Accounting Information System and Control Procedures to Minimize Company's Threats - Case Study Example

Case 5.1 1. Miller fit with the average fraud perpetrator profile of the general public. This is because the researchers have found similarities between them. In addition, all fraud perpetrators commit crime because of the opportunity to commit crime, conceal crime and convert the proceeds. As well, white collar crime or not according to the findings of researchers the fraud perpetrators commit crime because of financial, emotional, and lifestyle pressures and they all rationalize their behavior as an acceptable moral behavior and see them they are honest human beings. Miller differs from the characteristics of violent criminals because according to the findings the white collar criminals are significantly different to violent criminals and the employer do not notify to law enforcement authorities white collar crime because of loss of reputation and tendency to settle matter by other means. There fore in this respect Miller is different to other categories of fraud perpetrators. As Miller is not prosecuted his crime and not notified to law enforcement authorities his crimes becomes undetected. 2. When working in Associate Communications Miller embezzled funds using various methods of committing a fraud. He used his position and trust to commit the crime, he used various methods of concealment to conceal his crime and by transferring funds to his personal account and balancing the books he was able to get the proceeds of his crime. One approach he used is to circumvent the requirement to have two signatures when he was in a position of CFO when one of the executive was going on vacation leave and asking for hi signature on blank checks and transferring funds to his personal account. To conceal he used the cancelled checks in the bank reconciliation statement and destroying them and posting to a unit’s expense account to balance the books. 3. The pressure motivated to embezzle was financial as he was using the funds from the current position to finance his past crimes. As well, he was also motivated by his lifestyle and emotions as he like to live in luxury and to be noticed by others for his spending. He rationalized his actions by thinking theft is an illness as well he thought by spending money others will like him and that is the reason for his fraudulent behavior and not because his is dishonest or a bad person. 4. Miller’s framed T-shirt in his office of the statement “He who dies with most toys wins” indicate me that he likes to live beyond his means as well his life style is beyond his means and he is compulsive in maintaining his exorbitant lifestyle. Miller bought a new house and bought several expensive cars. In addition, he bought vacation property, an extravagant wardrobe and he gave generous tips and gifts. These lifestyle patterns would have given indication to the company that he cannot live this lifestyle within the salary of $130000 and the possibility of Miller committing fraud. 5. The reasons for the companies hesitate to prosecute white-collar crime are the fear of adverse publicity, copycats and loss of customer confidence. The problem with these reasons are that if they hesitate with these fears white-collar criminals will commit crime over and over again and the company will lose lot of money and encourage such activity by others as well. The law enforcement officials can encourage employers to prosecute white-collar crime by media publicity of such crimes, having seminars and conferences on the issue, public awareness campaigns. 6. All victimized companies affected by Millers crimes would have prevented such fraud by having more than adequate internal controls and enforcing effectively the internal controls. In addition, they would not have excessive trust on key employees, attention to detail and adequate staff. To prevent fraud in the future they must have measures, which reduce the likely hood of fraud occurrences in the first place. As well, measures to increase the difficulty to commit fraud, improve fraud detection methods and measures to reduce fraud losses. Problem 6.8 Internal control strengths a. Pre numbered purchase order authorized by purchase manager is strength as it ensures the accounts payable transactions are approved by appropriate person to authorize purchasing transaction and only approved accounts payable information is captured by the expenditure cycle. The copies sent to relevant departments and the vendor is a strength of internal control because it enables the accounts approved purchase order can be reconciled with external information such as invoices and the actual deliveries for quantity, quality and price and other agreed discount amounts as well as account for damages and get credit for the damaged goods from the supplier if the damages can be proven. That is this internal control ensures that the expenditure cycle recognize transaction which are delivered in correct quantity and quality and corresponds with the purchase order and loss of any purchase order in any department and provide evidence for the transaction for audit purposes for all expenditure transactions. The expenditure cycle administrative procedure authorizes to purchase specialized goods and services directly from the vendors is efficient and effective and gives flexibility for the transactions to rake place with unnecessary regulation. In addition, the procedure that these have to be authorized by user and purchasing department so that the specialized orders from the user department is independently verified and reduce the likelihood of purchasing excessive quantities and price and control of expenditure and fraud. As well, the requirement that these special orders have to be paid after proper approval by the user and purchasing department ensures the approved transactions are paid and payment are not made for any transactions which are not properly authorized in the accounting of these transactions. The internal control that the accounts payable clerks matches with purchase order and receiving report and delivery report and get approval of all special order invoices by appropriate personnel ensures the transactions in the accounts payable are all relevant, valued and accurate transactions. As well, the payments are only paid by original documents minimizes fraud and helps to protect assets and payment of unauthorized transactions as well as illegal transactions. Internal control weaknesses and possible solutions b. The accounts payable section has list of personal who can sign the purchase order. This is strength but it becomes a weakness because the list is not updated and it is 2 years old as well staff do not use it. The internal control is not implemented and there fore it is a weakness. It can be solved by the head of the section updating regularly the list of approval authority of purchase orders and supervise that all accounts clerks use the list to get appropriate approval and by counter checking by the head to ensure that the staff use the list to get correct approvals. Having a register to record the invoices dates of receipt, special order invoices, and date of special order sent to user department for approval, the return of special orders is strength. However this becomes a weakness if the invoices are not followed up within a given period or as practically as soon as possible. The head of the department by requesting the staff to notify regularly the process of their follow-up time may ensure the The invoices and orders are approved within the specified time. Taking the cash discounts regardless of terms is a weakness because it is not a Valid transaction and it is not accurate and the data is not correct and there for The accounts payable reports will be not correct. As well, paying on 5th and 20 The of each month in respect of cash flow and working capital it is not efficient and there fore in accounting sense loss of assets. In this respect this is a weakness. The treasurer signs the checks and cancels the paid invoices may be prone to Fraud because too much trust on one official and there fore it may be causing Loss of assets by fraud and other losses. In this sense it is an internal Weakness. This weakness of internal control can be overcome by Two responsible officials including the treasurer signs the checks and Another official verifying the cancellation of paid invoices. The internal control of keeping the pre numbered checks in locked safe Accessible to all cash disbursement department staff is a weakness. This is because it may induce or give opportunity to commit fraud and Therefore loss of assets. To rectify this weakness the checks must be Accessible by two reputable officials of the cash disbursement Department. The accessibility of all documents and records of Accounts payable department by all staff including the accounts Payable staff is an internal control weakness because it can cause Manipulation or alteration of data or output and therefore cause Error in accounts payable information and improper reports. This can be solved by having a procedure ensuring only approved Accounts payable access the records and documents and giving Prior permission by the head of the department to access records and Documents. Problem 10.7 a) To evaluate whether the contractors can be considered as potential credit worthy customers is to evaluate their past payment patterns and the value of sales as proportion of sales and their trend of sales to them. In addition, the company has to evaluate the profitability of these customers individually and in comparison to each other so that they only consider the most profitable and credit worthy contractors. b) In the approved sales order process is the order inquiry and recorded messages verified by the sales manager is the input and the out put is the approved sales order report. The sales order report is the input for the ware house system which produces delivery report as an output and the packing slips. For the Invoicing system, approved orders, delivery schedule become the input documents and the invoice becomes the output. For the cash receipts from the contractors the electronic transfer becomes input document and the cash received report becomes the output. For the accounts receivable invoice, delivery report and approved orders becomes input and the sales journal and updating of accounts receivable postings and general ledger postings becomes an out put. c) The useful management reports are the aging of accounts receivable balances, sales trend to the contractors in recent periods, and the profitability of the contractor sales. The data collected is the sales to these contractors, cash collected from them, sales returns to these contractors, discounts allowed and any bad debts by them. To ensure accuracy, validity and complete information ensure the input of transactions is corrected for errors by producing input data error reports and correcting errors. Ensuring the programs used has sufficient internal controls to detect unusual amounts and validation checks of transactions Have control procedure to have a system restricting appropriate staff accessing the computer system like pass word system and record of any changes to the data and the person altered the data and the purpose to detect unauthorized access and manipulation of data and records. Keep all records in a safe place and have back-up disk storage if transactions are deleted to recover lost data. Regularly checking the software whether it produces the expected results to identify unauthorized changes to the software. As well, ensure that staff follows the internal administrative controls and procedures and ensure adequate separation of duties and reconciliation procedures regularly and matching data and input documents. d) Refer to the flow chat diagram in the appendix e) The threats can come in the form of Input, and output and the damage to the hardware system as well as fraud. Input threat can be minimized by good validation checks in the programs in itself and correcting errors regularly and have batch controls and totals and reconciling with it. The process threat can come from the manipulation of the software. This can be minimized by regular internal audit of the software to ensure it produces the expected results and investigate if these not the outcomes and take action to rectify the manipulation. If fraud take disciplinary action as well prosecutes if the loss is substantial recover the losses. Have all, computer system have adequate physical controls so that unauthorized personnel cannot access data as well as using unauthorized software. Have adequate separation of duties and match documents and back-up storage to reduce loss of data by any fraudulent damage to the system by staff and others. Monitor accessing of the system and alteration to data and reports and the purpose of alteration. Have reports only available to staff in doing their duties and not allow others to access report without proper authorization. Reduce excessive trust on any higher level management to reduce fraud and white collar crime. Problem 12.4 1. Refer the Appendix for the data flow diagram and system flow chart 2. Potential threat and control procedure Production planning threats In the production planning stage it produces a Master production schedule during the next week specifying, which shoes to produce and in what quantities. Potential threat comes from any uncertainty produced by system failure, staff absences and worker not bringing in the ID card even the worker comes on a particular day as well as any defects in the material and malfunction of the machines. In addition, it can also be caused by what factors the production planning consider in preparing the master production schedule and the inventory levels it ought to have and the demand uncertainty it takes in to account.. Internal control procedure to minimize production planning threats This threat can be managed if they have a system of preventive maintenance of the machines, proper coordination with sales department, ensuring adequate levels of materials and checking their quality when purchased and regular check of their quality, have duplicate Id cards for every worker who operates the machines and have access to temporary workers to be employed if some workers are not present on a day or the ability to change the schedule easily for these contingencies. Production order program access threats The production order program access the MPS and operation list on disk to produce production order and then adds to the open production order master file. The accessing can pose a threat if the program is not accessed properly and who activated the access as well the program can be manipulated if on disk and will not work as expected and produce inaccurate results and the open order master file may have in accurate quantities and other information in the file. Internal control procedure to minimize production order program access threat This threat can be minimized by proper authorization activation by responsible staff and also have physical control of the computer hardware system where this accessing is done normally. And issue of password to the employer who activates this system. This internal control procedure will also ensure in accurate updating of open production order master file. Release of material threats In the release of materials the parts department clerks review the open order master file and MPS to release materials to production. In this they can manipulate the MPS and the open order file if no adequate controls present in the software or it are not supervised by the head of the department when they are releasing and ensure that before and after they access the information is the same in MPS and in the open order file. Internal control procedure to minimize release of material threat By having adequate controls to stop manipulating information in the files or adequate supervision of parts clerks will able to minimize this threat. Production threats In the production of shoes the Workers use Id cards and the reader collects information how much time they took to produce the shoes and who produced what quantity. If suppose the reader do not work properly this information will not be automatically collected as well if any worker fails to bring the Id card then some machine cannot be operated and they may produce less than what they have actually planned to produce for a week. Internal control procedure to minimize production threats This threat can be managed if the reader is checked before the release of materials for production and if not working to rectify any malfunction. As well, they may have system of regular maintenance and this may ensure there readers work properly most of the time. In addition, they can reduce the issue of lack of Id card by having duplicate cards under lock and key and a responsible officer issue the card and checks all employees have cards before production run. In addition, if any employee is absent on a day they may have a pool of temporary employees who can be employed on that day. 3. The efficiency can be further improved by the introduction of information technology by installing machines, which can be controlled by computer system And the possibility to automate the production technology there my reducing human intervention and speed of production and waste of material as well the possibility of human error and fraud. The computer information can be controlling the machines in doing the processes and operation more flexibly irrespective of different sizes and shapes by putting the shoe sizes and dimensions for each operation and assembly and there by enabling to reduce time or set up time. In addition, they may reduce uncertainty to some extent if the new system is implemented properly and with adequate training and proper internal controls and procedures. Appendix 1 d. Quality Building Supplies Company – proposed sales order and credit sales system Accounts Receivable section/Accounts Department Treasury Department Credit control Department Appendix 2 - Joseph Brant Manufacturing Company Data flow diagram Joseph Brant Manufacturing Company System flowchart- Production cycle Other Appendixes Topic 9 - The Production Cycle.ppt (109 KB) Topic 7 - The Revenue Cycle.ppt (279 KB) Topic 6 - Fraud and Computers.ppt (131 KB) fraud and computers.doc (128 KB) Read More