Accounting Information System Assignment: Case Analysis of RCE Limited
Accounting Information System Assignment Details
The Revenue Cycle of RCE Limited
RCE Limited is a Queensland based wholeseller that deals in the rafting and camping equipment. In particular, RCE Limited serves outdoor sports camping retailers throughout the Queensland. Mr. Chris Doubler has recently joined the accounting department of RCE Limited as a head of the department. Mr. Doubler gathered a wide range of data from his deparment using different sources to improve the operations of his departmetn. After analysing this data, Mr. Doubler is concerned about the revenue cycle of RCE Limited.
You are running an accounting consultancy and considered as the best consultant on the accounting information system. Therefore, Mr. Doubler approached you to evaluate their revenue cycle. During the initial meeting, you suspect that the business activities and related data processing operations of the revenue cycle of RCE Limited might not closely associated with providing goods and services to customers and collecting their cash payments. You further elaborated that the revenue cycle can be categorised into (1) sales order processing procedures (SOPP), and (2) cash receipts procedures (CRP). Consequently, you requested the head of the accounting department to describe the SOPP and the CRP of RCE Limited separately. This description is given below.
Sales Order Procedures of RCE Limited
The sales department encourages its customers to forward the orders in any form, including mail, e-mail or fax. The sales clerk first converts this sales order into the standardised sales order. For this purpose, the sales representative requests the missing information, if any. (In the light of our discussion during the Interactive Tutorials, please mention this missing information.) When the order is received, the sales clerk checks the customer’s creditworthiness of the customer from his computer terminal. Sales clerk thinsk that checking the accounting record is not technical and he can perform these duties efficiently. Two years ago, the sales clerk requested the accounting department to provide him with a list of customers whose account receivables are written off. The sales clerk is still using this information to check the creditworthiness of the customers. The sales clerk did not differentiate the new customers from the existing customers and he is using the same procedure to check the creditworthiness of the new customers. The customer’s order is rejected if the customer’s credit is not verified.
The sales order processing is started after the credit verification. In particular, the sales clerk records the approved standardised sales order in the sales order system through his computer terminal. A digital copy of the order is distributed to the warehouse and the shipping department terminals for further processing. The computer system automatically records the sale in the sales journal. The clerk files the hard copy of the customer order in the sales department without reviewing the entry. Then, the receipt of the digital sales order prompts on the computer terminal of the warehouse manager. This digital sales order has the associated stock release and the shipping notice. These documents play an important role in the transation processing system. The warehouse manager has access to these documents. For further processing, the warehouse manager prints out the sales order, the stock release, and the shipping notice. Using the stock release copy, a warehouse clerk picks the selected items from the shelves and sends them to the shipping department along with the stock release and the shipping notice. The warehouse manager then updates the inventory subsidiary ledger and the general ledger control account from his computer terminal.
The shipping clerk receives the physical stock, the stock release, and the shipping notice from the warehouse manager. The shipping clerk matches them to the corresponding digital sales order displayed on his terminal. If everything matches, he prints out three hard copies of the bill of lading and a packing slip. The shipping clerk sends two copies of the bill of lading and the packing slip, along with the goods, to the carrier. The stock release copy and the shipping notice are sent to the accounts receivable department. The third bill of lading copy is filed in the shipping department. Account receivable clerk receives the stock release and shipping notice from the shipping clerk.
Then, the accounts receivable clerk manually creates a hardcopy invoice, which is immediately mailed to the customer. After mailing the invoice, the clerk uses information on the stock release to update the accounts receivable subsidiary ledger and general ledger from his computer terminal. After the records are updated, the clerk files the stock release and shipping notice in the accounts receivable department. Sometimes, the account receivable clerk reconciles the quantities from the sales order and adjusts the account receivables.
Cash Receipt Procedures of RCE Limited
The payments of customers come directly to the general mailroom along with other mail items. The mail clerk performs the different tasks, including (1) sorting the mail, (2) opening the customer payment envelope, (3) removing the customer’s check and remittance advice, and (4) reconciling these two documents. To control the checks and remittance advices, the clerk manually prepares two hard copies of a remittance list. He sends one copy to the accounts receivable department, along with the corresponding remittance advices. The other copy of the remittance list accompanies the checks to the cash receipts department. Once the checks and remittance list arrive in the cash receipts department, the treasurer performs the following tasks: (1) reconciles the documents, (2) endorses the checks, (3) manually prepares three hard copies of a deposit slip, (4) updates the cash receipts journal and the general ledger from his computer terminal, (5) sends the checks and two copies of the deposit slip to the bank, and (6) files the third copy of the deposit slip and the remittance in the department.
The accounts receivable clerk receives the remittance list and remittance advice from the mailroom and reconciles these two documents. He then updates the accounts receivable subsidiary ledger and the general ledger. Then, account receivable files the two documents in the department.
Based on the above information, prepare a report for the chief financial officer of RCE Limited to evaluate their revenue cycle. In your report, you need to include the following items:
1. “The additional cost required to establish separate departments for warehousing, shipping and inventory control is considered a necessary cost for the added benefit of control over inventory.” Discuss this statement in the light of existing revenue cycle of RCE Limited.
2. In the light of our discussion during Interactive Tutorials, describe potential internal control weaknesses in the sales order processing procedures and cash receipts procedures of RCE Limited.
3. In the light of our discussion during Interactive Tutorials, discuss the potential risks associated with the internal control weaknesses identified in Section (2) above.
4. Based on Section (3) above, what types are frauds are possible.
The current accounting information system assignment talks about the accounting information system which is crucial for RCE Limited, and this report will focus on the revenue cycle of RCE Limited provided in the case study. The importance of the accounting information system will be evaluated with reference to the revenue cycle of RCE Limited. Sales Order Procedures and Cash Receipt Procedures are the two sections into which the revenue cycle of RCE Limited is segregated. The core aim and objective of this report is an evaluation of the role played by accounting information systems in a business organization. In the given case study of RCE Limited, the internal control weakness, risk, and possible fraud will be identified. Through this identification, an in-depth analysis of the accounting system of RCE Limited will be done in this report. Along with that, the necessity of incurring costs in the establishment of warehouse, shipment, and internal control departments will also be discussed in detail so that their costs can be said to be relevant.
1. Current Revenue Cycle of RCE
The statement given in the question states that the cost, which is required for the establishment of departments, like a warehouse, shipping, and internal control, is considered to be necessary. This is a necessary cost because when these departments are established, then RCE Limited can add benefit to the control over the inventory of the company. In the given case study of RCE Limited, there are several departments in the sales order procedures and cash receipt procedures. These departments include warehousing, shipping, and internal control departments as well. Hence, the revenue cycle process is the financial error and management of services and is the process of identifying, gathering, and dealing the revenue from providers on the services provided to the consumers (Araya-Sassi, Miranda, andParedes-Belmar, 2018). The additional cost needed to formulate separate departments for warehousing, shipping, and inventory control is considered as an essential cost for the added benefit of control over inventory.
Warehousing- Many of the business view warehousing as the only service to keep goods while they are being formulated for shipping or waiting to be picked up at the ultimate destination. Hence, this service is necessary for a successful logistics system, as it enables the entire cargo process for both providers and consumers and explains the benefits of warehousing. Thus, in order to boost the revenue cycle, RCE needs to invest in warehousing, and this can control inventory (Ignaciuk and Wieczorek, 2019).
Shipping-An effective shipping practice has an active influence on the consumer experience as the goods are shipped on a given period, and the freight is not damaged.
Inventory- It secures the resources of a firm by the contention of the financial proclamation.
However, the above-discussed reasons are the key factors that support the firm to invest additional cost for establishing separate departments to boost the revenue cycle of RCE.
2. Internal control weaknesses
Sales order procedure
The sales order procedure of any company is integral to the smooth operation of the accounting system that can affect the revenue cycle. It involves the conversion of orders into potential sales figures that can generate revenue for the company. The present sales order procedure of RCE limited involves the potential clients who use mails, emails, and faxes to place their orders to the company. This is a conventional method that is usually not practiced these days. A more modern and composite accounting system is applied nowadays. The potential weaknesses of internal control of RCE are the reasons for the company's inadequate growth and expansion. The weak revenue cycle is also significantly affecting the distribution process of the company. The process is very lengthy and is time-consuming as it involves a long duration of verification and validation of the customers.
The sales figure of RCE limited is affected due to the implementation of this process. Documentation of data needs to be updated at regular intervals to keep track of customer details. Proper maintenance of data also assures the preservation of customer details and minimizes data getting misplaced (Belousov et al., 2018). The existing sales order process can initiate missed out customer data during inquiry and verification that can force the sales team to reconnect with the consumers again. Therefore, it is noticed that the sales order procedure takes a very long time to get validated, and the customers can get irritated due to the lengthy process. This can force some of the existing customers to opt-out of this company and look for other options that offer an integrated and quick sales approach.
Cash receipt procedure
An integrated cash receipt procedure consists of a group of practices that involve the thorough documentation of the goods by the company that is received by customers. However, the cash receipt procedure of RCE limited is somewhat weak, and it requires some modifications. Consumer credibility is one aspect that should be considered the most profound concern for the cash department. The cheques provided by the customers can sometimes bounce back to the owner due to low credibility (Chernenko et al., 2019). To assess this, the cash team should comprise a strong team with efficient knowledge about the accounting process. The credit should be decided only after checking the credit score levels of the customers. A set of skilled employees should be designated for performing sound operational work related to receiving cash.
Proper recording of the cash receipts, verified documentation, and proper supervision of the entire cash transactional activities should be maintained by the company's supervisors. The supervisor should adequately evaluate and monitor all the company's transactions and document them for future audit purposes. As the accounting system of RCE limited is weak, the risk of internal and external threats to the company can be expected, which can make the company more vulnerable to risks and frauds within the company. Proper maintenance of the sales and cash procedures can assure the company of expected growth and development.
3. Risk Associated With the Internal Control
Risks are the future uncertainty that occurs when there is a variation in the estimation and the actual outcome, and they are of different types depending on the situation. Risks can be both favorable and unfavorable, but in the majority of the cases, it is unlikely that an organization gains from a risk. In the case of RCE Limited, there are several risks associated with their internal control weaknesses, such as lack of innovation, modern technology, and segregation of responsibilities and duties. The risks caused by these internal control weaknesses of RCE Limited are as follows:
Sales to Unqualified Customers: In the case study, it has been mentioned that the sales clerk in the sales department has used the information of the customers for two years. This can create a risk of selling the products of RCE to the customers who are unable to pay their dues (Week 4). This is because if the customer was able to pay their dues two years ago. It does not ensure that they will be able to their dues on time, even after two years.
Sales of Wrong Products: With no segregation of duties and responsibilities, RCE Limited is at the risk of selling the wrong products to their customers. It can happen that the sales clerk can print out wrong invoices for the sales order, or the warehouse clerk can make an error while sending out the products, or the clerk in the shipping department can ship the product to the wrong address. This leads to the shipping of products to the wrong customer, which increases the cost of RCE Limited. Risk of Errors: Since RCE Limited do not have the advanced facility of recording their transaction and the clerks in different departments make manual entries in the journals and ledgers (Bridle, 2018). There is a risk of human errors in the department of RCE Limited, which can lead to a high economic cost. The presence of risk of human errors can also cause a decrease in the efficiency and the effectiveness of the performance. In extreme cases, the risk of human errors can also lead to the loss of human life due to accidents and incidents. Identity Theft: Due to the internal weakness related to the lack of proper security, there is a risk of identity theft. Identify theft is an offense of obtaining personal information of other people without their consent and using it to commit crimes such as fraud (Maitlo et al., 2019). Due to identity theft, RCE Limited can lose money and time, and sometimes the image and goodwill of the company are also hampered. Therefore, RCE Limited should install a security system to safeguard the personal details of their employees and members of the management.
Data Loss: Another risk that is associated with the internal control weakness of lack of proper security is the risk of data loss. Data loss is the situation when the data stored in the company is deleted or stolen. Data loss can cause a revenue loss for RCE Limited due to the security breach, and it can cause extensive problems.
4. Types of Possible Frauds
Corporate fraud refers to illegal actions undertaken within the business organization. Frauds can be undertaken by employees of the business as well as any outsider of the business that can harm the overall business operation to an extreme level. The risks that have been identified in the above section can lead to some potential frauds that are explained as follows:
Sales Order Processing Procedure
As per the analysis of the risks, the following frauds may occur in the SOPP of RCE Limited- Security Fraud-It refers to the fraudulent activity that is a misleading exercise in the business that persuades investors to make the purchase or sale decisions on the basis of false information, continuously causing losses, in the desecration of securities laws. However, in RCE Limited, it is obvious that security fraud can take place in the firm because of the false representation that has been recorded. In addition to that, security fraud can also take place as data stored in the firm do not have proper security, because of which anyone can have easy access to the data and misuse it further.
Employment Fraud- It is the fraudulent activity undertaken by the employees in the firm due to lack of supervision and segregation of duties. Similarly, in RCE Limited, the employment fraud as there are no segregation of duties and the warehousing, as well as the shipping documents, are prepared by two clerks, which makes them much easier to commit fraud by taking away a certain amount of cash and adjusting in the transactions manually. These kinds of frauds will always create a barrier for the firm to achieve growth and success throughout their business.
Cash Receipt Process
On the other hand, the possible frauds that may take place in the firm are as follows: Corruption-In RCE Limited, corruption would be the major fraud that may take place frequently as the cash or cheques received from the customers are not recorded correctly and are not secured. This can give proper access to anyone to the general mailroom. Also, the cheques can be easily theft or lost and as such, employees could use the cash received whenever needed.
Reconciliation of Cash- Since it has been identified that the employees sometimes adjust the cash received by the customers after reconciling the quantity of the product ordered, it can be easily assumed that the employees can adjust the transactions even after misusing the cash. Thus, there will be a lack of supervision in the recording or bookkeeping in the firm, which makes the occurrence of this fraud more obvious.
False Entries- Since RCE Limited uses a procedure of manual documentation, the fraudulent action of including fake entries has more possibility. This false entry will lead to a fake image of the company that would adversely affect the reputation and goodwill of the firm at the same. Also, the fake image of the firm will be carried forward in the further business operation, and hence, the overall process will be false as a whole (Zhang, 2018).
The overall assignment is based on the provided case Study where the information about the revenue cycle of RCE Limited. Hence, the paper has analyzed the existing revenue cycle of the firm wherein it has been identified that the company lacks behind in having a strong revenue cycle. As such, the paper then summarises the identification of internal control weakness and the associated risk and frauds that may occur in the business because of the weaknesses addressed. Therefore, as a whole, the company needs to improvise their sales order process and cash receipt process in order to improve their revenue cycle for future benefit
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