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HI5019 Strategic Information Systems for Business and Enterprise - Holmes Institute
Case Study - Bell Studio
Learning Outcome 1: Describe the various transaction cycles, financial reporting, management reporting systems and e-commerce.
Learning Outcome 2: Understand the risks inherent in computer-based systems/ERP, including e-commerce, the role of ethics and the various internal control processes that need to be in place.
Learning Outcome 3: Appreciate the opportunities for computer fraud and the security measures in electronic commerce that need to be taken to overcome this.
Prepare a report to Chief Operating Officer to evaluate the processes, risks and internal controls for its expenditure cycle.
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Solution:
Executive Summary
Internal Controls are the policies, operations, procedures that are undertaken by an organization for the successful conduct of a business. This report discusses the internal controls of the organization Bell studio which is Adelaide-based wholesaler of art supplies. it sources its inventories from manufacturers in Australia, China , Japan and New Zealand. It contains details about expenditure cycle of bell studio .This report also contains description of internal controls with the help of data flow diagrams and flow charts with deep analysis of internal control weaknesses in each system and risk associated with the identified weakness. Sound Internal Controls of a company can help in ensuring integrity of financial information of a company and it improves accountability of the company. It ensures that the company comply with every rule and regulation mandatory by law and no cases of fraud are to be found. It prevents the company from stealing its assets. It guarantees the preparation of financial reports of the company in timely manner hence improves the satisfaction of stakeholders of the company. It also improves operational efficiency of the company. it protect investors from fraudulent activities of the company. It also ensures good corporate governance of the company.
Introduction
The Report describes the expenditure cycle of an organization called Bell Studio which is Adelaide based wholesaler of art supplies .The Organization sources its inventories from manufacturers around the world i.e. Australia, China, Japan and New Zealand. This company has centralized accounting system with network terminals at different locations .The report contains in depth analysis of the expenditure system of Bell studio with internal control weaknesses in the system and risk associated with each internal control weakness. As Internal Control is very important for efficient working of the company, safeguarding its valuable assets, ensuring smooth conduct of its business, Preventing actions of indiscipline in the company and timely financial analysis of the company .If there are any risks or weaknesses in the internal control of the system then the company will fail to achieve its goals and objectives. So, it is essential to detect weaknesses in internal controls of various systems of the company at a very early stage otherwise it may lead to serious repercussions. To practice high quality internal control system the company must ensure thorough authentication and documentation practices. Their should be proper review and verification of expenses to protect the company from going budget deficit and to prevent irrelevant expenses. Their must be proper backup procedures to protect and recover damage of secondary data. To implement good quality internal control system highly skilled professionals are requied.
Purchases System
Purchase system is the system which purchases various goods required by the organization. is the system which makes relationships with suppliers and contact various suppliers.The Purchase system of the company is responsible for placing order of goods that company falls short of by monitoring the inventory levels of the company and if the inventory levels falls low then placing order of goods and informing the concerned departments about the placement of order .The purchasing clerk choose the appropriate vendor for order placement and then prepares digital purchase order. After this, he sends digital order to vendor and keeps one record in his department.
When the goods arrive the receiving clerk inspect various goods and match items with the help of packing slip and digital purchase order .if goods are of desired quality then he prepares receiving report to send to inventory warehouse and account payable department where account payable clerk matches digital purchase order , supplier invoice and receiving report. If all three reconciles then he sends purchase order, invoice and receiving report to cash disbursement department.
The purchase system of the company has to go through so many persons so if updations needed to be done we have to make changes at multiple places which may lead problem of inconsistency. Also if we require data for decision making then we need to collect data from multiple places so it suffers problem of intergrity which may lead to poor decision making by the management.
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Cash Disbursement System
Cash Disbursement system is the department which prepares cheques for the purchased goods with reconciliation of all the documents .When cash disbursement clerk receives the three documents then he files them and on due date prepares cheque of invoiced amount which is signed by treasurer and is mailed to vendor .Then, Account payable clerk updates the related documents of his department i.e. cheque register, account payable subsidiary ledger and account payable control account.
Cash disbursement system of the company does not have frequent transaction audits which may lead to unlawful behaviour and misleading information in the financial statemenst.
Payroll system
Payroll system is the department which releases salaries to all the employees and gives required amount for the purchased goods. All the employees of the company submit their hours of work to their supervisors and the supervisors review the working hours for their correctness and give the record to payroll department. Payroll clerk inputs all the data and sends pay cheques of employees to the supervisors for review and distribution. He also deposits the whole payroll cheque amount to the bank.
Data flow diagram of Purchases and Cash Disbursement System
Data flow Diagram of Payroll System
Flow chart of Purchases System
Flowchart of Cash Disbursement System
Flowchart of Payroll System
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Internal control system is the set of policies; processes and rules which ensure smooth conduct of business. They ensures operating efficiency of business and in their absence no business can run properly. If there is any weakness in the internal control system of the business then it should be detected at early stage otherwise, it may lead to serious consequences like frauds, stealing of company assets, misleading information in the financial statements, delay in preparation of financial reports, inconsistency and lack of integrity in availability of data, incompliance to the rules and regulations laid down by law or improper cash inflows and cash outflows of the company.
Weakness in Purchases system
1) The system involves making updations at multiple places which may lead to problem of inconsistency. The problem of inconsistency means different data ata different places.
2) The system involves lack of integrity of data as to analyse something we have to collect data from multiple places.
3) There is no bidding for the resources to be purchased for the organization which leads to inappropriate spending. With the help of bidding we get the goods at best price and it also ensures higher quality goods.
4) While purchasing the goods purchasing clerk do not cross check the budget of the company which may lead to company landing in a situation of budgetary deficit.
5) Purchase clerk only monitors inventory levels while placing order for goods but that is not enough. He must reconfirm the order from inventory warehouse so that all the required goods can be purchased.
6) Suppliers are not asked for sending samples before placing orders which may lead to buying of poor quality goods.
Weaknesses in Cash Disbursement System
1) The Cash disbursement department delays the payments till due date which may lead to doubts in the minds of suppliers and company may land up making bad relationship with the suppliers. They may delay the delivery of goods next time.
2) The authority of signing the cheque should be with the cash disbursement clerk and treasurer and cash disbursement clerk should be the same person. The cash disbursement authority and responsibility should be centralized.
3) There is no audit officer to keep check on employees of the department which may lead to casual approach of the employees.
4) There is no review and verification of expenses which may lead the company into a situation of budget deficit.
5) There can be errors in posting to payables control account so account payables control account should be reconciled to payables listing regularly.
6) Invoice obtained from supplier is not checked for arithmetical accuracy and the prices which may lead to paying of more money than the listed price.
Weaknesses in Payroll System
1) The working hours are checked for accuracy by the supervisors of the employees which may lead to biasness as they can make two different documents of time cards for their advantage and employees may get the less salary.
2) Payroll system should also take care for incentives of employees so that they can provide quality work.
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Risks Involved in the system
1) Compliance Risks
There is risk of compliance if company do not follow the proper rules and regulations or give misleading information in the financial statements of the company.
2) Fraud Risks
As each and every thing from preparing order to disbursement of payment is done on the computer terminal so there is high amount of fraud risk as there are no security measures taken to protect the system. Anytime a intruder may enter any computer terminal and get the cheque information or order information or computer may become victim of malware and spyware. So, measures should be taken to protect the systems.
3) Audit risk
All the documents are kept by the respective departments but no manager or senior person keeps check on different department and there are no frequent reviews by the audit person which may make clerks of respective department to follow a casual approach.
4) Cyber attacks risk
As order are placed online so anytime an intruder may enter the system and modify the order which may to misconception between supplier and the company and spoil the relationship between them.
5) Data loss risk
As whole work is done through computer terminals so data is stored in computers only. If due to some cause data gets lost then there are no measures taken for recovery of data which can lead to huge losses to the company,
6) Stealing risk
The area where goods arrive should be secure as there is risk of stealing of goods when they arrive.
Conclusion
Internal Control system are essential part of a company and any casual approach towards them can lead to serious repercussions. Without internal control system a company can not run smoothly. They help in accomplishing goals and objectives of an organization. They lead to comply the company with laws and regulations. They prevent risks of fraud and unlawful acts in the company. With the help of internal control system company can keep correct information about its finance in its financial books and get true picture of its assets and liabilities which also results in giving satisfaction to its stakeholders and increasing the value of firm. It also helps in preparing the financial statements on time without any delays. Internal control system of a company should be centralized as in absence of centralization there can be problems of inconsistency and loss of intergrity of data which in turn leads to management landing at poor and delayed decisions .For preventing fraud risks the company should use appropriate security measures like firewalls and linux operating system. Any weaknesses in internal control system should detected on time so that corrections can be done if not done on time it may lead to serious repercussions. There should be authentication checks in the computer terminals so that no imposter can access the system. There should be responsible audit officers so that proper check on internal control system can be imposed. Their should be operational audits to ensure efficiency and performance of the organization. Operational audits should be accompanied with system audits so that there can be check on whether all the resources are allocated and managed properly. Transaction audit should be there to protect the unlawful beahviour and misleading information in financial statements.
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