List of Tables
Today’s business world is dynamic and fast moving where in the needs of the customers can change really fast, and as such only companies that have the processes in place that can allow them to cope with the changes are able to succeed and maintain their competitive advantage. There are various factors that could be addressed which can directly impact the degree of preparedness for responding to such an environment,
however, in recent times the level and quality of information systems that put in place have emerged to be one of the most important factors (Lipaj and Davidaviciene, 2013). With increasing number of businesses optimising their use of such information systems, over the past decade and a half, the importance of information systems has increased drastically (Paliulis, et al., 2012).
However, despite its importance, it is crucial that the systems are not just adopted on an ad hoc basis, but it has to be made certain that the systems are designed and adopted in a manner suitable to the needs of the organisation and its intrinsic processes (Pabedinskaite, 2009).
The purpose of this report is to enforce a better understanding of the information systems from both a technical and non-technical stand point and by doing so evaluate the current Expenditure Cycle and Conversion Cycle for Paradise Industries and identify key bottle necks and risk factors that need to be addressed.
Lipaj and Davidaviciene (2013) define Information Systems as “a set of components that help collecting process and sharing information and data with the help of software, hardware, core ware and organ ware.”
In simple terms, it can be understood as a “combination of an information technology and human resources that use the technology to perform some actions in support of business processes” (Awais, et al., 2012). The information systems can be broadly classified into five groups (Nowduri, 2010; Awais, et al., 2012), namely, Office Information Systems (OIS),
Transaction Processing Systems (TPS), Management Information Systems (MIS), Decision Support Systems (DSS) and Executive Support Systems (ESS). The following figure 1 can effectively communicate the relationship between all these groups of systems, as they do not work in isolation and are generally used in conjunction with each other in a business environment.
The arrows depict the direction of information flow that takes place between the information systems. The execute support systems receive input from both the MIS and the DSS. The MIS communicates with both the DSS and the OIS. The DSS receives information from TPS and communicates with the MIS. The OIS relays information to both the MIS and the DSS. The TPS shares data with both the MIS and the DSS.
According to Chung and Skibniewski (2007) ERP systems are mainly designed to “process information and enterprise transactions as well as foster integrated production, planning and customer feedback.”
It is designed such that the various systems that are operating within the organisation in different departments can be integrated in a manner that information can be shared between departments freely as and when required without structural constraints.
These are designed to incorporate all areas of interest in the business setting including human resource management, sales and distribution, finance and accounting, production management, purchasing management, inventory management and planning.
As noted in Belfo and Trigo (2013), “an Accounting Information System (AIS) is generally a computer-based method for tracking accounting activity in conjunction with information technology resources.”
AIS is designed for the “collection, storage and processing of financial and accounting data that is used for internal management decision making” (ibid.). AIS typically has three main sub systems, namely, the Management Reporting System (MRS), the General Ledger System and Financial Reporting System (GLS/FLS) and the Transaction Processing System (TPS).
3.1Management Reporting System (MRS)
Management Reporting systems are part of a system that works to provide information to the managers and executives in the form of reports and/or statements. They collect data from various systems of the organisation and process them into meaningful, actionable information in the form of reports or statements.
They provide the executives with the internal financial information that is required to manage a business in the current business environment. Examples of reports that can be created through the MRS include variance reports, budgets and cost-volume-profit analysis, etc. This is a discretionary form of reporting as the companies can chose what information is to presented and in what form.
Financial Reporting Systems collect information from the various reporting entities like the TPS, etc. and process them to report financial statements or reports that are useful in decision making. In order to be able to report effectively it is important that the data set that is fed into the system,
whether it be transactions or any other events, be kept accurate and verified. The primary function of the FRS is to measure and report the “status of financial resources and the changes in those resources” (Hall, 2011). The target of the information generated through FRS is external entities.
The information generated through these systems can be categorised under non-discretionary as the organisation has very limited to no control over the information that it will generate. The information through these systems are generated mostly in the form of tax returns, financial statements and other legal documents.
As stated in Hall (2011), “The TPS is central to the overall function of the information system by converting economic events intofinancial transactions, recording financial transactions in the accounting records (journals and ledgers),and distributing essential financial information to operations personnel to support their daily operations.” These types of systems deal with business events that occur on a regular recurring basis.
The TPS comprises of three subsystems or cycles which have been discussed in the following dection.
There are three main subsystems of the TPS, as discussed in the previous section, known as the transaction cycles. This section briefly discusses the three transaction cycles.
A significant portion of the organisation’s economic activity are process through one of the three transaction cycles, be it a for profit or non profit organisation. The fundamental assumption that the statement is based on is that first “all firms incur expenditures in exchange for resources (expenditure cycle)”; “provides value added through its products or services (conversion cycle)” and “receives revenue from outside sources (revenue cycle).”
This is the first cycle which deals with the procurement of materials or labour or property in exchange for cash or credit. It is to be noted that most expenditure transactions take place based on a relationship of credit and the disbarment of cash actually takes place at some point after the delivery of the goods or services. Therefore, there is a need for separating the two operations intoal least two subsystems – a physical receipt of the goods/services sub system and a financial subsystem.
The typical sub systems for the expenditure cycle include:
The purchases/Accounts Payable system which identifies the need for acquisition of inventory items and places an order with designated supplier based upon company regulations. Upon receipt of the goods, the event is reflected in the system through updating the inventory and establishing an account payable to be paid to the supplier.
Cash disbursements system identifies when an obligation for cash payment from the purchases system is due and then authorises the payment and records the transaction by reducing the appropriate value from the cash account and the accounts payable account.
Other subsystems include the Payroll system and the Fixed Asset system.
The conversion cycle comprises of two major subsystems, namely the production system and the cost accounting system. The production system deals with the scheduling, planning and management of the process of production where as the cost accounting system records the information related to cost during the production process.
The functions of the conversion cycle include “determining raw material requirements, authorizing thework to be performed and the release of raw materials into production, and directing the movement ofthe work-in-process through its various stages of manufacturing.” (Hall, 2011)
The sale of manufactured goods or services is done by firms through the revenue cycle and it includes the processing of sales whether cash or credit. Similar to the expenditure cycle, these also have a physical component as well as a financial component. The two main sub systems of this cycle are the Sales Order processing and the Cash Receipts.
CRF – Cheque Register File
GLA – General Ledger Accounts
ISL – Inventory Subsidiary Ledger
O/P PO – Open/Closed PO
PO – Purchase Order
PR – Purchase Requisition
PS – Packing Slip
RR – Receiving Report
RRF – Receiving Report File
SI – Supplier Invoice
SIF – Supplier Invoice File
For the analysis of the internal controls and any shortcomings that can be identified, we will go through the various functions and evaluate each aspect individually.
Identification of need: The system has an automatic need identification mechanism where the system identifies deficiencies in the inventory system and creates a Purchase requisition by itself. This system also takes care of the volume of good required through set predetermined values for stock.
Requisition Approval: One deficiency has been identified that there is no manual approval process for the requisitions and no confirmation regarding the volumes required is sought from the appropriate departments. This needs to be rectified in the system.
Vendor Selection: Purchasing Dept. clerk has access to approved vendor list and can make appropriate choices depending on the need and the cost.
Creating Purchase orders: Purchase orders are created by the Purchase Dept. clerk and copies are made and sent to the supplier and the receiving departmentfor verification at the time of delivery. There does not exist any procedure for authorisation from senior personnel regarding large purchases which can cause problems.
Receiving Goods: Appropriate measures are put in place that allows the receiving clerk to match the purchase requisition with the purchase order and verify the manifest. Receiving reports are filed within the department and forwarded to the warehouse as well.
Delivery to warehouse: Although records are kept in the warehouse regarding the acquisition of the order, a record of receipt at the time of delivery could enhance the system further.
Supplier Invoice: One major drawback of the system is that invoices are not compared to the purchase orders which can cause discrepancies. This needs to be rectified immediately.
Prepare and make disbursement: Records are maintained properly and separate entities are responsible for the disbursement of the check and the authorisation of the checks. However, although most of the process is automated, there needs to be a check done comparing the purchase order, receiving order and the invoice before signing the checks.
Ledger maintenance: This process is done appropriately and does not need any changes.
Optimal use of information systems has become extremely important for maintaining competitive edge in today’s business environment. There are various types of information systems, major among them, Management Information System and Accounting Information System.
Transaction processing system is a crucial part of the AIS and it itself has three transactional cycles namely, expenditure cycle, conversion cycle, and revenue cycle. IN the report we have analysed the expenditure cycle for Paradise Industries and identified the problems with the internal controls.
While most of the internal controls are functioning as desired, some aspects like the requisition approval, creating purchase orders, and supplier Invoice among others need immediate rectification. Based on this report, a rearrangement of the expenditure cycle in parts is recommended while maintaining the current infrastructure.
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