Back Ground

Sarah Bowman, the manager of Lava Java Packaging, has several concerns over the processes being used in the business.

Firstly, Sarah is concerned about the adequacy of the processes and controls in the accounting information system.

There have been inventory management issues where certain items of inventory have been out of stock and customer orders have not been met. Managers have been placing orders for inventory manually when stocks of certain items are getting low. When a customer order is received items of inventory are packed, checked and confirmed manually. Invoices are not sent with a customer order. They are sent out at the end of each week.

There have also been receivables management issues. Some customers seem to be consistently slow in paying their invoices. All outstanding debtors currently have credit terms of 15 days after the invoice date (payment is due 15 days after the invoice date). Payment can only be made by cheque, which is sent to the sales representative who passes it onto Sarah for processing.

Sarah has recently been reading up on the United Nations Sustainable Development Goals and is concerned that Lava Java isnt doing enough as a business. He has taken note of Sustainable Development Goal 12 Responsible Consumption and Production and is concerned that Lava Java is still selling too many packaging products that contain (or are made entirely) of plastic. Lava Java switched to biodegradable coffee cups twelve months ago and these have been extremely popular with their customers. Several of Lava Javas customers have also expressed a demand to have more biodegradable packaging offerings rather than plastic ones. Some regular customers of Lava Java have stopped ordering from the business due to a lack of biodegradable options.

Sarah is concerned about another issue that has arisen recently. Whilst the biodegradable coffee cups Lava Java switched to twelve months ago have proven to be popular with customers, an issue has arisen with the manufacturer of those cups. Lava Java import coffee cups from a large manufacturer in South-East Asia. There has recently been a media report about that manufacturer claiming that their workers are subject to unsafe working conditions and poor wages. Sarah has recently received several enquiries from potential customers about where Lava Java are sourcing their packaging products from.

Sarah wishes to hire you and your team to conduct a risk assessment of Lava Java Packaging. This risk assessment should focus on the adequacy of the processes and controls in the accounting information system as well as the potential for reputational damage because of sustainability risk.

Question

1. Evaluate the risk of Lava Javas accounting information system by assessing the adequacy of its processes and controls;