Analysing and Accounting Information System

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Executive summary

The accounting system of a company is vital as it helps to evaluate and measure the

company's operations and economic activities. The report takes XYZ Limited as a case

study to understand the importance and the role of accounting systems. The general

risks associated with the revenue cycle are stated. The report also analyses the internal

weakness related to SOPP and CRP and tries to give countermeasure for the

prevention of frauds. The report is also an analysis of possible fraud that can occur.

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Contents

Analysing and Accounting Information System............................................................1

Executive summary..........................................................................................................2

Introduction........................................................................................................................4

General risks associated with the revenue cycle.........................................................4

Physical measures that will help to mitigate the risks.............................................6

Potential internal control weaknesses in the SOPP and CRP of XYZ Limited.......6

Cash Receipt Procedure (CRP) risks........................................................................6

Sales Order Processing Procedure (SOPP) risks...................................................7

The potential risk associated with internal control..............................................................8

Sales Order Processing Procedures (SOPP)...........................................................8

Cash Receipt Procedures (CRP)................................................................................9

Frauds that is possible in Sales Order Processing Procedures..............................10

Frauds possible in the Cash Receipt Procedure (CRP)...........................................11

Conclusion........................................................................................................................11

Reference.........................................................................................................................12

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Introduction

One of the most crucial parts of accounting is maintaining a detailed record of the

receivable. The revenue cycle is a part of the accounting process used to keep track of

business activities that keep a record of the transaction from sales to receipt of payment

(Romney, 2018). Alternatively known as "Sales, Receivables, Receipts," the revenue

cycle comprises all the actions linked to selling products and services. Depending on

the type of business, companies may experience different steps in a revenue cycle,

although the overall procedure is the same. The revenue cycle starts with giving a

service or product and ends after the full payment (Romney, 2018). Several factors are

needed to be taken care of when maintaining a revenue cycle, such as the potential

risks associated with a business, the procedure of the cycle itself, and internal control

weakness.

The company in focus in the report is XYZ Ltd. Factors such as CRP (cash receipt

procedures), and SOPP (sales order processing procedures) of the company will be

discussed. The report will elaborate on the risks associated with the revenue cycle of

XYZ Ltd and will discuss the type of frauds that are likely to take place due to things like

the CRP and SOPP of the firm. The knowledge of the potential risks and frauds

associated with the SOPP and CRP will help the firm to be more conscious of such

problems and will help the firm formulate necessary strategies to mitigate those issues.

General risks associated with the revenue cycle

The risks of a revenue cycle are generally linked to the sales activities of the business

(Badar Fitrawan, 2020). Evaluating the risks will help the business be careful of it as it

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can impact the business's future growth. Below mentioned are the five general risks

associated with the revenue cycle.

 Insolvent customers – Insolvent customers are one of the most prominent

problems that businesses face (Shanker, 2017). They are responsible for useless

capital losses. Moreover, many companies face losses in their sales revenue due

to the customers' low credit ranking. These kinds of risks are beyond the

company's control, although it can be mitigated to some extent by looking into

factors like receivables and other financial aspects.

 Shipping of wrong items to the customers – Humans, unlike machines, are

prone to make mistakes. Delivery mistakes such as shipping products to the

wrong address are common mistakes that are just unavoidable. Stocks outs can

be another reason for the wrong delivery of products to customers. These kinds

of mishaps usually happen due to incorrect knowledge and cause harm to the

business revenue cycle.

 Inaccurate records of transactions – Any kinds of discrepancy in calculation of

the product's sales or incorrect recording of time during which the sales are

taking place or unavailability of the invoice for the customers can lead to

transactional risks.

 Embezzlement of inventory and funds – Inventory and funds, if not monitored,

can be usurped. It can result in an imbalance of the company's finances.

 Unauthorised access to accounting records – Accounting records and reports

are sensitive documents that should not be in the hands of an unauthorised

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 person. People can misuse accounting information and even lead to the deletion

of such a vital piece of document from the database.

Physical measures that will help to mitigate the risks

A physical measure such as prepayment of goods reduces the financial receiving costs

and can boot sales revenue. The measure is beneficial for insolvent customers. The

delivery address of goods should be verified before shipping. The company should keep

a backup of necessary information like customer updates and data entry to avoid

transactional risks and inaccurate recordings. A remittance list can be useful for

mistakes in the official transaction (Ayam, 2015). IT measures that will help to

mitigate the risks.

Making transactions cash-less by promoting credit cards or debit cards will help

businesses maintain a record of transactions and prevent miscalculation in the company

records. Surveillance cameras can be used as a remote monitoring option in the

inventories, preventing any misappropriation. Security passwords of computer systems

should be strong and challenging to crack. Also, passwords should be updated

regularly.

Potential internal control weaknesses in the SOPP and CRP of XYZ Limited

The potential internal control weakness in the CRP and CRP of XYZ Ltd are mentioned

below.

Cash Receipt Procedure (CRP) risks

 The mailroom receives many letters, including payment receipts. This can cause

confusion and make the sorting of mails more complicated if there are many

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 mails. It also makes the whole system unorganised. Therefore it is essential to

maintain a separate mailing address, and a hard copy of the payment mail

should be kept.

 Since the clerk manually prepares the remittance list, there is a chance of losing

copies. Therefore, it is better to keep computer records of such information,

which is secure and can be sued as a backup.

 XYZ Limited follows a manual method of slip depositing where the slip is

deposited after each payment. Any paperwork has a chance of being lost, and

therefore it is better to use a computer for maintaining records.

Sales Order Processing Procedure (SOPP) risks

 Things like not receiving the order of the customers on time are a significant

internal control weakness. Moreover, customers order their products through

emails. The company, on the other hand, must receive other emails that can

clutter their inbox. This clutter can increase the chance of missing out on any

order.

 The information systems are prone to cyber-attacks and are used by anyone

without proper authorisation. Therefore, the company must use stronger security

passwords and update them regularly (Secure Data Recovery, 2019).

 The old records kept by the clerk may be problematic and can lead to the

rejection of potential customers or accepting the orders of customers with weak

credit scores. While maintaining old records is necessary to check people's

creditworthiness, updating the record will help the firm make decisions based on

recent data.

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The potential risk associated with internal control.

Every internal control weakness carries a potential risk that might bring about a negative

impact on the business. The potential weakness of internal control related to SOPP and

CRP has been mentioned above, and the risks related to internal control have been

discussed below.

Sales Order Processing Procedures (SOPP)

The very first risk that can be identified on the internal control SOPP of the company

XYZ Ltd is the process of receiving unstandardised sales order through mails and fax.

Even though the orders through emails are fairly protected, there are higher chances of

mails and fax getting manipulated. Also, order through mail takes longer to arrive, which

can delay the delivery of the product (Coopersmith, 2019).

XYZ Ltd uses information from the accounts department to check the creditworthiness

of the customers, which is an excellent initiative taken by the department. However, the

information the sales clerk has been using to evaluate the creditworthiness has been

recorded to be three years old. It is evident that the financial status of many customers

has changed and the accounts of many customers may have been written off. Those

customers not eligible before three years may be eligible now, but they are unable to

receive any orders due to the use of information that has become obsolete. This puts

the reputation of the company at risk and needs to be corrected. On the other hand,

customers worthy of receiving order prior to 3 years maybe be ineligible due to certain

financial changes. Therefore accepting their orders on the basis of the old information

also puts XYZ Ltd at risk.

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Cash Receipt Procedures (CRP)

The mail clerk collects the cash receipt that comes directly through the mail. It has been

given that the cash receipt comes in along with numerous other mails items. The mail

clerk then goes through all these mails and takes out the cash receipt. The risk that is

associated with the CRP can be seen on the collection of the cash receipt itself. There

lies a risk of the receipt being left out by the clerk due to the massive collection of every

mail for the company. On such occurrence, there lies a risk of miscommunication or

misunderstanding between the company and its consumer. Such misunderstanding

may become a bitter experience for the consumer, which might force them to sever ties

with the company. This risk can be avoided if XYZ Ltd takes the initiative of collecting

cash receipt on a particular server.

The mail clerk prepares the remittance list manually and forwards each to cash receipt

and accounts receivable department. Manual preparation of the remittance list carries

the risk of misplacing the most important document of the entire procedure. Misplacing

or forgetting to send even a single copy of the remittance list to either department

carries the risk of putting the entire procedure at a stop. Also, inappropriate or

negligence during the preparation can hamper the reputation of the company.

Therefore, using the help of a computing system to prepare the remittance list should be

the focus of the company. The computing system also needs to have a backup drive

that collects all the checks and remittance advice making it easier to produce remittance

list as many as the company wants (Schofield, 2014).

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Frauds that is possible in Sales Order Processing Procedures

 The numerous weaknesses and risks associated with the SOPP may give birth to

many possible frauds in the SOPP. The entire structure of the SOPP has

loopholes, that can be effectively used by anyone to commit frauds against XYZ

Ltd.

 The company receives unstandardised sales order through email with all the

information of the consumer. With increasing and advanced use of technology, it

is possible to access such emails from the outside world, if the emails are not

protected by at least two-step verifications (Lord, 2019). This might put the entire

firm could at risk. The information sent by the consumers might contain some

sensitive information that could be easily manipulated to commit fraud in the

name of the consumer and even against the company.

 It has been given that the sales representative request the missing information

for converting unstandardised sales order into a standardised sales order. If

somehow, the information of the procedure and the consumer is leaked, an

outsider may pose as a client from the company to collect some other private

information as well (Euler Hermes, 2019). This informations could be used in the

future to commit frauds against both the company and the consumer.

 It has been mentioned above in the report that the clerk uses information from

the accounting department that is three years old. Any consumer who as eligible

three years ago may not be eligible anymore. Therefore the entire procedure of

checking the eligibility but providing goods on credit to consumers who are not

eligible anymore can be considered fraud against the company.

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Frauds possible in the Cash Receipt Procedure (CRP)

 Customers payments in the CRP comes directly to the general mailroom. It has

been made clear that the general mailroom isn’t the most secured server in the

company since it is also used for receiving emails related to other items

(Sampera, 2019). This negligence of using an unsecured server may prompt

outsider hackers to try to access the server. Also, the payment of customers can

be lost if someone other than the mail clerk has access to the general mailroom.

 The mail clerk in the company manually prepares the remittance list. This proof

of payment can be easily manipulated by the clerk if he has even the slightest

intention of doing so.

 Even the deposit slip is prepared manually within the accounts receivable

department. Access to such documents and no automatic records in any

computing system can lead to a number of frauds through the deposit slip.

Conclusion

In conclusion, it has been understood that the revenue cycle plays a huge role in a

company and effective implementation of the revenue cycle is necessary to keep in

check the flow of revenue throughout the year. This is successfully accomplished

through the use of SOPP and CRP by the company. The two procedures help to carry

out the main transactions between the consumer and the company, and ineffective

implementation of these two can bring about the huge risk to the company.

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Reference

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