Jertsy Ltd. Case Study: Accounting System Weaknesses and Solutions

This case study examines the accounting system of Jertsy Ltd., a fashion clothing retailer with a decentralized accounting system where each store operates with autonomy. The study identifies the weaknesses of this system, including loss of control, procedural differences, high operational costs, and reliance on individual store managers. The analysis suggests transitioning to a centralized accounting system to address these weaknesses, improve communication and coordination, establish uniform accounting policies, and enhance accuracy and control. The case study also touches upon audit assertions and substantive procedures relevant to another company, SS Ltd., and the impact of warranty provisions. The recommendations emphasize the importance of centralized control to facilitate the company's expansion plans and overall operational efficiency. The study concludes by highlighting the benefits of centralized accounting for improved control and alignment of company goals.

CASE
STUDY

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
QUESTION 1...................................................................................................................................3
Description of existing system and its weaknesses:-..............................................................3
Suggestions for improving the system of Jertsy Ltd.:-...........................................................5
QUESTION 2...................................................................................................................................8
Main assertions of auditing and types of substantive procedure to cover the assertions and
special risks............................................................................................................................8
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................15

INTRODUCTION
The internal control is a process for assuring the company's goals and objectives in
operational efficiency and effectiveness, reliable financial reporting, and in compliance with
regulations, laws and policies (Brusca, 2015). Auditing is done to examine and verify the
efficiency of internal control systems and to determine the reliability and validity of information.
This report includes the identification of existing accounting system that the Jertsy Ltd. is
following and it also determines the weaknesses of existing accounting system. This study
ascertains the various suggestions for improvement in the present system of accounting to
expand the business of Jertsy Ltd. This report includes the audit assertions for the part of SS Ltd
and the types of substantive procedures by the auditors in the context of SS Ltd. This study also
examines the impacts of raise in the amount of provision for warranty. The study analyses the
risks involved in the increment of provisional amount of warranty for the company Sweet
Sounds Ltd.
MAIN BODY
QUESTION 1
Description of existing system and its weaknesses:
In this study every store manages its operations with a degree of autonomy that means the
store manager have the freedom to decide the quantities and types of clothes that they prefer to
buy and sell. For this purpose, every store analyses the market conditions like latest demands,
requirements and preferences of youth because after evaluating these demands and preferences
only they will be able to satisfy these requirements which also help them to maximize their
revenues. Even the Head Office of Jertsy Ltd. has delegated the authority of recruiting the
employees to all the stores, so the managers of stores can recruit their employees according to
their mindset and it is also specified that these stores recruit young employees as they can better
understand the demands of youngsters so it also helps them to earn better revenues (Ammar, Al
Shobaki and Abu-Naser, 2017).
Since every store manages its own accounting records and submits returns to the Head
Office, therefore it indicates that the Jertsy Ltd. is following decentralized accounting system.
Decentralized Accounting System: This is an accounting system under which most of the
accounting functions are done by various divisions of enterprise (Busco and et.al., 2016). Under
decentralized accounting system, the accounting operations of Head Office consist of examining

the accounting records of these divisions, conveying instructions to the accounting employees or
workers and maintaining the accounting for centralized functions like consolidating the book-
keeping of balances and reports (Chen and et.al., 2016).
Since the Head Office has delegated its responsibilities to every store and so now the
stores are eligible to take their own decisions and perform their functions as per their
perspectives. As there is no intervention of top management so it will help the stores in taking
decisions quickly. However, the Jertsy Ltd. has specified a standard mark-up on cost that every
store is required to consider in selling prices (Bemelmans-Videc, 2017).
Generally, in Decentralized accounting system the management has to make various rules
and regulations regarding the authorities and responsibilities of every store as these
responsibilities and authorities impact the operations and revenues of Jertsy Ltd. Apart from that
there can be problems or issues in ascertaining where the authority of Head Office ends and
managers of local stores starts (Furnham and Gunter, 2015). So the Jertsy Ltd. can face various
difficulties while following Decentralized accounting system as this system has various
weaknesses such as:
 Loss of Control:- Generally the higher management i.e. Head Office controls certain
fields of operations but in this system the Head Office or top management delegates its
responsibilities and authorities to the local stores that means the local stores are
authorized and responsible to take their own decisions which indicates that the Head
Office does not have any control over the operations of the stores. This may lead to loss
of profits or revenues of Jertsy Ltd because there may be probability of authority abuse
and management in this system like the mangers of local stores can do misuse of their
authorities or powers as the Head Office does not have an effective control over the
operations of the stores (Gustavson and Sundström, 2018).
 Local Viewpoint:- The managers of local stores make decisions according to the
performance of their stores. And sometimes it can be possible that the decisions taken by
these managers may not prove favorable for the company because the top management
and lower management may have different viewpoints which may lead to conflicts in the
company. Since in this system every store takes their own decisions so it becomes
difficult to lead their goals and company's goal in one direction (Chen and et.al., 2016).

 Procedural Differences:- In this system there can be large number of procedural
differences between areas of responsibilities and authorities as the manager of each store
alters the system as per their needs and requirements. Apart from that the Jertsy Ltd. also
has to make various rules and regulations regarding the delegation of authorities and
responsibilities of every store which is again a time consuming procedure (Inauen and
et.al., 2015).
 High Cost of Operations:- This system also leads to high administrative expenses as the
professional managers are required to be appointed for managing the operations of each
store. Since, Jertsy Ltd. has various fashion clothing stores in Australia so the top
management has to incur high cost for recruiting the skilled managers for each store and
even for providing training to large number of employees, working in all the stores the
management has to incur high expenditure (Knechel and Salterio, 2016).
 Reliance on the Manager:- In decentralized accounting system the management of Head
Office has to rely on the efficiency of managers of local stores. So these managers must
be skilled in their work because if these managers do not have sufficient skills or
competence to make appropriate decisions than their faulty decisions may lead to heavy
losses of the Jertsy Ltd. Therefore, the top management has to keep undue reliance on the
capabilities of divisional managers so that they can take right decisions at the right time
(Busco and et.al., 2016).
 High Employee Turnover:- Since the store staff of Jertsy Ltd includes the younger
people who move on after one or two years so it leads to significant staff turnover.
However, it does not affect trade and operations of the Jertsy Ltd. but high employee
turnover always affects the long term profitability and growth of the organisation. Due to
high employee turnover Jertsy Ltd. has to incur expenditure on training and development
of new employees which will ultimately impact the profits of Jertsy Ltd.
Suggestions for improving the system of Jertsy Ltd.:
Currently, Jertsy Ltd. was following Decentralized accounting system but now the
company wants to open a new store and expand its business so the management should adopt
new system for improving the performance of Jertsy Ltd. as the Decentralized accounting system
has the various disadvantages or weaknesses which ultimately affects the revenues or earning of

Jertsy Ltd. Therefore, the top management should improve the system or acquire new system for
the growth of the company (Kosova and Shevchenko, 2018).
The Jertsy Ltd. should adopt Centralized system of accounting as this system helps the
management to overcome all the weaknesses of decentralized accounting system.
Centralized Accounting System: This is the system in which all the records are maintained at
one place and this place can be digital or physical. Under Centralized accounting system, the top
management controls all branches or stores or departments budgets, account payable, account
receivables, incomes, expenditures and other transaction for providing better services and
products to the customers (Furnham and Gunter, 2015).
Since the Jertsy Ltd. is planning to open a new store so this system helps the management
to keep the complete control over the operations and performance of all the stores. So Jertsy Ltd.
can improve its performance by adopting the Centralized accounting system as it will help the
management to reduce the confusion and conflicts occurring in the enterprise (Lawrence,
Minutti-Meza and Vyas, 2017). So these are the various improvements that Jertsy Ltd. should
make for expanding the business and improving its performance:-
Jertsy Ltd should keep all the records at one place as it enhances the communication and
coordination between the team members and also leads to achievement of its objective and In
centralized accounting system only Jertsy Ltd. can maintain their records at one place while in
previous accounting system of Jertsy Ltd. every store was maintaining its accounts according to
their own perspectives and then submitting those returns to the Head Office so there was no
coordination among the managers of various stores (Mahadeen and et.al., 2016).
In previous accounting system every store was making policies and rules according to
their needs because of which Jertsy Ltd. was suffering from the problem of procedural
differences. So Jertsy Ltd. should adopt such accounting procedures and policies which are
uniform and can be applied to all the stores as it makes easier for top management to update or
change these policies whenever the need arises. Therefore, the Jertsy Ltd. should select
centralized system of accounting to make uniform accounting policies(Gustavson and
Sundström, 2018).
The senior accountant should acquire centralized system of accounting to maintain
accuracy in the organization because under this system it is easier to identify and reconcile the
company's transactions and there is no need of performing the consolidation process which

ultimately leads to accuracy. While in decentralized accounting system every store was preparing
its own accounting records and then submitting those records to the Head Office and then the
senior accountant has to consolidate these returns and this consolidation procedure lead to
inaccuracy(Maung, Box Inc, 2018).
Since the senior management is getting worried about maintaining the control in the
business as the Jertsy Ltd. is planning to expand its business so the senior accountant should
adopt such system which can control the overall performance of all the stores to improve
efficiency and performance of the enterprise (McLaren, Appleyard and Mitchell, 2016).
Therefore, the accountant should opt for centralized system of accounting as under this system
the top management has complete control over all the affairs or operations of the organization as
all the accounting records are maintained at the same place and there is no requirement of
consolidation process, while in existing system of accounting i.e. Decentralized system of
accounting the top management or the Head Office has delegated the responsibilities and
authorities to every store and all the stores were preparing their own accounts and submitting
those accounts to Head Office for consolidation which indicates that the higher management did
not have any control over the affairs of the stores and this system lead to inaccurate accounting
records (Milandru and Constantin, 2017). Therefore, to avoid the problem of inaccuracy or
inefficiency the Senior management should select the Centralized system of accounting to
expand its business (Inauen and et.al., 2015).
Under previous system of accounting it becomes difficult to lead Company's goals and
objectives of every store in one direction as every store perform their operations according to
their needs and requirements so it becomes difficult to combine objectives of all the stores with
the company's goals. Therfore, Jertsy Ltd. should adopt the centralized system as under this
system the top management keeps complete control over all the operations of the company so it
becomes easy for the top management to combine the goals of all the stores with the company's
goals(Milojević, Andžić and Vladisavljević, 2018).
Jertsy Ltd. should also conduct training and development programmes to reduce the rate
of employee turnover. These training help to develop the skills of employees and it will also
motivate the employees. However, for retaining the employees the management should provide
rewards to the employees on the basis of their performance as this will encourage the employees

to improve their performance and it will also help in employee retention of Jertsy Ltd (Milojević,
Andžić and Vladisavljević, 2018).
Since the Centralized system of accounting helps to overcome all the disadvantages of
Decentralized accounting system as well as it also offers various benefits to the company so the
senior management of Jertsy Ltd. should adopt the centralized system of accounting for better
improvements (Knechel and Salterio, 2016).
QUESTION 2
Main assertions of auditing and types of substantive procedure to cover the assertions and special
risks.
Sweet Sounds Ltd. is the manufacturer of mini hi-fi system. They changed its
manufacturing process for making its product more reliable by increasing period of warranty
from 3 years to 5 years. This policy resulted out that there is reduction in claims by 20%
(Mukhina, 2015).
Audit Assertions are the implicit or explicit claims and representations made by
management responsible in preparation of financial statements regarding the appropriateness of
the various elements of financial statements and disclosures. Information included in financial
statements are presented properly and comprehensively (Price and et.al., 2015). Sweet Sounds
Ltd.'s auditors by financial statement assertions claims regarding financial statements prepared
by organization's management and management assertion regarding certain aspects of a business
by member of management. Management assertion classified as transaction level assertion,
account balance assertions, presentation and disclosure assertions. Sweet Sounds Ltd. Should
consider accuracy, classification, completeness, cutoff, existence, occurrence, rights and
obligations, understandability, valuation for audit. These main audit assertions are explained
below:
 Accuracy: Sweet Sounds Ltd.'s auditor ensure that all the information contained in
financial statements are recorded accurately and the recorded transactions are free from
mistakes. This is the foremost criteria of the auditing of financial statements that the
transactions were recorded without any errors and misstatements (Rogulenko and et.al.,
2016).

 Classification: All the transactions have been recorded with their correct ledger accounts
maintained by SS Ltd. Transactions in accounting records classified accurately for proper
presentation and disclosures. Example: the nature of related party transactions, balances
and events clearly disclosed in the notes of financial statements (Thomas and et.al.,
2016).
 Completeness: All information in financial statements are completely disclosed and
reported a complete disclosure of transactions for proper presentation and disclosure of
accounts. Ascertain that all business events, assets, liabilities and equity balance are
recorded properly.. Example: all inventory recorded during the year available in the
financial statements present a complete information about purchases, work in process and
finished goods in cost records (Vašiček and Vašiček, 2019).
 Cutoff: This is considered as essential assertion, it explains that each company is required
to record all its transaction within particular fiscal year only. Once it is completed then no
entry must be done into financial statement. SS ltd should consider this element and has
to ensure that all records are maintained properly and recorded in particular year only. All
the entries such as wages, raw material purchase records must be enter into income or
balance sheet within current accounting period only. If firm fails to do the same then
auditor will not consider it fair and it would create problem to business unit (Assertions in
the Audit of Financial Statements, 2019).
 Existence: This explains that companies have to ensure that all entries related to assets,
equity balance etc. are exist in statement in particular year only. All details which are
mentioned in that record are present in actual year only. If there is any element missing
then it may create issue for the business and auditor will not consider such mistakes
hence SS ltd must considered existence assertion(Knechel and Salterio, 2016).
 Occurrence: This is related with disclosure of data and its presentation. This reflects that
company has to enter all transactions in its financial statement if it fails to do the same
then it may cause difficulty to business unit. If it is not occurred in company and recorded
in financial statements, then it would not be considered as fair and ethical and entity
might face legal issue for manipulating its data. Hence SS ltd has to ensure that it disclose
all the detail that happened in the company in particular fiscal year without failure
(Mahadeen and et.al., 2016).

 Rights and obligations: This assertion highlights that each company can use its ownership
or can use asset assets of business by showing obligations in the financial statement. If
owner of company is using funds or assets of company for personal use, then it must be
reflected as liability or obligation. On other hand if inventory of SS ltd is used by other
firms then it must be recognized in financial statements. Hence SS ltd has to ensure that it
prepares proper obligation side in financial statements (Milandru and Constantin, 2017).
 Understandability: This is related with presentation and actual disclosure of data,
companies are required to disclose all its data in actual understandable manner asper the
standards. If any information entered into reports is not understood by auditor, then it
may create issue to the firm. Transaction between different parties, balance in business
must be disclosed in proper manner. There is option to determine captions that can show
clarity of all transactions. Valuation: There must be accuracy in financial matters, as no amount with any entry
must be manipulated. Accuracy of data must be maintained. Hence SS ltd has to ensure
that it maintain valuation without failure (Vašiček and Vašiček, 2019).
Substantive procedures are the process in which overall evidences are created and
assembled by an external auditor to identify and verify mistakes in making financial statements
and accounting transactions regarding the assertions of auditing i.e.; accuracy, completeness, cut-
off, existence, rights and obligations, understandability and valuation (7 assertions of audit). The
external auditors follow the substantive procedure to detect mistakes of transactions recording,
maintaining the accounts and preparation of financial statements. For the manufacturing
company Sweet Sounds Ltd (SS), an auditor will perform the substantive procedure of auditing
by assembling all evidence to detect the misstatements of financial statements (Mukhina, 2015).
There are so many substantive procedures which is performed by an auditor. Following
are some procedures which an auditor will perform to detect any kind of misstatements in the
accounts of Sweet Sounds Ltd.-
Bank Confirmations:
Auditor performs this procedure to test the accuracy and completeness in the recording
transactions and preparation of balance sheet of the company (SS). In this procedure, auditor will
verify the amount of cash shown in the financial accounts of SS is matched with bank or not. For
this purpose, auditor first check the final balance sheet of SS and see the cash amount recorded

with company then match that cash amount with cash ledger and identify whether the recorded
amount is matched with the amount shown in final balance sheet, after verify the accounts of SS
Ltd, auditor ask for the bank statement and then check all the transactions and verify the
calculated amount of cash. If the amount gets matched as per the books, then auditor will
conclude the audit of the amount of cash is complete and accurate (Mahadeen and et.al., 2016).
Once the auditor concludes the audit, auditor will save a copy of financial and bank statements
and cash ledger as an evidence.
Examine Inventory:-
To test the existence (one of the audit assertions) of account balances of assets, equity
balances and liabilities of SS Ltd, an auditor will follow the procedure of examination of
inventory as an evidence to check whether inventory recorded in the books are actually exists in
the organisation or not. For testing the assertion of existence, auditor look the amount of
inventory shown in final statements, then verify that amount with inventory ledger and then went
to the place where SS Ltd puts its manufactured as well as purchased inventory or stock. If all
the amount got matched then auditor will conclude that the inventory which is shown in final
account is actually exists with SS Ltd (Assertions in the Audit of Financial Statements, 2019).
Observe/ Evaluate Assets and Confirm Liabilities:-
An auditor will perform this procedure of observing the fixed assets and confirming the
liabilities or debts or payables while audit substantively. In this step, auditor will observe as well
as evaluate the fixed assets of SS Ltd, with the recorded amount of fixed assets in the final
statements. For this, auditor will evaluate the fixed as well as current assets of SS Ltd which is
owned by the organisation, look out the final statements and them check the valuation method
used by SS Ltd and then verify all the assets are correct and possessed by the company SS Ltd.
Same as the evaluation of assets, the auditor will confirm the liabilities, debts and payables of SS
Ltd. To confirm the company's liabilities, auditor will arrange the written details from the
suppliers about the balance of SS Ltd left with them. Then verify the amount of payable recorded
in the books of SS Ltd is same as the written details of suppliers. By this procedure company
verify the two audit assertions i.e.; rights and obligations and valuation ((Gustavson and
Sundström, 2018)).
Cost of Salaries and Wages:-

The auditor will check the final accounts along with salaries and wages accounts to detect
any mistakes in recognition of any transactions in correct or same accounting period in which it
occurred. For this, the auditor looked the recorded of salaries and wages in final statements and
in the ledger of salaries and wages, which is expected calculated accurately in the same year in
which it is occurred. Auditor also check or audit in the accounts of SS Ltd whether the accrued
and prepaid expenses of the company has correctly accounted in the books of accounts. By this
procedure auditor will audit the assertion cut off (Lawrence, Minutti-Meza and Vyas, 2017).
Assure Disclosure of Accounting Information:-
SS Ltd discloses the accounting information to related party or by mentioning the notes in
financial statements is identified and assured by the auditor. As the user of the accounting
statements, expects the clear disclosure of transactions, events, activities of SS Ltd. The
understandability of provided information to its user helps in the growth of company. If there
were lack of understandability in the accounting information then auditor can conclude that the
accounting information provided by the company is not reliable and relevant to its users (Brusca,
2015).
As the company SS Ltd, increases the period of warranty of its products from 3 years to 5
years, which results in decrease of warranty claim from 20%, with the expectations of increment
in the sale of the product. SS Ltd further made an estimation of $4,000,000 as provision for
warranty which is more than past year's provision, which was $3,500,000. As the company raise
the amount of provision for warranty, it also creates some risks for the company (Vašiček and
Vašiček, 2019). Risk face by the company SS Ltd because of increase in provision for warranty
are explained as follows:-
Generates Future Obligations:-
The estimate amount of provisions which is made by SS Ltd for warranty is more than
that of previous year's warranty provision, which means now company's liability to replace or
repair the products sold is also increased. Now more customers can demand for the replacement
and repairing of the products to SS Ltd, for which company is obliged to bear the warranty
expenses and same amount will be written off from the provision. The increment in the amount
of provision for warranty will raise company's obligations or liabilities to meet the warranty
expenses (McLaren, Appleyard and Mitchell, 2016).
Affects Profits:-