Internal control of inventory is too essential in every company to avoid theft and frauds. Every company needs to segregate their employees in such a way that all the employees must be responsible for safeguarding the assets of the company. This report is based on the case study analyses of Rainbow Illusions. It has thrown light on the processes, risks and internal control of Rainbow Illusions for its revenue cycle. The report to Chief Executive Officer of the company is a detailed analysis of the strengths of the company and the problems avoided by the company through these strengths. The report has further explained about the situational pressures in the company, increasing the likelihood of fraud and preference for distributed computer system rather than a centralized one in the company.
2. Strengths of Rainbow Illusion’s system for controlling sales transactions
Every company needs to identify its strengths to avoid the existing problems in the internal control of inventory. The strengths of Rainbow Illusions for controlling their sale transactions are as follows:
- Young sales personnel
The company has hired young personnel in their sales department. They are being paid on an hourly basis. The company is also offering them incentives to motivate them to increase the sales of the company. Young sales personnel are active enough to complete the tasks before time. Moreover, they are working on a part-time basis. The employees who are working in this department are needy, only that is why they are working part-time. Needy individuals always remain dedicated to their work (Seifzadeh & Rowe, 2019). Thus it is certain that these young sales employees will help the company in increasing the volume of sales. The hourly payment to these employees also saves the cost of the company. Thus it is reducing the overall cost of the company and increasing the annual revenue. It is promoting healthy competition for the company in the market (Arzensek, 2010).
- Unsophisticated cash registers
The company is using unsophisticated cash registers for recording the transactions of the sales. There are four parts of the sales invoice for recording these transactions. As we know that cash is the most sophisticated part of every business. Every company wants to use convenient and safe methods to handle the transactions. Every company needs to ensure that there is strong internal control for managing this transaction system (Aulet, 2017). Rainbow Illusion has adopted this system of unsophisticated cash registers to make the process of transactions easy. The company is using this system for all sales invoices except the cases of cash, check and bank card. The entry of transactions regarding sales invoices in these unsophisticated registers is very easy. The salespersons, cashiers and managers can easily enter the details in it and can understand the existing entries (Flatt & Jacobs, 2019). Thus the use of these registers helps the company to provide quick services to the customers because the cashier will not take too much time to enter the details of the sales invoice.
- Separation of cash receipt from the accounting records
The company has separated the cash receipts from all other accounting records. Except for the payment type of cash, check and bank card, they are using sales invoices for all the transactions. This system of transactions has made the process of audit quite easier. It is the responsibility of the cashier to get approval in case of sales done by payment through cheques (Gorondutse & Hilman, 2019). Every business needs to have proper control over the cash. That is why it becomes essential to maintain separate records for cash receipts among all accounting records. To make a strong control over cash transactions, Rainbow Illusions has maintained much separate system to avoid fraud and theft. This system also helps the company to avoid the excess holding of idle cash. This cash can be used again and again by the company by making further investments (Grebitus & Bruhn, 2011). The company can make their financial system more strong by proper segregation of duties of employees, by assigning specific duties to each employee for proper segregation of cash receipts from all other accounting records.
Supervision process in the company is also a strong factor which helps in controlling sales transactions. At the sales floor, all the sales employees are responsible for manually recording all the details of the sales of the products to the customers. They will be solely responsible for the entry of sales invoice number and type of sales (Jabbour, 2019). Next, it becomes the responsibility of cashier to supervise all the records entered by the sales employees to avoid any kind of fraud and risk. Cashier reviews the sales invoice and enters the sales records. Then the sales invoice is put into the cash register for further validation. Then one copy of the sales invoice is given to the customers and one is kept for future reference. The assistant manager supervises all the records compiled by a cashier (Jiménez‐Jiménez & Sanz‐Valle, 2012). He offers a daily conciliation report to present all the details to the manager. The manager supervises all the activities of assistant managers and it is his responsibility to make the final deposit in the bank. All the sales transactions and related activities are supervised by the data processing department. This supervision process in the company makes the process of sales transactions easier and simple (Jurksiene & Pundziene, 2016).
Though sales personnel of the company are working on a part-time basis and are being paid on an hourly basis, the managers are salaried employees. The salaried managers will not desire for any kind of commission. Sometimes, the commission-based managers approve credit for the person who is not even eligible for the credit. If the managers are salaried, they will not have any greed, and then it will avoid such fraud cases. This factor makes the sales transaction system stronger. Managers need to work on a full-time basis because they are all in all responsible for all the sales-related activities of the company (Ketchen & Short, 2012). By paying them a monthly salary, the company has bound them with their work and they work dedicatedly to enhance the sales of the company. Managers used to stay with the company for long hours. Thus the hourly payment as sales personnel is not a good idea because it will increase the cost of the company.
- The same system of controlling transactions at all the stores of the company
The company is using the same system for control over sales transaction at all its 30 stores. It is beneficial for the company because the company can easily shift its employees from one store to another. The same system will not create any difficulty for the employees to adjust to the different stores (Kreutzer & Rueede, 2019). This factor will also make the audit process easy for the audit team. In case of different systems at some stores, it would be difficult for the audit team to make analyses for their transactions. This process would become expensive as well as time-consuming. Thus, we can say that this system has made the control of transactions easier.
3. Problems avoided by incorporating the strength
Rainbow Illusion has remained successful in avoiding various problems due to its strength factors. The major problems avoided because of the above-mentioned strength factors are as follows:
- As mentioned above, young sales personnel of the company is the strength of the company, this strength of the company has helped to avoid the problem of slow service. As the sales personnel are young, they are very active to handle the customers in long queues (Mendes & Machado, 2015). The incentives offered by the company also help in boosting the dedication of employees towards their work and it positively affects the sales volume.
- Use of unsophisticated registers for entering transactions related to sales invoice has solved the problem of providing training to the new employees. The companies which are using electronic techniques for entering transactions always need to train their new employees to learn the method of entering transactions (Nicole, Ralph, & Begone, 2012). Rainbow Illusion is using the easiest method of entering transactions. The registers are already divided into four parts which make easy for the sales personnel, cashier, assistant manager and manager to analyse the entries easily. This strength of the company has also reduced the burden of the sales personnel regarding the entry of data and they are being able to provide quick services to the customers (Pastor, Santana, & Sierra, 2010).
- By separating the cash receipt from the accounting transactions, the company has avoided the problem of frauds and risks in the sales transactions. Cash is a very crucial asset of every company. It becomes essential to deal it with proper care to avoid fraud. This idea of the company to separate cash receipt has reduced the burden of the higher authorities regarding the proper handling of cash transactions (Pehrsson, 2016).
- The company has followed a hierarchical supervision system. This system has solved the issue of mistakes in sales transactions at a lower level. In this system, Cashier is responsible to supervise the work of sales personnel, the assistant manager is responsible for the work of cashier and manager is responsible to supervise the activities of the assistant manager (Rumbles & Rees, 2013).
- The company is paying monthly salaries to its managers. The company has followed these criteria to avoid complexity in the system of control transactions. The company needs higher authorities to work for long hours because they are responsible for the activities of lower management (Schnellbächer, Heidenreich, & Wald, 2019). This strength of the company has made it possible to avoid the problems of mismanagement in the company.
- Use of same controlling transaction system at all the stores can have also made it easy for the company to avoid the problem of adjusting employees at other stores. Sometimes the companies need to shift their employees from one store to another due to a shortage of employees at another store. The company has made this process easy by adopting the same system at all the stores (Schoenberg, Collier, & Bowman, 2013).
4. Situational pressure and likelihood of fraud in the company
According to research studies, situational pressures of companies always lead to fraud. In general, the main situational pressures for the occurrence of frauds in the companies are the need for cash by the employee and when the employees are threatened or forced by someone to commit this fraud. Besides these situational pressures, environment, individuals and institutional pressures also play an important role in increasing the chances of fraud in the organization. From the company point of view, decreasing revenue or share of the company in the market gives birth to frauds in the company, intense pressure over the employees to meet the targets and financial pressure over the company due to poor economic performance (Schuh, Quaquebeke, Keck, Göritz, Cremer, & Xin, 2018). Moreover, there are some other factors which make the occurrence of frauds easier are weak internal control of the company over the functions of the employees, failure of higher management to monitor the activities of the employees, carelessness of the management lack of detailed audits due to ineffectiveness of auditing staff, poor security systems and poor procedure of authorities.
In Rainbow Illusions also, the two situational pressures can be the financial issues of the employees and pressure over them to complete their targets. As we know those sales employees of the company are working on a part-time basis and they are being paid on an hourly basis. Those who are working for fewer hours can do these frauds in the sales invoice just to hatch the big amount (Seifzadeh & Rowe, 2019). The pressure of managers over them to increase the sales volume can also force them for doing frauds while entering in unsophisticated registers. On the one hand, these unsophisticated registers are beneficial for the company because these are based on the easy process of entering the transactions. But the pressurized employees can enter the wrong amount in these transactions which can spoil the overall system of transactions (Serenko & Bontis, 2013).
Rainbow Illusion needs to establish a strong corporate environment to strengthen the integrity of the financial reporting process. Enforcement of strong internal forces in the company can reduce the situational pressure and can reduce the likelihood of frauds in the company.
5. Reason of preference to the distributed computer system instead of a centralized computer system
Centralized systems perform computing at a central location. On the other hand, distributed computing is a collection of various computers and the tasks are divided among all the computers. There is no centralized system to control the activities of all computers. Under a centralized computer system, all the calculations are performed on one system (Sinha, 2019). This type of system needs a dedicated server for the calculations of data. Under the distributed computer system, tasks are distributed over multiple computers. This type of system makes the task easy in case of a large amount of data. Most of the companies prefer to install distributed system instead of a centralized one because of its extensive features. The main strength of the distributed system is regarding scalability (Sreenivasan & Tripathy, 2014). It is easy to add new hosts with the main server. This system supports various types of hardware and software programs.
The distributed system is more open as compared to the centralized one. Its openness made it more extended and modified the system. It can continue functioning in case of various faults in the system (Wang, Noble, Dahl, & Park, 2019). There are various benefits of using these distributed systems such as these systems protect the data because of their multiple destinations. As compared to centralized systems having only one main destination, the distributed system protects the data from failure because of its connection with multiple computers. Centralized systems are being avoided these days because of their non-autonomous components, use of homogenous technology for the system, use of same resources by all the users, one point of control and one point of failure. The distributed system can carry out those tasks which are not possible by the centralized system through coordination of actions through interconnected networks (Wronska, Bujacz, Goclowska, Rietzschel, & Nijstad, 2019). Moreover, the distributed system ensures the protection of data. Thus the companies prefer to use this system instead of a centralized one.
The case study explains that the main strong factors for Rainbow Illusions for controlling their sales transactions are their salaried managers, separation of cash receipts from other accounting transactions, young sales professions, unsophisticated cash registers, supervision and the same system of controlling transactions at all the stores. The company has solved the various problems through these strength factors such as avoidance of frauds and risks in the company, mismanagement of cash, lack of supervision, expectation of commission by managers and delay in services. Some situational pressures such as financial issues of the employees and pressure from higher authorities to complete the sales target can be the reason of fraud in the company. Most of the companies prefer to install distributed system instead of a centralized one because of its extensive features. The main strength of the distributed system is regarding scalability. There are various benefits of using these distributed systems such as these systems protect the data because of their multiple destinations. As compared to centralized systems having only one main destination, the distributed system protects the data from failure because of its connection with multiple computers. Thus most of the companies prefer to use distributive system instead of a centralized one.
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Case Study – Rainbow Illusion by Subject Academy
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