Chapter 2

Review of the Existing Accounting Information System

I. General Overview
For the past 22 years since it started as a business ATON marketing has been using the

manual processing of its transactions and records. In the administrative function four parties are

responsible the cashier who receives the cash and takes responsibility over the petty cash fund, the

general secretary who records sales and purchase transactions, she also receives the checks and

prepares the related source documents of the company, the proprietor who gives authorization to

the transactions and is responsible for the purchase of the materials and the external accountant

and bookkeeper to whom the general journal and source documents are turned over to prepare the

financial statements.
The company does not follow a fix conversion cycle because they are processing non-stop,

that means they hold finished goods inventory in their warehouse and they only stop production

upon lack of raw materials to be used.

II. Transaction Cycles
A. The Revenue Cycle

Sales Order Processing

The Sales Representative (SR) receives a customer order through e-mail or fax and checks

the availability of the products. This is done if the customers are ordering in bulk. After checking

the availability, the SR will send a master list of the prices to the customer for the approval of their

orders.

Once the orders are approved, if the sale is made on credit, the credit terms will be

processed by the General Secretary (GS) and approved by the Proprietor. The term of the sale

usually requires a down payment with the balance paid in installment through post-dated checks
due monthly or every fifteen days but within the three month period from date of purchase. Based

on the approved credit sales, the GS will prepare a Charge Invoice (CI) in two copies and the

original will be given to the customer. The credit sales will be summarized in the Daily Credit

Sales Report (DCSR) by the GS.

When the parties agree to the terms of payment, the goods will be prepared for packing and

delivery. The terms of the delivery will depend on the location of the customer. If the goods will

be sent within Panay Island, it will be delivered two days after the order was made. However, if

the destination of the goods is not within Panay, the freight and handling terms will be discussed

further with the customer. Upon the release of the goods, the customer is required to sign the CI

copy of the SR for the acknowledgment of the receipt of goods.

B. The Expenditure Cycle

Purchasing System

In the purchasing system, all purchases by the company must be done by the Proprietor

himself. Otherwise, all purchases must be approved by him or his appointed representative

should be the one to buy it. The materials are being logged into a book by the PS Assistant. In

case of need for order, the PS Assistant will fill up two Purchase Order (PO) Forms, show it to

the production manager, have it signed, and forward it to the GS. The amount is being funded by

the Cashier from the PCF as long as amount is not over PHP 20,000. Liquidation takes place

right after purchase. The company then provides the necessary information to the account in

order to update the inventory and accounts payable subsidiary ledgers. It is then reconciled with

the general ledger. Subsequently, the file is updated.

 Payroll System

The company provides time cards and output records for their basis of the company’s

payroll. A summary is then provided which is subject to the manager’s approval. The company’s

files are then updated. After being approved, the payroll is distributed to the respective

employees in the form of cash. A summary of the disbursements is then provided to the

company’s accountant who will then update the payroll account. The amount updated to the

payroll account is reconciled with the general ledger. The file is then updated.

C. The Conversion Cycle

The conversion cycle of ATON Marketing starts with the assessment of inventory

requirements of the production department as to whether or not the materials are sufficient to
cover two to three weeks of production. The production supervisor checks the materials currently

available and posts the details of which into the Materials Logbook. Upon his assessment of a

need to order, the production supervisor fills up two purchase order forms and passes it to the

production manager to obtain approval to purchase. A copy is then forwarded to the general

secretary who sends the document to its suppliers.

One problem that ATON considers with its conversion cycle is the fact that their

production has been interminable or non-stop since it has commenced, and they have yet to

impose a system to address this problem. In spite of these, the company still suffers from

materials shortages and stockouts because production demand for each unit output changes from

time to time due to reorganization of the order of deliveries which can also be subjective to the

personal ties of the proprietor and the ordering party.In such cases of stockouts, the production

supervisor would obtain approval from production manager to begin production.

Their raw materials are stored in their fabrication/manufacturing facility. Finished

products are then transported to their home office for sale and display while others are kept in the

fabrication facility when no immediate order is foreseen.

In terms of quality control, the production supervisor makes sure that products are well-

painted and finely furnished after welding. However, units produced cannot be easily subjected

to test runs because it develops rust if it is used once and becomes idle for a period of time

afterwards.

In this cycle, they use documents such as the ___________ to issue serial numbers to

each unit and trace them to the employee who built it and to its ultimate purchaser. There is also
 the ______ to record the amount of materials consumed for the week or for a batch of production

per fabricator/welder.

III. Analysis of Internal Controls and Recommendations

In assessing the effectiveness of the internal control procedures in the transaction cycles of

ATON Marketing, the group decided to evaluate the system based on the six classes of internal

control activities provided in designing and evaluating transaction processing controls, (i.e.

transaction authorization, segregation of duties, supervision, accounting records, access control,

and independent verification).

1. Revenue Cycle

a. Criteria

1. Transaction Authorization

Proper transaction authorization must take place in order to process only the valid

transactions. Specifically, in the revenue cycle, authorization must take place when

sales are made on credit, a cash refund is requested and the posting of cash payment to

the subsidiary ledger.

 Segregation of Duties

Segregation of Duties ensures that there is oversight and review to catch errors. It

helps to prevent fraud or theft because it requires two people to collude in order to

hide a transaction. There are three general rules in segregation of duties: (1)

transaction authorization must be separate from transaction processing, (2) asset

custody should be separate from asset record-keeping and (3) the organization should

be so structured that perpetration of a fraud would require two or more individuals to

 collude. Specifically, in the revenue cycle, credit authorization should be separate from

the sales order processing, inventory control is separate from the warehouse, cash

receipts separate from accounting records and subsidiary ledger is separate from

general ledger.

 Supervision

Supervision is usually considered as the plan B if the company is unable to enact

appropriate segregation of duties. Supervision of employees serve as a deterrent to

dishonest acts and is particularly important in receiving checks and remittances from

customers.

 Accounting Records

These records serve as the audit trail. With these records, it is possible to track

transactions through systems and to find where and when errors were made

 Access Controls

The access to the company’s assets and information should be limited to specific

people. Within the revenue cycle the specific assets to protect are cash and inventories

and access to records such as accounts receivable subsidiary ledger and cash journal.

 Independent Verification

Physical procedures as well as record-keeping procedures should be reviewed

from time to time to check for accuracy and completeness: (1) shipping department

verifies the goods sent from warehouse, (2) warehouse reconciles stock release

document and packing slip, (3) billing reconciles the shipping notice with the sales

invoice and (4) general ledger reconciles journal vouchers from billing, inventory, cash

receipts and accounts receivable.

b. Condition, Cause, and Risks
1. Transaction Authorization

ATON Marketing has a transaction authorization with regard to its credit sales, a

credit sales approval is prepared by the general secretary and it shall be approved by

the proprietor but upon the record of the general secretary of the checks paid she is

also the one recording in the general ledger.

 Segregation of Duties

The business has a few people in its administrative function that is why

segregation of duties cannot be completely achieved. In ATON marketing’s revenue

cycle only four people are involved in the administrative function, the sales

representative who receives the order from the customer and who would also be the

one to check the availability of the product, the cashier who receives cash payments

from walk-in customers, the general secretary who records most transactions

particularly the sales and checks received and the the proprietor who gives

authorization to the transactions.

 Supervision

Under the sales department of ATON marketing there are about 20 employees

under the supervision of Jyle Perez. Transactions and actions are more supervised

since there are only a few employees under this department.

 Accounting Records

The general secretary records the transactions in the general journal and prepare

the necessary source documents. These documents are serially numbered to ensure the

accuracy of the records. If there are missing documents the proprietor takes immediate

action to know the reason for this.

 Access Controls

In ATON marketing only those who are tasked to record the transactions and keep

the assets are those who can access these records or assets and there are only few

employees in the sales department. This access is specifically given only to the

proprietor who has the power to check all the record books prepared by the specific

employees, the general secretary who records most of the transactions of the company

and then the external accountants and bookkeepers the company hired to whom the

records are turned over for the preparation of the financial statements.

 Independent Verification

In the revenue cycle there are two transactions that exemplifies independent

verifications and that is when there is a transaction that involves sales on credit, the

general secretary records all credit sales in the Daily Credit Sales Report and at the end

of the day the GS summarizes the DCSR and attaches it to the Charge Invoice. Next is

if there are cash sales, the cashier receives the cash from walk-in customers and at the

end of the day, the cashier prepares and organizes the ORs and reconciles the footed

amount to the cash on hand. This is an everyday cycle.

c. Weaknesses in Internal Control

1. General Secretary both receives payments and records/updates receivables

signifying lack of segregation of duties, it is easier to commit fraud because only one

person is responsible for recording of transactions and custody of the asset.

2. Since there is no separate internal accounting department, the proprietor is also

the one giving the authorization to transactions it may lead to abuse of this freedom.

3. There is no separate internal auditor so there is a limitation to the verification of

 the the transactions, it may lead to a lax on the part of the supervisors who are directly

responsible to report to the head of the business function/segment.

d. Ranking (High, Medium, Low)

e. Recommendations

For the revenue cycle, the researchers would recommend that the company must

develop a system in order to facilitate the transactions of the business. Segregation of

duties is a crucial control that must be focused on to by the company but since there

are only a few employees in the administrative function, supervision must be done

regularly by the managers or the proprietors.

1. In order to double-check the work of the general secretary, the manager must

regularly conduct a review of the transactions processed. For the petty cash

custodian, ensure that the total in the footed amounts of cash match the cash box

at the end of the day

2. Mandatory vacation leave must be encouraged, through this a system of abuse

may come to light as irregularities may occur when a certain employee takes a

vacation leave. This type of activity may help in detecting fraudulent activities.

An accounting department is essential to the company especially since it has

expanded greatly from the time it started. They have more customers and receive more

orders daily. The accounting department should be responsible for the monitoring of

the records of the company and financial controls which include the reconciliation of

records and source documents.

2. Expenditure Cycle

a. Criteria
1. Transaction Authorization

Proper transaction authorization must take place in order to process only the valid

transactions. Specifically, in the expenditure cycle, the accounting department should

authorize the purchase of materials not the purchasing agents and the accounting

department should also be the one authorizing the payment of bills and not the cash

disbursements clerk.

 Segregation of Duties

Segregation of Duties ensures that there is oversight and review to catch errors. It

helps to prevent fraud or theft because it requires two people to collude in order to

hide a transaction. There are three general rules in segregation of duties: (1)

transaction authorization must be separate from transaction processing, (2) asset

custody should be separate from asset record-keeping and (3) the organization should

be so structured that perpetration of a fraud would require two or more individuals to

collude. Specifically, in the expenditure cycle, custody of the asset by the warehouse

must be separate from recordkeeping of the assets by the accounting department and

custody of the asset (cash) should be under the cash disbursements clerk and the

recording of payment must be done by the accounting department.

 Supervision

Supervision in the expenditure cycle is of highest importance in the receiving

department, where the inventory arrives and is logged in back by the receiving clerk

 Accounting Records

These records serve as the audit trail. With these records, it is possible to track

transactions through systems and to find where and when errors were made
 Access Controls

The access to the company’s assets and information should be limited to specific

people. Within the expenditure cycle the specific assets to protect are cash and

inventories and access to records such as accounts payable subsidiary ledger, inventory

subsidiary and cash journal.

 Independent Verification

Physical procedures as well as record-keeping procedures should be reviewed

from time to time to check for accuracy and completeness: (1) Purchase requisitions,

purchase orders, receiving reports, and suppliers’ invoices must be checked and

verified by Accounts Payable, (2) general ledger reconciles total obligations recorded

with the inventory received and total reductions in accounts payable to the total cash

disbursements.

b. Condition, Cause, and Risks

1. Transaction Authorization

In purchasing raw materials, the proprietor must be the one to do so or his

appointed representative and he is also the one giving authorization for the purchase.

As for the check disbursements, all payments above Php 20,000 are issued through the

check voucher and is to be approved by the proprietor.

 Segregation of Duties

The business has a few people in its administrative function that is why

segregation of duties cannot be completely achieved. In ATON marketing’s

expenditure cycle only three people are involved in the administrative function, the

petty cash custodian whose fund is used to pay for purchases below Php 20,000, the
 general secretary who is responsible in preparing the check voucher for disbursements

above Php 20,000 and the proprietor who is the one authorizing the transaction and

also the one purchasing the material.

 Supervision

In the expenditure cycle, the receiving department is the most prone to theft that is

why supervision must be emphasized in this function. For ATON marketing, upon

receipt of the goods in the warehouse, the general secretary, who is responsible for

recording purchases, is also the one maintaining the records for the goods received.

 Accounting Records

The general secretary records the transactions in the general journal and prepare

the necessary source documents. All documents issued must be in sequential

numbering order. A skip on numbering will be directly reported to the proprietor.

 Access Controls

In ATON marketing only those who are tasked to record the transactions and keep

the assets are those who can access these records or and in the expenditure cycle only.

The general cashier, then the external accountants and bookkeepers the company hired

to whom the records are turned over for the preparation of the financial statements and

the proprietor who gives authorization to most transactions. Also, checks should be

dated only on the 15th and 30th of the month to have control over the preparing and

releasing of checks.

 Independent Verification

The goods received is checked in the warehouse to ensure the quality of the

products that there are no defects even up to the sale of goods, the products about to be
 sold is also verified by the warehouse man to ensure that upon release there are no

defects in the product

c. Weaknesses in Internal Control

1. General Secretary both receives goods and the payable related signifying lack of

segregation of duties, it is easier to commit fraud because only one person is

responsible for complementing transactions.

2. There is lack of supervision over the petty cash custodian since no one responsible

for verifying all the transactions recorded and the cash upon the footing of the

balances at the end of the day. These records will be immediately turned over to the

external accountant and bookkeeper because the company has no separate accounting

department this may lead to understating the assets in the logbook and the theft of

cash.

3. The company maintains only a general journal, it will be hard to reconcile the

balances of the receivables and payables which will we lead to a poor audit trail and

verification of amounts recorded.

d. Ranking (High, Medium, Low)

e. Recommendations
Proper segregation is important to every entity. It emphasizes that there should be

no single person that has complete control over all buying activities. ATON

Marketing’s general secretary is in charge of activities regarding receiving goods and

providing the related disbursement. Assigning another person the activities regarding

payments would lessen the occurrence of fraud. Another issue that needs to be solved

is the fact that the entity lacks supervision regarding the petty cash custodian. Another

person can be assigned to record the transactions to have better control.

 It would be best if different people are assigned in various operations of the entity.

One person can be assigned to approve purchases and another one can be responsible

for receiving the ordered materials. Approving the invoices for payments and

reviewing and reconciling the records can be assigned to different people to lessen the

probability of fraud. A different person should be responsible for performing inventory

counts. If proper segregation is maintained, it could lessen the occurrence of having

purchases that are unauthorized and unnecessary.

3. Conversion Cycle
a. Criteria
1. Transaction Authorization
Proper transaction authorization must take place in order to process only the valid
transactions. In the conversion cycle certain documents are released such as work
orders, move tickets and material requisitions would signify the authorization of a
certain process or procedure.
 Segregation of Duties
Segregation of Duties ensures that there is oversight and review to catch errors. It
helps to prevent fraud or theft because it requires two people to collude in order to
hide a transaction. There are three general rules in segregation of duties: (1)
transaction authorization must be separate from transaction processing, (2) asset
custody should be separate from asset record-keeping and (3) the organization should
be so structured that perpetration of a fraud would require two or more individuals to
collude. Specifically, in the conversion cycle, production planning and control
department is separate from the work centers, inventory control is separate from the
storeroom and finished goods warehouse and cost accounting function for WIP should
be separate from the work centers in the production process.
 Supervision
 Supervision in the conversion cycle is emphasized in the work centers that the
usage of raw materials that are all released should be utilized and waste is minimized.
Time cards and job tickets are checked for accuracy.
 Accounting Records
These records serve as the audit trail. With these records, it is possible to track
transactions through systems and to find where and when errors were made
 Access Controls
The access to the company’s assets and information should be limited to specific
people. Within the conversion cycle there must be a direct access control to the
storerooms, productions work centers and finished goods warehouse and quantities in
excess of standard amounts require approval.
 Independent Verification
Physical procedures as well as record-keeping procedures should be reviewed
from time to time to check for accuracy and completeness: (1) cost accounting
reconciles material usage and labor usage with standards, (2) general ledger verifies
movement from WIP to FG by reconciling journal vouchers from cost accounting and
inventory subsidiary ledgers from inventory control and (3) a physical count is
conducted.
b. Condition, Cause, and Risks
1. Transaction Authorization
The production supervisor obtains approval from the production manager to begin
production for products that are currently unavailable or out of stock. However, the
company considers one of its main problems to be the fact that its conversion cycle
has been interminable since its inception, given that this is one problem to which
they have no solution yet. In addition to this, they also use documents such as the
___________ to issue serial numbers to each unit and trace them to the employee
who built it and to its ultimate purchaser. There is also the ______ to record the
amount of materials consumed for the week or for a batch of production per
fabricator/welder. However, they do not have the recommended documents such as
move tickets and materials requisitions that the batch production process entails.
 Segregation of Duties
 The conversion cycle is where ATON Marketing is relatively stronger compared to
other cycles when it comes to segregation of duties. They have separate people
authorizing their transactions and holding custody of their assets (both under the
production manager) from those processing their transactions and keeping the
records of their assets (both under the production supervisor). The process of
allocating costs of overhead and labor are also under the proprietor separate from
the work centers. However, their work centers are also where they store their
inventory which could also be an opportunity for fraud.
 Supervision
The company lacks the basic documents such as job tickets and time cards but they
have alternative documents that record the work made by every employee. They
also have proper supervision from the production supervisor to make sure that the
products are at the best quality possible without having to do preliminary test runs
that could formulate rust inside the products.
 Accounting Records
They use documents such as the ___________ to issue serial numbers to each unit
and trace them to the employee who built it and to its ultimate purchaser. There is
also the ______ to record the amount of materials consumed for the week or for a
batch of production per fabricator/welder.
 Access Controls
Access to company’s assets and information are only limited to the production
manager, production supervisor, the proprietor, and the specific employees who
created the specific products. However, given that the work center is also where they
store their inventory, it could be prone to theft.
 Independent Verification
*ask ko lang ni anay*

c. Ranking (High, Medium, Low)

d. Recommendations
 ATON Marketing should use documents prescribed
 Move tickets
  Improve costing (allocation of overhead)
 Separate storeroom for their products

IV. Summary of Recommendations

A. Revised Transactions
B. Proposed Documents, Journals and Ledgers
The company records all transactions in the general journal. This would be a limit

in the audit trail of the company. The researchers greatly recommend the use of special

journals and ledgers, both general and subsidiary for easier documentation and

segregation of transactions and accounts.

1. Special Journals include cash receipts, cash payments, sales journals and

purchases journals. These journals are designed as a simple way to record the

most frequently occurring transactions. With the use of these journals it would be

easier to reconcile the balances at the of the day and it will be a more organized

basis for the audit trail of the company.

2. Subsidiary and General ledgers, these ledgers will catch the total balance

of the accounts and upon the preparation of the financial statements of ATON

Marketing it will serve as the basis for the balances of the accounts.
C. Recommendation for implementing good accounting policies and practices
The researchers highly recommend the creation of a separate accounting

department for the business. Since it has expanded greatly with over a hundred

employees, it is about time for the company to have an accounting department so that

segregation of duties can be implemented, it can lower the risk of the company to

fraudulent activities.
The accounting department’s essential roles and duties are:
1. Money out – making payments and keeping the bills paid
2. Money in – processing incoming payments
3. Payroll – make sure everyone gets paid, the employees and taxes to the

government
4. Reporting – preparing financial reports, e.g. financial position, comprehensive

income
5. Financial Controls – to avoid errors, fraud and theft