Question

Question 13 Section C: Short answer questions / Risk and Control

Strides for Strides manufactures and sells athletic wear to retail stores, who then stock the goods and sell them to customers. Its range of products includes warm-up tracksuits, body suits and running shoes and spikes. The business process followed by Strides for Strides in supplying retail stores is as follows:

·         The retail store will send an order to Strides for Strides, where it will be received by the customer service representative. Orders are generated by and originate from the retail stores and can come at an ad hoc and irregular basis. Retail stores, while all being long-standing and regular customers, have typically ordered at the last minute, resulting in irregular demand levels across the year. Two copies of the order form are made, with one being sent to the warehouse assistant, who checks that all goods are available for dispatch to the retail store. The second copy goes to the accounts receivable office.

·         Once confirmed as available, the goods are packed, manually recorded on the goods release form (two copies are prepared) and sent to the shipping department for dispatch. A courier collects goods and a goods release form every morning and afternoon and delivers these to the retail store. Once delivery details are confirmed, an invoice is prepared by accounts payable, based on the details in the customer order and the goods release form. Paper invoices are sent out at the end of each week. Retail stores currently have standard payment terms of 2/15, n/35. Payment is made in the form of a cheque, which is sent back to the customer service representative who forwards it on to the accounts receivable office. Strides for Strides has recently noticed that it is having inventory management problem due to the spasmodic and irregular nature of orders. This has impacted on its own ability to meet customer demands. It is also concerned that incorrect quantities of goods may be packed and shipped, and not detected until the goods reach the retail stores. This introduces extra costs of handling returns and allowances. Strides for Strides has also noticed that its accounts receivable turnover has dropped from 11.7 times per year to 9.5 times per year over the last twelve months.

An independent consultant has suggested that by re-engineering the process these problems could be addressed.

Source: Considine, B., Parkes, A., Olesen, K., Blount, Y., & Speer, D. (2010). Accounting Information Systems Understanding Business Processes.4th Edition. John Wiley & Sons Australia.___________

Question. Name four (4) possible risks in the above case and suggest appropriate controls to avoid the each risk.

Answer 1

The possible risks to the industry in the case discussed above are described below :

• Due to the irregular order being received, the items delivered are not according to the order and thus they require to be returned. This if continues would result in causing loss to the organisation as bringing back those products would require additional and if they are not returned product will go waste without giving any profit.
• It will also create a negative impression on retail shops against the company. They would feel that they are receiving eroung or inappropriate orders as requested by them.
• Also its mentioned that the accounts receivables turnover is declining overtime from few yearyears. This if not considered properly would lead to further loss for the organization's and lastly woule be counted in bad debts of the company which cannot be received.
• Also, it's possible that drop in turnover of accounts receivables would be because of any error being conducted in accounting practices. And if this is the cause, it will leave wrong impression of company on stakeholders as well as on the financial statements it will report loss being incurred to the company.

These are the four risks to the company as the case discussed above.

The appropriate controls to avoid these risks are :

• For controlling the results of irregular orders being done, all retailers should be guided to send their orders atlest one day before so the company gets time to arrange the orders properly and there should be a proper check on the quantities being ordered and the quantities being delivered. This type of control is preventive controls. This prevents from wrong order being sent to the retail shops to avoid further inconvenience.
• To avoid the risk of creation of wrong impression and loosing its customers, the company should adopt the corrective controls. Like when a wrong order if by mistake is delivered, retailer should be made to negotiate on its price and being requested to accept ur if he could make any productive use of it. This would reduce their cost for bringing those items back. Or if they have no need of items it can be arranged in such way that when any second order is made, after dropping that order, previous order that has been delivered wrong is taken back with it, which would not require any additional cost at least.
• For risk related to accounts receivables where, their turnover is actully decreasing onetime, detective controls should be used in the system that generate and record financial transactions to detect the due of accounts receivables and send a reminder to the ones who are liable to pay to the company.
• For the risks related to wrong wrong financial reports being made, detective controls controls are very useful as any misconception or misinterpreted data would immediately be reflected in the system and can be corrected and financial reports would be properly maintained.

These were the four risks associated with the company, and the controls needed to avoid those risks.