StJames2006 - St. James Clothiers:1 Evaluation of Manual...

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St. James Clothiers: 1 LEARNING OBJECTIVES Recognize risks in a manual-based accounting sales system Explain how an information technology-based accounting system can reduce manual system risks Identify new risks potentially arising from the use of an information technology (IT)-based accounting system Recognize issues associated with the process of converting from a manual to an IT-based accounting system Prepare a formal business memorandum INTRODUCTION St. James Clothiers is a high-end clothing store located in a small Tennessee town. St. James only has one store, which is located in the shopping district by the town square. St. James enjoys the reputation of being the place to buy nice clothing in the local area. The store is in its twentieth year of operation. The owner, Sally St. James, 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 a software vendor. As the audit senior on the St. James engagement, you recently asked one of your staff auditors, Joe McSweeney, 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 working papers 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 St. James personnel. The narrative from last year's working papers as well as the narrative recently prepared by Joe are provided in the pages that follow. REQUIREMENTS The audit partner on the St. James 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 12/31/05 financial statement audit. Betty wants you to prepare a memorandum for her that addresses these questions: 1 This case was prepared by Frank A. Buckless, Ph.D. and Mark S. Beasley, Ph.D., Steven M. Glover, Ph.D. and Douglas F. Prawitt, Ph.D. and modified by J. Christopher Westland PhD CPA as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of an administrative situation.
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1. What aspects of the current manual sales accounting system create risks 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. " 2. What features, if any, of the proposed IT-based sales accounting system will help
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This note was uploaded on 01/23/2012 for the course BUSI 4900 taught by Professor B.c. during the Fall '11 term at Carleton CA.

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StJames2006 - St. James Clothiers:1 Evaluation of Manual...

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