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ANALYZING AN ACCOUNTING INFORMATION SYSTEM: A CASE OF THE REVENUE CYCLE OF RCE LIMITED

Executive Summary

This paper aims at critically evaluating the role and purpose of accounting information in RCE Limited, a Queensland based company that deals in camping and rafting equipment. To realize that, the paper focuses on analyzing RCE’s revenue cycle, noting its shipping, warehousing, and control activities to determine their effectiveness. The analysis exposes various risks and weaknesses in the company’s cash receipts procedures (CRP) and sales order processing procedures (SOPP), like inventory misappropriation, shipping clients’ wrong items, cash misappropriation, incorrect recording of sales transactions in RCE’s journals, and sales to un-creditworthy clients. Due to the company’s revenue cycle, the study revealed that it is likely to experience two main frauds: employee and monetary management types of fraud.

Table of Contents

1. Introduction. 4
2. Additional Cost Needed To Establish Separate Departments. 4
3. Potential Internal Control Weaknesses in RCE’s SOPP and CRP. 7
4. Potential Risks Associated with RCE’s Internal Control Weaknesses. 8
5. Potential Frauds in the SOPP and CRP of XYZ Limited. 9

List of References. 12

Appendix. 14

1.    Introduction

This paper aims at evaluating the role and purpose of accounting information RCE Limited, Queensland based company that deals in camping and rafting equipment. The paper begins by analyzing the factors that can be considered as additional costs needed to establish separate divisions, and then explores the potential internal control weaknesses in RCE’s SOPP and CRP and the associated risks and possible frauds.

2.    Additional Cost Needed to Establish Separate Departments

There are various reasons why additional cost needed to institute separate departments for inventory control, shipping, and warehousing are regarded as needful for the added payback of control over inventory. The separation of the inventory control, shipping, and warehousing departments allow for segregation of roles, functions, and responsibilities over the three departments for the custody of RCE Limited’s assets during the three phases of its revenue cycle that comprise of the cash receipts procedures (CRP) and sales order processing procedures (SOPP). The warehouse attendants, as a result of the separation, have custody over RCE Limited’s finished goods till they get a stock release form from the company’s sales department. The company’s warehouse clerks collect the inventory items and send them to the department in charge of shipping along with the stock release form copy (Rezvani et al., 2017, p. 421(3)). According to Ogiela (2015, p. 155(5)), in such an arrangement, the shipping department of RCE Limited is only capable of shipping goods that it receives from the personnel in charge of the company’s warehouse. Additionally, it must be in agreement or coherent with a packing slip as well as a shipping notice that springs from the company’s sales department. Therefore, RCE Limited’s warehouse staffs are forbidden from shipping out any unsanctioned inventory items since the staff in charge of shipping would not have matching paperwork. Therefore, the extra paperwork needed is regarded as a needful cost for the added benefit of control over RCE Limited’s inventory.

Similarly, warehouse staff must not keep RCE Limited’s official accounting records. This is so because the asset custodial responsibility must be separated from the official record-keeping responsibilities (Maharaj & Brown, 2015, p. 281(3)). The inventory control, according to Sun et al. (2017, p. 172(4)), keeps RCE Limited’s official accounting records of inventory stock items. RCE Limited’s sales order department has the responsibility of taking the client order and putting it into a standard form or format. The department has the responsibility of recording information, like RCE Limited’s customers’ address, name, account number, units and quantities of each, freight, preferences, and discounts, among other information. In some cases, the SOP plays the duty of determining and/or verifying the promised date of shipping. RCE Limited’s billing department, on the other hand receives copies of sales order from the company’s sale department. On receiving the sales order of the shipping notice as well as stock release documents, RCE Limited’s billing division prepares the sales invoices, which are the customers’ bill reflecting costs for the shipped items, which may sometimes be different from items that are ordered, freight, taxes, along with any discounts that are offered.  RCE Limited’s sales order department, in the arrangement, have the duty of preparing bills since the company’s salespersons may bill less they ought to bill their favourite customers (Appelbaum et al., 2017, p. 31(7)).  The salespersons, similarly, place orders, and therefore, begin RCE Limited’s wheels in motion for inventories to be shipped. Additionally, the salespersons ought not to be permitted to determine the amount that customers pay for their inventories since they may be tempted to levy lower prices on customers so that they receive kickbacks (Rezvani et al., 2017, p. 423(4)).

RCE Limited’s accounts receivables department gets sales orders before posting them to the receivables account’s subsidiary ledger. As transmittal advices are obtained, they are directly posted in the accounts receivable subsidiary ledger. According to Maharaj and Brown (2015, p. 282(3)), the accounts receivable department ought not to be permitted to prepare clients’ bills because the division has protection on RCE Limited’s accounts receivable assets. Ogiela (2015) adds that accounts receivable staffs record customer payments besides tracking unpaid bill by clients (p. 155(3)). Through the arrangement, if they were permitted to prepare bills, Sun et al. (2017, p. 175(6)) reason that they may not bill some clients and get kickbacks from the clients for the free sales.

Moreover, checks that are received in payment for RCE Limited’s accounts receivable are an essential asset for the company. The same must be safeguarded from people who might attempt to deposit the checks into their personal accounts. Having an individual or team from the mail roof staff taking records of all checks obtained before the same are routed to RCE Limited’s accounts or cashier department is aimed at ensuring that the accounts receivable staff are not involved in similar activities as lapping RCE Limited’s accounts receivable accounts. Within this environment, segregation of responsibilities and duties is realized via multilevel security protocols. Multilevel security, according to Maharaj and Brown (2015, p. 288(5)), uses programmed techniques of permitting simultaneous access to a central system, which in this case is RCE Limited’s system, by several users with various access rights though but preventing them from accessing information/data for which they do not have authorization (Rezvani et al., 2017, p. 425(5)).  Sun et al. (2017, p. 170(3)) explain that a staff having access to incoming payments (checks or cash), along with authorization to the credit issue memo may pocket the check or cash of a payment received from the sale of goods. Subsequently, the individual staff could issue a credit memo to the client’s individual account so that the client may be unable to show a balance due to the company (Ogiela, 2015, p. 156(3)). Therefore, through the separation of the departments, RCE Limited should be able to periodically send account summary of clients’ individual accounts to all their clients, listing amounts paid and invoices by check dates and numbers. This approach will allow RCE Limited’s customers to verify its records’ accuracy since should there be realized an unrecorded account, the customer(s) will be able to inform RCE about the discrepancy. These reports ought not to be handled by RCE Limited’s accounts receivable cashier or clerk.

3.    Potential Internal Control Weaknesses in RCE’s SOPP and CRP

From the discussion Interactive Tutorials, there are a number of possible internal control weaknesses in RCE Limited’s SOPP and CRP. From the description given, the weaknesses include no credit check execution and RCE Limited’s billing clerks are allowed to record the company’s sales in the company’s sales journal before economic events (shipping of goods) actually happen, a thing that should not happen (Appelbaum et al., 2017, p. 41(2)). Similarly, the company’s billing department bills customers before goods are eventually shipped and with no confirmation of quantity shipped and shipment. According to Singh et al. (2017, p. 697(4)), a shipping notice ought to prompt the billing process, which does not happen in the case of RCE Limited’s. Another internal control weakness is that RCE’s warehouse clerks responsible for controlling the physical inventory maintain the company’s subsidiary records. Similarly, the warehouse clerks update the company’s inventory general ledger control and subsidiary ledger and the accounting clerks update account receivables subsidiary and various general ledger accounts. Professionally, these expose RCE to several loopholes, like fraud. According to Jewell (2020), accounts receivable ought not to process cash receipts as well as maintain account receivables subsidiary records (p. 12(2)). Boritz et al. (2015) also note that warehouse clerks, who regulate RCE’s physical inventory, ought not to maintain the company’s inventory subsidiary records (p. 884).  Similarly, Bhattacharya (2018) adds that the general ledger department ought to receive journal vouchers as well as account summaries from accounts receivable, billing, cash receipts, and inventory control (p. 661 (4)). Conversely, they improperly use source documents for purposes of updating general ledger accounts.

4.    Potential Risks Associated with RCE’s Internal Control Weaknesses

With RCE lacking a proper procedure for assessing inventory availability, the company may encounter the risks of carrying cost, stock-outs, and markdowns. In the event RCE’s manager prints shipping documents without any data/information from the company’s inventory checking report, Jewell (2020) reasons that the warehouse clerk may encounter problems in picking the items. This would largely be experienced in cases where products run out of stock. The company, in the long run, can incur costs in sourcing for products (Appelbaum et al., 2017, p. 33(3)). The concerns of stocks running out can be averted by instituting a framework that notifies RCE’s warehouse department when it reaches each and every item’s economic order quantity.

RCE’s system of checking/assessing customers’ creditworthiness by the company’s sales clerks poses the danger of sales to clients with poor credit history (Singh et al., 2017). The list that is obtained from RCE’s accounting department does not comprise of new customers’ names owing to the fact that RCE does not store their accounts and the possibility of sales customers having poor credit history may result in bad debts (Stone, 2016, p. 16(2)). RCE can employ IT solutions to better the conditions of checking their clients’ creditworthiness. For example, the automation of the company’s balances and credit limits can allow its sales department to assess each client’s credit level (Bhattacharya, 2018, p. 658(1)). Similarly, sending emails to RCE’s credit manager for accounts that need particular authorization can help mitigate the risk. 

RCE’s CRP’s weakness can be attributed to the risk of illegitimate orders. Errors that are made by mail clerk when they are preparing the remittance lists, particularly by including unsanctioned transactions, may result in unlawful orders. RCE may encounter the danger of fulfilling orders that were not put by the clients. The reliance upon the treasurer and mail clerk can raise the dangers of fraudulent activities.

The danger of stealing customer credit, cash, along with other assets can be experienced in RCE due to the company’s CRP’s weaknesses. The manual recording and records kept by the company’s treasurer may pose the danger of fraudulent activities (Singh et al., 2017, p. 701(4)). Owing to the fact that the bank relies upon treasurer’s records, any deliberate omission or errors can result in customer credit theft (Boritz et al., 2015, p. 894(2)).  To curb challenges associated with this weakness, RCE can introduce a framework where by customers remit their payments to the bank directly, and there after the bank sends notification(s) of the remittances to the RCE’s accounts receivable department.

5.    Potential Frauds in the SOPP and CRP of XYZ Limited

Based upon the dangers linked to the internal control of RCE’s CRP and SOPP, employee fraud is likely to happen. According to Mock et al. (2017, p. 39(1)), employee theft negatively impacts a company’s output and operations. Principally, the treasurer can participate in fund embezzlement when manually developing a record of deposit slips. If the treasurer deliberately omits certain deposits and channels the omitted slip to their account, RCE will realize financial losses (Stone, 2016, p. 17(3)). Jewell (2020, p. 23(4)) notes that such financial losses can substantially affect a business especially in instances where the business sources extra funding to realize its operational expenses.  Improper internal control structures have the potential of increasing opportunities of employee fund. Similarly, employees can take part in fraudulent acts by manipulating the system a company’s system for individual benefits, resulting in organizational losses (Mock et al., 2017, p. 41(2)).

Monetary management fraud may happen as a result of the weaknesses of RCE’s CRP and SOPP’s internal controls. Owing to the fact that most of RCE’s divisions are headed by people, collusion between and among them may result in monetary management fraud. For example, the collusion between the company’s treasurer and its central clerk can present an incorrect remittance list to the accounts receivable department and the bank. Monetary management fraud may also happen despite the availability of regulations, principles, and rules (Boritz et al., 2015, p. 910(2)). The involvement of the management in fraudulent dealings can cause financial fraud, which can have substantial impacts upon the business’ performance. Nonetheless, the business can employ a segregation of responsibilities to avert monetary management frauds. Stone (2016, p. 18(5)) reasons that segregation of responsibilities and duties helps a company address changes within its management controls, fraud threats, and IT modifications.  Monetary management fraud can also be minimized by reducing the overreliance upon individuals in various divisions of an organization, company, or business. Segregation of responsibilities will enable RCE’s management to ensure that each of its departments contribute to the accomplishment of transactions, therefore minimizing overreliance upon one individual or department.

Conclusion

This paper aimed at evaluating RCE’s revenue cycle with the intention of determining the company’s SOPP and CRP’s control weaknesses, possible risks associated with its control weaknesses, and frauds that are likely to emerge because of the control weaknesses. The weaknesses determined include inventory misappropriation, shipping clients’ wrong items, cash misappropriation, incorrect recording of sales transactions in RCE’s journals, and sales to un-creditworthy clients, while frauds include employee fraud and monetary management fraud.