Internal Control Weaknesses in Bell Studio's Accounting Systems

This report identifies the internal control weaknesses in Bell Studio's accounting systems and provides recommendations for improvement. The weaknesses include lack of segregation of duties, absence of peer review, and manual procedures. The risks posed by these weaknesses include cash embezzlement, errors in record keeping, and collusion with suppliers. The report suggests implementing automated systems, engaging an internal controls expert, and providing necessary funding and decision-making support.

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STRATEGIC INFORMATION SYSTEMS FOR BUSINESSES
Name of student
Name of institution
Name of instructor
Course code
Date

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Executive summary
Bell studio is based in Adelaide and deals with the wholesale of art supplies. The
studio has developed various departments to efficiently perform various activities.
The departments include cash disbursement, purchase system and payroll system.
The various systems have a proper organisation that shows the hierarchy of
activities and flow of data from one stage to the next. Bell studio emphasises that the
employees follow the stages without fail to prevent errors and override of authority.
Moreover, Bell studio faces various internal control problems that introduce risks to
the accounting system. The company fails to implement internal control principles
such as segregation of duties, authorisation of activities, peer review and physical
inspections. The failure to implement the internal control standards could cause risks
such as cash embezzlement in the cash disbursement office, collusion with suppliers
and errors of commission and omission. The availability of errors and loopholes to
misappropriate finances could result in undermining the going concern of the
company.
Furthermore, Bell studio should focus on developing an automated system to avoid
the problems that arise from manual systems. The company should purchase
accounting software such as QuickBooks and sage that ensure accurate entries. Bell
studio should ensure the implementation of the internal control systems to prevent
shortages of working capital.
However, the implementation of the system will require a huge financial outlay to pay
for the various expenses. The expenses include hiring a consultant, buying computer
software and corresponding hardware. Other expenses include training the
employees to understand the need to implement proper financial controls. Therefore,
the company should ensure the availability of the finance to avoid hitches in system
development and implementation.

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Table of Contents
Executive summary......................................................................................................2
Introduction...................................................................................................................4
Cash disbursement system..........................................................................................4
Data flow diagram of a cash disbursement system......................................................4
Internal control weaknesses.........................................................................................5
The possible risks arising from the weaknesses..........................................................5
Payroll system..............................................................................................................6
Data flowchart of payroll...............................................................................................6
The internal control weaknesses of the payroll system................................................7
The risks posed by the internal control weaknesses....................................................7
Purchase system..........................................................................................................8
Data flow system of purchase system..........................................................................9
The internal control weakness in the purchase system...............................................9
The risks caused by the internal control weaknesses................................................10
Conclusion..................................................................................................................10
Bibliography................................................................................................................11

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Introduction
The reason for the report is to identify the accounting system applied at Bell studio
and the internal control weaknesses. Additionally, the report gives recommendations
on how Bell studio can improve the system and rid out the weaknesses. The various
departments mentioned in the report include the cash disbursement, payroll and
purchases systems. The report has diagrams that show the system and data flow
with necessary symbols (Chen, 2009).
Bell studio has internal control weaknesses in the accounting systems, which calls
for the implementation of a new automated system. The new system should follow
internal control principles to prevent the risks from happening and undermining the
working capital situation (Chapple, 2016). Bell studio can engage the help of an
internal controls expert to develop a flawless system. The system should ensure
transparency and prevent errors while limiting access to unauthorised persons.
Furthermore, the management should support the implementation with the
necessary funding and decision making.
Cash disbursement system
Filing
Update
cheque
register
Signing by
treasurer
Cheque Cheque sent
to vendor
Accounts
payable
subsidiary
ledger
Accounts
payable
control
account

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Data flow diagram of a cash disbursement system
Updating the accounts payable control account
Cheque is sent to treasure
Pay cheque sent to bank
Updating the ledger
Updating the cheque register
Internal control weaknesses
The cash disbursement system at Bell Studio lacks segregation of duties (Dobie,
2016, p.784). The clerk writes the payment cheques and does the updates the
relevant accounts. Bell studio should not rely on one individual to perform the various
tasks due to risks that accrue. Bell studio should engage more people and spread
out the duties. For example, the cash disbursement clerk should write the cheque
and then leave another person to update the relevant accounts.
Additionally, the system lacks peer review to ascertain whether the cash
disbursement clerk observes accuracy and the financial accounting principles (Lau,
2013). Bell studio should engage an accounting professional to perform peer review
and correct the issues found. The reviews assists in maintaining cash records that
do not mislead the company due to errors such as omission and commission.
The possible risks arising from the weaknesses
The lack of segregation of tasks poses the risk of cash embezzlement (Walton,
2016, p.122). The cash disbursement clerk owns the whole system and can
manipulate the entries to steal cash from the company. The various ways to steal
cash includes paying ghost suppliers and overstating payments. Bell studio does not
have a way of identifying the thefts quickly since the process is not passed through
Cash
disbursement
department
Treasurer
signs cheque
Bank
Cheque
register
Accounts
payable
Control
account

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different persons. Therefore, the company could face cash shortages that could lead
to an inability to pay suppliers (Sahut, 2014, p.665).
Additionally, the system faces the risk of poor application of financial accounting
principles in record keeping (Siegel, 2015, p.366). The clerk could wrongly classify
expenses without correction since no one else interacts with the system. For
example, the clerk could fail to identify unpaid vendors as accounts payables and
record as expenses. The error causes poor decision making while planning for
receivables since the company will allocate a smaller amount than required.
The lack of peer review introduces the risk of errors and misapplication of accounting
standards. The risk continues to occur since the cash disbursement system does not
undergo a check and balance procedure (Tangpong, 2010, p.346). The involvement
of peer reviewers will assist in identifying the errors and do necessary corrections to
the records.
Moreover, failing to review the work done by the cash disbursement clerk could
result in errors of omission and commission (Windsor, 2010, p.80). The errors result
in records that do not tell the true and fair cash situation of the company. Therefore,
bell studio could end up with a cash record that does not match the actual amount of
cash at hand and in the bank.
Furthermore, the lack of segregation of duties poses the risk of collusion between
the cash disbursement clerk and the vendors (Phillips, 2010, p.177). The suppliers
could agree with the clerk to record exaggerated quantities and get paid.
Additionally, the suppliers could fail to indicate discounts on the invoices and reverse
the amounts to the cash disbursement clerk. Therefore, Bell studio could fail to enjoy
the benefits of buying products at a discount.
Payroll system
Data flowchart of payroll
Time cards
Input time
records in
computer
Filing time
cards
Payroll
register
received
Review of
register
Cheque sent to
supervisor
Post on the
general
ledger
Write salary
cheque
Payroll
register
received
Post to general
ledger Filing

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Payroll register is filed properly
Supervisor signs cheque
Posting of payments
Salary cheque is sent to the bank
The internal control weaknesses of the payroll system
Bell studio’s payroll system uses manual procedures, for example, in preparing the
disbursement voucher. The company should introduce automatic systems to develop
the voucher. For example, Bell studio should introduce computer software such as
sage and QuickBooks. The computerised systems will assist in automatically
checking and correcting errors (Powell, 2014, p.201).
Furthermore, the employees record manual timesheets, which pose a risk of failure
to indicate the correct times (Kujala, 2012, p.54). Therefore, the employees could
end up earning more money than the hours worked. Consequently, Bell studio
should introduce automated systems that record the time worked by the employees.
An example of automated systems includes introducing biometric sign in and out
procedures. The biometric system captures unique features of the employees such
as fingerprints and voice. The employees must sign in to the system when starting
work and sign out after finishing. The system will automatically report the time
worked to the payroll department in a timely and accurate manner (Dacin, 2011).
The other weakness involves the lack of peer reviews to identify errors and
misapplication of accounting principles. Therefore, the various persons included in
the recording could perpetuate an error to the whole system and cause an imbalance
of the accounts (Gurkov, 2013, p.70). Therefore, Bell studio could maintain poor
records that do not depict the actual salaries expense. On the other hand, Bell studio
could maintain wrongly classified expenses, which is against the financial accounting
principles.
The risks posed by the internal control weaknesses
The use of manual timesheets could result in employee collusion when recording the
hours worked. The employees could post work hours for absent employees, which
could result in additional wages and salaries expenses. Furthermore, the ability to
post for absent employees could result in having ghost workers (Gurkov, 2013,
Payroll
system
Filing
General ledger
Cheque
Supervisor

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p.71). The ghost workers could arise from employee collusion with the supervisors to
approve additional time sheets for workers who do not exist. Therefore, Bell Studio
incurs more expenses than required. However, the introduction of the biometric
system could solve the risk by directly communicating with the payroll system.
The other risk involves the possible loss of information in the case of damage or loss
of time sheets. The system lacks a back-up system to supplement the payroll
department with information. Therefore, the loss or damage of time sheets could
result in guesswork and estimations to come up with employee work hours. The
estimations and guesswork could cause errors and wrong calculations, which could
result in higher salary and wages than expected (Dacin, 2011). To prevent the risk
form happening, Bell studio should invest in cloud computing to secure and have a
back-up for data in case of loss. The current data back-up plans offer great storage
capacity for a long time, therefore, Bell studio will have no fear of loss of data.
Additionally, the cloud data systems offer security protocols to prevent unauthorised
access, which prevents malicious damage. Another benefit of cloud back-up is the
reduction of paper work in the form of document filing since authorised parties log in
to the system and access the necessary information.
The other risk includes omission and commission when posting manually. The error
could happen when the payroll clerk is posting the time sheets into the computer
system. The clerk could fail to post employees work hours or post the wrong amount.
The mistake results in an employee earning the wrong salary compared to the hours
worked (Hemphill, 2012, p.127).
Purchase system
Receiving report
Inventory ledger Vendor
selection
Digital
purchase
order
Purchase order sent
to vendor Purchase order sent to
purchase department
Arrival of
goods
Inspection
of goods
Report sent to
accounts
payables Reconciliation Invoice sent to
cash
disbursement

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Data flow system of purchase system
Checking ledger to identify requirements
Purchase order sent to vendor
Vendor delivers and an officer does inspection
The internal control weakness in the purchase system
The purchase system lacks procedures for authorising the purchases done by the
clerk. The clerk has the power to check the requirements and make orders at will,
which shows a deficiency in the system (Robertson, 2012, p.86). Bell studio should
improve the system and appoint a management staff to confirm the purchase orders
and give authority on issues such as the quantities and the exact suppliers to
engage.
Inventory ledger
Purchase
system Vendor
Goods
Cash
disbursement

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The other weakness includes the lack of segregation of duties (Newbert, 2014,
p.143). For example, the receiving clerk inspects the received goods and proceeds
to update the relevant account. Relying on one person to do all the activities exposes
a weakness in the purchase system run by the company. Consequently, the
company should engage more employees to update the various accounts to avoid
errors and abuse of powers.
The system also fails to emphasise on physical counting of the goods received
(Gillingham, 2012, p.431). The receiving clerk only compares the digital purchase
order and the packing slip, which do not give conclusive evidence that the packed
goods match requirements. Therefore, Bell studio should insist on physically
counting and checking the goods received to establish a match with the digital
purchase slip.
The risks caused by the internal control weaknesses
The lack of authorisation procedures could result in theft of money through fake
purchases (Chapple, 2016). The purchase clerk could buy products for personal use
since no authority confirms whether the requested amounts match requirements.
Additionally, the clerk can select a supplier based on the willingness to collude in
stealing from Bell studio. The suppliers can agree to overcharge products and revert
the extra amounts to the purchase clerk.
On the other hand, the failure to segregate duties gives the purchase and receiving
clerk an opportunity to commit fraud (Dobie, 2016, p.785). The clerks can overstate
the product prices or fail to disclose discounts offered on the received goods.
Therefore, Bell studio fails to enjoy the benefits of economies of scale. However, with
segregation of duties the various parties involved can detect the fraud and report to
the relevant authorities.
Additionally, the failure to physically count and check the received goods could result
in the wrong quality and quantity of products (Lau, 2016). The physical checking
allows the receiving clerk to interact with the goods an establish a much with the
purchase order specifications. Furthermore, the lack of emphasis on physically
counting the products opens up an opportunity for collusion with the suppliers to
deliver the wrong products. For example, the receiving clerk could accept a smaller
amount of goods to cash in on part of the payment made to the supplier.
Conclusion
Bell Company has the opportunity to develop a flawless system by implementing
proper internal control systems. The major problem facing Bell studio includes a lack
of segregation of duties. Therefore, the company should bring in more employees to
perform different tasks. The failure to implement proper internal controls could cause
cash embezzlement, which could undermine the going concern.
Moreover, Bell studio should engage an internal controls expert to assist in the
implementation of the internal controls. The expert will play a major role in ensuring
that the internal control systems have no errors and meet the requirements.
Additionally, the expert will train the employees on better control methods. For
example, the receiving clerk could understand the need to physically count the
goods before accepting.
Furthermore, Bell studio should concentrate on automating the system and eliminate
all manual procedures. The manual procedures have a high risk of errors and
inputting the wrong amounts. Therefore, Bell studio should consider various software

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such as sage and QuickBooks that automatically update related accounts. The
accounting software does not accept wrong records, which acts as a review
procedure.
The development of internal controls will require Bell studio to set aside a huge
amount of finances to ensure adequate purchase of necessary components. For
example, the development of an automated system requires Bell studio to purchase
accounting software and hardware for proper functioning. Additionally, the company
requires to train workers to understand internal control systems and procedures. The
training will require Bell studio to hire coaches and send employees to seminars,
which costs money. On the other hand, the help of external experts is necessary to
ensure successful implementation of the system. Therefore, Bell studio should set
aside adequate finances to ensure success and effective shift to the new internal
controls system.
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