Case study final 2 - Smith\'s market PDF

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Summary

I. Background In 1989, Robert Smith’s opened a small fruit and vegetable market in Bethlehem, Pennsylvania. Originally Smith sold only produce grown on his family farm and orchard. As the market’s popularity grew, however, he added bread, canned goods, fresh meats, and a limited supply of frozen goo...

Description

I.

Background In 1989, Robert Smith’s opened a small fruit and vegetable market in

Bethlehem, Pennsylvania. Originally Smith sold only produce grown on his family farm and orchard. As the market’s popularity grew, however, he added bread, canned goods, fresh meats, and a limited supply of frozen goods. Today Smith’s Market is a full range farmers’ market with a strong local customer base. Indeed, the market’s reputation for low prices and high quality draws customers from other Pennsylvania cities and even from the neighboring state of New Jersey. Currently Smith’s Market has 40 employees. These include sales staff, shelf stockers, farm laborers, shift supervisors, and clerical staff. Viewed in this way his market is a well-known of all in the city of Bethlehem. With this strategy it enables the company to become a global leader in the electronics distribution industry. However, Smith has noticed a decline in profits and sales, while his purchases of products from resale have continued to rise. Although the company does not prepare audited firm to assess his company’s sales procedures and controls, Smith noticed that he must create a solution for his market. A revenue cycle procedures which described in Part V Alternative Causes in internal controls with Data Flow Diagram and System Flow Chart is one of the solution in this scenario. To support this strategy, the company needed to overcome a number of expandable

challenges.

Historically,

market

has

mainly

focused

on

cost

management to deal with these pressures (Gapenski, Vogel, and Langland-Orban 1993). Due to the complex interrelations among purchaser, supplier and payers, which characterize the Smith’s Market Accounting System, the way Robert Smith

manage revenues and accounts receivable differs substantially from that in firms in most other industries. In this study it shows that the mode of payment by the cash, check or credit card to the clerk is having a deficiency for the clerk has many roles in a market and he must submit his collection every end of the day in to the main branch. Smith remained unaffected in response to the incident. Smith’s Market need to maintain and stabilize revenue streams and improve collections has thus sparked the creation of a new industry of consultancies that specialize in helping their clients improve their performance at managing the revenue cycle. Examples include Hourly Pay, CareerBuilder and Payscale to name but a few of the players in this new and growing industry. II.

Statement of the Problem 

III.

How does Smith’s Market solve its Internal Control Weaknesses?

Point of View This study implicates Mr. Robert Smith, the CEO of Smith’s Market.

IV.

Objectives

V.



Discover an answer to the internal control weaknesses of the market.



Aid the deficiency of their inventory strategic plan.



Reflects transparency in accounting department to the management.

Relevant Facts

Smith’s Market experience a material weakness which is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely

basis. In the Smith’s Market in Bethlehem, it was clear that his internal control was not in place. They must pay attention of what happen in a market in order to find solution in there Accounting Department. Also the segregation of some duties is not really implemented in a good condition with some strict advices to a head of the market. Access to control to the billing and accounts receivable records that are part of the revenue cycle is just as important as the physical control devices over cash and inventory because these affects the collectability of an asset which eventually be converted into cash. However, Smith uses Point-Of-Sale system where you can extend credit to the customers. Obviously, this assumption is not valid for all types of business enterprises. Example: Smith’s Market that exchange goods directly for cash in a transaction that is consummated. This example, only cash, checks and bank credit card that is valid but not put in a separate drawer. Smith’s Market is experiencing a risky task in a day to day operation. It is because of the collection of payments per day were always put into their main branch. This action leads to confusion of some inventory or assets like cash. They must reduce this risk in order to have an easy flow of their daily operating cycle. A deficiency in design exists when (a) a control necessary to meet the control objective is missing or (b) an existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met. A deficiency in operation exists when a properly designed control does not operate as designed or when the person performing the control does not possess the necessary authority or qualifications to perform the control effectively.

VI.

Alternative Courses of Action

A. Ensure Duties Are Segregated Segregation of duties is a basic, key internal control and one of the most difficult to achieve. At the most basic level, it means that no single individual should have control over two or more phases of a transaction or operation. It is used to ensure that errors or irregularities are prevented or detected on a timely basis by employees in the normal course of business. If a single person can carry out and conceal errors and/or irregularities in the course of performing their day-to-day activities they have generally been assigned or allowed access to incompatible duties or responsibilities.

FIGURE 1.A DATA FLOW DIAGRAM

FIGURE 1.B STSTEM FLOWCHART

The following are the advantages and disadvantages of ensuring duties are segregated: Advantages: 

It makes a deliberate fraud more difficult because it requires collusion of two or more persons.



It ensures that there is oversight and review to catch errors.



Assets are safe from misappropriation.



Increases the credibility of accurate financial reporting for both internal and external parties.



Improving time management

Disadvantages: 

Inadequate segregation of duties could make fraud detection difficult.



Asset misappropriation



Possible Miscommunication Conflicts



Risks of Inferior results.



Territorial Disputes

B. Perform Reconciliations of Cash Receipts To ensure all funds are properly accounted for, units must reconcile received funds daily. Proper segregation of duties ensures that no one person has sole control over the entire cash handling process from

receiving to reconciling. Someone other than the person receiving and depositing the money must perform reconciliation.

FIGURE 2.A DATA FLOW DIAGRAM

FIGURE 2.B SYSTEM FLOWCHART

The following are the advantages and disadvantages of performing reconciliations for the cash receipts: Advantages: 

It makes accounts to be in good standing.



It prevents theft.



It will help detect accounting errors.



It will keep mistakes at bay.



It achieves accurate balance.

Disadvantages: 

It can issue un-cleared checks that continue not to be presented.



It risks changes in the dates covered by bank statement.



Lost or stolen cash receipts.



It risks having missing transaction.



Inaccurate application of

cash receipts to departmental

accounts.

C. Perform a Self-Evaluation of Your Internal Control This self-evaluation can often be done by performing a “walk-through” which is simply the act of tracing a transaction through market records and procedures. The walkthrough will help provide an understanding of process and control design, particularly with respect to controls that may help prevent

or detect fraud, a determination of whether controls have been designed effectively and actually placed in operation.

FIGURE 3.A DATA FLOW DIAGRAM

FIGURE 3.B SYSTEM FLOWCHART

The following are the advantages and disadvantages of performing a self-evaluation with regards to their internal control:

Advantages: 

Creates a clear line of accountability for controls, reduces the risk of fraud (by examining data that may flag unusual patterns of transactions) and results in an organisation with a lower risk profile.



Provide a flexible but structured approach to improving the controls framework through the organisation.



Foster an improved awareness of risk and controls among management and staff.



Foster an improved awareness of risk and controls among management and staff.



Performing a self-evaluation of your internal control can help identify possible deficiencies before problems arise and will lead to the implementation of more effective controls.

Disadvantages: 

Opposition of participants and/or management to the process, with the result that erroneous information is supplied or that important information is not revealed.



Role players oversimplify the process and the planning it requires.



It is not always appropriate to reveal certain risks, for example where participants are involved in fraud.



Other important factors in the organisation can handicap the process, for example a rationalisation programme.



If management does not support the process in word and deed, the remainder of the staff will be reluctant to become fully involved in the process.

D. Conclusion

As we go through the process of our study we therefore conclude that Smith’s markets are much in need to have a progress with regards to their internal control. There are instances where their employees perform diverse role at a time and we see that this is one of the reason why they can’t improve their business even though they undergo such process. Smith’s Market need also to maintain and stabilize revenue streams and improve collections has thus sparked the creation of a new industry of consultancies that specialize in helping their clients improve their performance at managing the revenue cycle.

E. Recommendation We recommend our first alternative courses of action which is to ensure duties are segregated should be done to solve internal control weaknesses. It takes an advantage to the market since it increases the credibility of accurate financial reporting for both internal and external parties. We see that it is the best way to detect fraud easily since it requires a collusion of two or more person and it ensures that there is oversight and review to catch errors that leads the asset to be safe from misappropriation....