Case Study – Rainbow Illusion

Executive summary
This report is a detailed analysis of the case study- Rainbow Illusion. The main
purpose of this report is to throw light on the strengths of the company which have
helped in overcoming the problems. The report explains that the major strengths of the
company are their salaried managers, separation of cash receipts from other accounting
transactions, young sales professions, unsophisticated cash registers, supervision and
the same system of controlling transactions at all the stores. The company has avoided
the problem of commissioned credit by offering good salaries to the managers.
Separation of cash and accounting records has made the process of audit quite easier
for the company. Except for the payment type (cash, check and bank card), they are
using sales invoices for all the transactions. Use of unsophisticated registers for
entering transactions related to sales invoice has solved the problem of providing
training to the new employees. The company has followed a hierarchical supervision
system. This system has solved the issue of mistakes in sales transactions at a lower
level. The same system will not create any difficulty for the employees to adjust to the
different stores. This factor will also make the audit process easy for the audit team.
Some situational pressures such as financial issues of the employees and pressure
from higher authorities to complete the sales target can be the reason of fraud in the
company. The company uses a distributed system of computers because this system
can carry out those tasks which are not possible by the centralized system through
coordination of actions with interconnected networks.

PAGE 1
Table of Contents
Executive summary..................................................................................................................................1
1. Introduction............................................................................................................................................3
2. Strengths of Rainbow Illusion’s system for controlling sales transactions....................................3
3. Problems avoided by incorporating the strength..............................................................................5
4. Situational pressure and likelihood of fraud in the company.........................................................6
5. Reason of preference to the distributed computer system instead of a centralized computer
system........................................................................................................................................................6
6. Conclusion.............................................................................................................................................7
7. References............................................................................................................................................8

PAGE 2
1. Introduction
Internal control of inventory is too essential in every company to avoid theft and
frauds. Every company needs to segregate their employees in such a way that all the
employees must be responsible for safeguarding the assets of the company. This report
is based on the case study analyses of Rainbow Illusions. It has thrown light on the
processes, risks and internal control of Rainbow Illusions for its revenue cycle. The
report to Chief Executive Officer of the company is a detailed analysis of the strengths
of the company and the problems avoided by the company through these strengths.
The report has further explained about the situational pressures in the company,
increasing the likelihood of fraud and preference for distributed computer system rather
than a centralized one in the company.
2. Strengths of Rainbow Illusion’s system for controlling sales transactions
Every company needs to identify its strengths to avoid the existing problems in
the internal control of inventory. The strengths of Rainbow Illusions for controlling their
sale transactions are as follows:
 Young sales personnel
The company has hired young personnel in their sales department. They are
being paid on an hourly basis. The company is also offering them incentives to motivate
them to increase the sales of the company. Young sales personnel are active enough
to complete the tasks before time. Moreover, they are working on a part-time basis. The
employees who are working in this department are needy, only that is why they are
working part-time. Needy individuals always remain dedicated to their work [ CITATION
Pou19 \l 1033 ]. Thus it is certain that these young sales employees will help the company
in increasing the volume of sales. The hourly payment to these employees also saves
the cost of the company. Thus it is reducing the overall cost of the company and
increasing the annual revenue. It is promoting healthy competition for the company in
the market [ CITATION Arz10 \l 1033 ].
 Unsophisticated cash registers
The company is using unsophisticated cash registers for recording the
transactions of the sales. There are four parts of the sales invoice for recording these
transactions. As we know that cash is the most sophisticated part of every business.
Every company wants to use convenient and safe methods to handle the transactions.
Every company needs to ensure that there is strong internal control for managing this
transaction system [ CITATION BAu17 \l 1033 ] . Rainbow Illusion has adopted this system of
unsophisticated cash registers to make the process of transactions easy. The company
is using this system for all sales invoices except the cases of cash, check and bank
card. The entry of transactions regarding sales invoices in these unsophisticated
registers is very easy. The salespersons, cashiers and managers can easily enter the
details in it and can understand the existing entries [ CITATION The191 \l 1033 ]. Thus the
use of these registers helps the company to provide quick services to the customers
because the cashier will not take too much time to enter the details of the sales invoice.
 Separation of cash receipt from the accounting records
The company has separated the cash receipts from all other accounting records.
Except for the payment type of cash, check and bank card, they are using sales
invoices for all the transactions. This system of transactions has made the process of
audit quite easier. It is the responsibility of the cashier to get approval in case of sales

PAGE 3
done by payment through cheques [ CITATION Gor19 \l 1033 ]. Every business needs to
have proper control over the cash. That is why it becomes essential to maintain
separate records for cash receipts among all accounting records. To make a strong
control over cash transactions, Rainbow Illusions has maintained much separate
system to avoid fraud and theft. This system also helps the company to avoid the
excess holding of idle cash. This cash can be used again and again by the company by
making further investments [ CITATION Car11 \l 1033 ]. The company can make their
financial system more strong by proper segregation of duties of employees, by
assigning specific duties to each employee for proper segregation of cash receipts from
all other accounting records.
 Supervision
Supervision process in the company is also a strong factor which helps in
controlling sales transactions. At the sales floor, all the sales employees are responsible
for manually recording all the details of the sales of the products to the customers. They
will be solely responsible for the entry of sales invoice number and type of sales
[ CITATION Jab19 \l 1033 ] . Next, it becomes the responsibility of cashier to supervise all the
records entered by the sales employees to avoid any kind of fraud and risk. Cashier
reviews the sales invoice and enters the sales records. Then the sales invoice is put
into the cash register for further validation. Then one copy of the sales invoice is given
to the customers and one is kept for future reference. The assistant manager
supervises all the records compiled by a cashier [ CITATION Jim12 \l 1033 ]. He offers a
daily conciliation report to present all the details to the manager. The manager
supervises all the activities of assistant managers and it is his responsibility to make the
final deposit in the bank. All the sales transactions and related activities are supervised
by the data processing department. This supervision process in the company makes the
process of sales transactions easier and simple [ CITATION Jur16 \l 1033 ].
 Salaried Managers
Though sales personnel of the company are working on a part-time basis and are
being paid on an hourly basis, the managers are salaried employees. The salaried
managers will not desire for any kind of commission. Sometimes, the commission-
based managers approve credit for the person who is not even eligible for the credit. If
the managers are salaried, they will not have any greed, and then it will avoid such
fraud cases. This factor makes the sales transaction system stronger. Managers need
to work on a full-time basis because they are all in all responsible for all the sales-
related activities of the company [ CITATION Dev12 \l 1033 ]. By paying them a monthly
salary, the company has bound them with their work and they work dedicatedly to
enhance the sales of the company. Managers used to stay with the company for long
hours. Thus the hourly payment as sales personnel is not a good idea because it will
increase the cost of the company.
 The same system of controlling transactions at all the stores of the
company
The company is using the same system for control over sales transaction at all its
30 stores. It is beneficial for the company because the company can easily shift its
employees from one store to another. The same system will not create any difficulty for
the employees to adjust to the different stores [ CITATION Kre19 \l 1033 ]. This factor will
also make the audit process easy for the audit team. In case of different systems at

PAGE 4
some stores, it would be difficult for the audit team to make analyses for their
transactions. This process would become expensive as well as time-consuming. Thus,
we can say that this system has made the control of transactions easier.
3. Problems avoided by incorporating the strength
Rainbow Illusion has remained successful in avoiding various problems due to its
strength factors. The major problems avoided because of the above-mentioned strength
factors are as follows:
 As mentioned above, young sales personnel of the company is the strength of
the company, this strength of the company has helped to avoid the problem of
slow service. As the sales personnel are young, they are very active to handle
the customers in long queues [ CITATION Men15 \l 1033 ] . The incentives offered by
the company also help in boosting the dedication of employees towards their
work and it positively affects the sales volume.
 Use of unsophisticated registers for entering transactions related to sales invoice
has solved the problem of providing training to the new employees. The
companies which are using electronic techniques for entering transactions
always need to train their new employees to learn the method of entering
transactions [ CITATION The12 \l 1033 ] . Rainbow Illusion is using the easiest method
of entering transactions. The registers are already divided into four parts which
make easy for the sales personnel, cashier, assistant manager and manager to
analyse the entries easily. This strength of the company has also reduced the
burden of the sales personnel regarding the entry of data and they are being able
to provide quick services to the customers [ CITATION Pas10 \l 1033 ].
 By separating the cash receipt from the accounting transactions, the company
has avoided the problem of frauds and risks in the sales transactions. Cash is a
very crucial asset of every company. It becomes essential to deal it with proper
care to avoid fraud. This idea of the company to separate cash receipt has
reduced the burden of the higher authorities regarding the proper handling of
cash transactions [ CITATION Peh16 \l 1033 ].
 The company has followed a hierarchical supervision system. This system has
solved the issue of mistakes in sales transactions at a lower level. In this system,
Cashier is responsible to supervise the work of sales personnel, the assistant
manager is responsible for the work of cashier and manager is responsible to
supervise the activities of the assistant manager [ CITATION Rum13 \l 1033 ].
 The company is paying monthly salaries to its managers. The company has
followed these criteria to avoid complexity in the system of control transactions.
The company needs higher authorities to work for long hours because they are
responsible for the activities of lower management [ CITATION Sch19 \l 1033 ]. This
strength of the company has made it possible to avoid the problems of
mismanagement in the company.
 Use of same controlling transaction system at all the stores can have also made
it easy for the company to avoid the problem of adjusting employees at other
stores. Sometimes the companies need to shift their employees from one store to
another due to a shortage of employees at another store. The company has
made this process easy by adopting the same system at all the stores [ CITATION
Sch \l 1033 ].

PAGE 5
4. Situational pressure and likelihood of fraud in the company
According to research studies, situational pressures of companies always lead to
fraud. In general, the main situational pressures for the occurrence of frauds in the
companies are the need for cash by the employee and when the employees are
threatened or forced by someone to commit this fraud. Besides these situational
pressures, environment, individuals and institutional pressures also play an important
role in increasing the chances of fraud in the organization. From the company point of
view, decreasing revenue or share of the company in the market gives birth to frauds in
the company, intense pressure over the employees to meet the targets and financial
pressure over the company due to poor economic performance [ CITATION Sch18 \l 1033 ].
Moreover, there are some other factors which make the occurrence of frauds easier are
weak internal control of the company over the functions of the employees, failure of
higher management to monitor the activities of the employees, carelessness of the
management lack of detailed audits due to ineffectiveness of auditing staff, poor
security systems and poor procedure of authorities.
In Rainbow Illusions also, the two situational pressures can be the financial
issues of the employees and pressure over them to complete their targets. As we know
those sales employees of the company are working on a part-time basis and they are
being paid on an hourly basis. Those who are working for fewer hours can do these
frauds in the sales invoice just to hatch the big amount [ CITATION Pou19 \l 1033 ]. The
pressure of managers over them to increase the sales volume can also force them for
doing frauds while entering in unsophisticated registers. On the one hand, these
unsophisticated registers are beneficial for the company because these are based on
the easy process of entering the transactions. But the pressurized employees can enter
the wrong amount in these transactions which can spoil the overall system of
transactions [ CITATION Ser13 \l 1033 ].
Rainbow Illusion needs to establish a strong corporate environment to strengthen
the integrity of the financial reporting process. Enforcement of strong internal forces in
the company can reduce the situational pressure and can reduce the likelihood of
frauds in the company.
5. Reason of preference to the distributed computer system instead of a
centralized computer system
Centralized systems perform computing at a central location. On the other hand,
distributed computing is a collection of various computers and the tasks are divided
among all the computers. There is no centralized system to control the activities of all
computers. Under a centralized computer system, all the calculations are performed on
one system [ CITATION Sin19 \l 1033 ]. This type of system needs a dedicated server for the
calculations of data. Under the distributed computer system, tasks are distributed over
multiple computers. This type of system makes the task easy in case of a large amount
of data. Most of the companies prefer to install distributed system instead of a
centralized one because of its extensive features. The main strength of the distributed
system is regarding scalability [ CITATION Sre14 \l 1033 ] . It is easy to add new hosts with
the main server. This system supports various types of hardware and software
programs.
The distributed system is more open as compared to the centralized one. Its
openness made it more extended and modified the system. It can continue functioning

PAGE 6
in case of various faults in the system [ CITATION Wan19 \l 1033 ] . There are various
benefits of using these distributed systems such as these systems protect the data
because of their multiple destinations. As compared to centralized systems having only
one main destination, the distributed system protects the data from failure because of its
connection with multiple computers. Centralized systems are being avoided these days
because of their non-autonomous components, use of homogenous technology for the
system, use of same resources by all the users, one point of control and one point of
failure. The distributed system can carry out those tasks which are not possible by the
centralized system through coordination of actions through interconnected networks
[ CITATION Wro19 \l 1033 ]. Moreover, the distributed system ensures the protection of data.
Thus the companies prefer to use this system instead of a centralized one.
6. Conclusion
The case study explains that the main strong factors for Rainbow Illusions for
controlling their sales transactions are their salaried managers, separation of cash
receipts from other accounting transactions, young sales professions, unsophisticated
cash registers, supervision and the same system of controlling transactions at all the
stores. The company has solved the various problems through these strength factors
such as avoidance of frauds and risks in the company, mismanagement of cash, lack of
supervision, expectation of commission by managers and delay in services. Some
situational pressures such as financial issues of the employees and pressure from
higher authorities to complete the sales target can be the reason of fraud in the
company. Most of the companies prefer to install distributed system instead of a
centralized one because of its extensive features. The main strength of the distributed
system is regarding scalability. There are various benefits of using these distributed
systems such as these systems protect the data because of their multiple destinations.
As compared to centralized systems having only one main destination, the distributed
system protects the data from failure because of its connection with multiple computers.
Thus most of the companies prefer to use distributive system instead of a centralized
one.

PAGE 7
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