Internal Control Planning Advancement in Technology

Question: Describe about the Internal Control Planning for Advancement in Technology. Answer: Introduction For ensuring smooth working of any business organisation, it is important that all its processes are conducted in proper sequence and all its activities are properly documented. With advancement in technology, the way businesses are conducted, especially the accounting and business transaction s, have also advanced. The day-to-day activities related to sales transactions are also supported by information technology. Therefore, using traditional manual system of transaction recording comes with its own set of risks and threats. The following report outlines the current transaction process of JK Saddlers in the form of system documents which include context diagram and Level 0 (logical) data flow diagram to visually represent the organisations operations. This representation will help in understanding the steps that are involved in the business cashiering process. Further, the report aims to identify the risks associated with the current system of transaction processing and handling. Finally, a control plan to improve the existing system and to mitigate the risks posed by the current cashiering process is described. Part A: Diagrams Context Diagram Figure1: Context Diagram Assumptions: The cashier receives payments through cash as well as through cheques by mail. All the payments (cash/ cheques) received by the cashier are deposited in the bank. Level 0 (logical) DFD Figure 2: Level 0 (logical) DFD Assumptions: Payment is received by customers in the form of cash and cheque (through mail). Cashier maintains two types of receipts book: cash and cheque received and credit card receipts. All the payments (cash/ cheques) received by the cashier are deposited in the bank. Process Map Figure 3: Process Map for Cashiering Process Assumptions: Payment is received by customers in the form of cash and cheque (through mail). Two copies of receipts are made, one for customer and other for business. Part B: Risk Analysis JK Saddlery is a family business making and selling saddlery to farmers and tourists. It also sells directly to retailers as well as on the mail orders from the public. JKs products are very famous in the market. Owner is a traditional business person, so he does not sell over internet, only accepts cash transaction. He sells the product on credit only to reliable customer. The cash flow of the JK saddlery is sound, but he employed only one cashier for all the account handling activities such as accepting payment in cash, by mail and banking transactions. He also maintains two receipts books one for cash and cheques and second for credit card. All the transactions are done by the cashier manually which is risky task for the JK saddlery. Many risks come up with the manual handling of accounting system and banking transactions. Risks associated with Cashiering Process Many risks are associated with cashiering process for the business of JK Saddlery. These risks may arise in the sales transaction, manual recording of transactions, credit sales and banking transaction process. Sales transaction Sales are the major part of the business (Gelinas et al., 2014). Lots of transactions are done in a day and these are recorded in the receipt books of account. In the sales transaction the risks can take place such as, many times cashier entered the transaction that has not been occurred in the business. It leads to the misrepresentations of the accounting transaction in sales ledger. On the other hand where the transaction has been done but it is not recorded by the cashier in the books of accounting. It negatively impact on the financial recording of the transactions. Manual recording of transaction Most of the organization completes the account handling procedure through the computers (Mancini et al., 2013). JK Saddlers all business transactions are recorded manually by the cashier in books. Many transactions occurred in a single day and these are accounted by only one cashier, so he can record the wrong transaction amount and wrong quantity of the products in the account of business. If the transactions of sale is recorded on the other period, such as the transaction is completed in August and recorded on the page of September. This is a risk for the business to match the financial transaction of account or balancing the figure of that time period. On the other hand, many times the classification of accounting item cannot be done accurately and liability transaction is recorded in the asset side. The wrong classification of items distorts the financial statement for JKs business. Risk of accuracy is also associated with the manual recording of the transaction (Porter and Norto n, 2016). All the business transaction of JK Saddlery is done by a single cashier, so he has a burden of work to complete on the time and effectively. In manual recording of transactions it is difficult to tally the amount correctly. The risk of dishonest recording of transactions is also associated with the business. Mailed cheques Mailed cheques can be tempered with which can lead to loss for the company. Also, there is a risk of company account being hacked. Moreover, as single person handles the account, there may be delays in recording the cheque details or the person can skip a cheque payment altogether. Banking transactions Banking transactions contain many risks. The banking transactions are done manually by a cashier, at this time cheques are received by the mail these may be bounce and delay in the payment process. Theft of cash is also a risk for JK Saddlery because it has only one cashier and he goes to bank with cash amount. Sometimes cashier can fill the wrong transaction number in the bank detail, it leads to the loss of money for business. Control plan for JK Saddlery Control plan is a systematic process for a business to improve the efficiency in reporting of account and it also increases reliability of financial statements of the business. Control plan helps in assessing the risk and proceed for mitigating the risk which ultimately improves the effectiveness of accounting system of the business (Mancini, 2013). After assessing the risk of JK Saddlery, it should computerize the accounting and banking process of business. JK Saddlery should adopt the Enterprise Risk Management Model (ERM) to ensure better accounting system. This model helps in fulfilling the organization objectives and attains the financial target (Moeller, 2011). Its major impact is to identify and mitigate accounting risk that can be broadly divided into two categories such as preventive, detective and corrective control and input, processing and output control. Sales transaction risks like recording transaction without actual sales and forgetting to record the transaction that has occurred, can be prevented through the internal control of transaction and then record in the accounting books. If the sales transaction are recorded without transaction for this these process of transaction should be verified (Porter and Norton, 2016). On the other hand, in manual recording of transaction many risks are countered by the business which can be mitigated through the internal corrective plan which helps in correcting the error in accounting transaction. To mitigate the risk of manual transaction business can use the COSO for controlling activities and monitoring the assessment of account. It can also use the XBRL for financial reporting that helps in reducing manipulation of data and to reduce the accounting time. General ledger reporting can also be used for reconciliation of the data. On the other hand, it may adopt the COBIT framework for ensuring integrity and confidentiality of accounting transaction. The risk associated with the payment through mailed cheques can be controlled by providing proper guidance on timely recording the cheque data and training to cashier that how to use the email in the process of payment. The risk of theft for JK Saddlery while depositing cash and cheques at the end of the day can be mitigated by adopting the online procedures for banking transaction of business account. At the time of online transaction, cashier need to verify the account detail and transaction number that helps in maintain the security of banking transactions. Conclusion From the report presented above, it can be concluded that the company adopts a very manual procedure for cashiering process that comes with many risks with respect to recording of data, account handling, managing mailed cheques and conducting banking transactions. Thus, the business needs to appoint one more personnel for helping the cashier in this process. Alternatively, the cashiering process can be computerized using enterprise resource management software like XBRL, COSO, COBIT and likes, which will not only reduce the associated risks with cashiering process but will also increase the reliability of accounting data and reduce the burden of work for the cahier, thereby, leading to fewer mistakes on the part of cashier. This will further help the business in producing reliable financial statements depicting the actual cash flow position without any risk of fraud, dishonesty and recording error. Reference Gelinas, U.J., Dull. R. B. and Wheeler, P. (2014) Accounting Information System. USA: Cengage Learning. Mancini, D.M., Vaassen, E.H.J. and Dameri, R.P. (2013) Accounting Information System for Decision Making. Germany: Springer Science Business Media. Moeller, R. R. (2011) COSO Enterprises Risk management: Establishing Effective Governance, Risk and Compliance (GRC) processes. USA: John Wiley Sons. Fraser, J., Simkins, B. and Narvaez, K. (2014) Implementing Enterprise Risk Management: Case Studies and Best Practices. USA: John Wiley Sons. Hall, J.A. (2012)Accounting information systems. USA: Cengage Learning. Porter, G.A.and Norton, C.L. (2016) Financial Accounting: the Impact on Decision Maker. USA: Cengage Learning.