I.

Background

In 1989, Robert Smith’s opened a small fruit and vegetable market in

Bethlehem, Pennsylvania. Originally Smith sold only produce grown on his family

farm and orchard. As the market’s popularity grew, however, he added bread,

canned goods, fresh meats, and a limited supply of frozen goods. Today Smith’s

Market is a full range farmers’ market with a strong local customer base. Indeed, the

market’s reputation for low prices and high quality draws customers from other

Pennsylvania cities and even from the neighboring state of New Jersey. Currently

Smith’s Market has 40 employees. These include sales staff, shelf stockers, farm

laborers, shift supervisors, and clerical staff.

Viewed in this way his market is a well-known of all in the city of Bethlehem.

With this strategy it enables the company to become a global leader in the

electronics distribution industry. However, Smith has noticed a decline in profits and

sales, while his purchases of products from resale have continued to rise. Although

the company does not prepare audited firm to assess his company’s sales

procedures and controls, Smith noticed that he must create a solution for his market.

A revenue cycle procedure which described in Part V Alternative Causes in internal

controls with Data Flow Diagram and System Flow Chart is one of the solution in this

scenario.
 To support this strategy, the company needed to overcome a number of

expandable challenges. Historically, market has mainly focused on cost

management to deal with these pressures (Gapenski, Vogel, and Langland-Orban

1993). Due to the complex interrelations among purchaser, supplier and payers,

which characterize the Smith’s Market Accounting System, the way Robert Smith

manage revenues and accounts receivable differs substantially from that in firms in

most other industries.

In this study it shows that the mode of payment by the cash, check or credit

card to the clerk is having a deficiency for the clerk has many roles in a market and

he must submit his collection every end of the day in to the main branch. Smith

remained unaffected in response to the incident. Smith’s Market need to maintain

and stabilize revenue streams and improve collections has thus sparked the creation

of a new industry of consultancies that specialize in helping their clients improve their

performance at managing the revenue cycle. Examples include Hourly Pay,

CareerBuilder and Payscale to name but a few of the players in this new and

growing industry.

II. Statement of the Problem

 How does Smith’s Market solve its Internal Control Weaknesses?

III. Point of View

This study implicates Mr. Robert Smith, the CEO of Smith’s Market.

IV. Objectives

 Discover an answer to the internal control weaknesses of the market.

 Aid the deficiency of their inventory strategic plan.

 Reflects transparency in accounting department to the management.

V. Relevant Facts

Smith’s Market experience a material weakness which is a deficiency, or a

combination of deficiencies, in internal control over financial reporting, such that

there is a reasonable possibility that a material misstatement of the company's

annual or interim financial statements will not be prevented or detected on a timely

basis. In the Smith’s Market in Bethlehem, it was clear that his internal control was

not in place. They must pay attention of what happen in a market in order to find

solution in their Accounting Department. Also the segregation of some duties is not

really implemented in a good condition with some strict advices to a head of the

market.
 Access to control to the billing and accounts receivable records that are part of

the revenue cycle is just as important as the physical control devices over cash and

inventory because these affects the collectability of an asset which eventually be

converted into cash. However, Smith uses Point-Of-Sale system where you can

extend credit to the customers. Obviously, this assumption is not valid for all types of

business enterprises. Example: Smith’s Market that exchange goods directly for

cash in a transaction that is consummated. This example, only cash, checks and

bank credit card that is valid but not put in a separate drawer. Smith’s Market is

experiencing a risky task in a day to day operation. It is because of the collection of

payments per day were always put into their main branch. This action leads to

confusion of some inventory or assets like cash. They must reduce this risk in order

to have an easy flow of their daily operating cycle.

A deficiency in design exists when (a) a control necessary to meet the control

objective is missing or (b) an existing control is not properly designed so that, even if

the control operates as designed, the control objective would not be met. A

deficiency in operation exists when a properly designed control does not operate as

designed or when the person performing the control does not possess the necessary

authority or qualifications to perform the control effectively.

VI. Alternative Courses of Action

A. Ensure Duties Are Segregated

Segregation of duties is a basic, key internal control and one of the

most difficult to achieve. At the most basic level, it means that no single

individual should have control over two or more phases of a transaction or

operation. It is used to ensure that errors or irregularities are prevented or

detected on a timely basis by employees in the normal course of business. If

a single person can carry out and conceal errors and/or irregularities in the

course of performing their day-to-day activities, they have generally been

assigned or allowed access to incompatible duties or responsibilities. For

more accountability, consider using two people to balance the cash register.

One person will count the drawer and create the daily cash report, while the

other person prepares a bank deposit. Both staff members should sign the

report indicating they are responsible for the figures shown. While no system

can prevent fraud, this audit trail will help discourage collusion among

employees.

At the beginning of the next shift, each cashier should be assigned

their own cash drawer. Have the cashier recount the cash in the drawer to

verify the beginning balance. If you are a small store with only one register,
the cash most likely stays in the drawer overnight. If this is your situation, the

procedure is the same. 

In Figure1.A, which is a Data Flow Diagram shows the flow from

customer to bank must be in an appropriate position and must be study in

order for the market to have a heavy-duty. This data help to enable segregate

proper duties provides information about the outputs and inputs of each entity

and the process itself. Visualizing each element makes it easy to identify

inefficiencies and produce the best possible system. While in Figure1.B is a

system flowchart that can operate and also use in a computer base. Many

business man uses this system in order to check some inventory and cash

receipts immediately. It enables to access a daily operation using this system

to some up all transaction from one to the other. When all the bar codes are

scanned, the system automatically calculates taxes, discounts, and the total

for transaction. In the case of credit card, transactions, the sales clerk obtains

transaction approval from the credit issuer via online connection. This system

is extensively use in some grocery, stores, and department stores.

FIGURE 1.A
DATA FLOW DIAGRAM OF SALES ORDER PROCESSING

FIGURE 1.B
POINT-OF-SALE SYSTEM
The following are the advantages and disadvantages of ensuring duties are

segregated:

Advantages:

 It makes a deliberate fraud more difficult because it requires

collusion of two or more persons.

 It ensures that there is oversight and review to catch errors.

 Assets are safe from misappropriation.

 Increases the credibility of accurate financial reporting for both

internal and external parties.

 Improving time management

Disadvantages:

 Inadequate segregation of duties could make fraud detection

difficult.

 Asset misappropriation

 Possible Miscommunication Conflicts

 Risks of Inferior results.

  Territorial Disputes

B. Perform Reconciliations of Cash Receipts

To ensure all funds are properly accounted for, units must

reconcile received funds daily. Proper segregation of duties ensures

that no one person has sole control over the entire cash handling

process from receiving to reconciling. Someone other than the person

receiving and depositing the money must perform reconciliation.

In Figure 2.A, from customer to bank must coincide from the

beginning. This DFD consists a cash, check or credit card that is an

automated teller machine or the automatic banking machine that could

help the store to become automatically sell. But this data need only in

credit. A banking subsystem that provides bank customers with access

to financial transactions in a public space without the need for a

cashier, clerk, or bank teller. The process of counting the money,

reconciling the receipts, and balancing the cash drawer creates

accountability of the day's transactions. This cash management

system can be created at the same time store policies are established.

Many of today's POS (point of sale) systems have step by step

 instructions for closing the cash register drawer to guide the

employee. While Figure 2.B is a system of cash receipt that performs

reconciling which tend to occur continuously throughout the day.

Checks and remittance advices arrive from postal service in batches.

Likewise, the deposit of cash receipt in the bank usually happens as a

single event at the end of the business day. This system uses the

technology that automates manual procedures.

FIGURE 2.A

DATA FLOW DIAGRAM OF SALES ORDER PROCESSING

FIGURE 2.B

AUTOMATED CASH RECEIPTS SYSTEM

The following are the advantages and disadvantages of performing reconciliations

for the cash receipts:

Advantages:

 It makes accounts to be in good standing.

 It prevents theft.

 It will help detect accounting errors.

  It will keep mistakes at bay.

 It achieves accurate balance.

Disadvantages:

 It can issue un-cleared checks that continue not to be

presented.

 It risks changes in the dates covered by bank statement.

 Lost or stolen cash receipts.

 It risks having missing transaction.

 Inaccurate application of cash receipts to departmental

accounts.

C. Perform a Self-Evaluation of Your Internal Control

This self-evaluation can often be done by performing a “walk-through”

which is simply the act of tracing a transaction through market records and

procedures. The walkthrough will help provide an understanding of process

and control design, particularly with respect to controls that may help prevent

or detect fraud, a determination of whether controls have been designed

effectively and actually placed in operation.

 The Figure 3.A is a data flow that could help the department for having

an evaluation in internal control. This order processing system enables to

align inventory and orders across multiple channels, complex shipping

schedules and order profiles, and also reporting, analytics, and evaluation.

This tool or platform that tracks sales, orders, inventory, and fulfillment as well

as enables the people, processes, and partnerships necessary for products to

find their way to the customers who bought them. Today, order management

requires a multi-dimensional system that touches nearly every facet of how

your business operates, including customers and this requires some

evaluation to achieve. From marketing to shipping it will undertake a few

marketing initiatives to generate business for the company. Figure 3.B

illustrates a sales order system that uses a batch processing and sequential

files. Because this system uses the sequential file structure for its accounting

records, either tapes or disks may be employed as the physical storage

medium. For day-to-day operations, however, tapes are inefficient because

someone must mount them on a tape drive and then dismount the tape when

the job ends. This approach is a labor-intensive and expensive. The constant

decline in the per unit cost of disk storage in recent years has destroyed the

economic advantage of using tapes. Today, tapes are used primarily as

backup devices and for storing archive data.

FIGURE 3.A

DATA FLOW DIAGRAM OF SALES ORDER PROCESSING

FIGURE 3.B

SALES ORDER BATCH PROCESSING SYSTEM

The following are the advantages and disadvantages of performing a self-evaluation

with regards to their internal control:

Advantages:

 Creates a clear line of accountability for controls, reduces the

risk of fraud (by examining data that may flag unusual patterns

of transactions) and results in an organisation with a lower risk

profile.

 Provide a flexible but structured approach to improving the

controls framework through the organisation.

 Foster an improved awareness of risk and controls among

management and staff.

 Foster an improved awareness of risk and controls among

management and staff.

 Performing a self-evaluation of your internal control can help

identify possible deficiencies before problems arise and will lead

to the implementation of more effective controls.

Disadvantages:
  Opposition of participants and/or management to the process,

with the result that erroneous information is supplied or that

important information is not revealed.

 Role players oversimplify the process and the planning it

requires.

 It is not always appropriate to reveal certain risks, for example

where participants are involved in fraud.

 Other important factors in the organisation can handicap the

process, for example a rationalisation programme.

 If management does not support the process in word and deed,

the remainder of the staff will be reluctant to become fully

involved in the process.

D. Conclusion

As we go through the process of our study we therefore conclude that

Smith’s markets are much in need to have a progress with regards to their

internal control. There are instances where their employees perform

diverse role at a time and we see that this is one of the reason why they

can’t improve their business even though they undergo such process.

Smith’s Market need also to maintain and stabilize revenue streams and
improve collections has thus sparked the creation of a new industry of

consultancies that specialize in helping their clients improve their

performance at managing the revenue cycle.

On our DFD, data items flow from an external data source or an

internal data store to an internal data store or an external data sink, via an

internal process. The input data flow can be in various form such as a

document, a record, a control signal transmitted by a transducer, a series

of numbers keyed by a human operator and much more. There may be

cases where the users themselves have no visual, auditory or tactile

deficits however, the environment in which they use the interface limits

their normal perceptual abilities. Data Flow Diagram is definitely bringing

much fastest way to understand such a complicated system to other staff

of the like market and compress it into a very simplest way to the user or

programmer to understand it. In this study, from what our illustration of

DFD it is one of the simplest way me to compress and segregate

everything from a big stack of documentation which is complex and not

easy to understand into simplest way in just a few levels of the flows and

how it works between stages of levels from what their changes.

 In quality improvement work, our flowcharts are particularly useful for

displaying how a process currently functions or could ideally function in

 segregating some duties to the market and improve the activity of the

entity. Point-of-Sale System can help you see whether the steps of a

process are logical, uncover problems or miscommunications and define

the boundaries of a process. This sum up all the benefits of the POS

system, save time.

E. Recommendation

We recommend our first alternative courses of action which is to ensure

duties are segregated should be done to solve internal control weaknesses. It

takes an advantage to the market since it increases the credibility of accurate

financial reporting for both internal and external parties. We see that it is the

best way to detect fraud easily since it requires a collusion of two or more

person and it ensures that there is oversight and review to catch errors that

leads the asset to be safe from misappropriation.

The current version of POS mostly fits the needs of the Smith’s Market.

Their staff must show high satisfaction with the product and does consider the

current version to have more advantages. However, based on the findings of

the analysis of this system we would highly recommend an upgrade of both

hardware and software. Their previous POS, slightly outdated version has

proven to have certain bugs and glitches. This may not be a current burning

issue but can be potential cause of more severe business problems in the

future. So our newly POS system can support new payment system. Your

customers may be primarily using one or two payment methods now, but give

how quickly payment options can change, those customers may be asking for

new options soon. It’s best to have a POS system in place that has payment

flexibility built-in rather than having to swap out a new system. Point of Sale

systems can help you to better understand your customers, your staff and

your business, letting you to drive towards better profits and smarter ways of

working.