Case Study: Rainbow Illusion - Internal Control System Evaluation

This case study evaluates the internal control system of Rainbow Illusion's revenue cycle, identifying strengths and weaknesses in controlling sales transactions, situational pressures that increase the likelihood of fraud, and the benefits of using a distributed computer system.

Running head: CASE STUDY- RAINBOW ILLUTION
CASE STUDY-RAINBOW ILLUTION
Name of the Student
Name of the University
Author Note

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Executive Summary
The aims of the report is to conduct a study on Rainbow Illusion and evaluate its processes, risks
and internal controls for its revenue cycle. The report identifies six strengths in Rainbow
Illusion’s system for controlling the sales transactions and for each identifies strengths,
explanation is provided regarding the problems that Rainbow Illusion has avoided by
incorporating the strength in the system for controlling sales transactions. The report also points
out two situational pressures like inadequate segregation of duties and manual entry of sales
transactions that would increase the likelihood of fraud. At the end, the report illustrates the
reasons behind choosing distributed computer system rather than a centralized one by some
companies.

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Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Recognizing the strengths of controlling the sales transaction under Rainbow Illusion.............3
Identifying the problems that should be avoided by sales controlling transactions system............6
Identifying the two situational pressures which influences the possibility of fraud....................7
Benefit of using a distributed computer system instead of centralized one................................8
Conclusion...................................................................................................................................9
References......................................................................................................................................10

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Introduction
The report shows the processes, risks as well as the internal control system of the
Rainbow Illusion’s revenue cycle (Hall, 2015). The internal control system evaluation is
analyzed with the help of the power of the illusion system that handles the sales related
transactions. The problems which are avoided by sales transaction system are too illustrated,
besides identifying the power. The report also explains two situational pressures which rise the
fraud tendency of Rainbow Illusion. An assessment of collation between the centralized
computer system and the distributed computer system is carried out in the light of internal
control system with proper description of reasons of installing.
Discussion
Recognizing the strengths of controlling the sales transaction under Rainbow Illusion
In this section the six strengths which are associated with the internal control system of
Rainbow Illusion are discussed one by one. The strengths are explained in the following
paragraphs.
The power that a system has for controlling the sales transaction entirely depends on the
productiveness as well as the simplicity in controlling and managing the transactions, besides
wide acceptance about the regular application by the workers of the respective organization.
1. The Rainbow Illusion maintains an appropriate authorization structure regarding sales
transactions (Groomer& Murthy, 2018). The maintenance of a consistent authorization
structure can be considered as one of the components of powerful internal control system
that assists in identifying any kind of fraud or fault occurred in the transaction system.
Efficient sales invoice scrutiny is performed because of the existence of proper structure

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for verification, through which the invoices are passed. The sales invoice is completely
prepared by the sales person. The sales person keeps a copy of the sales invoice within
himself while the sales book retains another copy (Orchard & Hoag, 2014). After
retaining one copy of sales invoice within himself and keeping another to the sales book,
the invoice is forwarded to the cashier of the organization. After inserting the medical
validation and sales, invoices are then reviewed by cashier. Customer’s sales copy is
retained in form of a store copy. Sales invoices are sequentially ordered by the cashier
and after getting an inference and understanding from such an invoice structure, it is
found that the verification of the sales invoice has consistent structure (Ojala et al., 2014).
In case of Rain bow Illusion, the strength of internal control system of sales transaction
lies in its documentation and adequate records. All the transaction are précised in form of
summary and recorded in documents. It is very important to have enough documents for
recording the sales related transactions correctly that can be later used for its proper
verification. The respective number of transactions is automatically assigned after the
mechanical validation of invoice sales by cashier. The renumbering and validation in
such way assists in the facilitation of the control over various missing documents and
records and also helps them to locate when needed. In addition to this, a reconciliation
details is prepared daily by the assistant manager so that it can be reviewed by the store
manager. The sales invoices are then forwarded to central data for processing.
2. For reducing the error timing, on-time records are constructed during the time when the
transactions are occurring. In case of sales, all the transactions are recorded by the staffs.
Finally, all the invoices of the sales are recorded by the cashier with the full
reconciliation by the assistant manager.

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3. The strength of internal control system of sales transaction lies in its adequate
documentation and records (Al-Mamary, Shamsuddin & Aziati, 2014). The
summarization of the entire document is done and then it is recorded in documents or
records. Having adequate documents is very essential so that they can be utilized for
verification in order to have accurate recording of the transactions related to sales. The
invoices are mechanically validated by the cashier while the transactions are assigned
automatically. The validation and remembering helps in facilitating of the control over
the missing records which further assists them in finding out when needed. Moreover, a
regular reconciliation report is prepared by assistant manager for store manager of the
organization and central data for processing receives the invoice of sales.
4. The invoice of the sales is segregated since the sales persons prepare the staffs’ duties of
Rainbow Illusion. In comparison to sales voice, transactions are recorded manually by
sales persons. Appropriate processing of the sales invoice is carried out and then passed
forward for the proper verification along with right authorization.
5. In Rainbow Illusion, the power of sales transaction in internal control system can be
referred to its Monitoring. The information gathered from several sources aids in
uplifting the quality and standard of the system of internal control. The daily report of
reconciliation is prepared by the assistance manager after reviewing the total invoices
done by cashier. After preparing the daily reconciliation report, the manager reviews the
report of commission activity and the department of data processing prepares the weekly
sales report.
6. All documents are maintained properly so that reconciliation report can be prepared
correctly in accounting the records of the sales invoice. In Rainbow Illusion, the staffs of

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accounts department prepare the required and adequate transaction related records. The
cashier of the organization put the input into sales invoice and the sales book maintains
the record of invoice. The daily reconciliation report constitutes the sales invoice which is
constructed by the company’s assistant manager. It is the responsibility of the assistant
manager to prepare the daily bank deposits report.
Identifying the problems that should be avoided by sales controlling transactions system
 Reconciliation of Accounts: Reconciliation is a method by which comparison of
accounting data are done with underlying items which are represented (Simkin, Norman
& Rose, 2014). The correctness of information is ascertained along with appropriate
operation of control. Further, it assist in proving the assets’ existence. From the case
study of Rainbow Illusion, it has been observed that in order to review as well as
reconciliation of accounts for resolving the changes and analyze uncommon documents,
both are verified via internal control process. After reviewing the documents properly in
stages, the invoices and the documents are prepared by both the cashier and assistant
manager.
 Documentation: Those documents that are easily available are avoided by any type of
power disruption and employees’ responsibility. The employees are served with reference
tool for finding out the required guidance and also to get help in handling several
situations and transactions. The transaction must the complete and accurate for ensuring
the transaction related documentation so that an appropriate control of assets can be done
(Brandon, 2016). The documents must have sufficient amount of details that the
organization requires for carrying out any type of supporting amendments and
transactions. The staffs of Rainbow Illusion prepare the daily bank deposit, sales invoice,

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commission activity report and daily reconciliation report depending on sufficient
documents.
 Authorization and Approval of the related Transactions: The people who are doing
the transactions for efficient internal control system, need authorized transaction
(Sompolinsky & Zohar, 2015). Moreover, they must work under the guidance of
authority and should possess the knowledge about information that is being examined by
authority in terms of validity verification, approval of transaction and transaction of
property. The fact approved by the individual is anticipated and significant. As far as
documentation and accounting record preparation are concerned, there exist a suitable
and appropriate level that is viewed from the Rainbow Illusion case study. During the
construction of accounting records, sales invoice is prepared by sales persons, the invoice
validation is prepared by the cashier and assistant manager looks after the daily
reconciliation and bank report (Rahman, 2014). Hence, the preparation of accounting
records are done at a proper level which will help in solving authority issues.
 Monitoring: The monitoring of accounting balances primarily depends upon internal
control system (Vasarhelyi, Kogan & Tuttle, 2015). In Rainbow Illusion, the monitoring
method is undertaken for the purpose of supervising as well as decision-making reviews
of the accounts.
 Checking of Transactions: It is impossible for one individual to control all types of
financial transactions (Burman et al, 2016). Hence, more than a single person must check
the transactions.

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Identifying the two situational pressures which influences the possibility of fraud
I. Inappropriate segregation of duties: It is most essential to reduce the risk of inclination
of fraudulent activities and this can be done by proper segregation of duties, the most
efficient method of internal control. If the segregation of accounting function is not
appropriate then it leads to the of wrong assets calculation (Gamage, Lock & Fernando,
2014). In the case study identifies that it is the responsibility of cashier for inputting sales
along with mechanical invoice validation and assigning respective number to
transactions. The cashier also approves the sales those are paid by cheques and gets credit
approval based on charge sales. In order to design efficient internal control, it is essential
to prevent a single person from accessing and maintaining the accountability of assets.
Due lack of proper segregation of duties, the Rainbow Illusion is at the risk of
misappropriation of assets which might lead to fraudulent activities.
II. Recording the sales transactions manually: The entries and recordings done manually
are regarded as high risk related problems which may result in various fraudulent
activities. The primary risk of manual entries are the possibility of the human errors,
incomplete recording of transaction figures, omissions and delay. Fraudulent activities
can be committed willingly by the people those who have the fraud committing
characteristic. It is also likely that the staffs might process unauthorized transactions like
cancellations, paid off, voids, adjustments, non-cash credits and so on, during manual
entries. It is possible to prevent the frauds occurring due to manual recording by using
proper information system like mainframe computers, mini computers, personal
computers and others.

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Benefit of using a distributed computer system instead of centralized one
There are several advantages of utilizing a distributed computer system, consisting of a
number of configurations like mainframes, personal computers, mini-computers and alike rather
than a centralized one. The benefit is received in terms of reliability, redundancy, availability and
scalability.
While dealing with high volume of transactional data, it becomes more expensive and
inefficient to use the centralized computing system. Online users also face ineffectiveness while
dealing with centralized systems (Firdhous, Ghazali & Hassan, 2014). All the limitations lead
toward the usage of distributed computer system which has more and better computational power
compared to the centralized one. Centralized computer system has a tendency of system
breakdown as a result of software abnormalities leading to server failure and malfunctioning
resulting from hardware glitches (Kaur & Rai, 2014). In such a condition, the distributed
computing system is regarded as more reliable by the company since multiple controlling
systems are spread across different machines. Hence, even if glitch is caused, it will not affect
the network because when glitch is created by a machine, another machine undertake the
processing capability (Bal et al, 2016).
Further, the distributed computer system works in a faster manner compared to the
centralized system as the system has multiple machines to handle the work (Wu, 2017). This
enhances and improves the performance significantly in a reduced time frame. Higher reliability
and inherent application distribution are the potential advantages that the distributed system has
over centralized system. Thus, the above study depicts that the distributed computer system
provide substantial benefits over the centralized computing system for small as well as medium
sized enterprises.

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Conclusion
From the entire discussion, it can be concluded that in case of Rainbow Illusion, internal
control system has both strengths and weaknesses. One of the strengths of the internal control
system of revenue cycle is, its power to control the sales transaction. Another strength lies in its
efficient sales control transactions which can be made even more effective through proper
monitoring, review and documentation. On the other side the weakness lies in terms of likelihood
of fraudulent activities which arise due to inadequate segregation duties and manual sales
transaction recording procedure. Therefore, it is suggested that these issues or weaknesses can be
addressed by incorporating distributed computer system.

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References
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