University of Adelaide Adelaide Business School

ACCOUNTING SYSTEMS and PROCESSES (M)

TUTORIAL 10 – Answers Guide

BEFORE TUTORIAL 10

1 Read the material indicated below and attempt answers to the questions that
follow.

Material to read:
MyUni>
Data Analytics – Microsoft Power BI Material>
Topic 9 – Creating smart narrative summaries.pdf

Key aims of Topic 9 are to develop an understanding of using smart narrative

visualisation to develop reports including smart narrative customisation.

Students are expected to learn basic hands-on skills to carry out these tasks.

Students are expected to attempt tasks in this document before the tute and raise
questions about issues encountered during the tute.

2 Prepare the answers to the following questions from Accounting information

systems applications (transaction cycles) (Romney Et Al, Chapters 14 and 15):

Question 1
Employees with access to cash should not have the responsibility for recording or
authorizing transactions involving its receipt. Explain the pair of duties that should be
segregated in this regard.

Employees with access to cash have custody responsibilities and as such

should be segregated from authorisation and recording duties. No employee
should undertake more than one of these duties. Segregation of accounting
duties is an accounting control to prevent the committing and concealment of
fraud. An employee with custody and recording duties can falsify the reason
and amount for a cash transaction (recording) and steal part or all of the
payments received.

Question 2
What internal control procedure(s) would provide protection against the following
threats?

a. Posting the sales amount to the wrong customer account because a

customer account number was incorrectly keyed into the system.

If the transactions are being entered online, closed loop verification could
be used. The system could respond to the operator entering the account
number by retrieving and displaying the customer's name for the operator
to review.

If the transactions are being entered in batches, redundant data such as the
first five characters of the customer's name could be included in each input
record; after finding a match on customer account number, the system
 would also verify that the name characters match before posting the
transaction.

Note that a validity check would only tell you if a valid customer number
was entered, not if the correct valid customer number was entered.
Likewise, check digit verification could tell you if the customer number
existed, but not if it was the right customer number.

b. Making a credit sale to a customer who is already four months behind

in making payments on his account.

Up-to-date credit records must be maintained to control this problem.

During the credit approval process, the credit manager should review the
accounts receivable aging schedule to identify customers with past-due
balances to prevent additional sales to those customers. Alternatively, the
computer system could be programmed to determine if the customer had
any past due balances over a specified length of time (such as 60 days). If
not, the sale would be approved. If they had a past-due balance, a notice
could be sent to the credit manager who could review the sale and make a
decision about extending additional credit.

A credit limit checkwould not be sufficient, because a customer could have

a balance below the credit limit but be past due. A computer system could
be programmed to check both credit limit and past due accounts and
authorize sales. Sales not passing either the credit limit or the past due test
would be sent to the credit manager for a decision.

c. Writing off a customer’s accounts receivable balance as uncollectible

to conceal the theft of subsequent cash payments from that customer.

The problem usually occurs because the same individual writes off
accounts and processes cash payments. Therefore, the best control
procedure to prevent this problem is to separate the function of authorizing
write-offs of uncollectible accounts from the function of handling
collections on account.

d. Theft of cash by a waiter who destroyed the customer sales ticket for
customers who paid cash.

In a manual system, all sales tickets should be prenumbered and accounted

for so management can detect missing sales tickets.

In many restaurant systems, waiters cannot get food out of the kitchen
without entering a customer order into the system. The system creates a
prenumbered sales document that must be cleared by the waiter that day.
This prevents the waiter from destroying sales tickets and giving people
free food.

These systems also are capable of some reasonableness tests such as:

Beginning inventory of food

• Food used in the sales orders that day
= Ending inventory of food

The ending inventory of food is counted and compared to the projected

ending inventory to determine if food items are missing. This check is
most frequently used for expensive items of food like steak, shrimp,
lobster, etc.

e. Shipping goods to a customer but then failing to bill that customer.

To prevent this from occurring deliberately, it is necessary to segregate the

shipping and billing functions.
Accounting Systems and Processes (M) Tutorial 10 Page 2
 To prevent this from happening by accident, the system needs to
automatically bill customers for shipments. The system should also be
configured to periodically reconcile all shipments with a billing and
generate reports of unbilled shipments for management review and
corrective action.

f. Unauthorized disclosure of buying habits of several well-known

customers.

Access to customer information should be restricted using User IDs,

passwords, and an access control matrix.

Employees given such access need to be trained to follow the

organization’s privacy policies.

In addition, encryption of the data would prevent snooping by IT

employees who do not have direct access to the application system.
Otherwise, such employees may be able to use their access to the operating
system to be able to view data.

g. A sales clerk sold a $7,000 wide-screen TV to a friend and altered the

price to $700.

All product prices and sales discounts maintained in the system

Use of barcodes and RFID tags to identify the product and sales price

A system configured to give sales clerks read-only access to pricing data to

prevent them from changing the price.

Supervisor approvals for any needed changes or discounts to the listed

price

A log of all system overrides and supervisor changes to prices

Accounting Systems and Processes (M) Tutorial 10 Page 3

Question 3
A Stockholm-based medicine company wishes to reduce kickbacks. For kickbacks to
make economic sense, the supplier must find a way to recover the money spent on it.
This usually is accomplished by inflating the price of subsequent purchases or by
substituting goods of inferior quality. Name three processes to prevent kickbacks.

Kickbacks, which are gifts from suppliers to purchasing agents for the
purpose of influencing their choice of suppliers, are another threat. For the
kickback to make economic sense, the supplier must find some way to recover
the money spent on the bribe. This usually is accomplished by inflating the
price of subsequent purchases or by substituting goods of inferior quality.
Even if neither of these problems occurs, kickbacks impair the buyer’s
objectivity.
To prevent kickbacks, companies should prohibit purchasing agents from
accepting any gifts from potential or existing suppliers. (Trinkets that are
clearly of inconsequential value may be allowed.) These policies should apply
not only to gifts of tangible goods, but also to services. For example, meeting
planners should be informed that it is against company policy to accept
frequent-traveler points from hotels for booking the company’s meetings
there. Training employees how to respond to unsolicited “gifts” from suppliers
is also important, because many kickback schemes are initiated when unethical
suppliers send such “tokens of appreciation,” usually in the form of cash, to
unwary employees. Once the employee accepts the gift, the supplier threatens
to disclose the payment to a supervisor unless the employee makes additional
purchases from that supplier.
Job rotation is another important control to reduce the risk of kickbacks:
Purchasing agents should not deal with the same suppliers indefinitely,
because doing so increases the risk that they may succumb to the constant
temptations offered by an unethical supplier. If the organization is too small to
rotate job duties across different purchasing agents, it should periodically
conduct a detailed audit of the purchasing agent’s activities. Purchasing agents
should also be required to take their allotted vacation time each year, because
many frauds are discovered when the perpetrator is absent and unable to
continue covering up the illicit activity.
Finally, purchasing agents should be required to sign annual conflict of
interest statements, (control 11.3) disclosing any financial interests they may
have in current or potential suppliers. Kickbacks are difficult to prevent, so
detective controls are also necessary. One particularly effective detection
control is the supplier audit. Supplier audits may be one of the best tools for
assessing the effectiveness of expenditure cycle controls. It entails having an
internal auditor visit a supplier’s office to check its records. The objective is to
identify suppliers likely to be associated with problems such as kickbacks. Red
flags that indicate potential problems include:
1. A large percentage of the supplier’s gross sales was to the company
conducting the supplier audit.
2. The supplier’s pricing methods differ from standard industry practice.
3. The supplier does not own the equipment it rents, but is itself renting that
equipment from a third party.
4. Entertainment expenses are high in terms of a percentage of the supplier’s
gross sales.
5. The supplier submits altered or fictitious third-party invoices.
6. The supplier’s address on its invoices is fictitious. Supplier audits can yield
substantial returns. One company recovered more than $250,000 for such
problems as duplicate billings. Supplier audits also often uncover violations of
the company’s conflict of interest policy. Interestingly, many suppliers support

Accounting Systems and Processes (M) Tutorial 10 Page 4

 the idea of supplier audits, because the process gives them a “good excuse” for
not offering purchasing agents gifts or entertainment.

DURING TUTORIAL 10

• Contribute to the class discussion of the above questions.

Please remember that you’ll enhance your learning by ACTIVELY

PARTICIPATING in the discussions.

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