Emerald Fashion may be a high-end clothing store found in a little Tennessee town. Emerald has only

Fantastic news! We've Found the answer you've been seeking!

Question:

Emerald Fashion may be a high-end clothing store found in a little Tennessee town. Emerald has only one store, which is found within the shopping locale by the town square. Emerald enjoys the notoriety of being the put to purchase decent clothing within the nearby region. The store is in its twentieth year of operation.

The owner, Sally Emerald, recently decided to convert from a relatively simple manual sales system to an IT-based sales application package. The sales application software will be purchased from software vendor. As the audit senior on the Emerald engagement, you recently asked one of your staff auditor, Joe Mc. Sweeney, to visit with the client more formally to learn more about the proposed accounting system change. You asked Joe to review the narrative in last year’s audit files that he prepared, which describes the existing manual sales accounting system, and update it for any current-year changes. You also asked him to prepare a second narrative describing the proposed IT-based sales accounting system, using information he obtained in his discussions with Emerald personnel. The narrative from last year’s audit file and the narrative Joe recently prepared are provided in the pages that follow.

Emerald Fashion

Narratice Description of Manual-Based Sales Accounting System

For the Year Ended December 31, 2014

This narrative is based on discussions with client personnel at Emerald Fashion on June 29, 2014, in conjunction with the audit of the December 31, 2014 financial statements. This narrative describes the manual sales system in place during the year ended December 31, 2014

Description of the Existing Sales Accounting System

Emerald has several salespeople who work with customers. Sales personnel are compensated based on an hourly rate plus a bonus for sales they generate by assisting customers. When the customer is ready to purchase the goods, the salesclerk directs the customer to the store cashier for payment.

To process a sale, the cashier manually records the salesclerk’s name, the product number, quantity sold, and sales price on a pre-numbered sales ticket using information on the clothing price tag. The sales ticket is in duplicate form. For special sale item, the cashier refers to newspaper clippings of advertisements or in-store sales signs. Occasionally, the cashier has to rely on the salesperson to determine the sales price. The cashier manually extends the price times quantity to compute the sales amount and then adds the sales tax to arrive at the total sale amount. Once the sales ticket is computed, the pre-tax sales total and the sales tax amount are entered into the cash register, and the cash register records these amounts plus computes and record the total sales amount on a duplicate cash register tape. The cashier staples the customer copy of the cash register tape receipt to a copy of the manually prepared sales ticket and gives that to the customer.

The other copy of the cash register tape is maintained inside the locked cash register. No one except the store accountant, Meredith Mc. Glomm, can unlock the tape from the register. The cash register is a relatively simple machine-it is basically used to generate the sales ticket and to provide a locked drawer for cash collected. The cash drawer is generally only opened when a sale is entered; however, the drawer can also be opened by pressing the “Total” button.

The original sales ticket is retained in a file box beside the cash register. Salesclerks assist the cashier during breaks and busy peaks (Saturday particularly). Emerald will accept customer returns only if the customer can provide his/her copy of the sales ticket. The cashier processes sales returns by completing a sales ticket using negative amounts.

John Thornberg, the store’s manager count the cash in the cash register each night and prepares the deposit slip. He takes the cash to the local bank each night and drops it in the overnight depository. On the next day, the bank processes the deposit and emails the validate deposit slep directly to the store accountant (Meredith Mc. Glomm)

At the end of each day, Meredith collects all the sales tickets from the cashier and also takes the cash register tape that is locked inside the cash register. Those are store in a safe located in the accounting office. On the next day. Meredith groups all sales tickets by salesclerk number and records sales by salesclerk in separate columns of a spreadsheet. Meredith accumulates the subtotals of sales by salesclerk to determine the total sales amount for that day for the store.

Meredith manually enters the daily total into the sales Journal. She compares the daily sales total in the Sales Journal to the cash register tape total for that day. When the validate deposit slip arrives from the bank, Meredith compares the deposited amount to the Sales Journal for that day nothing agreement. The store owner, Sally Emerald, periodically compares the daily deposit slip to the Sales Journal recorded amounts. At the end and of each month, the store accountant foots the Sales journal columns and post account total to the General Ledger, She uses the monthly sales by salesclerk totals to calculate salesclerk bonuses for the month. Because of the volume of sales transactions that occur, the store is unable to maintain a perpetual inventory system. Thus, at month end, the store performs an inventory count to establish ending inventory for the month. This is used to compute Cost of Goods Sold for the month.

Update for Year Ended December 31, 2015 Audit:

Base on my review and discussions with Emerald Fashion personnel on July 10, 2015, the above narrative description of the manual-based sales accounting system accurately describes the sales accounting system currently in place

Joe Mc Sweeney

July 10 2015

Emerald Fashion

Narrative Description of the Proposed IT-Based Sales Accounting System

For the Year Ended December 31, 2015

This narrative is based on discussions I had with client personnel at Emerald Fashion on July 10, 2015. The narrative describes the key components of the proposed new IT-based sales accounting system, which Emerald Fashion plans to install in the fourth quarter of the year.

Description of the Proposed IT-Based Sales Accounting System

The new IT-based sales system that Emerald Fashion is planning to implement later this year is an externally developed sales accounting software package that will be hosted as a cloud-based software solution by Olive States software. Sally Emerald learned about this software package while attending an industry meeting several month ago. From talking with several store owners, Sally is convinced that this software package would be great for Emerald Fashion.

Sally talked with some local friends who recommended a Nashville-based computer consultant to assist with the implementation. The consultant has met with Sally on five different occasions to discuss their plans for installation. The installation is scheduled for the last two weeks of November 2015. Emerald will begin using the new system effective December, 1. The sales software will actually be hosted as a cloud-base software solution hosted on servers ‘ad Olive states software. Aspects of the solution will be installed by on computers at Emerald so that they can access the actually software solution that will be maintained and supported at Olive States Software. The software to install on Emerald equipment will be download from Olive States. The basic package includes a number of features associated with the system that Emerald will have the option of activating. Sally has asked the consultant to assist with the software installation and to be responsible for setting those features, given that Sally and the rest of the store staff have no experience with computer programming of software installation.

When the new system is implemented, the old cash registers will be removed, and new computer will be used by the cashier to process sales. The computer (PC) has a special cash drawer attachment that can only be opened after a sale is entered into the PC. To open the drawer any other time requires a special password code, which will be maintained by the store manager. Thus, if the cashier makes a mistake while entering a safe, the store’s manager will have to enter a password to void the sale.

To operate the new PC cash register, the cashier must input a three digit password pior to processing each sale. Sales clerks will continue to fill in for the cashier, but each clerk will have a unique password to operate the PC. The PC will record the operator password for each sale on an internal storage device that can only be accessed by the store manager. The store manager will be able to generate reports by password number for review. Sales tickets will no longer be prepared. Instead, the cashier will scan product bar codes on the price tag associated with the product and the cashier will enter quantity sold, and the salesclerk number. The PC will extend price times quantity and compute the pre-tax sales amount, sales tax amount and total sale amount. The PC will pull the unit price from a Price List master file base on the product number entered. As a result, sales cannot be processed for invalid product number or for product numbers with no price in the Price List master file.

The PC generates a receipt, which will be given to the customer. The receipt will indicate the product number, quantity, extended transaction amounts, and sales clerk number. The PC does not generate a separate cash register tape. Instead, the daily sales figures are store “in the cloud” on servers at Olive State. At the end of each day, the cashier selects the “daily closing procedure” menu option, which automatically updates the Sales Journal and Perpetual Inventory master file also maintained in the cloud application. Sales returns can only be processed by the store manager using a special password option.

A maintenance application that comes with the new computerized sales system must be used to input changes to the Price List master file. Access to the maintenance application is password protected and only the store manager and Sally will have password access to the master file.

The store manager will continue to make the nightly deposits in manner consistent with the manual system procedures.

The new system will dramatically change the store accountant’s responsibilities. Given that the computer automatically post individual transactions to the Sales Journal by sales clerk, the store accountant will no longer prepare the Sales Journal. As a matter of fact, a Daily Sales Journal will not be produce in hardcopy form. Instead, the store accountant’s password will allow access to a READ ONLY version of the daily sales figures. READ ONLY means the accountant can only view the contents of the file.

When the validated deposit slip arrives from the bank each day, the store accountant will enter the deposit-slip total into the accounting system, and the system will then compare the deposit amount to the daily recorded sales totals. Any differences will be listed on an exception report forwarded via email to Sales Emerald each day. In addition, the nightly posting will also update the perpetual inventory records, which can be printed daily in the accounting office. Discrepancies will be reviewed by the store manager daily and by the owner on a test basis.

As part of the monthly closing procedures, the computer will automatically post sales and inventory transactions to the General Ledger accounts. The store accountant will print the General Ledger Trial Balance to prepare monthly financial statement reports. No other hardcopy report or journals will be generated. All underlying data will be stored in cloud.

Joe Mc Sweeney

July 10 2015

REQUIRED

(1) The proposed new IT-based sales accounting system will be cloud-based and Emerald will access the underling software via online access. Visit the website of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (www.coso.org) to obtain a free copy of COSO’s thought paper, Enterprise Risk Management for Cloud Computing, to answer the following questions: What is cloud computing? What benefits, if any, would use of cloud computing for the sales system provide Emerald? What risk, if any, would the use of computing for the sale system impose on Emerald?

(2) The audit partner on the Emerald engagement, Betty Watergate, has asked you to review the narratives prepared by Joe as part of your audit planning procedures for the current year’s December 31, 2015 financial statement audit. Betty wants you to prepare a memorandum for her that addresses these questions:

(a) What aspects of the current manual sales accounting system create risk that increase the likelihood of material misstatements in the financial statements? Specifically identify each risk and how it might lead to a misstatement. For example, don’t just put “Risk: Sales tickets are manually prepared by the cashier”. Rather, you should state why this increases risks of material misstatements by adding “This increases the risk of material misstatements because it increases the risk of random mathematical errors by the cashier”

(b) What features, if any, of the proposed IT-based sales accounting system will help minimize the risks identified in question 2.a? If a deficiency exists that is expected to persist under the new system, indicate that “no computer controls reduce this risk”

(d) What recommendations do you have related to plans for the actual conversion to this new system?

(e) Prepare a memorandum containing your responses to Betty’s questions. You May find it helpful to combine your responses to question 2a. and 2b. For example, you might present your answer to question 2.a and 2.b, using the worksheet format on the next page.