The Quill Electric Company has recently installed a new computer system that has online, r...

The Quill Electric Company has recently installed a new computer system that has online, real-time capability. Terminals are used for data entry and inquiry. A new cash receipts and accounts receivable file maintenance system has been designed and implemented for use with this new equipment. All programs have been written and tested, and the new system is being run in parallel with the old system. After 2 weeks of parallel operation, no differences have been observed between the two systems other than data-entry errors on the old system.

a. Brand, data processing manager, is enthusiastic about the new equipment and system. He reveals that the system was designed, coded, compiled, debugged, and tested by programmers using an online terminal installed specifically for around-the-clock use by the programming staff; he claimed that this access to the computer saved one-third in programming elapsed time. All files, including accounts receivable, are online at all times as the firm moves toward a full database mode. All programs, new and old, are available at all times for recall into memory for scheduled operating use or for program maintenance. Program documentation and actual tests confirm that data-entry edits in the new system include all conventional data error and validity checks appropriate to the system.

Inquiries have confirmed that the new system conforms precisely to the flowcharts. A turnaround copy of the invoice is used as a remittance advice by 99% of the customers; if the remittance advice is missing, the cashier applies the payment to a selected invoice. Sales terms are net 60 days, but payment patterns are sporadic. Statements are not mailed to customers. Late payments are commonplace and are not pursued vigorously. The company does not have a bad-debt problem because bad-debt losses average only 0.5% of sales.

Before authorizing the termination of the old system, Cal Darden, controller, has requested a review of the internal control features that have been designed for the new system. Security against unauthorized access and fraudulent actions, assurance of the integrity of the files, and protection of the firm’s assets should be provided by the internal controls.

Required

a. Describe how fraud by lapping of accounts receivable could be committed in the new system, and discuss how it could be prevented.

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b. Based on the description of the new system and the systems flowchart that has been presented in Figure,

Figure Flowchart for Problem

1. Describe any other defects that exist in the system.

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2. Suggest how each defect you identified could be corrected.