Accounting Information Systems and Control Issues - FoodRUs - Case Study Example

Accounting Information Systems and Control Issues Introduction The four main roles played by a manager in any organisation is to plan, to organise,to engage staffs, to direct and to control. By controlling it is verified whether all aspects of the business is occurring with conformities with the plans that were implemented, with the instructions that were issued and the principles that were established (Fayol, p.107). A Control Manager warrants efficient and effective exploitation of resources in an organisation so that the planned goals are achieved. It seeks to measure the divergence of actual productivity from the benchmark performance and analyses the causes of the divergence if any and renders measures to take corrective actions. Controlling has several features: As dynamic in nature, it enhances the coordination of activities taking place in an organisation and helps in the process of planning. Internal control In the context of accounting and finance, internal control relates to a process by which the structure, the flow of task and authority, the people and the management information systems are designed in a manner so as to help an organization achieve definite goals and objectives. By this operation an organization directs monitors and measures its resources. Control plays a significant part in checking and identifying fraud and defending both physical resources like land and machinery and intangible resources like goodwill or intellectual property (Trenerry, p.126). The objectives of internal control in an organisation would mean delivery of reliable financial reporting, opportune feedback when operational goals are achieved and conformity with rules and regulations. At the level of a specific functional department, internal control, also referred to as operational control, refers to the means by which definite objectives are achieved. For example, all the transactions that are taking place between the company and the suppliers are should be accounted for. Internal Control system is implemented over Financial Reporting to ensure accounting statements are accurate so that the financial statements are reliable (Harrer, p.2). Revenue Control Issues in FoodRUs FoodRUs, a countrywide chain of wholesale depot, supplies to the small to medium scale shops and catering businesses. The credit terms with its customers is that if a customer has good credit records then they can buy on account. Else they are to pay 100 % cash before taking delivery of their merchandise. The company also has an online portal through which they sell their products. The main control problem that the management is facing is that the General Ledger does not conform to the Accounts Receivable Ledger and the Cash book of the company. It was pointed out that the Debtors balances are incorrect which clearly indicates that each items of the accounts receivable is not accounted for properly in the MIS of the company. It implies that the debtors had paid their money but due to some kind of fraudulent activity by some employee this was not recorded in the books of accounts. The Revenue subsystem In the context of a business, a revenue cycle refers a series of activities which leads to transaction of goods in exchange of cash. This especially happens on credit that is the merchandise is delivered first and the payment is received at a time lag of few days. Now there are two aspects to this operating cycle and the cash cycle (Hill and Sartoris, p.15.). The operating cycle is the time between the time at which the raw materials are received from the suppliers and the cash is received from the debtors. On the other hand, Cash cycle is the time gap between the payment of cash to the credits and receipt of cash from the debtors at the end of the final delivery of the products (Hall, p.147). Thus the Cash Conversion cycle would be the sum of the Inventory Conversion period, the payables conversion period minus the payables deferral period (ODonnell, p.27). Now the control problem that is arising in this particular company is that the accounts receivable ledger does not tally with the General ledger. Hence proper documentation and compliance of the revenue system has to be ensured. Now the internal controls should ensure the following. These should be the chief control objectives of FoodRUs Plc. Responsibilities for sanction, evidence, and other functions should be segregated. In situations where it is not viable, other justifying measures shall be set up. Cash receipts and accounts receivable transactions should be processed daily. Funds should be deposited on time. Reconciliation to the accounting ledgers should be well-timed. Automated systems pertaining to resources management should be utilised for superior reconciliation and processing. Establishing physical security procedures which would be periodically reviewed. On the occurrence or suspicion of any fraud the notifications should be issued for internal audit procedures (COSO, p.17). Appropriate agencies should be employed at such circumstances to carry on the any further investigation that is required. If the management is suspicious about any matter relating to non compliance, internal audit should be conducted. Types of control Susceptibility is a deficiency in a system, process or application that gives rise to a prospective for loss or harm. Vulnerabilities are identified out of control deficiency to resolve the inclination of a process or a system for failure. Preventive Control averts the damage from occurring. For instance, the control enforcing segregation of responsibilities curtails the possibility a staff issuing falsified payments. That is if a person submits a request for payment, there should be a second person who would authorise it. Detective Control supervises the activities to spot occurrences where custom procedures were dishonoured. For instance, any big business might blend the general ledger or re-examine request for payment on audit logs in order to point out fraudulent payments. Corrective Control attempts at restoring the process or the system to the prior state, post occurrence of a harmful event. A business, for example, may put into operation a full reinstallation of a scheme from previous records after substantiation is obtained that some entity had malformed the payment data. Out of these control techniques the most efficient method is the Preventive Control because it saves a lot of resources of the company by preventing the occurrence of an unwanted incident. However the most frequently used id the Detective control. Controls can be manual as well as automated. The manual control can be implemented to diminish the likelihood of a fraudulent payment (Bragg, p.28). For example, every time there is a transaction it should be signed by the control manager manually. On the other hand it can be automated by making the computer programs in such a way that it would undergo a security check and be recorded immediately. Control Techniques that should be implemented in FoodRUs The integrity of the accounting information system is essential for the success of FoodRUs. Since FoodRUs is facing a control crisis the systems controller with the help of the Finance Manager should ensure the following necessary steps while carrying out their daily work: The cash should be handled with efficiently and every step of transaction should be accounted for. If this is done poorly then it would give any person with mal intension the opportunity to embezzle cash receipts avoiding any risk of exposure. If practicable, two individuals should be in charge of opening the mail; one should be employed to release the dispatch and a second one to generate a list of transfer of funds. Reconciliation of the proceeds should be done by a person who would not have any access to the cash (Stolowy and Lebas, p.72). A unique person should preserve custody of transfer of funds until it is settled with. Deposits of amounts collected should be placed in the banks on an everyday basis. Also other deposits collected should be submitted to the bank even if it is a small amount. Appropriate protection is to be preserved for defending collections that have not been deposited. If a credit card is used for the purpose of sales, the daily statements should be kept for the record. Physical protection of the fund transfers should also be maintained. Proper authorisation should be there for accounts that are maintained outside the banks. Records should never be maintained by a person who has taken custody of the stocks of the company, has an authority of getting the withdrawals or any kind of misplacement of the inventory. Every doubtful receivable needs to be managed by a person who is not concerned with the receiving of the payment made by the debtors. Problems arising out of Control Issues The duties of every individual associated with the production and inventory management should be demarcated (Choi, p.36). Unless that is done areas where a person should operate would become vague. This would lead to a clash in the task allocation and it would hamper the work culture. There should be cross checking and double checking of each of the process so that any discrepancy is easily pointed out and is rectified. This however may lead to a problem of over employment as a lot of people would be required to do this work and hence and it will have an effect on the bottom-line of FoodRUs. Improper management of control would also lead to losses for the company. Works Cited Trenerry, Alan. Principles of Internal Control. Sydney: UNSW Press, 1999. Print. Harrer, Julie. Internal Control Strategies: A Mid to Small Business Guide. New Jersey: John Wiley & Sons, 2008. Print. ODonnell P.D. Production control. London: Prentice-Hall, 1952. Print. Fayol, Henri. General and Industrial Management. New York: Pitman Publishing, 1949. COSO. Internal Control - Integrated Framework. The Committee of Sponsoring Organizations of the Treadway Commission, 1992. Hall, James. A. Accounting Information Systems, Mason: South Western Cengage Learning, 2011.Print. Hill Ned.C. and Sartoris William. L. Short-Term Financial Management: Text and Cases, 2nd ed. New York: Macmillan, 1992. Choi, Frederick D. S. International Finance and Accounting Handbook. New Jersey: John Wiley & Sons, 2003. Print. Stolowy Herve and Lebas Michel J. Financial Accounting and Reporting: A Global Perspective. London: Cengage Learning EMEA. 2006. Print. Bragg, Steven M. Accounting Control: Best Practices. New Jersey: John Wiley & Sons, 2011. Print. Read More