Evaluation of Manual and IT-Based Sales Accounting System Risks
Copy Right: Anthony Butka Ralph Avallone Hong-Ming Yen
We meet Sally St. James of St. James Clothiers who has a retail clothing store in Tennesse. Sally has decided to abandon her manual sales entry system and convert to a more sophisticated IT-based application. As the audit engagement team we have been asked to review narratives of former years and then draft a narrative for the new system. We will address the weaknesses of having a manual based sales entry system. We will discuss how switching to an IT-based will take care of some of those weaknesses. We will then talk about some of the new risks that Sally St. James will encounter with the IT-based sales system. Finally we will make some recommendations on how to make the conversion process a successful one.
5.4.1 Upon review of St. James several risk factors have been identified due to their manual operations system. The highlighted risk areas pose a risk to the income statement and balance sheet. The accounts that are most likely to be impacted are the cash balance and inventory balance. However cost of goods sold, taxes, sales revenue, compensation, amongst otherwise are all impacted as well. One risk intangible that is not discussed is the risk of losing customers due to a poor reputation and customer service. a. The fact that the cashier manually records the clerks name, product number, quantity sold, and sales price on a pre-numbered ticket indicate a potential misstatement in all these categories as the cashier may make an error or intentionally record the wrong sales information. The clerk also has the ability to alter the actual sales amount driving potential misstatement in the income statement and balance sheet. b. For special items, the cashier refers to newspaper clippings of advertisements, in store sale signs, or will ask the salesperson for the price. The material misstatement likely to occur due to customers moving signs or salespeople having control of price of items which they sell imposes a risk to St. James as there is no reputable source to determine the actual price. c. A risk to the cash on hand at the point of sale is threatened by the fact that the draw can be opened by pressing the “Total” button on the register. This means that anybody can open the register and physically remove the contents of the draw. d. A sales transaction generates two receipts, one is given to the customer and the other is locked in the register. No one except the store accountant can unlock the tape from the register. If the accountant has
access to the only store record of a sales transaction, it presents the potential for the accountant and manager to collude and skim cash from the register in order to match the altered receipts for that day. e. At times when the store is busy, a sales clerk will assist the cashier with check outs. However, by putting a clerk at the Point of Sale runs the risk of being able to identify who’s recording which transaction. Similar to the risk we see in steps a and b. f. The cashier processes sales returns by completing a sales ticket using negative amounts. However it’s possible that fictitious tickets could be created in order to record and take money out of the register. g. John Thornberge the store manager counts the cash each night and prepares a deposit slip and then compares to accountants record. Similar to the risk in step d, the store manager and accountant could work together in order to display something other than what actually occurred. 5.4.2 After review of the manual system, we the auditors then discussed the impacts of the new IT system features and how they might mitigate all the risks that we previously addressed. a. When the product prices are stored in a computer, the system will automatically calculate the tax, total quantity, and price. Here no manual errors are possible,...