Case Study: Rainbow Illusion

This case study evaluates the revenue cycle and internal control system of Rainbow Illusion, a retail chain in Victoria and New South Wales. It identifies strengths of the control system, problems avoided, and situational pressures influencing fraud. It also outlines the advantages of using distributed computer systems over centralized ones.

Running head: CASE STUDY- RAINBOW ILLUSION
Case study- Rainbow illusion
Name of the Student
Name of the University
Author Note

CASE STUDY- RAINBOW ILLUSION
Executive summary:
The paper demonstrates the evaluated of the hives cased study on Rainbow Illusion, which is
a retail chain concentrated in Victoria and New South Wales. The company has the business
of selling readymade clothes of young females and it is requited to evaluate the revenue cycle
for identifying the effectives of internal control system. Strengths of the control system
transactions are identified in the report along with the two situational factors that would
increase the likelihood of occurrence of fraud. The reason why some companies prefer to use
distributed computed system over centralized has been addressed by outlining the various
advantages of the former over later. It has been ascertained that the identified strength of
sales control transactions helps in avoiding the issue of review, documentation and
authorization.
Table of Contents
Introduction:...............................................................................................................................3
Discussion:.................................................................................................................................3
Identification of strengths of Rainbow illusion system for controlling sales transactions:.......3
Identification of problems avoided by sales controlling transactions system:...........................3
Identification of two situational pressures influencing the likelihood of fraud:........................3

CASE STUDY- RAINBOW ILLUSION
Outlining the factors for installing a distributed computer system rather than a centralized
one:.............................................................................................................................................3
Conclusion:................................................................................................................................3
Reference list:.............................................................................................................................4

CASE STUDY- RAINBOW ILLUSION
Introduction:
The report is prepared to evaluate the risks, process and internal control for the
revenue cycle of Rainbow Illusion. The evaluation of the internal control is done by assessing
the strength of illusion system for controlling sales transactions. For the strength that has
been identified, report has also demonstrated the problems that are avoided by the sales
controlling transactions system. In addition to this, report illustrates the two situational
pressures that would increase the likelihood of fraud for Rainbow Illusion. Regarding the
assessment of internal control system, the comparison between the distributed and centralized
computer system explaining the reasons why the company would install the former (Shao et
al. 2016).
Discussion:
Identification of strengths of Rainbow illusion system for controlling sales transactions:
In this section, six strengths of internal control system of Rainbow Illusion has been
identified and they are as follows:
The strength of system of controlling sales transaction lies in its effectiveness and
simplicity in managing and handling the sales transactions along its wide acceptance by the
personnel of organization and its consistent application.
 One of the elements of strong internal control lies in the consistent structure of
authorization so that the transactions can be tracked for the identification of any fault
or fraud. Rainbow illusion has proper structure of authorization when dealing with the

CASE STUDY- RAINBOW ILLUSION
sales transactions. Scrutinization of the sales invoice is done adequately as there is a
proper structure where sales invoices are passed through for the verification. The sale
invoice of Rainbow is prepared by the sales person which is then passed to the cashier
while keeping one copy with himself after one copy is retained in the sales book.
Invoice is reviewed by the cashier after inputting the sales and the validation of
invoice is done mechanically. The copy of sales invoice presented to the customer is
retained as a store copy (Appelbaum et al. 2017). Moreover, the sales invoices are
ordered sequentially by the cashier and it can be inferred from such structure that
there is a consistent structure for the verification of sales invoice.
 Adequate records and documentation is another strength of the internal control of the
sales transaction system of Rainbow Illusion. Records and documents are the records
upon which the transactions can be summarized and recorded. For the correct
recording of the sales transaction, it is essential to have adequate documents that can
be used for the verification. The sales invoice is mechanically validated by the cashier
and the consecutive number of the transactions is assigned automatically. Such
validation and renumbering helps in facilitation of control over missing records and
documents and aids in locating them when they are needed (Mohamed and Galal-
Edeen 2018). In addition to this, a daily reconciliation report is prepared by assistant
manager for the review by store manager and the sales invoices are forwarded to the
central data for processing.
 Records are prepared at time when the transactions are taking place so that the error
of timing is minimized. Each transactions relating to sales are recorded by the staffs
as and when it occurs and sales invoices are sequentially recorded by the cashier at
the end of each day along with the reconciliation of total by assistant manager.

CASE STUDY- RAINBOW ILLUSION
 Monitoring is another strength of the internal control system of sales transactions of
Rainbow Illusion. The assessment of the information should be done from several
sources as it helps in enhancing the quality of the internal control system. The total of
consecutively numbered invoices done by cashier is reviewed by the assistance
manager for preparation of daily conciliation report. After the preparation of daily
reconciliation report by assistant managers, managers review the commission activity
report and weekly sales prepared by the data processing department.
 Duties of the staffs of Rainbow Illusion in preparing sales invoice is segregated as the
sales invoice is prepared by salesperson. However, the transactions relating to the
sales voice is manually recorded by the sales person. The processing of sales invoice
is done appropriately as in is passed for the verification with a proper authorization
(Shao et al. 2016).
 Accounting records of sales invoice is properly maintained so that no documents are
missed in the preparation of daily reconciliation report. All the accounting staffs of
rainbow Illusion prepares the adequate and required records relating to the
transactions. Cashier is responsible for inputting the input into the sales invoice and
the record of invoice is also maintained in the sales book. The daily reconciliation
report comprising of sales invoice is prepared by assistant manager and he is also
responsible for preparation of daily bank deposits (Rajnoha et al. 2016).
Identification of problems avoided by sales controlling transactions system:
 Review and Reconciliation of accounts- Reconciliation is the process using which
the accounting data are compared with the underlying items that are represented. It
helps in proving the existence of assets and help in ensuring the accuracy of
information along with ensuring that there is proper operation of control. It can be

CASE STUDY- RAINBOW ILLUSION
observed from the case of rainbow that the internal control process has incorporated
review and reconciliation for resolving any differences and investigation of any
unusual documents and records. Reviewing of all the documents is done in stages that
is all the prepared invoices and documents are reviewed in stages by assistant
manager and cashier (Guo and Jingxu Du 2019).
 Documentation- Readily availability of the documents avoids any kind of disruption
as it outlines the specific responsibility and authority of employees. It serves as a
reference tool for employees in seeking guidance on how to handle the transactions
and situation. The documentation of transactions help in ensuring completeness and
accuracy of the transactions and ensures that there is proper control on the assets.
However, it is required by the organization to have documents reflecting sufficient
details for any kind of amendment and supporting the transactions (Kasemsap 2018).
Rainbow Illusion have sufficient documents that are prepared by different staffs such
as sales invoice, daily reconciliation report, daily bank deposit and weekly sales and
commission activity report.
 Approval and authorization of related transactions- For the effective internal
control system, it is required for the transactions to be authorized and the person
executing the transactions should do within their scope of authority. The supporting
information’s should be reviewed by the authority for verifying the validity and
property of transactions and for the transactions being approved, they should have
firsthand knowledge. The significance of the fact that are approved by the individual
should be well understood. It is observed from the case of Rainbow Illusion that there
is appropriate level of authorities regarding the documentation and preparation of the
accounting records. This assist in solving the issue of delegation of authority as
preparation of accounting records are delegated at the adequate degree as the sales

CASE STUDY- RAINBOW ILLUSION
invoice is prepared by sales person, validation of invoice by cashier, preparation of
daily bank deposit and daily reconciliation report by assistant manager (Tarhini et al.
2015).
 Monitoring- The effectiveness of internal control system is dependent upon the
extent of monitoring of the accounts balances. Rainbow Illusion has adopted adequate
monitoring of its accounts due to supervisory and managerial reviews.
 Balances and checks- The aspects of financial transactions should not be controlled
by a single person and any particular person should account or authorize for the
transactions.
Identification of two situational pressures influencing the likelihood of fraud:
 Manual recording of the sales transaction by sales person and pre paring the grand
total- Manual entries are considered as the high risk problems because of overriding
control and susceptibility to fraud. One of the main risks associated with the manual
recording is likelihood of human errors and the manifestation of errors occur
themselves and some of the common mistakes might be incorrect and incomplete
recording of transactions, transposition of figures. The manual recording of the
employee number and other transaction associated with class, cloths, description, unit
piece and quantity might results in occurrence of fraud as there can be risk of errors,
delay and omission. Fraud can also be committed due to the willingness of the person
as they might have the characteristics of committing fraud (Korhonen and Halén
2017). It is quite possible that when the staffs are engaged in manually recording the
transactions then they might process the unauthorized transactions such as
adjustments, cancellations, non-cash credits, receipts, voids, paid off and writing off
of any accounts. There can be alteration in the unit price and quantity by the sales

CASE STUDY- RAINBOW ILLUSION
person when recording sales transactions and there also exist the possibility of
producing irregular documents as the records are done manually. When verifying the
accounts, the adjustments made to the account might not have supporting and
authorization. The fraud resulting from the use of manual recording can be prevented
by the use of information system such as local area and wide area of mini computers,
mainframe computers, personal computers and single workstations and system of
video conferencing (Altamony et al. 2016).
 Inadequate segregation of duties- One of the most effective methods of internal
control is the segregation of duties and it is essential to have such control as this
would minimize the risk of fraudulent activities. The inadequate segregation of the
accounting functions could cause the misappropriation of assets. It is identified from
the case study that the cashier is responsible for inputting the sales and mechanically
validating the invoice and assigning a consecutive number to the transactions. In
addition to this, it is also the responsibility of the cashier to approve the sales paid by
cheque and getting credit approval on charge sales. For designing effective internal
control, preventing one person from having access to assets of the company and
responsibility of maintaining the assets accountability. Validation of invoice and the
responsibility of maintaining the assets accountability should be done by different
people. The likelihood of committing the fraud due to lack of segregation of duties is
that the duties or the person responsible for the tasks should be adequately segregated
and segregation of considered to be deterrent to fraud as segregation requires to
collude with another person that would help in perpetrating the fraud (Ogiela 2015).
Therefore, the person approval the sales paid by cheque and charge sales should be
reviewing the invoice and the inputs to sales. The inadequate segregation of the
accounting functions might results in the misappropriation of assets and the Rainbow

CASE STUDY- RAINBOW ILLUSION
Illusion have risk of misappropriation of assets as the cashier is responsible for
approving the sales paid by cheque and charge sales along with the validation of
invoice. This might cause fraudulent activities due to misappropriation of assets.
Outlining the factors for installing a distributed computer system rather than a
centralized one:
The companies are inclined towards installing a distributed computer system rather
than a centralized one because of the benefits attributable from the decentralized system.
Distributed computer system offers various advantages over centralized computed system as
such system consist of number of possible configurations such as personal computer,
mainframes, minicomputers and work frames. Such benefits is provided in terms of
redundancy, scalability and since they use a variety of software that has standard base
components and the system is not dependent upon the underlying software (Lee and Olson
2016). These benefits are provided at the cost of availability and consistency.
Decentralized systems have been gaining a lot of popularity as the application of this
system have been found by many organizations. Centralized computing system proved to be
costly and ineffective in processing high volume of transactional data and rendering support
for online users on concurrent basis. These limitations of centralized computing system paved
a way for distributed and cloud computing for commercial exploitation of parallel processing
technology. When compared to centralized system, better performance ratio and better price
is provided by the distributed system because adding mainframes is less economic than
adding microprocessors (Mohamed and Galal-Edeen 2018). The cost of sharing data is
lowered considerably because of distributed computerized system.
In addition to this, the computational power of distributed computed system is more
than the centralized computing system. Moreover, organizations are provided with the

CASE STUDY- RAINBOW ILLUSION
incremental growth that enable them to add computational power and software as an
incremental need of the business. There can be complete breakdown of the system because of
software anomalies and hardware glitches which can cause processing of single server to fail
and malfunction. In such scenario, companies considers distributed computed system to be
more reliable as the multiple control are spread across the different machines. It is so because
the network is not impacted as the glitch caused by one machine is taken over by another
machine for taking over the capability of processing. Furthermore, the principle on which the
distributed computed system works is the work of distributed data processing and the jobs are
getting done faster because there are multiple machines handling the work (DeLone and
McLean 2016). These helps in improving the performance and significantly reducing the
processing time.
Higher reliability is another potential advantage of distributed computer system over
centralized one. Distributed system can be used by many organizations for achieving higher
reliability. This system is also implemented by the companies because it has inherent
distribution of applications. Most of the enterprise network model are distributed because of
some potential advantage of distributed computer system (Tamm et al. 2015). Therefore, the
discussion above depicts that distributed computed system offers considerable advantages
over centralized system for the small and medium scale enterprises. It is for these reasons that
some companies prefer to install distributed computer system as against centralized one.
Conclusion:
From the analysis of the case of Rainbow Illusion, it is inferred that the internal
control system of the organization has strengths as well as suffer from few drawbacks. The
internal control of revenue cycle has significant strengths that control the sales transactions.
Incorporation of these strengths have made the sales control transactions effective in avoiding

CASE STUDY- RAINBOW ILLUSION
the issues associated with review, documentation and monitoring. However, there exist the
likelihood of fraud due to the lack of segregation of duties and manual recording of the
transactions by sales person. Some of the organizations are able to address the issues with
their accounting records by installing the distributed computed system.
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Reference list: