HI5019 SIS Tutorial Solution
HI5019 SIS Tutorial Solution Holmes T1 2021
Question 3.1. Some argue against corporate involvement in socially responsible behaviour because the cost incurred by such behaviour place the organisation at a disadvantage in a competitive market. Discuss the merits and flaws of this argument.
Answer. The costs of socially responsible behaviour include those associated with environmental protection, improving worker safety, and affirmative action. In the short run, when one firm incurs these costs and its competitor does not, the latter has a competitive advantage over the former. However, the socially responsive firm can maximize its profitability in the long run by accruing goodwill in society and avoiding the negative effects of government regulations.
Question 3.2. When a company has a strong internal control structure, stockholders can expect the elimination of fraud. Comment on the soundness of this statement.
Answer. A strong internal control structure provides an excellent shield against fraud. However, these shields are not 100 per cent bulletproof, especially when employees collude and/or top management is involved. A strong internal control structure coupled with good employee morals and ethics is the best deterrence against fraud.
Question 3.3. Although top management’s attitude towards ethics sets the tone for business practice, sometimes it is the role of lower-level managers to uphold a firm’s ethical standards. John, an operations-level manager, discovers that the company is illegally dumping toxic materials and is in violation of environmental regulations. John’s immediate supervisor is involved in the dumping. What action should John take?
Answer. Normally, the resolution of an ethical problem on the job would involve consultation between the subordinate and the immediate supervisor. When the supervisor is part of the problem, the matter should be taken to the next higher-level person in the organization structure.
Question 3.4. The following describes the cash receipts procedures for a medium-sized online and catalogue-based retailer.
Customer payments come directly to the general mail room along with other mail items. The customer payments mail constitutes about 20 percent of the total mail received each day. The mailroom clerks’ sort through the mail, open the customer payment envelopes, remove the customer checks and remittance advices, and reconcile the two documents. The mailroom
supervisor then sends the reconciled checks and remittance advices to the Accounts Receivable clerk, who posts the amounts received to the customer AR subsidiary ledger and the cash receipts journal from her computer terminal. The AR clerk then manually prepares a remittance list of all checks received, endorses the checks “for deposit only” and sends the
HI5019 T1 2021 Strategic Information Systems for Business and Enterprise
checks and remittance list to the Treasurer. Finally, the clerk files the remittance advices in the AR department.
Once the checks and remittance list arrive at the Treasury department, the treasurer reconciles the documents, and manually prepares three hard copies of the deposit slip. Next, he sends the checks and two copies of the deposit slip to the bank. Finally, he files the third copy of the
deposit slip and the remittance in the department.
Required: Identify the internal control weaknesses in the cash receipts process. For each weakness, describe the associated risks. For each weakness provide a possible control activity.
• Weakness: Mailroom clerks have access to checks and remittance advices.
• Risk: The mailroom clerks could steal the check and destroy the remittance advice –
- no record of transaction
• Control: Require the cash receipts to be sent to a separate PO box a separate room.
This smaller amount of similar mail can be better controlled though supervision.
• Weakness: The AR clerk receives checks and remittance advices from the mailroom
• Risk: The AR clerk has access to both asset and records. The clerk could steal the
check and destroy the remittance advice to eliminate any record of the cash receipt.
• Control: Prepare remittance list in the mailroom. Any loss or theft of checks after
they are recorded on the remittance list would result in a discrepancy between the
remittance list and the checks that are deposited in the bank.
• Weakness: The AR clerk has responsibility for recording cash and updating the
customer accounts from the checks (asset).
• Risk: The clerk could engage in a lapping fraud.
• Control: Segregation of duties is needed to separate the tasks of recording accounts
receivable and receiving cash receipts.
Question 3.5. The following describes the cash disbursement procedures for a wholesale
building supply company.
When the accounts payable clerk receives the supplier’s invoice she records the purchase in
the purchases journal, records the liability in the AP subsidiary ledger, and sets a due date
based on the terms specified on the invoice. The clerk then updates the inventory control and
accounts payable control accounts in the general ledger. The invoice is then filed in the
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Each day, the clerk visually searches the AP subsidiary ledger from her terminal for invoices
that are due to be paid. From her computer terminal, the clerk prepares the check and records
it in the check register. The negotiable portion of the check is mailed to the vendor and a check
copy is filed. The clerk then closes the liability in the AP subsidiary ledger and updates the
accounts payable control and cash accounts in the general ledger.
Required: Identify the internal control weaknesses in the cash receipts process. For each
weakness, describe the associated risks. For each weakness provide a possible control
Answer. Assessing Internal Control: cash disbursement procedures.
• Weakness: Clerk sets up a liability based solely on the vendors invoice.
• Risk: The company may be paying for things it did not order, did not receive, or is
paying too high a price.
• Control: The clerk should perform a three-way-match of the purchase order, receiving
report, and invoice to verify that the liability is legitimate and correctly stated.
• Weakness: AP clerk authorizes the liability and writes the check to pay it.
• Risk: The clerk could create a false vendor, set up a liability and disburse funds (see
payments to fictitious vendors, chapter 12),
• Control: Segregation of duties between the tasks of authorizing a liability and check
• Weakness: AP clerk has access to both the AP subsidiary ledger and the general
• Risk: Balancing general ledger control accounts with corresponding subsidiary
ledgers, can help detect certain types of errors and irregularities. This control is lost
when the same individual is responsible for updating both accounts.
• Control: Segregation of duties between the general ledger function and other
Question 3.6. Peter started his career as a clerk in the accounting department of XYZ
corporation in 2000. Now he is the highly regarded employee of the organisation. His loyalty
to the company is reflected in his dedication to his job as a general accounting clerk. From
which he has not taken a vacation in almost 12 years. Because of his commitment and long
tenure, he has acquired many related responsibilities, which has allowed the XYZ Corp to
reduce its workforce through attrition, control salary expenses, and become more efficient and
competitive. The following describes Peter’s responsibilities.
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Peter receives copies of credit sales orders from the sales department. From these documents,
he accessed the AR subsidiary ledger from her office computer and recorded the AR. He then
records the sales in the sales journal and posts the transactions to the general ledger accounts.
Cash receipts in payment of customer accounts receivable come directly to his office. He
records the cash receipts in the GL cash and AR accounts and updates the AR subsidiary
ledger. He then endorses the checks “for deposit only” and deposits them in the bank at the
end of each day.
a) Identify any control problems in the procedures described above.
b) What sorts of fraud are possible in this system?
c) What controls are needed to reduce the risk of fraud?
Answer (a). Peter’s dedication to his job from which she has not taken a vacation in many
years is a red flag that she may be engaged in something illegal. This concern is reinforced
by his job description, which combines several incompatible tasks:
Segregation of Duties: Peter is responsible for recording both accounts receivable and cash
Segregation of Duties / Accounting Records: Peter has access to both the AR subsidiary
ledger and the general ledger accounts.
Answer (b). The following possible fraud could be committed:
Skimming: Peter could steal check and write off customer account receivable as a bad debt.
Cash Larceny: Peter could implement a lapping scheme because he has access to both cash
receipts and AR records. The complicated accounting procedures needed to manage such a
scheme would require him to not take a vacation for fear that a replacement clerk would
uncover the fraud.
Answer (c). Controls need to reduce the risk of fraud are:
• Implement a policy that all employees must take a vacation each year,
• Separate the task of AR record keeping and cash receipts processing, and
• Separate the tasks of posting to the general ledger from the functions of updating