The purpose of this memo is to document the audit objectives with related planned audit procedures regarding the Faculty Professional Expense (FPE) accounts audit as well as to identify the internal control weakness and recommendations within the FPE process. The current concerns about the Internal Audit department will also be discussed at the end of this memo.
Use of FPE Accounts:
The objectivity of the use of FPE accounts is to provide faculty members reimbursements and credits for allowable expense paid that are directly related to the pursuit of faculty member’s teaching or research activities. Faculty members’ bookstore purchases claims are processed differently from non-bookstore purchases. The maximum entitled FPE account for each member per fiscal year is $3000. The board would want to ensure that all FPE accounts are being used as intended; that all expenditures being claimed must be legitimate and specifically meet the definition of allowable expenses. Thus, we need to examine the current control procedures and policies in place within the FPE process, then evaluate and document the effectiveness and sufficiency of controls over FPE process.
Exhibit 1 provides three detailed Audit Objectives related to our internal control audit of FPE account and the related procedures that we would perform to provide a high level of assurance.
Exhibit 1- Audit Objectives and Procedures
|Audit Objectives||Audit Procedures|
|1. All expense claims (both bookstore purchases and non-bookstore purchases) are certified; that they are being properly authorized and approved to verify for its occurrence/existence.||a) bookstore purchases :
– Inquire bookstore managers and clerks whether they are aware of the list of allowable products that faculty members can purchase in the bookstore using their FPE account and whether there are policies and procedures that guide the bookstore clerks on how to deal with the FPE account.
– Observe whether the clerks would refuse to initiate a purchase transaction(s) related to FPE account when the purchase consists of non-allowable products.
Obstacles: Although the bookstore manager is aware of the policies and have knowledge about most professors taking advantage of the FPE account, but it seems that she didn’t properly train her staff of what items are allowable for FPE credits and further instructed her staff to be nice to the faculty members as these transactions would help them to increase store sales and do not want to dissatisfy long term customers. Thus, the integrity of bookstore manager is questionable and the information we get at the bookstore level is likely to be biased.
– Inquire Maggie on the monthly generated report of bookstore purchases using FPE account. Whether the report consists of an automatic control by computers that would match the product codes of each purchase to its allowable product codes list for FPE claims and generate an exception report on any unmatched items. If automatic controls do not exist, then examine whether manual controls are in place to confirm allowable product codes for claims.
– Inquire Maggie on product codes for any non-allowable product purchases using FPE accounts and send an invoice to the faculty members for any non-legitimate claims.
b) Non-bookstore purchases
– Inquire relevant Department heads on their normal practices of approving faculty member’s claims.
– Interview with Department head on their awareness of the FPE policies that they should be experienced with the definition of allowable expenses.
Obstacles: The Department head’s answers to our questions may be biased if using the FPE accounts for personal benefits is a normal practice for the faculty members and that approving these types of expenditures are acceptable for the most of the Department heads.
– Randomly obtain copies of approved expense claim forms and ensure that all claims come with supported documents such as types of purchases, relevant receipt, and evidence of approval by their Department heads.
– Consider randomly examining the large amount or usual claims and verify its appropriateness. For example, office furniture purchased could be verified by checking to see if the furniture is located at the office of the faculty member; Membership fees in professional bodies could be verified by checking if that the professional bodies are related to the home faculty where that faculty member belongs to.
– Obstacles: Some expenditure may be harder to verify. For example, travel or travel related expenses and laptop could be claimed primary for personal use.
|2. Controls are adequate to ensure that balance of FPE accounts are accurate and that they should be reconciled with reimbursements made to bookstore and/or faculty members.||– Inquire Maggie on her procedures regarding the monthly reconciliation of FPE accounts. In the event of discrepancy is found, inquire about her follow up procedures to correct the discrepancy.
– Randomly select the completed reconciliations done by Maggie and examine whether they are initialed by Darlene.
– Check to ensure that no credit balances exist for all FPE accounts (i.e. faculty members could not use their FPE account for more than $3000 per fiscal year.)
– Check to ensure that at year end (April 30), all remaining balances of FPE accounts are transferred to the Scholarship Trust Fund either automatically or manually. (i.e. FPE balances should be zero at each year end)
|3. Management policies are in place that the FPE programs are being effectively managed and monitored.||– Inquire The Human Resource Department on control procedures over termination of faculty members. That the lists of faculty members should be complete and up to date. Inquire HR department staff whether they would notice the Financial Service Department immediately after terminating any faculty member so that they could terminate the FPE account associated with the terminated faculty member on a timely basis.
– Check to see if Financial Service would verify with HR department for a new faculty member when setting up a new FPE account associated with that member.
– Ensure that the FPE program is being monitored for its effectiveness on a continuous basis and any major changes should be presented/ discussed with the board.
Current Control Weakness
The current control environment and general control over the FPE accounts are considered to be very weak mainly due to the lack of control procedures and policies in place in the bookstore level, poor quality of review/procedures before approving receipts by Department heads and lack of independent check/verification of approvals made by department heads including lack of segregation of duties in the Financial Service Department.
Exhibits 2 identified these significant internal control weaknesses within the FPE process, described the implications of each weakness as well as recommendations for improvement.
Exhibit 2- Control Weakness, Implication and Recommendation
|1. Either no well established procedures and policies regarding the use of FPE account for bookstore purchases in place for manager and staff to be followed or Policies and Procedures exist but Royola Berterson, Bookstore manager did not follow and didn’t instruct her staff to follow. Instead bookstore manager instructed the staff to be courteous and helpful to faculty members because they are long-term customers and do not want to lose them and hence doesn’t really care of what allowable purchases to expense against FPE account.
e.g. Brian Ross (professor) bought clothes, computer for personal use at home. This clearly shows the staff members credited FPE account for clothes bought at bookstore. Either it is possible that the bookstore staff does not have the list for allowable expense under FPE which they should have or if they have the list then they are just not following it.
|Most professors take advantage of the Bookstore for a number of purchases. These purchases included the non-allowable expenditures that were not supposed to be charged against the FPE accounts, resulting in misuse of the FPE accounts for the bookstore purchases.||-Establish clear and enforceable policies and procedures at the bookstore to ensure that FPE accounts may only be used against allowable expenditure.
-Implement an automatic system at sales terminal that would read the product code and match them to the pre-authorized categories of product code (i.e. books, equipments), so that non-allowable purchase such as clothing from the bookstore using the FPE account could be automatically rejected.
-Book store clerks should confirm the identity of the faculty members before crediting the FPE account to prevent the misuse of lost cards.
-Consider hiring another bookstore manager since Royola Perterson’s integrity is questionable
|2. Poor quality of review of approvals for non-bookstore purchases by various Department heads.
No procedures of how to review the attached receipts of non-bookstore purchases to check if those expenses are allowed to be deducted under FPE account or not. No procedures to check if those non-bookstore purchases were used for office or personal purpose.
e.g. Brian Ross (professor) plan to travel for business and holiday purpose- expense related to business purpose and non business purpose needs to be segregated
|Misuse of FPE account can result in an increase of FPE expenses. Faculty members can claim reimbursements for purchase of items for personal use by providing those receipts. Faculty members can claim for items not allowable under non-bookstore purchases due to lack of control procedures. FPE expense can be maximum of $3000*195 faculty members= $585,000.
Faculty members will be more inclined to deceive/ claim unallowable expenses if errors go undetected.
|– Require all division managers to review all the receipts submitted by faculty members to check if it’s an allowable expense to be reimbursed to employees for non-bookstore purchases.
– Need to check the date on the receipt submitted by faculty members for allowable reimbursements to see if the expense incurred is in the current year for cutoff.
-Need to check if non-bookstore purchases/expenses were solely for the purpose of office/university benefit (not personal benefit)- to segregate the personal expense from office expense (e.g. Travel expense related to business and personal use- to reimburse business related travel expense only)
-Check for previous year’s receipts submitted by those faculty members who are found to claim unallowable expense by providing receipts to charge back those amounts.
|3. Lack of independent check in the Financial Service Department of the receipts submitted by different department heads for its accuracy and reliability if it’s an allowable expense that is being claimed for reimbursement as Maggie just debits the expense account and initiates a cheque requisition for payment to the faculty members. Maggie shouldn’t do both reconciliation and writing cheques at the same time, which clearly indicates lack of segregation of duties.||Intentional/ unintentional errors made by divisional heads will go undetected.
This will result in reimbursing amounts that shouldn’t have been which increases the expense under “FPE account” which otherwise would have been transferred to a “Scholarship Trust Fund”.
Faculty members will be more inclined to deceive/claim unallowable expenses if errors go undetected. Fraud may occur as Maggie can easily make adjustments at the year-end if the total university account posting related to FPE is not equal to the amount relieved from the faculty FPE accounts.
|-Requires Financial department to check for all claims/receipts that are being claimed to confirm if it’s an allowable expense under FPE account before initiating a cheque requisition for payment to the faculty member.
-Hire a new employee in financial department to check all the receipts initialized by department heads.
-Duties of reconciliation and writing cheques should be segregated by hiring a new employee.
Current concerns about the Internal Audit department
- Lack of independence as there is no direct presentation/reporting to the Board at their quarterly meetings.
- Nature of job duties- Internal auditor working/replacing staff in the financial services during vacations violates independence issues and is not a part of responsibility of an internal auditor.
- Internal auditors should not prepare bank reconciliation for bank accounts.
- Independence rules will be violated if internal auditor assists Vice-president of financial services.
- Need to present/report findings, results and issues directly to Board of Governors at quarterly meetings rather than reporting it to VP to avoid independence issues.
- When employees in financial service department goes on vacation there should be employees within the financial service department to cover for them and they should be paid overtime to give an incentive to them. Only one financial employee should be permitted to take long planned vacation at a time which can be reserved by employees well in advance. Additionally, work done by the employee replacing the employee on vacation should be double checked by someone else for its accuracy.
- Duty of bank reconciliation for all bank accounts should be segregated so that employee responsible for bank reconciliation is not responsible for any other accounting department work (i.e. A/P or A/R department) to have proper segregation of duties.
- Internal auditor shouldn’t assist Vice-president of financial services to remain independent as internal auditor will be auditing the work of vice president, in case if internal auditor does assist Vice-president, it should be clearly disclosed in internal auditor’s report that is presented to external auditor.
Bloomington University does not have effective controls procedures in place for use of FPE account. Evidences have been found to prove the misuse of FPE account by faculty members because of lack of review by bookstore manager, department heads and financial department to allow reimbursing all claims. We recommend the Board to immediately take action to improve its control weaknesses over the FPE process. A list of our recommendations is provided in exhibit 2. An alternative way would be to eliminate the use of FPE account, because the integrity of FPE program seems to be very questionable. The procedures to replace the FPE accounts could be as followed. For book-store purchases and non-book store purchases, different department should be in place to order/buy on behalf of faculty members. Faculty members can just place an order to that separate department of their needs to carry out their job and that department will automatically take care of all allowable purchases to be made.