Case: St. James Clothiers Evaluation of Manual and It-based sales Accounting system risks by Mark S. Beasley
LEARNING OBJECTIVES
After completing and discussing this case you should be able to
[1] Recognize risks in a manual-based accounting sales system
[2] Explain how an information technology (IT)- based accounting system can reduce manual system risks
[3] Identify new risks potentially arising from the use of an IT-based accounting system
[4] Recognize issues associated with the process of converting from a manual to an IT-based accounting system
INTRODUCTION
St. James Clothiers is a high-end clothing store located in a small Tennessee town. St. James has only one store, which is located in the shopping district by the town square. St. James enjoys the reputation of being the place to buy nice clothing in the local area. The store is in its twentieth year of operation. The owner, Sally St. James, recently decided to convert from a relatively simple manual sales system to an IT-based sales application package. The sales application software will be purchased from a software vendor. As the audit senior on the St. James engagement, you recently asked one of your staff auditors, Joe McSweeney, to visit with the client more formally to learn more about the proposed accounting system change. You asked Joe to review the narrative in last year's audit files that he prepared, which describes the existing manual sales accounting system, and update it for any current-year changes. You also asked him to prepare a second narrative describing the proposed IT-based sales accounting system, using information he obtained in his discussions with St. James personnel. The narrative from last year's audit files and the narrative Joe recently prepared are provided in the pages that follow.
[1] The proposed new IT-based sales accounting system will be cloud-based and St. James will access the underling software via online access. Visit the website of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to obtain a free copy of COSO;s thought paper, Enterprise Risk Management for Cloud Computing, to answer the following questions:
[a] What is cloud computing?
[b] What benefits, if any, would use of cloud computing for the sales system provide St. James?
[c] What risks, if any, would the use of cloud computing for the sale system impose on St. James?
[2] The audit partner on the St. James engagement, Betty Watergate, has asked you to review the narratives prepared by Joe as part of your audit planning procedures for the current year's December 31, 2015 financial statement audit. Betty wants you to prepare a memorandum for her that addresses these questions:
[a] What aspects of the current manual sales accounting system create risks that increase the likelihood of material misstatements in the financial statements? Specifically identify each risk and how it might lead to a misstatement. For example, don't just put "Risk: Sales tickets are manually prepared by the cashier." Rather, you should state why this increases risks of material misstatements by adding "This increases the risk of material misstatements because it increases the risk of random mathematical errors by the cashier."
[b] What features, if any, of the proposed IT-based sales accounting system will help minimize the risks identified in question 2.a? If a deficiency exists that is expected to persist under the new system, indicate that "no computer controls reduce this risk."
[c] How does the IT-based sales system create new risks for material misstatements?
[d] What recommendations do you have related to plans for the actual conversion to this new system?