St, James Clothiers: Case Analysis Report

St, James Clothiers: Case Analysis Report

Introduction

St. James Clothiers is a high-end clothing brand that is located in a small town in Tennessee. The company had only one store that is located in the shopping district by the town square. St. James enjoys having their reputation being in place for them to buy nice clothing in the local area and now operating in its twentieth year. For the twenty years, the firm has been operation, it has earned a name locally and beyond as the home of the nicest clothes. The owner, Sally St. James, recently decided to convert from relatively-simple manual sales to an IT-based sales application package, which would be purchased through a software vendor.

Like any other organizational change, the adoption and implementation of a new sales application package would be accompanied by several other changes. There would be changes in both human resources and the necessary information technology infrastructure to correspond to the latest developments. To effectively initiate and incorporate such changes, it would be critical for the technical team to review the manual-based accounting system to isolate the specific areas that need to be automated. Equally, the team would have to study the proposed IT-based system to ensure that it has all the user requirements.

Even with insufficient technology resources, the company can still implement the necessary change with the help of cloud computing. The availability of Internet connection would enable the firm to access computer resources and applications from anywhere. Based on the cloud computing model used, the firm can host part of or all of its data, software, and hardware on shared technology resources. Adopting the cloud computing approach would relieve the firm from maintenance experiences as well as additional human resources. However, the respective technology could as well propagate cyber-attacks and data leakages, which would compromise the confidentiality, integrity, and availability of the firm’s information.

Key Point

Sally St. James, the owner of St. James Clothiers, recently decided to change the sales system.  In 2014, Sally was using an accounting system that was purely manual-based throughout the records, procedures, and maintenance of the store. The cashier manually records the sales clerk’s name, the product number, quantity sold, and sales price on a pre-numbered sales ticket using the information on the clothing price tag.

They usually had to rely on the salespersons to determine the sale price. A staff auditor recently visited St. James Clothier to prepare a narrative summary where it features the new IT-based sales system. However, the company’s fiscal year ends December 31, 2009; the conversion of the new IT-based accounting system is scheduled to be converted during the fourth quarter of that year.

Auditing Standards

The essential professional auditing standards would be in AU Section 312, 314, 318 of dealing with “Audit Risk and Materiality in Conducting an Audit, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained.” Also, the PCAOB fifth standard, “An Audit of Internal Control over Financial Reporting that is integrated with an Audit of Financial Statements.”

It is essential to note that the standards comply with the eight conventionally-accepted auditing procedures that St. James Clothiers would have to follow. The auditing firm would first need to obtain and document an understanding of internal controls to isolate potential errors, fraud, and other irregularities that would help in designing auditing procedures. After designing the auditing procedures, the next steps would involve the assessment of control risk; understanding and assessment of outsourced system’s controls; result evaluation, the decision on planned detection risk, and designing of substantive tests; auditing in more complex IT environment; generation of auditor’s report and submission to the management; and reporting on internal controls.

The Problem

After reviewing St. James’ financial reports, there are several factors that were determined through their manual operations system. These risks will impact the financial statements such as the Income Statement and the Statement of Financial Position. The accounts that will mostly be affected are the cash balance and inventory. The Cost of Goods Sold, Tax Sales Revenue, and Compensations are affected as well. Another problem is the potential loss of clients due to the company’s poor reputation and customer service. Since the cashier manually records the clerk’s name, product number, quantity sold, and sales price on pre-numbered tickets, that will lead to a potential misstatement in these accounts as the cashier has a high chance of making an error or purposely recording wrong sales information.

The clerk also has the ability to falsify the actual sales amount, which also leads to potential misstatement in the financial statements. For example, since cashiers refers to the local newspaper for advertisements, in-store sales, or asking a salesperson for the price. The risks of having financial misstatements are also likely to occur as customers tend to move signs or the salesperson having to control the pricing of the products that they sell. The manual accounting system also increases the risk of St. James Clothier to lose its reputation due to failure to determine the actual price of the products.  Risk having cash on hand during the recording of a sale is also being threatened by the fact that the drawer in the register can be accessed by pressing the “Total” button. In other words, anyone who is in the store has access to the register machine and is able to physically withdraw the cash available.

Although the store account can unlock the tape from the register, once the accounting has opened it, there is a potential for both the accountant and manager to connive and skim the cash available from the register to match the altered receipts for that day. If there are any sales returns, the cashier has to process it by completing a sales ticket using negative amounts manually. Store Manager John Thornberg counts the cash every night and prepares slips and compares it to the accounting books. There are also risks as the store manager, and store accountant may work together and record something other than what took place. As the auditors asked what would be the impact by implementing the new IT-based accounting system features and how it will alleviate the risk that was previously mentioned.

Once the product prices have been recorded in the computer, it will automatically calculate the tax, total quantity, and price. Therefore, there are no possible manual errors that would occur, and it will not alter the Income Statement and the financial position and the accounts that would be affected, as previously mentioned. However, this system may have a potential problem. While using this new IT-base system, for example, if the store lost power or power outage, then the data may vanish without a backup. Also, there may have some cases where the system has an error, or the computer has a mistake, which can lead to faulty transactions.

Though the new It-system is an excellent transitioning for the store’s monitor system, there still have some issues that need to consider. For instance, the store will have to do a whole new training for the employee to adapt to the new system, updating new data to the cloud base like inventory amount, pricing adjusts, etc. As can be seen, upgrading the system for the store is a perfect choice for providing better assurance and security for the store as it brings a lot of advantages and benefits but having some problems that need to consider at the same time.

Case Questions:

1. 1. What is cloud computing?
   2. What benefits, if any, would the use of cloud computing for the sales system provide St. James?
   3. What risk, if any, would use the cloud of computing for the sales system impose on St. James
2. 1. What aspects of the current manual sales accounting system create risks that increase the likelihood of material misstatements in the financial system? Specifically, identify each risk and how it might lead to a misstatement.
   2. What features, if any, of the proposed IT-based sales accounting system will help minimize the risk 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.”
   3. How does the IT-based sales system create new risks for material misstatements?
   4. What recommendation do you have related to plans for the actual conversion to this new system?

Conclusion

The rapid surge in technological developments across the globe has revolutionized every economic sector. The IT-based solutions are embraced far and beyond, not because of the need to transition but due to their ability to achieve efficiency. The decision by St. James Clothiers to adopt an IT-based accounting system is one that would go a long way to help the firm avoid financial misstatements that are often associated with the manual recording of financial statements. However, like every other IT application, the system administrators would need to deal with issues of cybersecurity and data leakages, which, if not taken care of, can collapse the firm’s operations. Ideally, the system would need frequent auditing to ensure that its data is accurate.