Internal controls are the key to running a successful business. Kudler Fine Foods, after reviewing flowcharts created by Accounting Team A, is requesting information regarding controls for system improvements. Presented here is an analysis of their current accounting information system, risks and controls associated with this system and an evaluation of applying internal controls to help mitigate risks and losses. Risk Analysis Assessing risk is a difficult task. In its simplest term risk is the chance of negative outcomes (Hunton, Bryant, & Bagranoff, 2004).There are many types of risk that all business must consider; Kudler Foods is susceptible to at least two.
First, business risk, the likelihood that an organization will not achieve its business goals and objectives (Hunton, Bryant, & Bagranoff, 2004). The most evident business risk that Kudler faces is from new competition. They are currently in a market where few businesses exist that provide their services, however their expansion plans could see more store popping up in these areas. Economic conditions can also interfere with Kudler’s expansion plans.A second form of risk is IT risk.
IT risk includes risks associated with data access and integrity. Unauthorized access to data can be physical, actually viewing confidential information, or logical, an employee who has physical access but abuses that access by looking up information not needed to perform his or her job (Hunton, Bryant, & Bagranoff, 2004). Kudler runs the risk of hackers stealing customer or employee data, or employees manipulating time or inventory records. Risks and Internal ControlsManagers need to assess risk and decide how to apply resources to manage it (Hunton, Bryant, & Bagranoff, 2004). Input controls, used by companies in an attempt to ensure validity, accuracy, and completeness of the date entered into an AIS (Bagranoff, Simkin, & Strand Norman, 2008), are needed for Kudler Foods.
Payroll, accounts payable, accounts receivable and inventory all rely on some sort of input from the users of the system. Kudler will also benefit from implementation of data access controls and manipulation controls.Limiting users who can access and change data on the system will help to ensure the validity of data output. Internal Controls Payroll requires the employees to clock in an out, and then a supervisor reviews and approves the time card. To avoid errors in time sheets, Kulder should install time card applications that allow the input of a regular schedule for each employee.
When timecards are then sent for approval, any unusual hours worked or missed would be flagged for review.Accounts payable, accounts receivable and inventory controls should all be tied into the current POS system currently being used by Kudler. POS systems that use bar code readers that interpret the UPC printed on packages have been found to substantially decrease recording errors (Bagranoff, Simkin, & Strand Norman, 2008). Using their POS system, Kudler could automatically reduce their inventory when a product is purchased, set flags for low inventory warnings or trigger messages to headquarters to avoid stock outs by transferring items from locations not selling well to stores that need the item.AP can also use the POS system to reduce errors. By tracking the availability of items in all stores, when an order is placed for an out of stock item or a specialty item, the store placing the item will have a faster turnaround time if they can retrieve the item from another store automatically instead of from the vendor.
AR can benefit from the POS system by triggering warning on stock based on expiration dates, low stock or stock outs and help to analyze what is not selling.Both AP and AR should implement input validation routines, programs that check the validity and accuracy of input data after users enter it into the system (Bagranoff, Simkin, & Strand Norman, 2008). For example, when a customer places an order in the store, the system should indicate that a product code is valid or invalid and that it can still be ordered. Customers should also approve the order prior to it being submitted. Printing an order receipt for them to initial before leaving the store avoids ordering incorrect items the store may then be stuck with.
AR can use validation tools by having approval levels. One user inputs an order or requests payment for a vendor, the order of payment request then must travel to a supervisor or manager for approval and finally headquarters for the final OK. This can help avoid over/under ordering of items. Other Controls Continuity risk is another risk that Kudler Foods needs to consider. Continuity risk includes risks associate with an AIS’s availability and backup and recovery (Hunton, Bryant, & Bagranoff, 2004).They system should always be accessible to users, if the system should be unavailable; Kudler needs to have a recovery plan in effect.
This also applies to their website. If the website has been hacked or is not responding for some other reason Kudler will risk losing customer orders and credibility. Having a detailed disaster recovery plan is essential in all businesses, this is especially so for Kudler, even though competition is scarce locally, the internet allows customers to shop all corners of the world from the comfort of their own home.
