HI5019 Expenditure Cycle and Conversion Cycle of Paradise Industries Assessment Answer

Assessment Details and Submission Guidelines
Trimester	T1 2020
Unit Code	HI5019
Unit Title	Strategic Information Systems for Business and Enterprise
Assessment Type	Individual assignment
Assessment Title	Case Study – Paradise Industries
Purpose of the assessment (with ULO Mapping)	Students are required to: Critically evaluate the purpose and role of accounting information systems in today’s business environment (ULO 1). Articulate the various transaction cycles, financial reporting, management reporting systems and e-commerce systems to technical and non-technical stakeholders (ULO 2). Appraise the risks inherent in computer-based systems/ERP, including the role of ethics and the various internal control processes that need to be in place (ULO 4).
Weight	20% of the total assessments
Total Marks	20
Word limit	Not more than 2,500 words
Submission Guidelines	All work must be submitted on Blackboard by the due date along with a completed Assignment Cover Page. The assignment must be in MS Word format, no spacing, 12-pt Arial font and 2 cm margins on all four sides of your page with appropriate section headings and page numbers. Reference sources must be cited in the text of the report, and listed appropriately at the end in a reference list using Harvard referencing style.

Assignment Specifications

After working at several accounting and consultancy firms for more than a decade, you have recently decided to start your own consultancy business. A friend of your wife introduces you to Paradise Industries, a manufacturer of high-precision machine tools based at Adelaide. Paradise Industries employs a centralised computer system with distributed terminals in the departments. The company recently have a number of operational problems and the managing director of the company has engaged you to assess its systems and processes.

Expenditure Cycle

When an inventory item falls to the recorder point, a purchase requisition is automatically generated and printed on the terminal in the purchasing department. The purchasing clerk select suppliers and prepare a purchase order. One copy of the purchase order is sent to the supplier and another copy is sent to the receiving department. The purchasing clerk then adds a record to the open/closed purchase order file through an update program in the data processing department.

When the receiving clerk receives the delivery from the supplier, the clerk reconciles the items with the packing slip and the purchasing order. After the reconciliation, the receiving clerk prepares a hard-copy receiving report recording the quantity and quality of the goods received. One copy of the receiving report accompanies the items to the warehouse and another copy is filed in the receiving department. Using the department terminal, the receiving clerk adds a record to the digital receiving report file. The system then automatically closes the purchase order. Upon receiving the items, the warehouse clerk updates the inventory subsidiary ledger through the terminal in the warehouse.

When the supplier’s invoice arrives, the accounts payable clerk adds a record to the supplier invoice file, which in turn triggers the system to automatically set up a liability in the accounts payable subsidiary ledger based on the financial information contained in the invoice. The system then automatically updates all affected general ledger accounts.

The computer system scans the accounts payable subsidiary ledger every day for items due to be paid and print the cheque. The cheque is sent to the supplier and a copy is sent to cash disbursements where it is filed. The system then adds a record to the cheque register file and removes the liability in the accounts payable subsidiary ledger. Finally, the system automatically updates the general ledger accounts.

Conversion Cycle

The production process is triggered by a quarterly forecast of expected sales, which goes to the production planning and control clerk. From the clerk’s terminal, the production planning and control clerk updates the digital production schedule to include the batches of products to be produced during the next quarter. Drawing upon the bill of materials and routing sheet files, the system automatically prepares the digital work orders move tickets and material requisitions and sends them to the work centre supervisor’s terminal on a weekly basis.

The work centre supervisor accesses the digital documents and print hard-copy work orders, move tickets and material requisitions. The supervisor distributes the move tickets and two copies of the material requisitions to each work centre in the production process.

Staff members submit the two copies of material requisitions to the warehouse in exchange for the materials. If additional materials are needed beyond the standard quantity, the supervisor issues additional material requisitions. As the production is completed in each work centre, the staff members send the move ticket to cost accounting to the mark the completion of that phase of the production batch. Staff members also record labour time spent on each batch on hard-copy job cards, which they send to cost accounting. Finally, upon completion of the batch, the work centre supervisor closes the open work order file.

The warehouse clerk files one copy of the material requisition and updates the materials inventory file from the terminal in the warehouse office. The clerk then sends a second copy of the material requisition to cost accounting. At the end of the day, the clerk prepares a digital journal voucher and posts it to the general ledger control accounts.

The cost accounting clerk accesses the digital work orders and set up a work-in-process account for the production batch. The clerk also receives move tickets, job tickets, and material requisitions throughout the production process and use the documents to post in work-in-process subsidiary ledger. At the end of each day, the cost accounting clerk prepares a digital journal voucher and posts to general ledger control accounts to reflect the status of work-in-process and to record transfers of work-in-process to finished good inventory.

Required

Prepare a report to the managing director of Paradise Industries to evaluate the processes, risks and internal controls for Paradise Industries’ expenditure and conversion cycle. In your report, you need to include the following items:

System flow chart of expenditure cycle
System flow chart of conversion cycle
Analysis of physical internal control weaknesses in the expenditure cycle
Analysis of the risks exist in the conversion cycle and the changes needed to reduce the risks

Assignment Structure

The report should include the following

Answer

system flow Chart

Introduction

In this competitive world, it is become very difficult for an organization to stand in the current market. To beat the competitive dimension of an organization a system is developed that is strategic information system. To respond the corporate world and get hold on market this type of system is very helpful. Strategic information system in business compiles business strategy, organizational strategy and information strategy together and become an essential feature in an organization. With the help of strategic information system a company can change their business strategy and structure. Now it can say that strategic information system is a type of system which align information system with the business strategy. It is also helpful to maintain a rapid response and the quality indicator. In an organization, database with data mining capabilities to make the best use of available corporate information for marketing, production, promotion and innovation. This type of system can give a service which is less expensive, varied and focused on particular market dimension. By developing this system, the efficiency and control of an organization are enhanced which is mandatory in the current market. This can develop a new product, different market and a way of doing a market differently. In this report, it is also mentioned the expenditure cycle and the conversion cycle of Paradise Industries. Also discuss the weaknesses which is exist in the internal control system in the expenditure cycle and the risk associated with the conversion cycle of Paradise Industries.

Expenditure cycle of Paradise Industries

In this cycle, the department are divided into 4 components which are mentioned below:

Firstly, Purchasing department
Secondly, receiving department
Thirdly, account payable department
Lastly, cash disbursement department

In each department the work is done by their respective department clerks. Each department clerks work is rely on the data which is provided by the previous department and the invoice generated (Malicka, 2018). They follow the chain pattern for instance receiving clerk work on the data which is given by purchasing clerk and so on.

case of Paradise Industries

Here, in the case of Paradise Industries it is mentioned that the purchasing clerk generates a purchase order copy.

Purchase order copy is sent to receiving department and account payable department.

They perform their work on the data which is provided by previous department.

Now verification is performed, purchase order copy with the invoice generated by the vendor and continue the work of their respective department.

Then finally, account payable department provide data to the cash disbursement department.

Now they make payment to the vendor for the goods which is delivered by them.

Flowchart showcasing the expenditure cycle of the current business organization

System flow chart of expenditure cycle

Image 1 – Flowchart showcasing the expenditure cycle of the current business organization

Conversion cycle of Paradise Industries

In Paradise Industries, the activities are performed on the forecast they do. The organization forecast for 3 months i.e. a quarter perform accordingly (Moser, et al. 2019). In the marketing department present the schedule to the production department for the future period.

The purchasing department select the quality of raw material and collect it in the beginning of quarter which is utilized in the production of machine tool for the next 3 months. If more raw material is required in the midsession then a requisition is generated which is then approved and then more raw material is purchased.

The time that is utilized to convert the investment into its inventory is represent a metric that is known as cash conversion cycle. There are factor through which cash conversion cycle can be derived that are the average time required to pay the suppliers, to convert the raw material into products and lastly to collect receivables customers. This department strengthen the business process and helps in setting up the proper network program from the purchase of the inventory in the system and its conversion to the finished goods in process. This could be managed by the proper cash management program and also sets the undertaken work approach to strengthen the business outcomes.

System flowchart of conversion cycle

Flowchart showcasing the conversion cycle of the current business organization

Image - Flowchart showcasing the conversion cycle of the current business organization

Internal control weakness in the expenditure cycle of Paradise Industries

An expense system is required in an organization to purchase the goods and services. This system is set by following the steps:

Raising the purchase requisition
Receiving the raw material
Finally, making the payment

All the other business activities is directly or indirectly linked with this particular type of cycle. This cycle is completely based on the money related things so here is strong vulnerability of internal control weaknesses exist. The internal control system must consist of proper checks and control at adequate place to ensure an adequate system.

In the given case of Paradise Industries, a deep research is performed to evaluate the weaknesses in the internal control of expenditure cycle. The weaknesses are mentioned below:

Weaknesses in the purchasing department- In Paradise Industries, the activity of selection of buyer and the quality of raw material is performed by the purchasing department clerk. Upon this activity no reconciliation inspection is performed. Purchasing clerk is solely responsible for finalizing the price of raw material purchased. So here, a possibility is generated that while performing the task purchasing clerk may making some personal benefit out of it. This creates a purchase event which is basis in nature for the company. As this purchasing activity is not monitored by any official. This leads to generate a loophole in the organization and making space for the fraud activity (Coombes, Smit, & MacDonald, 2016). However, the main weakness of the system is related to its increasing business complexities and its impact on the business cost of the process. This risk arises when the rivals of the business come up with the strong completion and uses the advance technology in the system process. However, this risk could be managed by using the proper advance system process and adapting towards the new system and technology program.

Weaknesses in the receiving department- In the given case of Paradise Industries, multiple jobs are performed by the receiving department clerk. This will lead to create error and fraud activity. Receiving department clerk job start with receiving the goods, seeking the material quality, generating manual and computerized record so by performing that much activities may become a hectic task. Due to performing multiple activities by single personnel the risk of errors and frauds are increased. Second thing is that the receiving department clerk works rely on the data provided by the purchasing department clerk. If any mistake or fraud is done in initial level then it cannot be fix in this department. As no reconciliation is performed in purchasing department that will increases the fraud activity. There is need to set up proper credit rating program which helps in evaluating the undertaken work program and also evaluate the process system accompanied with the various activities.

Weaknesses in the payment department- In the case of Paradise Industries, payment department is more vulnerable to fraud because it is directly related to money. For organization success, there are great need of adequate internal control system in this department because all the payment is made in this department only. Specific rules are follow for disbursement of funds. The account payment clerk made payment according to the data which is provided by the purchasing department so here again if any error or misappropriation is generated in previous department then it can not be fix in this department (Akhmetshin, et al. 2019). This could be managed by the proper cash management program and also sets the undertaken work approach to strengthen the business outcomes.

Existence of risk in the conversion cycle and steps taken to reduce the risk

Paradise industries is a business entity which faces different type of risk and take different steps to eliminate or reduce the risk. The risks are mentioned below:

Operational risk- This type of risk is deals with the breakdown of equipment. In the given case of Paradise Industries, the organization work rely on equipment only if any mishappening is happens with the equipment because of any factor then the entire work of an organization will affects. It is more dangerous when an organization is in its initial stage of establishment. This type of risk hinders the whole process system. The operational risk is managed by the undertaken work program and also mitigate the work approaches for the better operating outcomes. However, internal control system is set up to manage the operational risk and strengthen the business process.

After analysis the current case, it is revealed that no security is implemented with the equipment. So first of all, adequate security is implement with the equipment to avoid or reduce this operational risk. There is a strong need to design a plan B in case of disaster for the company. When the risk is reduce that will ultimately reduces the loss of an organization. To reduce the risk outsourcing is another approach. Outsourcer have the capability to reduce or minimize the risk to the possible dimension (Ahmad, et al. 2016). In the current scenario, technology is taking charge and provide support system to the organization. In strategic information system, information strategy is algin with the business strategy and beneficial for an organization to beat the competitive world and get hold on the market

Liquidity risk- in the given case, this type of risk arise when the company arises insufficient funds due to which the company are not able to clear its debt and continue its daily operation. If the company with insufficient amount faces many difficulties and that will ultimately leads to diminish the market. This risk arises when there is higher amount of cash outflow in the process and undertaken work program is managed by managing the liquidity risk in the process. Nonetheless, proper credit rating and arranging the higher amount of cash liquidity in the process lower down this liquidity risk. The higher liquidity risk may also increases the overall financial leverage.

To reduce this type of risk the technique of estimation of cost can be beneficial. In the given case of Paradise Industries, it is mentioned that they planned for entire quarter so they collect raw material and other requirement in the beginning of quarter due to which a huge amount of capital is blocked in the beginning. This enhances liquidity risk and slow down the entire process. The company should obey the tool of economic order quality which can reduce this type of risk and organization continue work without any disturbance.

Developed payroll system to reduce the liquidity risk

Developed payroll system to reduce the liquidity risk.

Technological risk- In this evolving world, nothing is permanent specially technology. Technology is changing day by day and become very powerful in the current scenario. As they plan for entire quarter and make plan accordingly and any change in the technology will lead to change in market and market demand and affects the organization. It become very difficult for an organization to stand in the market for long run (Kaya, 2018). This risk arises when the rivals of the business come up with the strong completion and uses the advance technology in the system process. However, this risk could be managed by using the proper advance system process and adapting towards the new system and technology program.

To reduce this type of risk, organization should not overstock because that will lead to failure of organization. So they should handle this risk differently to eliminate it.

Documentation risk- For the success of organization, maintaining the adequate document is essential. Not only making the right documentation is required but also checking of the adequate document is also mandatory. In the given case of Paradise Industries, records are maintain manually basis which delay the process. And the chances of misstatement is also enhanced and also create difficulty in projection of budget. Manual entry take’s several steps in the current case which is also demerit for an organization (Anton, 2018). The documentation risk arises due to the higher complexities in the process and managing the work program. However, the internal control is set up to the take the manual documents online to manage the work program ad reduce the paper work associated with the process system.

To reduce this risk adequate steps should be taken. In this technological world, technology is becoming helping hand for an organization so here also technology can help to minimize this risk. Use of modern software in the business organization will reduce the occurrence of risk. This will enhance the accuracy of accounting data of an organization (Berk, 2016).

Forecasting risk- It is known that adequate forecasting is performed to predict the future market and perform the activities accordingly. In the given case, the forecasting is performed for quarter i.e. 3 month and perform their respective task accordingly. If any mistake in the prediction then it will lead to failure of an organization.

To reduce this type of risk, forecasting is performed by the expertise of this respective field only. In this current case there is forecast made for the complete quarter which creates challenge for the company to vouch for its accuracy. It is greatly needed to generate forecasting budgets for the short period as well (Quon, Zéghal, & Maingot, 2012).

Conclusion

Strategic information system can gives benefit with respect to operational and technological aspects. It gives competitive advantage to the organization to get hold on the market. In the current scenario, technology is taking charge and provide support system to the organization. In strategic information system, information strategy is algin with the business strategy and beneficial for an organization to beat the competitive world and get hold on the market. But a risk is also related with this is that information is available online which can be stolen. So to ensure an adequate system an extensive security is needed. In the given case of Paradise Industries, evaluated the overall weaknesses in the internal control in the current system of expenditure cycle and the risk is associated in the conversion cycle of Paradise Industries and the step to eliminate, reduce or diminish the risk.

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