1. The proposed new IT-based sales accounting system will be cloud-based and St.

James will access

the underlying software via online access. Visit the website of the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) (www.coso.org) to obtain a free copy of COSO's
thought paper, Enterprise Risk Management for Cloud Computing, to answer the following questions:

[a] What is cloud computing?

Using the cloud, computer services such as data storage and computational power can be accessed from
anywhere with an Internet connection. Users do not have direct control over it. In addition, the software
solution provider can manage the organization's hardware, software, and data stored on servers
through a web-based interface.

[b] What benefits, if any, would use of cloud computing for the sales system provide St. James?

Cloud computing has the potential to eliminate clerical errors, and it may make it easier for employees
to conduct data analysis, evaluate the overall record, and identify errors. Because Olive States manages
the cloud computing system for St. James, it may be possible to eliminate the requirement for St. James
to update the software versions on its own in the future. Olive States might assist St. James with various
technological issues, allowing St. James to more easily handle the sales application on this cloud
computing system, which was developed by Olive States.

[c] What risks, if any, would the use of cloud computing for the sale system impose on St. James?

● The cloud computing system has the potential to increase the rate of systematic error. When a cloud
computing system is created, it is possible that fraud or a back door will be included.

● Unauthorized access became more likely as a result of this.

● It's impossible to do anything when the system is down. When the system is infected with a virus, data
may be lost and unable to be recovered from the system.

● Unless the cloud computing system is brought back online, St. James will be unable to provide backup
or support for the sales system.

● Olive States would not just answer to St. James' needs, but also to the needs of the many other clients
that use the selling system software that Olive States provides. It's possible that the revisions from Olive
States will have a negative impact on St. James' business model.

2. 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 December
31, 2015 financial statement audit. Betty wants you to prepare a memorandum for her that addresses
these questions:

[a] 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.”
More substantial misstatements could result from data entry errors – It takes longer to perform double-
entry accounting in a manual system than it does in a computerized system since each transaction must
be manually entered twice. Many accounting software programs employ the double-input method,
although the second entry is performed automatically by the software. While this will not prevent an
inaccurate number from being entered, it will eliminate discrepancies between the first and second
inputs.

In addition, a lack of visibility and control may worsen material misstatements - Aspects of accounting
include the preparation of bills and invoices as well as the preparation of bank statements and other
financial data. You can find it cumbersome and difficult to track manual procedures if you have them. It
may be difficult to keep track of and report payments, for instance. Manual tracking would be required
at all stages of the process, from data entry and processing through updating and reconciling the final
payments.

[b] What features, if any, of the proposed IT-based sales accounting system will help minimize the
risks identified in question 2.a? If a deficiency exists that is expected to persist under the new system,
indicate that “no computer controls reduce this risk.”

- Segregation of duties: assign more than one person to a particular responsibility, such as supervision
access to daily sales data and sensitive information, in order to maximize efficiency.

- Firewalls are being installed, and user ID and password systems are being set up in order to create a
strong internal control over unwanted access to the system.

[c] How does the IT-based sales system create new risks for material misstatements?

1. For the IT-based sales system to function properly, it is necessary for auditors to collect critical
information in order to identify material misstatements caused by fraud. Additionally, the system must
be accessible only by those who are authorized to do so.

2. The lack of computer programming knowledge among the store's employees increases the likelihood
of substantial misrepresentation.

[d] What recommendations do you have related to plans for the actual conversion to this new
system?

● All of the personnel who will be utilizing the system should receive training on how to use it.

● It is possible that the owner will need to engage an expert to assist them in transferring their data
from the manual system to the IT system.

Worksheet for Answering Question 1 and 2

Risks of Manual System
- Manually enter the product number and the number of units sold.
- Cashier makes use of newspaper clippings to support her claims.
- The total sales amount is manually computed by the cashier.
- Make a copy of the information using the price tag on the clothing.
- By pressing the "Total" button, you can quickly access the cash drawer.
- At the end of each month, they count the inventory on hand.
- Meredith inserts the daily totals into the sales journal by manually.
- The business owner checks the daily deposit slips against the amounts recorded in the Sales
Journal on a regular basis.

How Risks Impact Financial Statements

- Increase the likelihood of accidently writing the wrong product number and amount, resulting
in an inventory problem.
- The coupon had expired, leading the sales price to be understated.
- Increase the likelihood of making an inaccurate estimate of total sales revenue.
- It is possible that the information on the clothes price tag is incorrect.
- Increased danger of cash loss, as well as a potential underestimation of the cash amount
- Mathematical errors cause under/overstated cost of products sold.
- A higher chance that you may enter the incorrect number.
- When the accountant manually enters the daily total into the Sales Journal, it is possible that the
data is incorrect.

New IT System Features that Mitigate Manual System Risks

- The cashier scans the product bar codes on the price tag linked with the product, and the cashier
enters the quantity sold as well as the sales clerk's identification number.
- Each product in the Price List master file may be automatically identified by the computer,
which can identify unit prices for each product automatically.
- The amount of sales will be calculated by the computer system.
- The computer will automatically record each item's quantity and price.
- After the sale, the computer can lock the cash drawer. To open the cash drawer, the store
manager needs a specific password code.
- On a daily basis, using the perpetual inventory method and physically counting special objects.
- Individual transactions are automatically entered into the Sales Journal by the computer
- The deposit amount is compared to the daily sales totals recorded by the system. Any
discrepancies will be communicated to the store owner via email.

MEMORANDUM
Date: November 12, 2019
To: Betty Watergate
From: Audit Seniors from Group 20
Subject: Evaluation of St. James’ Current and Proposed Sales Accounting Systems
Facts:
In a little Tennessee town, St. James Clothiers is a high-end clothes boutique. Instead of sticking
with the current manual sales approach, the owner chose to implement an IT-based sales
application package. Based on your request, this document responds to your questions about the
current system's risk, the benefits, and potential problems with the new IT system. The new IT
system reduces the danger of clerical errors, erroneous data, and disorganized administration.
The following paragraph goes over the present system's possible flaws and how the new IT
system addresses them in depth.
Issues and Analysis:
● The existing system manually enters the product number and quantity sold, increasing the
possibility of citing incorrect product numbers and quantities. As a result, the inventory's
category and quantity may be incorrect. The cashier will scan product bar codes if the
organization implements the new IT system. The quantity and value of the sold items will be
determined automatically. Inventory problems are less likely with the new IT-based method.
● The existing manual accounting method requires the cashier to manually calculate the total
sales amount by multiplying the price by the quantity and then adding the sales tax, which raises
the possibility of total sales amounts being miscalculated. The new IT-based system will
automatically calculate the overall sales amount. It lowers the likelihood of a profit loss.
● The cash drawer can be simply accessible under the current system by hitting the "Total"
button. It raises the possibility of losing money, and the cash will be undervalued. Once the cash
drawer has been accessed, the computer system locks it. Cashiers needed a specific password
from the store manager to open the cash drawer.
● Meredith, the store accountant, manually inputs daily totals into the Sale Journal, putting her at
risk of entering incorrect amounts. Individual transactions are automatically posted to the Sales
Journal via the new computer system.
● The current system employs a periodic inventory system. The inventory is manually counted.
It raises the number of math errors. It's possible that inventory and cost of products sold be
inflated or undervalued. The perpetual inventory system is implemented utilizing the IT system.
Employees are only required to count some goods once a day.

New Material Misstatements for IT Based Sales Package:

● In the system development process, there is a lack of control. All technical issues must be
discussed with the vendor. The revenue recognition procedure may be delayed if the vendor
needs a few days to resolve issues.
● The salespeople in the store are unfamiliar with the new IT-based sales method. Employees
may make errors and be unsure how to correct them. Due to errors and a lack of understanding,
the possibility of material misstatements exists.
● A third-party firm purchases the IT system, but it is not designed by the third-party company.
There may be a back door application when the system is designed. Hackers may cause the
organization to lose client information or accounting data.
● It's possible that the computer programming won't always work. It is possible that the system
will fail at times. As a result of the inefficient computer programming, there's a chance that the
daily sales statistics will be incorrectly computed.

Recommendations of applying New IT System:

St. James Clothiers' management must determine whether to employ an expert to assist them in
converting data from the manual system to the IT system before implementing the new IT
system. Furthermore, they must test the system with fictitious data before implementing it. If the
management discovers any errors, they can speak with the vendor and resolve the issues before
December 1st. All personnel who will be using the system should be taught how to use it. The
training sessions could be tailored to their specific roles and responsibilities.