The report on Analysis of

Holmes Institute’s Accounting System

And revenue cycle

Executive summary
Here within this report, sales revenue of XYZ Limited and business process, risks, and
internal controls are analyzed. The main purpose is to highlight the different prospects and
the risk associated with revenue cycle of the company and how these risks can be alleviated.
It also clarifies the types of frauds and potential risks associated with the internal control
weakness. Holmes is an Australian higher educational institute which provides quality
education and has earned great reputation in the field of vocational training, higher education
and secondary education. However the head of the accounting department is concerned about
their revenue cycle. Thus, this report clears the doubt by stating how recurring set of business
activities and data processing categorized and provide goods and services to the customer and
collect cash payments.

Contents
Executive summary

Introduction

Background of accounting information system

Scope and importance of accounting information system

Procedures involve in revenue cycle of XYZ Limited

1. sales ordering processing procedure(SOPP)

2. cash receipt procedures(CRP)

General risk involve in the revenue cycle of any business and physical and IT controlling
measures

Potential internal control weaknesses in the sales ordering processing procedures and cash
receipt procedures of XYZ Limited

AIS and possible fraudulent activities in accounting information system

Conclusion

Appendices

Introduction
An accounting information system (AIS) is a procedure of collecting, storing, managing,
processing, retrieving, and reporting financial data that a business use so that it can b used by
accountants, consultants, business analytics, managers, chief financial officers(CFOs),
auditors, regulators, and tax agencies. It is generally use for decision making process in an
organization. Accounting information system is a computer based method for tracking
accounting activity in simultaneity with information technological resources. It is used by the
internal users to report information to investors, creditors, and tax authorities. A modern
information technology resource combines with traditional accounting practices with the help
of AIS. Atypical AIS includes data relating to revenue, expenses, customer information,
employee information, and tax information where as specified data includes sales order ad
analysis report, purchase requisitions, invoices, check registers, inventory, payroll, ledger,
trial balance, and financial statement information. To run an accounting information system it
must have a database structure which in typically programmed with query language require
for table and data manipulation.AIS is highly secured electronic platform which secure the
electronic data from hackers, viruses and other sources of collecting information. In addition,
it allows user to edit and input data from numerous sources.

Background of accounting information system

The development of information system has greatly affected the growth spurt of the
company, its economic growth, national stability and public welfare. The main function of
accounting information system is to provide relevant information for management to carry
their duties. Forming physical even, personal resources that characterize most business
processes is the oldest and traditional form of accounting information system. Flat file model,
database system model, REAREA system model and ERP system model are the models
evolved with the evolution of accounting information system. In early 1920, British
petroleum signed the first outsourcing agreement with Accenture. After that, accounting
process was changed from book keeping to management strategic and decision making
support function. In the late 80s, Enterprise Resource planning (ERP) evolved from
technological evolution, used to connect and incorporate various organizational functions
such as accounting, asset management, operations, procurement, human resource etc(Ziemba
and Oblak, 2013).In 2008, when there was financial economic crisis, the role of accountants
within the organization changed enormously from book keeping and reporting to playing
active role in decision making process.

Scope and importance of accounting information system

Bookkeeping process that records transactional activities, keeps financial records and
performs auditing is call accounting. It is designed to perform specific task. The scope of
Accounting is wide and extends in business, trade, government, financial institutions and
every other arena. Accounting information system collects and prepares historical and
predictive data. The collected information processed and evaluated by applying accounting
theory and finally evaluated data reported to internal and external sectors ensuring privacy.

Business sector

As we know, the prime objective of every business organization is to earn and maximize their
profit. Financial transactions of business concern are recorded in the books of accounts to
ascertain operating result and financial position.

Non-trading concern

The system of accounting is equally important for non-trading concerns such s hospital,
school and colleges, club, church, association to maintain their financial transaction.

Government offices

Accounting information system plays indispensible role for the preparation of national
planning and budget, and equally important for national progress and development which is
only known through the interpretation and evaluation of accounting data.

Professional life

Professionals like doctor, engineers, and advocates maintain their accounts of income and
expenditure because it is mandatory for them to maintain accurate accounts of income and
expenditure to pay income tax.

Procedures involve in revenue cycle

1. sales ordering processing procedure(SOPP) of XYZ Limited
Sales ordering processing procedure are a sequence of action that business follows to
fulfill the desire of the customer. SOPP is one of the methods to categorize revenue
 cycle. In this procedure, the customer order received by sales department via mail,
email or faxed consider as unstandardised sales order which is then converted into
standardized sales order. In the case of XYZ Limited, Clerk checks the
creditworthiness of the customer’s orders to find out the missing information and data
in the request of sales representative and the sales clerk using the same method from
the last three years to check creditworthiness of the new customer. Sales processing
started only after the verification of the credit which is otherwise rejected if not
verified. Approved standardized sales order is then recorded in the computer and its
digital copy is then distributed to the warehouse and shipping department for further
processing. After that the sales is recorded as sales journal by the computer
automatically and clerk review the entry and files the hard copy of the customer.
After that, the stock notice and shipping notice are accessible at the stock market and
for further processing the manager of the warehouse print this notice which is again
updated as inventory subsidiary ledger and the general ledger control account.

In addition, the warehouse manager provides physical stock, the stock release and
shipping notice to the shipping clerk which is again verified for the digital sales
order. The printed hard copies of bill lading and packing slip including goods are then
sending to the carrier which is later filed in the shipping department. Account
receivable creates the hard copies of these notices and mailed it to the customer. After
mailing the invoice, this information are used by the clerk for updating the account
receivable subsidiary ledger and general ledger and to keep the records of these
updates.

2. cash receipt procedures(CRP)

When the general information of customer come along with the various mail item clerks
performs the various tasks such as sorting the mail, opens the customer payment envelop,
remove the customer check and remittance advice and reconciles the two documents.
Two hard copies of remittance list is then prepare in which one hard copy is send to the
account receivable along with remittance advices and another copy accompanies the
check to the cash receipt department. Once the remittance received by CRD, after that the
treasurer reconciles the document, endorse the texts, prepare the three hard copies if a
deposit slip, update the cash receipt journal and general ledger, sends the checks and two
copies of deposit slip to the bank and files the third copy of deposit slip and the
remittance in the department.

General risk involve in the revenue cycle of any business and their Physical and
IT controls
As we know revenue controls the organizational overall internal control framework
however there are some risks associated with it. One of the major risk involve in the
revenue cycle of any business is the authorization or accuracy of sales contract with
 the client. Prices should be fairly quoted by following the sales pricing policy. There
are several elements of inherent risk associated with the revenue cycle.
1. Quality of company’s management
One of the risk of revenue cycle in any business is the about the quality of company’s
management. Auditor’s main concern is ensuring that whether the sales really happen
or not.
Physical control:
The main audit procedure involve to analyze this risks
 Understanding the business of the company
 Preliminary analysis
 Understanding control and test of control

IT controls:

 Test of detail like selection of sample size, sample and perform sales
transaction.
2. Changing in accounting principle
Changing in accounting principle is the inherent risks of revenue cycle because net
income might be overstated over the period of time.
Physical control:
 To alleviate this risk company should verify the existence of clients,
verification of component part they purchase from material movement Inc.
IT controls:
 Updated files and transactional records
 Verification of policies and their criteria before processing sales

3. Non-arm transactions
The price and the quantity of purchased product may not be correctly showed
which are purchased through non arm transaction.
Physical control:
 Confirmation of collected evidence and examining the assets condition by
comparing depreciation rate is the audit procedure required to mitigate this
risk.
IT controls:
 Data input edit
 Automated posting to subsidiary and GL accounts
 File backup

4. Risk of selling to un-creditworthy customer

It has high risk of loss of excessive bad debt.
Physical control:
 Customer should be verified before starting any sales dealing.
IT control:
  Automated credit checking performed automatically as a programmed process
control.

5. Risk of shipping wrong item to the customer

Sometime wrong items are delivered to the customer due to human error or because
of shortage of goods which is known as stock out.
Physical control:
 Independent verification of goods
IT controls:
 Scanner technology
 Automated Inventor ordering

Potential internal control weaknesses in the sales ordering processing

procedures of XYZ Limited
An order error or problem may occur with the each step of the order process in which there
are some internal errors caused by business employees, system and process. Order processing
problems may leave negative impression on the customer satisfaction and are costly as well.

Customer error

Sales ordering begins with the demand of the customer for the product nut sometimes the
details provided by the customers regarding number, quantity, shipping address or billing
information may be wrong. The error may be verbal, electronic or writing, via online order
entry.

Inquiry

Sometime customer are not sure about what they really want to purchase or what type of
product or service satisfy their need and demand and will conduct a customer service
department for advice. During the exchange of information, problems may occur like
customer may not communicate clearly or the employee who receive the inquiry may be new
or poorly trained.

Order entry

During the process of entry of data, there may be chances of input incorrect product, service,
customer or billing information. Sometime correct information is processed in the system but
due to system error or malfunction input information may be changed.

Shipping

Orders ship to customer location via U.S.P.S. mail, truck or air delivery. Shipping problem
commonly include choosing the shipping carrier or the wrong shipping priority.

Product quality
Sometime product quality can cause problems even though the order entry and fulfillment are
flawless. Product quality is a problem, which usually lends to a product replacement or
product return.

Potential internal control weaknesses in the cash receipt procedures of XYZ

Limited
1. Failure to list and deposit cash receipt on timely basis.
2. Sales not coded on cash register tapes.
3. Inadequate reconciliation of the subsidiary records of accounts receivable with the
general ledger account.
4. Accounting manuals not used to assist in properly recording miscellaneous cash
receipt.
5. Lack of segregation of duties between personnel who have access to cash receipt and
those who made entry into account receivable records

AIS and possible fraudulent activities in accounting information system

Employees who are authorized the user of AIS may have the opportunity to misappropriate
AIS data and information which is regarded as occupational fraud, the illegal action of
converting or concealing information for personal gain. The Association of Certified Fraud
Examiners defines occupational fraud as the misappropriation of assets. An authorized
accounting employee with access to the AIS database may be able to alter payroll, billing, or
reimbursement data for personal gain. Intentional manipulation of the content or the structure
of financial reports is also termed as fraudulent behavior of accounting employee.

Conclusion
To recapitulate, Accounting Information System (AIS) become quite insecure and risky these
days for business environment. However, it plays vital role to collect, control, monitor,
implement the data in a integrated manner, A company needs to follow the correct procedures
and policies while using strategic mode so that business does not face problem when
receiving strategic mode. Company should also has a contingency plan set so that it can deal
with problems in a facile manner.
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