g. “$247.50 drinks sales”)
- When financial statements are prepared, a summary of the petty cash transactions needs to be prepared so the income and expenses can be incorporated into the financial statements
Petty cash funds should not be used inappropriately as a means of circumventing normal control procedures. It is inappropriate for petty cash to be used in any of the following circumstances:
- To make payments to staff/members for personal items or services
- For cashing personal cheques
- To advance loans to staff / members
- To make cash advances for travel
(v) Receipting and Register of Receipt Books
There are seven principle ways in which the Surf Life Saving Club’s collect money. These are considered to be:
- Donations
- Memberships Fees (Subscriptions)
- Sponsorship
- Grant Income
- Bar/Bistro or Merchandise Income, Other Commercial operations undertaken by the Club.
- Fundraising Income
- Venue Hire
A policy for the collection of monies should be in place and available for all Committee members and volunteers of the Club. Recording of income and controls over receipts and receipting are important aspects of accounting by charities, and are often a focus of auditors in their review of systems and internal control.
Each of the major receipting methods requires accurate control processes to ensure that revenue is recognised accurately and on a timely basis.
Cash is received regularly in several income streams (such as bar, memberships, etc.). Good physical safeguards, including a locked and controlled access safe and secure cash drawer, are necessary to prevent any loss of cash from the Club premises. Clubs should also consider insuring their cash and other assets to prevent any significant losses occurring from theft. As a good procedure for cash handling, more than one person should be present for counting and securing of daily takings, or other cash receipts. The count should then be noted and both parties present should sign the count.
Receipts should be entered into the accounting software when received and when the original receipt is issued. In certain circumstances where this is not possible, a manual receipt can be issued. The receipt book should be reconciled to the accounting system transactions when they have been entered to ensure all amounts received by the Club have been banked.
(vi) Purchasing and Payments
Surf Life Saving Clubs have a variety of means to make payments to suppliers, creditors and the issuing of refunds. The payments are generally made through direct debit, Billpay (BPAY), cheque and cash.
Clubs should not use cash as a form of payment to suppliers. Regardless of the method of payment, a documentation trail must exist, beginning with the creation of a purchase order. The approval and authorisation processes must occur prior to payment. In order to improve internal controls, it is important to ensure that the functions of authorising and recording purchases are separated at the Clubs. The person who performs the purchasing function will ideally be independent of that person who carries out invoice processing and payment, and receipt of the goods or services.
(vii) Debtors and Creditors
An integral part of financial management, particularly cash flow, is the careful review and analysis of amounts which are owed by other organisations to your Club (debtors), and amounts which you owe others (creditors).
The accurate recording and management of debtors and creditors is important because you need to be able to determine and promptly follow up amounts that are owed to you, and to provide details when requested. It is recommended that Club’s actively chase up debtors on a timely basis to ensure recoverability.
It is a statutory obligation of the governing body to ensure that, at all times, your entity can pay its debts as and when they fall due. While management of debtors will ensure the maximum amount of funds are available, management of creditors will also provide information about the amounts owed and when they are due for payment.
Efficient management of the timing of receipts and payments can have a positive impact on your organisation’s results. Conversely, if outstanding accounts are not followed up promptly, they represent funds which are not available for your use in carrying out your activities. If you use accrual accounting, you may be required to forward GST to the ATO before you have been paid by your debtor.
An Aged Trial Balance for both debtors and creditors is the most useful means of reviewing and analysing receivables and payables. These should be printed and tabled monthly.
(viii) Assets
Many Clubs hold substantial physical assets such as inventory, motor vehicles and equipment throughout the financial year. Valuable and attractive items often represent a major investment of the Club’s financial resources, so asset management is an important part of internal control.
The term ‘fixed assets’ is used to describe those assets which an organisation owns, which have a useful life greater than one year, and which therefore must be carried forward in the balance sheet to be depreciated in subsequent years.
The Committee should determine a policy in regards to the monetary value of an asset. It is recommended that all assets be entered onto the Clubs asset register. It is important to note that only assets owned by the Club can be kept on the Clubs asset register.
A fixed asset register is required to:
- Maintain control over and safeguard assets
- Record information for the purpose of calculating depreciation
It is important to note that significant assets such as buildings and premises should only be recognised on the asset register if the Club maintains full ownership rights to the assets. Leased assets (i.e. leased council buildings) are not considered to be assets to the Club, unless the ownership of the asset will transfer to the Club at the end of the lease life, or if the term of the lease is equal to the useful life of the asset.
Any assets that are donated to the Club should also be recognised on the asset register with the corresponding entry appearing in the Club’s income as ‘Donations’.
Depreciation is the means by which an entity gradually writes off the original cost of an asset over its useful life, thereby applying it as an expense across many years of income. All assets that are maintained on the asset register must be depreciated in accordance with the Clubs depreciation policies and comply with Accounting Standards.
(ix) Stocktaking
Where inventory assets (bar stock and merchandise etc.) are held within a Club, a stocktake should be conducted monthly and must be done at least once per annum as a minimum. This stocktake will provide the most accurate check on the existence of current assets and the controls which surround them.
Best practice would ensure that the President would appoint a stocktaking officer who is not involved in the handling or custody of the inventory, to conduct and supervise the stock take. Any final adjustments arising from the stocktake would be approved by the Committee.
References
ACNC – Publications
http://www.acnc.gov.au/ACNC/Pblctns/Guides/