Case 5.1 Final Draft

Auditing Cases: An Interactive Learning Approach (4th Edition)

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MEMORANDUM DATE: July 11, 2009 TO: Betty Watergate FROM: Matt Steger SUBJECT: St. James Clothiers Evaluation The new IT-based sales accounting system is scheduled for installation on October 1. To have a smooth transition from their current manual-based sales accounting system, the following issues must be addressed: There is no planned trial-run for the new system There are no current internal controls which would mitigate potential system failures for the new system There is no policy and/or procedure for incorrectly coded merchandise There is no plan for how to handle employee training for the new system Is the fourth quarter the ideal time to install the new system for a clothing store (e.g. holidays)? The following chart identifies the risks associated with St. James’s current manual sales accounting system, the potential material misstatements that the said system is capable of, and how those risks can be mitigated by the new IT-based sales accounting system: Risks of manual system How risks impact financial statements New IT system features that mitigate manual system risks Cashiers manually records the salesclerk’s name, the product number, quantity sold, and sales price (if any) on a pre-numbered sales ticket using information obtained from individual clothing price tags Potential for random mistakes in accounts such as cash, sales bonuses, inventory, COGS, and sales revenue Cashier will instead input a product number, quantity sold, and a salesclerk number directly into the new system. The system will extend price times
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Case 5.1 Final Draft - MEMORANDUM DATE: TO: FROM: SUBJECT:...

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