Accounting Information System

Chapter Two
Overview of Business Processes
Learning Objectives:
1. Explain the three basic functions performed by an accounting information system (AIS).
2. Describe the documents and procedures used in AIS to collect and process transaction
data.
3. Discuss the types of information that can be provided by AIS.
4. Describe the basic internal control objectives of AIS and explain how they are
accomplished.

2.1. Introduction
This chapter provides an overview of how AIS can perform its three basic functions:
1. To collect and store data about the organization’s business activities and transactions
efficiently and effectively
2. To provide information useful for decision making
3. To provide adequate controls to ensure that data are recorded and processed accurately

2.2. Business Activities and Information Needs

Assume that you are gong to buy an accounting package for a retail business organization. It is
clear that you have to decide that before shopping an accounting package you must first
understand how the company functions. This insight will enable you to identify the kinds of
information that the management of such a retail company will need to manage its
organization effectively. Then you can determine the types of data and procedures that will be
needed to collect that information. Create a three column table to summarize the results of
your analysis. In the left column list basic activities in which a business organization will
engage. Next in the middle column, you list key decisions that will need to be made for each of
these activities. Finally, in the right column, list helpful information that the organization will
need to make these decisions.
Business Activities Key Decisions Information Needs
Acquire capital How much? Cash flow projections
Invest or borrow? Pro-forma financial statements
If borrow, best terms? Loan amortization schedule
Acquired building and Size of building? Capacity needs
equipment Amount of equipment? Market study
Rent or buy? Tax tables and regulations
Location?
How to depreciate?
Hire and train Experience requirements? Job description
employees How to assess integrity and Applicant job history and skills
competence of applications?

Addis Ababa University; School of Commerce; Wogayehu W. 1

 Accounting Information System
How to train?
Acquire inventory What model to carry? Market analyses
How much to purchase? Inventory status reports
Which vendors? Vendor performance and
How to manage inventory payment terms
(store, control, etc)
Engage in advertising Which media? Cost analyses
and marketing Content? Market coverage
Sell merchandise Mark-up percentage? Pro-forma income statement
Offer in-house credit? Credit card costs
Which credit cards to accept? Customer credit status
Collect payments from If offer credit, what terms? Customer account status
customers How to handle cash receipts? Accounts receivable aging
report
Pay employees Amount to pay? Sales (for commissions)
Deductions and withholdings? Time worked (for hourly
Process payroll in-house or use employees)
outside service
Pay taxes Payroll tax requirements Government regulations
Sales tax requirements Total wage expense, total sales
Pay vendors Whom to pay? Vendor invoices
When to pay? Accounts payable
How much to pay?

You have noted that these basic exchanges that are made by business organizations involve
what historically have been called transaction/business cycles. These are:
1. The revenue cycle: involves activities of selling goods or services and collecting payment
for those sales.

2. The expenditure cycle: involves activities of buying and paying for goods or services used
by the organization.
3. The human resources/payroll cycle: involves activities of hiring and paying employees.
4. The production cycle: involves activities converting raw materials and labor into finished
goods.
5. The financing cycle: involves activities of obtaining necessary funds to run the
organization, repay creditors, and distribute profits to investors.

These various transaction cycles relate to one another and interface with the general ledger
and reporting system, which is used to generate information for both management and
external parties. In many accounting software packages, the various transaction cycles are
implemented as separate modules because a certain company need not apply all the modules.

Addis Ababa University; School of Commerce; Wogayehu W. 2

 Accounting Information System

As shown in Figure above, the basic activities in each of the five cycles can be described in
terms of a give-to-get relation. For example, the expenditure cycle entails giving-up cash in
order to get goods and services. Similarly, the revenue cycle entails giving-up goods and
services in order to get cash. Fig 2.1 also shows how the five cycles (or subsystems) of AIS are
related to one another and how each feeds data to the general ledger and reporting system
that provides information to both internal and external users.

2.3. Transaction Processing: Documents and Procedures

A data processing cycle consists of four steps:
1. Data input 3. Data processing and
2. Data storage 4. Information output
The cause of data input is usually the performance of some business activity. Data must be
collected about three facets of each business activity:
1. The events of interest
2. The resources affected by each event
3. The agents who participate in each event

Addis Ababa University; School of Commerce; Wogayehu W. 3

 Accounting Information System
Each transaction cycle typically processes a large number of individual events, or transactions.
Most of these however, can be categorized into a relatively small number of distinct types.

2.3.1. Data Input

Historically, most businesses used paper source documents to initially collect data about their
business activities and then transferred that data into the computer. Today, however, most
data about business activities are recorded directly through computer data entry screens.
Usually the data entry screen retains the same name as the paper source document it replaced.
Refer the following examples of source documents in the subsystems of AIS.

Well-designed source documents and data entry screens improve both internal control and
accuracy of capturing data about business activities. Control is improved either by purchasing
pre-numbered source documents or by having the system automatically assign a sequential
number to each new transaction. Accuracy is improved by providing instructions or prompts
about what data to collect, grouping logically related pieces of information close together,
using check-off boxes or pull down menus to present the available options, and using
appropriate shading and boarders to clearly separate data items.

If paper documents are still to be exchanged with customers or suppliers, data input efficiency
and accuracy can be further improved by using turnaround documents, which are records of
company data sent to an external party and then returned to the company system as input.
Turnaround documents are prepared in machine-readable form to facilitate their subsequent
processing as input records.

Source data automation is yet another means to improve the accuracy and efficiency of data
input. Source data automation devices capture transaction data in machine-readable form at
the time and place of origin. Examples are ATMs used by banks, point of sale (POS) scanners in
retail stores, and bar code scanners used in warehouses.

2.3. 2. Data Processing

Once data about a business activity has been collected, the next step usually involves updating
previously stored information about the resources affected by that event and the agents who
participated in that activity. Example, data about a sales transaction results in updating the
information about inventory to reduce the quantity on hand of items sold, as well as the
customer’s account balance. This updating can either be done periodically or immediately as
each transaction occurs.

Periodic updating of the data stored about resources and agents is referred to as batch
processing. Immediate updating as each transaction occurs is referred to as on line, real time
processing. Batch processing is to be used for some applications that occur at fixed time
intervals. Most companies are shifting to OLRT processing because:
1. Online entry is more accurate than batch entry because the system can refuse incomplete
or erroneous entries, and

Addis Ababa University; School of Commerce; Wogayehu W. 4

 Accounting Information System
2. Real-time processing ensures that stored information is always current, thereby
increasing its usefulness for making decisions. Indeed, it offers companies competitive
advantage to companies.

The sequence of accounting procedures during a fiscal period is called the accounting cycle. It
begins with the analysis and the journalizing of transactions & ends with the post closing trial
balance .The most significant outputs of the accounting cycle are the financial statements.
Refer the diagram given below bout the accounting cycle.

Entering transactions in the general journal and posting them to the correct general ledger
accounts is time consuming. In the general journal, a simple transaction requires three lines—
two to list the accounts and one to describe the transaction. The transaction must then be
posted to each general ledger account. If the transaction affects a control account, the posting
must be done twice—once to the subsidiary ledger account and once to the controlling
general ledger account. To speed up this process, companies use special journals to record
repetitive transactions that affect the same set of accounts and have a consistent description.
Such transactions can be documented on one line in a special journal. Then, instead of
separately posting individual entries, each column's total is posted at the end of the
accounting period.

Although companies create special journals for other types of repetitive transactions, almost
all merchandising companies use special journals for sales, purchases, cash receipts, and cash
disbursements.

Addis Ababa University; School of Commerce; Wogayehu W. 5

 Accounting Information System

Sales journal: The sales journal lists all credit sales made to customers. Sales returns and cash
sales are not recorded in this journal. Entries in the sales journal typically include the date,
invoice number, customer name, and amount. Invoices are the source documents that provide
this information. In its most basic form, a sales journal has only one column for recording
transaction amounts. Each entry increases (debits) accounts receivable and increases (credits)
sales.

Notice the dates and posting references applied to each entry in the illustration to the right.
Each day, individual sales journal entries are posted to the accounts receivable subsidiary
ledger accounts so that customer balances remain current. Customer account numbers (or
check marks if customer accounts are simply kept in alphabetical order) are placed in the sales
journal's reference column to indicate that the entries have been posted. At the end of the
accounting period, the column total is posted to the accounts receivable and sales accounts in
the general ledger. Account numbers are placed in parentheses below the column to indicate
that the total has been posted.

Addis Ababa University; School of Commerce; Wogayehu W. 6

 Accounting Information System

Many companies use a multi-column (columnar) sales journal that provides separate columns
for specific sales accounts and for sales tax payable. Each line in a multi-column journal must
contain equal debits and credits. For example, the entries in the sales journal to the right
appear below in a multi-column sales journal that tracks hardware sales, plumbing sales, wire
sales, and sales tax payable. Individual entries are still posted daily to the accounts receivable
subsidiary ledger accounts, and each column total is posted at the end of the accounting
period to the appropriate general ledger account.

Addis Ababa University; School of Commerce; Wogayehu W. 7

 Accounting Information System

Purchases journal: The purchases journal lists all credit purchases of merchandise. Entries in
this journal usually include the date of the entry, the name of the supplier, and the amount of
the transaction. Some companies include columns to identify the invoice date and credit terms,
thereby making the purchases journal a tool that helps the companies take advantage of
discounts just before they expire. The purchases journal to the right has only one column for
recording transaction amounts. Each entry increases (debits) purchases and increases (credits)
accounts payable.

Each day, individual entries are posted to the accounts payable subsidiary ledger accounts.
Creditor account numbers (or check marks if the creditor accounts are not numbered) are
placed in the purchases journal's reference column to indicate that the entries have been
posted. At the end of the accounting period, the column total is posted to purchases and
accounts payable in the general ledger. Account numbers are placed in parentheses below the
column to indicate that the total has been posted.

Addis Ababa University; School of Commerce; Wogayehu W. 8

 Accounting Information System

Companies that frequently make credit purchases of items other than merchandise use a multi-
column purchases journal. For example, the purchases journal below includes columns for
supplies and equipment. Of course, every purchase in the journal below must credit accounts
payable; equipment purchased with a note payable or supplies purchased with cash would not
be recorded in this journal. Individual entries are still posted daily to the accounts payable
subsidiary ledger accounts, and each column total is posted at the end of the accounting
period to the appropriate general ledger account.

Cash receipts journal: Transactions that increase cash are recorded in a multi-column cash
receipts journal. If sales discounts are offered to customers, the journal includes a separate
debit column for sales discounts. Credit columns for accounts receivable and for sales are
normally present, but companies that frequently receive cash from other, specific sources use
additional columns to record those types of cash receipts. In addition, the cash receipts journal
includes a column named other, which is used to record various types of cash receipts that
occur infrequently and therefore do not warrant a separate column. For example, cash
receipts from capital investments, bank loans, and interest revenues are generally recorded in

Addis Ababa University; School of Commerce; Wogayehu W. 9

 Accounting Information System
the other column. However, a company that provides consumer loans and receives interest
payments from many customers would probably include a separate column for interest
revenue. Whenever a credit entry affects accounts receivable or appears in the other column,
the specific account is identified in the column named Account.

Accounts receivable payments are posted daily to the individual subsidiary ledger accounts,
and customer account numbers (or check marks if the customer accounts are not numbered)
are placed in the cash receipts journal's reference column. At the end of the accounting period,
each column total is posted to the general ledger account listed at the top of the column, and
the account number is placed in parentheses below the total. Entries in the Other column are
posted individually to the general ledger accounts affected, and the account numbers are
placed in the cash receipts journal's reference column. A capital X is placed below the Other
column to indicate that the column total cannot be posted to a general ledger account.

Addis Ababa University; School of Commerce; Wogayehu W. 10

 Accounting Information System
Cash disbursements journal: Transactions that decrease cash are recorded in the cash
disbursements journal. The cash disbursements journal to the right has one debit column for
accounts payable and another debit column for all other types of cash payment transactions. It
has credit columns for purchases discounts and for cash. Since each entry debits a control
account (accounts payable) or an account listed in the column named Other, the specific
account being debited must be identified on every line.

The nature of each company's transactions determines which columns this journal includes.
For example, companies sometimes choose to include separate debit columns for regularly
used accounts such as salaries expense, sales commission’s expense, or other specific
accounts affected by cash disbursements.

Addis Ababa University; School of Commerce; Wogayehu W. 11

 Accounting Information System
Entries that affect accounts payable are posted daily to the individual subsidiary ledger
accounts, and creditor account numbers (or check marks if the creditor accounts are not
numbered) are placed in the cash disbursements journal's reference column. At the end of the
accounting period, each column total is posted to the general ledger account listed at the top
of the column, and the account number is placed in parentheses below the total. Entries in the
Other column are posted individually to the general ledger accounts affected, and the account
numbers are placed in the cash disbursements journal's reference column. A capital Xis placed
below the Other column to indicate that the column total cannot be posted to a general ledger
account.

General journal entries: The general journal is used for adjusting entries, closing entries,
correcting entries, and all transactions that do not belong in one of the special journals. If a
general journal entry involves an account in a subsidiary ledger, the transaction must be
posted to both the general ledger control account and the subsidiary ledger account. Both
account numbers are placed in the general journal's reference column to indicate that the
entry has been posted correctly.

2.3.3. Data Storage

Information in AIS can be organized for easy and efficient access. The basic data storage
concepts and definitions are seen below:

Addis Ababa University; School of Commerce; Wogayehu W. 12

 Accounting Information System
An entity is something about which information is stored. Examples of entities include
employees, inventory items, and customers. Each entity has attributes or characteristics of
interest, which need to be stored. An employees pay rate and a customers address are
examples.

Generally, each type of entity possesses the same set of attributes. The specific data values for
those attributes, however, will differ among entities. Data values are stored in a physical space
called field. The set of fields that contain data about various attributes of the same entity
forms a record. Related records are grouped to form a file. For example, all customer
receivable records are stored in an account receivable file.

A set of interrelated, centrally coordinated files is referred to as a database. For example, the
accounts receivable file might be combined with customer, sales analysis, and related files to
form a customer database. In AIS, the files used to store cumulative information about
resources and agents are called ledgers. Refer the diagram given below.

2.3.4. Information Output: Providing Information for Decision Making

A second function of the AIS is to provide management with information useful for decision
making. Whether presented in the form of paper reports or displayed on a computer screen,
the information and AIS provides falls into two main categories: financial statements and
managerial reports.

Financial statements: They are primarily designed for external parties to use in making
decisions about extending credit to or investing in the organization. Your other accounting and
finance courses focus on financial statements in great detail. Therefore, this section provides
an overview of some type of managerial reports that an AIS should be designed to provide.
E.g. Income statement, Retained earnings statement, Owners equity statement, Balance
sheet, Statement of cash flows-cash flows. Refer the balance sheet given below.

Addis Ababa University; School of Commerce; Wogayehu W. 13

 Accounting Information System

Managerial Reports: An organization’s AIS must be able to provide managers with detailed
operational information about the organization’s performance. For example, a retail company
need reports about inventory status, relative profitably of products, relative performance of
each salesperson, cash collections and pending obligations and the company’s performance in
meeting its delivery commitments.

Addis Ababa University; School of Commerce; Wogayehu W. 14

 Accounting Information System
Often, both traditional financial measures and operational data are required for proper and
complete evaluation of performance. To illustrate this, consider the evaluation of sales staff.
Dividing sales revenue by the number of sales staff provides one measure of productivity.
Dividing the number of sales transactions by the same denominator provides another way to
look at productivity. Dividing sales revenue by the number of hours worked by average sales
staff provides yet another measure of productivity. Additional perspective is gained by
calculating the average sale amount and the cost of sales staff salaries as percentages of sales
revenue. All these measures are valid, and all five together provide a better overall evaluation
of performance than any one does alone. Most source documents capture both financial and
operational data about business transactions. The key is to design the AIS so that both kinds of
data are stored in manner that facilitates their integration in reports.

Traditionally, most AIS have failed in this regard because they were designed primarily to
support the preparation of financial statements, rather than the decision needs of internal
management. Corporate accountants also must know how to reorganize existing internally
generated data and present them in a manner that sheds new light on operational results. For
example, innovation is one vital requirement for continued long-term growth. One way that
companies can measure innovation success is to track and report the percentage of sales
revenues that new products generate.

Some important data must be collected from external sources, however. Data about customer
satisfaction is one good example. It is not sufficient simply to measure and track how long it
takes to fill and deliver customer orders. That merely provides information about how well a
company is meeting its own goals for customer service. Information about whether the
company is meeting its customers’ requirements and expectations is also needed. The only
way to find this out is to ask customers directly. Consequently, certain companies, regularly
survey their customers. Other firms collect that data. Once again, it is important to design the
AIS so that such externally generated data are integrate with internally generated measures in
a manner that facilitates the preparation of reports based on both kinds of data.

Budgets and Performance Reports

Two important types of managerial reports are budgets and performance reports. A budget is
the formal expression of goals in financial terms. One of the most common and important
types of budgets is the cash budget. A cash budget shows projected cash inflows and
outflows. This information is especially important to a small business, because cash flow
problems are a principal cause of small-business failures. A cash budget can provide advance
warning of cash flow problem in time to permit corrective action to be taken. Budgets are
financial planning tools. Refer the Cash Budget given below.

Addis Ababa University; School of Commerce; Wogayehu W. 15

 Accounting Information System
ABC Company
Cash Budget for the Year Ended Dec. 31, 20x5

Particular Q-1 Q-2 Q-3 Q-4 Year

Cash (Jan. 1,2005) $10,000 $93,540 $54,645 $28,855 $10,000
Add: Receipts
Collection from Customers 187,200 80,400 106,800 213,600 588,000
Total Cash available for Needs 197,200 173,940 161,445 242,455 598,000
(a)
Less: Disbursements
Direct Material 46,410 26,670 28,590 48,330 150,000
Other Cash Disbursements 86,750 50,750 72,750 160,750 315,000
Payment for constriction 45,000 15,000 5,000 31,000 100,000
Total Cash disbursements (b) 176,160 92,420 106,340 190,080 565,000
Minimum Cash Balance Desired 0 0 0 0 0
Total Cash Needed(c) 176,160 92,420 106,340 190,080 565,000
Cash Excess or Deficiency (a-c) $21,040 $81,520 $55,105 $52,375 $33,000
Financing :
Borrowing (at Beg) $100,000 0 0 0 100,000
Repayment (at End) (25.000) (25,000) (25,000) (25,000) (100,000)
Interest(10% per yr) (2,500) (1,875) (1,250) (625) (6,250)
Net Effect of financing (d) 72,500 ($26,875) ( 26,250) $(25,625) (6,250)
Cash Balance (Dec.31,2005) $93,540 $54,645 $28,855 $26,750 $26,750
(a-b+d)

Performance reports, in contrast, are used for financial control. A performance report lists the
budgeted and actual amounts of revenues and expenses and also shows the variances for
which item in the performance report. Therefore, the principle of management by exception
should be used to interpret those variances.
ABC Company
Performance Report
For the year ended Dec.31, 20xx
Actual results Budget Amount Variances

Units sold 18,000 20,000 2,000

Revenues 1,710,000 2,000,000 $ 290,000U
Variable costs 1,146,400 1,248,000 101,600F
Contribution Margin $ 563,600 $ 752,000 $ 188,400U
Fixed costs 390,000 370,000 20,000U
Operating income $ 173,600 $ 382,000 $ 208,400U

Addis Ababa University; School of Commerce; Wogayehu W. 16

 Accounting Information System
If the performance report shows actual performance to be at or near budgeted figures, a
manager can assume that the item is under control and that no action needs either direction,
signal the need to investigate the cause of the discrepancy and take whatever action is
appropriate to correct the problem.

Behavioral Implications of Managerial Reports

According to an old saying, measurement affects behavior. As applied to business, this means
that employees tend to focus their efforts primarily on those tasks that are measured and
evaluated. This can be either good or bad, depending on the nature of the relationship
between the behavior being measured and the organization’s overall goals. To illustrate this,
consider the task of customer complaint resolution. The organization wants to satisfy its
customers to the greatest extent possible at the lowest possible at the cost. If customer
service representatives are evaluated solely in terms of the number of complaints resolved per
unit of time, however, two types of problems may arise. The customer service representative
may be focused on resolving quickly each complaint in the sore’s favor that they alienate some
customers in the process. Or customer service representative may “give away the store” just
to appease and please every customer with a complaint.

Budgets can often result in dysfunctional behavior. For example, if a budget does not include
all the funds required to purchase the equipment needed to meet performance goals,
managers may be tempted to rent the equipment. This solution might allow them to meet
their performance targets and remain within budget, but may end up costing the company
more than it would have spent to purchase the equipment outright.

Indeed, the budgeting process itself can be dysfunctional. Management may spend a great
deal of effort in “numbering crunching,” trying to get the budget numbers to turn out as
desired, rather than focusing on how to accomplish the organization’s mission and goals.

We have presented several examples of how reports produced by the AIS can unintentionally
result in dysfunctional behavior. The key point to remember is that the AIS do not “neutrally”
report on employee performance. Rather, it directly affects behavior. In the next section, we
look at how the AIS can be designed to encourage employees to behave in ways congruent
with the organizational goals of providing accurate, reliable information and safeguarding
assets.

2.4. Internal Control Considerations

The third function of AIS is to provide adequate internal controls to accomplish three basic
objectives:
1. Ensure that the information produced by the system is reliable.
2. Ensure that business activities are performed efficiently and in accordance with
management’s objectives while also conforming to any applicable regulatory policies
3. Safeguard organizational assets, including data

Addis Ababa University; School of Commerce; Wogayehu W. 17

 Accounting Information System
Two important methods of accomplishing these objectives are providing adequate
documentation of all business activities and ensuring effective segregation of duties.

Adequate Documentation
Adequate documentation of all business transactions is the key to accountability.
Documentation allows management to verify that assigned responsibilities were completed
correctly. You may recall an example you encountered while working as an auditor (if you had
already worked as an auditor) that may gave you a firsthand glimpse of the types of problems
that can arise from inadequate documentation. One of your audit clients sold and serviced
computers, providing free repairs during the warranty period. Service personnel were
instructed to treat repairs as being under warranty unless explicitly informed otherwise. The
client had no procedures, however, for tracking warranty periods. Consequently, the company
was completing a great deal of free repair work that should have been charged to customers.
Indeed, the results of the audit estimated that the client had failed to bill almost a huge
amount of worth of repair work.

Well-designed documents and records can help organizations quickly identify potential
problems. For example, gaps in the sequence of completed source documents might indicate
that some documents have been misplaced, in which case some transactions may not have
been recorded. Such a gap may also, however, be a sign of a more serious problem. For
example, a missing check may have been written for fraudulent purposes.

Adequate documents and records can also ensure that an organization does not make
commitments it cannot keep.

Adequately written descriptions of task procedures are also important. You may recall another
audit problem you encountered that is related to a weakness in this area. The clerk responsible
for processing customer payments had not been instructed how to handle checks for which no
match could be found in the accounts receivable records. Consequently, the clerk had decided
that the proper thing to do was to return such checks to customers along with a note
requesting additional information about why the check had been sent. This added more than
one week to the time it took to turn accounts receivable into cash. After this situation was
uncovered, the clerk was instructed to endorse restrictively and deposit all such checks and
then to initiate correspondence with the customer for resolution of the matter. To avoid
similar problems in the future, the company should add this policy to the printed procedures
manual.

Segregation of Duties
Segregation of duties refers to dividing responsibility for different portions of a transaction
among several people. The objective is to prevent one person from having total control over
all aspects of a business transaction. Specifically, the functions of authorizing transactions,
recording transactions, and maintaining custody of assets should be performed by different
people. Segregation of these three duties helps to safeguard assets and improve accuracy

Addis Ababa University; School of Commerce; Wogayehu W. 18

 Accounting Information System
because each person can look at and thereby limit the others’ actions. Effective segregation of
duties should make it difficult for an individual employee to steal cash or other assets
successfully.

Segregation of duties is especially important in business activities that involve the receipt or
disbursement of cash, because cash can be stolen so easily. For example, in processing cash
receipts from customers, one person should be responsible for handling and depositing those
receipts (the custody function) and another person should be responsible for updating the
accounts receivable records (the recording function). Otherwise, a person who performed
both functions could divert customer payments for personal use and conceal the theft by
falsifying the accounts. Similarly, in the realm of cash disbursements, one person should be
responsible for preparing and approving checks for payment (the authorization function), and
another person should be responsible for signing and subsequently mailing those checks (the
custody function). For instance, assume that cash disbursement function is not adequately
segregated in a certain firm. If the treasurer signed all checks prepared by accounts payable
manager, but instead of mailing them out himself, he returned the checks to accounts payable
manager. After receiving the signed checks, however, the accounts payable manager would
change the payee name and then cash the checks himself. Assume also that the fraud is
detected & the treasurer is instructed to mail all checks after signing them. As this example
shows, inadequate segregation of duties can create opportunities for the theft of
organizational assets.

Small organizations like the retail store however do not always have enough staffs to
segregate duties effectively. In such cases, effective control can still be achieved through close
supervision and owner performance of some key business activities. For example, you intend
to recommend that principals be the only ones authorized to write checks on the company’s
account. In addition, only principals should have the authority to approve the granting of credit
to new customers or the extension of additional credit to existing ones.

Addis Ababa University; School of Commerce; Wogayehu W. 19