Question 1 – Week 6
Conversion Cycle is defined as the cycle which keeps a regular track of all the records for the system starting from processing of raw material until its conversion into finished goods. It refers to the time period needed for finishing the production batch initiating from the requirement of raw material inventory to the production of finished goods (Kabuye et al., 2019). In today’s time, there are various types of conversion cycles like inventory conversion cycle, cash conversion cycle and many more which are applied by the management of the organization in order to effectively manage its operations. There are various risks that exist in the conversion cycle of Central Production Limited. The first risk is concerned with placing the order for material prerequisites by the Supervisor. No further approval is being made to the representative of the store. Another major risk is concerned with the inadequate processing of work tickets.
Creation representatives are themselves preparing their work tickets which indicate that they are not authentic. As the tickets are being completed by the creation representatives themselves, there is inadequate and ineffective control of information and its endorsement. Moreover, in the organization, the accountant himself undertakes decisions regarding the work in progress and the request made for the finished goods over the crude information received as per time card, employment card and material order. The accountant here should verify the information by checking the details received from the creation officials rather than keeping up the record of quantities of the material used up in different activities by himself.
The financial reporting system provides an overview of the financial resources of the business organization. All the information with regard to the financial position and performance of the organization is also depicted by this system (Blums & Weigand, 2019). This financial information is used by external users of the firm in order to undertake an effective decision-making process. This is because the information shows the adequate position and performance of the company. The major objective of developing an internal control system is to accomplish reliability in financial reporting, comply with laws and regulations, safeguard assets and to achieve effectiveness and efficiency in operations. In the given case, major internal control risk and weakness is concerned with the ineffective segregation of duties. Richard Palm is the only person who is responsible for authorizing all the transactions related to sales and purchase, keeping an adequate record of transactions and for undertaking custody of impacted assets of transactions.
Therefore, it is essential to formulate compensating control in order to achieve objectives such as supervision, oversight and proper monitoring by management executives or by those who are charged with governance. The owner of this business completely neglected the performance of basic review procedures. He should take out some time from his daily routine to review monthly revenues, inventory reports, expenditure reports, variance reports, etc. This will help in analyzing the potential problem areas where the performance is lacking. A regular and proper review of financial information is considered as an essential component and used as an input for making effective decisions. Proper documentation acts as evidence for recording transactions. The accounting clerk does not put numbers on the financial documents in order to make sure that each and every transaction is recorded and has been accounted for. Pre-numbering the documents will help in preventing the recording of the same transaction two times. This further helps in simplifying the process of accumulating financial records and finishing the tax returns.
The REA model is referred to as the Resource – Event – Agent model. It is defined as a process of intellectualizing the economic activities of the business organization such as accounting and sales transactions (Laurier et al., 2018). This model is considered as an ISO standard that guarantees both reliability and quality. By gaining an understanding of the three factors, namely, resource, events and agents, the REA model can be understood in the best manner.
R- Resource: Resources are considered as the events or objects that are under the authority of a specific economic agent. Economic resources comprise of goods, services, obligations and claims, etc. So, in the given scenario, the major resource of Elegant Limited is the resorted classical cars which are being sold by it to its customers.
E – Event: Events are defined as the circumstances, transactions and other phenomena that transform the economic resources of the business organization from the exchange, production, distribution and consumption. For the given case scenario, the vent is described as the transactions that take place between the investors, private buyers and the company, Elegant Limited. All the sales made by the company in cash, therefore, cash is considered as the resource.
A – Agent: Agents are described as the individuals or the identifiable parties that use, obtain and dispose of the economic resources offered by the company. As per the given case, an agent is the other party who is buying the cars from the company, Elegant Limited and holding them for resale purposes.
The audit agreement is only acceptable in cases where the auditor is free to carry out its operations and his roles and responsibilities. An auditor must be independent and there must not be any kind of pressure put on him. Here, the term pressure does not indicate work pressure. There are some preconditions that are to be applied to an audit as per Auditing Standard 210, Agreeing the Terms of Audit Engagements Standards of Auditing. As per this standard, the auditor has to undertake two things (Lessambo, 2018). Firstly, the auditor should identify the acceptability of the framework used by the company for financial reporting purposes. This comprises evaluation of the financial reporting framework with respect to laws and regulations undertaking the aim of the financial statements and nature of the entity. The second major thing is concerned with obtaining the agreement of management that it understands and acknowledges its responsibilities to provide the auditor with the required access to the necessary information to carry out audit operations (Nwaobia et al., 2016).
With regard to this provision, if the management enforces any limitation on the scope of the work of an auditor, then the auditor may decline the audit engagement. Moreover, the audit engagement can also be declined if the auditor found the framework of financial reporting as unacceptable or the management failed to provide the required information to the auditor. The management must also provide unrestricted access to the employees to obtain needed evidence for audit purposes. Here, in the given scenario, the management is forcing the auditor to carry out auditing operations by using the data from the data warehouse rather than from the operational database. It is also not providing the auditor with access to employees in order to acquire the required evidence meant for auditing purposes. Therefore, in this case, the auditor has the right to decline this management engagement if he does not find a financial reporting framework as acceptable.
The analysis of the system is defined as the course of action to collect all the information which is related to the system, examine the data in a proper manner and identify and explain the problem in the system (Davis & Yen, 2019). This is all done to identify the major flaws in the current system.
In my view, an individual can sympathize with the system professional as per the conversation held between Mr. CIO (Chief Information Officer and Mr. MID (Managing Director). This is because of the suggestions and the views presented by CIO which is listed below:
Use of old system parts: The system professional suggests that determine the old system and analyze different aspects from the old system that can be effectively kept to be used in the future time period. There are high chances that some parts of the old system are in good condition and can be used effectively and efficiently in the new system.
Understandability of workers: The workers have to gain an understanding of the conversion process when the new system is being installed in the organization (Turner et al., 2020). It is the responsibility of the organization to observe the understandability level of its workers with the old system. This viewpoint is suggested by the system professional. This method would help in analyzing the required that are to be implemented in the new system.
For system analysis, the problem-solving method must be used by Illustrious Limited. Different stages of system analysis are as follows:
Collect, analyze and validate the information
Describe the requirements for the new system
Evaluate the alternatives and prioritize the different requirements
Determine the information needs of end-users and thereby enhance the objectives of the system
A document named Software Requirement Specification is to be prepared at the end of this stage (Rajaram, 2018). This document will specify the hardware, software, functional and network requirements of the new system.
Blums, I., & Weigand, H. (2019, November). A financial reporting ontology for market, exchange, and enterprise shared information systems. In IFIP Working Conference on The Practice of Enterprise Modeling (pp. 83-99). Springer, Cham.
Davis, W. S., & Yen, D. C. (Eds.). (2019). The information system consultant's handbook: Systems analysis and design. CRC press.
Kabuye, F., Kato, J., Akugizibwe, I., & Bugambiro, N. (2019). Internal control systems, working capital management and financial performance of supermarkets. Cogent Business & Management, 6(1), 1573524.
Laurier, W., Kiehn, J., & Polovina, S. (2018). REA 2: A unified formalisation of the Resource-Event-Agent ontology. Applied Ontology, 13(3), 201-224.
Lessambo, F. I. (2018). The International Auditing and Assurance Standards Board. In Auditing, Assurance Services, and Forensics (pp. 35-39). Palgrave Macmillan, Cham.
Nwaobia, A. N., Luke, O., & Theophilus, A. A. (2016). The new auditors’ reporting standards and the audit expectation gap. International Journal of Advanced Academic Research, 2(11), 118-133.
Rajaraman, V. (2018). Analysis and design of information systems. PHI Learning Pvt. Ltd..
Turner, L., Weickgenannt, A. B., & Copeland, M. K. (2020). Accounting information systems: controls and processes. John Wiley & Sons.
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