Case Study- Rainbow Illusion: Evaluation of Risks, Process and Internal Control System of Revenue Cycle

The paper intends to critically evaluate the risks, process and internal control system of revenue cycle of one organization presented in the case study. The analysis is based on the facts presented in the case study on Rainbow Illusion. For this, the system of sales control transaction of the organization is evaluated by identifying its strengths. Some of the issues faced by rainbow Illusion has been addressed by the strengths of the system of sales controlling transactions. The later part of the report illustrates the reasons why the company is choosing installation of distributed computer system compared to centralized system.

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 intends to critically evaluate the risks, process and internal control system of
revenue cycle of one organization presented in the case study. The analysis is based on the
facts presented in the case study on Rainbow Illusion. For this, the system of sales control
transaction of the organization is evaluated by identifying its strengths. Some of the issues
faced by rainbow Illusion has been addressed by the strengths of the system of sales
controlling transactions. The later part of the report illustrates the reasons why the company
is choosing installation of distributed computer system compared to centralized system.

CASE STUDY- RAINBOW ILLUSION
Table of Contents
Introduction:...............................................................................................................................3
Discussion:.................................................................................................................................3
Identifying strengths system for controlling sales transactions of Rainbow illusion:...............3
Identification of problems avoided by the system of sales controlling transactions:................5
Identifying situational pressures influencing the likelihood of fraud:.......................................7
Evaluation of preference of distributed computer system over a centralized one:....................9
Conclusion:..............................................................................................................................11
Reference list:...........................................................................................................................12

CASE STUDY- RAINBOW ILLUSION
Introduction:
In this report, the evaluation of risks, process and internal control system of revenue
cycle of the organization presented in the case study is demonstrated. The system for
controlling sales transaction of Rainbow Illusion is critically evaluated in terms of its
strength. In addition to this, the report also exhibits the problems or issues faced by the
organization and which has been avoided by the incorporation of the identified strength of
sales controlling transactions. The likelihood of occurrence of fraud has been evaluated by
identifying two situations pressures faced by the company in its system of sales control
transaction. In the later part of the report, several reasons have been outlined why the small
organization like Rainbow Illusion prefers distributed computer system power the centralized
computer system.
Discussion:
Identifying strengths system for controlling sales transactions of Rainbow illusion:
This section of the report present the six strengths of the system of sales control
transaction and they are listed below:
 Adequate documentation and record keeping- One of the strengths of the internal
control system of sales control transaction of Rainbow Illusion lies in the proper
recording and adequate documentation by the staffs. There should be adequate
documents for the verification purpose in relation to the sales transaction for
determining the efficacy of the system. Cashier is responsible for mechanically
validating the sales invoice along with automatically assigning the numbers to the

CASE STUDY- RAINBOW ILLUSION
transactions in a consecutive manner. Such system helps in facilitating the control
system by way of aiding the documents when they are required and accounting for
missing records with the help of renumbering and validation (DeLone and McLean
2016).
 Monitoring- One of the strength of the sales control transaction of Rainbow Illusion
is monitoring as the information’s pertaining to sales are assessed from various source
and thereby contribute to enhancing the quality of sales control system. In addition to
this, the daily reconciliation report is prepared by the assistant manager after the total
of consecutively numbered invoices are done properly (Mandal and Bagchi 2016).
Moreover, the weekly sales and commission activity report prepared by the
department of data processing is reviewed by the managers.
 Segregation of duties of staffs- The assignment of responsibility to one person in
dealing with the sales control transaction is done by segregating the duties. Such
segregation of duties helps in safeguarding the assets and transaction. The duties
pertaining to the sales transaction is segregated as the sales person is responsible for
preparing the sales invoice and inputting of the sales and reviewing of invoice is done
by the cashier. In addition to this, the credit card sales, cheque and cash is performed
by manager.
 Proper maintenance of accounting records- The invoice prepared by sales person is
retained by cashier as a store copy and for the bank card. Proper procedures is
followed in the case of return by customers. The daily conciliation report is prepared
by assistant manager by reconciling the total and accounting for the return slips and
sales invoice (Widjaja and Matitaputty 2018). In addition to this, the system also
prepares the commission activity and weekly sales report.

CASE STUDY- RAINBOW ILLUSION
 Consistent structure of authority- One of the strength of internal control system of
sales control transaction of Rainbow illusion is authorizations of a consistent
structure. It becomes easier to identify the origin of any problem and track the
problems when employees are signing off on each stage of the procedures (Dwivedi
et al. 2015). That is, it is possible for the management to trace the responsibilities. It
can be observed from the given case study that there is appropriate and consistent
structure of authorization in rainbow Illusion. The existence of proper structure results
in sufficient verification of the sales invoice. Sales person is responsible for preparing
sales invoice and is then passed onto cashier for recording and maintained therein by
producing another copy of the same (Morecroft 2015). After the mechanical
validation of invoice and inputting the sales, cashier is responsible for reviewing the
invoice and sequentially ordering it.
 Timeliness and completeness-The errors concerning timing of recording is
minimized because as and when the transactions take place, recording is done by the
staffs. There is sequential recording of the sales and at the end of each day, sales
documents are recorded sequentially and the assistant manager is responsible for
reconciling the total amounts attributable to the sales.
Identification of problems avoided by the system of sales controlling transactions:
 Communication and information- The transparency and the effectiveness of the
internal control system happens when there is proper and reliable information flow
between different departments and amongst the staff members. Good communications
is vital in the business accounting and they form an intrinsic part of it.
Communication of meaningful information is regarded as most important as it assist
management in their decision making process (Groomer and Murthy 2018).

CASE STUDY- RAINBOW ILLUSION
Therefore, preparation of different accounting reports helps in enhancing
communication. In the case study, the transactions relating to sales invoice are
accounted for and is prepared in stages and are evaluated by cashier, assistant sales
manager and are processed in the department of central data processing. Rainbow
Illusion has addressed the issue of lack of communication by ensuring proper flow of
information between the staffs and departments.
 Authorization and approval of the sales related transaction- In the absence of
adequate level of authority, the transactions is difficulty to be accounted and verified.
The establishment of responsibility and authority helps in facilitating control over the
system. The quality of internal control environment relating to sales transactions are
enhanced with the help of consistent structure of responsibility and authorization. In
addition to this, the basis of decision by the management is dependent upon the
documents and its approval by the authority. The documents prepared and recording
of the transaction can be looked for decision making when it is determined by
appropriate level of authority (Cui et al. 2015).
 Reconciliation of accounts- Reconciliation is considered fundamental for the
business in preventing the errors ion maintaining the financial records and inspecting
fraudulent activities. Accounts reconciliation helps in facilitating the operational
control and ensuring the accuracy in the information presented (Lenz and Hahn 2015).
The unusual records and documents of the Rainbow Illusion is investigated and are
accounted for any differences by incorporating reconciliation and review in the
internal control system of sales transaction. Reconciliation of the sales invoice in the
preparation of bank deposit slip and other reports is done in the transaction system.
 Credibility of the records- Many organizations faces the issue whether their
accounting records are credible or not. In the absence of proper internal control

CASE STUDY- RAINBOW ILLUSION
system, the credibility of the records reduces and become less reliable. With the
adequate level of authorization and proper records and documentation, the issue of
credibility is solved. It will be difficult for the management to make a qualified
opinion on the financial information presented if the information presented is not
credible.
 Documentation- Some kind of disruption faced by the organization is avoided when
the documents are readily available. Employees when dealing with any situation or
handling the transactions can use documentation as reference tool. It helps in ensuring
that the transactions are controlled properly and it can be ensured for its accuracy and
completeness. For supporting any kind of transactions and making any amendments,
organizations requires appropriate and sufficient details that is available in the
documentation of the records (Clarkson 2019). From the given case study, it is
inferred that there is sufficient documentations available in the control system of
rainbow Illusion that are prepared by different staffs such as sales person, cashier and
assistant manager. Some of the documents enhancing the control system of sales
transaction and the revenue cycle of the company includes preparation of invoice,
bank deposit slip, daily reconciliation report, return slip, commission activity and
weekly sales report.
Identifying situational pressures influencing the likelihood of fraud:
The likelihood of the occurrence of fraud can be attributable to several situational
pressures faced by the company and the two situational pressures faced by Rainbow Illusion
is listed below:
 Inadequate segregation of duties- Duties segregation is considered to be vital factor
in the determination of effectiveness of the internal control system of the

CASE STUDY- RAINBOW ILLUSION
organization. The segregation of duties implies that one person will not have
knowledge of operations and complete oversight. The primary defense against the
occurrence of internal fraud is the adequate segregation of duties. Duties segregation
helps in serving the purpose of reviewing and oversight to catch errors and hiding of
any transactions requires two people to collude and thereby help in preventing theft
and fraud. There are three separate functions of segregation of duties such as being
able to authorize the assets usage, having assets custody and assets record keeping.
However, in small business, it is difficult to achieve segregation of duties but there
should be as much implementation as possible for preventing the occurrence of
fraudulent activities (Dornier 2018). Small business such as Rainbow Illusion suffer
disproportionately from fraud and the errors in committing fraud can be reduced when
the errors of one is checked by other employees. It can be observe that the cashier of
the company is responsible for perfuming two functions relating to the sale
transaction. Cashier is responsible for reviewing the sale input and by mechanically
validating it and this is done by assigning consecutive number to the transaction. In
addition to this, cashier is also responsible for approving sales paid by cheque and
getting credit approval on charge sales. Hence, in this regard, cashier should not be
responsible for performing two functions as it increases the chance of errors. Different
people should be involved in maintaining the assets and responsibility of approval and
invoice validation. The possibility of misappropriating the assets increases because of
the inadequacy in the accounting functions segregation (Altaf and Khalil 2016). Since
the cashier is responsible for performing two accounting functions that is validation of
invoice and sales approval, there exist the risk of misappropriating the transactions
and might give rise to theft and fraud.

CASE STUDY- RAINBOW ILLUSION
 Recording of the sales transactions manually- One of the areas of high risk in the
business accounting is manual recording as this increases the fraud susceptibility and
overriding of control. Recording of the sales transaction figures manually results in
occurrence of common problems such as incomplete and incorrect recording and
manifestation of errors and likelihood of human errors. The items associated with the
transactions such as unit, quantity, measurement basis and description along with
recording the employee number might suffers from the risk of delay, error and
omission and thereby becomes a cause for the occurrence of fraud. Sometimes, one
person responsible for two performing two or than two accounting functions might
develop the willingness to commit the fraud. The manual recording of the transactions
might results in recording the transactions that is not authorized such as cancellations,
adjustments, paid off, voids, writing off any account and receipts (Maas et al. 2016).
It is certainly possible that the staff might alter the quantity and price when preparing
records and producing irregular documents as they are done manually.
Evaluation of preference of distributed computer system over a centralized one:
The reasons why some companies prefer to install a distributed computer system as
against the centralized computerized system is attributable to a wide range of benefits
provided by former compared to later. Many organizations have ascertained the benefits of
the application of the distributed system which has caused this computer system to gain
publicity. The centralize computer system has proved to be ineffective and costly in
performing activities such as providing support to online users and processing of the high
volume of data. The way for distributed computer system have been paved by several
limitations poised by the centralized system for commercially exploiting the processing
technology. Distributed computer system provides better price and performance ratio as

CASE STUDY- RAINBOW ILLUSION
against centralized system because adding microprocessors is economic than adding
mainframes (Peltier 2016). Installation of distributed computerized system lowers the cost for
the company when sharing data. Some of the benefits of the distributed computer system over
the centralized system can be counted for scalability, redundancy and possible configurations
for mainframes, person computers, work frames and mini computers and the system being
independent of the underlying software (Lain et al. 2015).
Furthermore, the centralized computerized system has less computational power as
against distributed system. Adding of the computational power by the organization helps
them in incremental growth that would meet the incremental requirements of the business.
The hardware glitches and anomalies of software might cause complete breakdown of the
system and this would result in malfunction and causing single server to fail. In such
scenario, company using and relying on the distributed computer system would prevent the
failure of server because different machines have multiple controlling systems. It is so
because no impact is created on the server as the glitch is resolved by another machine in the
system. Since multiples machine are handling the task in distributed computerized system,
tasks are done on faster basis as the functioning of the system is to distribute the processing
of data. Reduced processing time and improved performance are some other benefits
provided by distributed computer system as performance can be augmented by adding
another computer to the network (Fallows et al. 2016).
Another potential advantage provided by distributed system over centralized is higher
level of reliability. Therefore, organizations intending to achieve higher reliability is inclined
towards installing distributed computer system. Parallelism and scalability are other
advantages offered by distributed system. This particular system can be designed for
parallelism such as its implementation in common mathematical operations such as scientific
computing and weather modeling as the independent part of complex simulations are divided

CASE STUDY- RAINBOW ILLUSION
by the multiple powerful processors. Moreover, the queries faced by the organization can be
routed using particular information of user to the server with the help of distributed database
instead of all the request going to single machine and thereby preventing overloading of the
machine (Libby 2017). Therefore, all the loads get balanced on the nodes that helps in
minimization of the situation of issues of bottlenecks. Organizations installing distributed
computer system will be able to gain control over resources and gaining more autonomy as
the behavior is controlled by each of the nodes and generating control over resources with
better autonomy.
Conclusion:
The report depicting the evaluation of the internal control system of the internal
control system of its revenue cycle deduces the fact that the system has considerable strengths
that has helped in addressing issues and it also suffers from limitations. The transactions
pertaining to the sales are effective due to the strengths in its internal control system such as
documentation, recording and authorization. Nonetheless, it has also been ascertained that
there is likelihood of the occurrence of fraud activities due to manual recording of the
elements of transactions and employee number and thereby impacting the effectiveness of the
internal control system. However, such issues can be addressed by the installation of
distributed computer system as this would help in adding transparency to the system.

CASE STUDY- RAINBOW ILLUSION
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