Page 174 - Accounting Information Systems

CHAPTE R 3 Ethics, Fraud, and Internal Control 145

terminal in his office. At that time, he identifies items 12. EVALUATION OF CONTROLS
that have fallen to low levels, selects a supplier, and
Matt Demko is the loading dock supervisor for a dry
prepares three copies of a purchase order. One copy is
cement packaging company. His work crew is composed
sent to the supplier, one is sent to the accounts pay-
of unskilled workers who load large transport trucks with
able clerk, and one is filed in the warehouse. When
bags of cement, gravel, and sand. The work is hard, and
the goods arrive from the supplier, Mirchandaniis
the employee turnover rate is high. Employees record
reviews the attached packing slip, counts and inspects
their attendance on separate time cards. Demko autho-
the goods, places them on the shelves, and updates
rizes payroll payments each week by signing the time
the inventory ledger to reflect the receipt. He then pre-
cards and submitting them to the payroll department.
pares a receiving report and sends it to the accounts
Payroll then prepares the paychecks and gives them to
payable department.
Demko, who distributes them to his work crew.
Required Required
a. Prepare a systems flowchart of the procedures previ- a. Prepare a systems flowchart of the procedures
ously described. described here.
b. Identify any control problems in the system.
b. Identify any control problems in the system.
c. What sorts of fraud are possible in this system?
c. What sorts of fraud are possible in this system?
Internal Control Cases

1. Bern Fly Rod Company period ending October 31 were disproportionately high
Bern Fly Rod Company is a small manufacturer of high- compared with previous months.
quality graphite fly-fishing rods. It sells its products to Required
fly-fishing shops throughout the United States and Can- Analyze Bern’s situation and assess any potential inter-
ada. Bern began as a small company with four salespeo- nal control issues and exposures. Discuss some preven-
ple, all family members of the owner. Because of the tive measures this firm may wish to implement.
high popularity and recent growth of fly-fishing, Bern
now employs a seasonal, nonfamily, sales force of 16. 2. Breezy Company
The salespeople travel around the country giving fly-
(This case was prepared by Elizabeth Morris, Lehigh
casting demonstrations of their new models to fly-fishing
University)
shops. When the fishing season ends in October, the tem-
Breezy Company of Bethlehem, Pennsylvania, is a
porary salespeople are laid off until the following spring.
small wholesale distributor of heating and cooling fans.
Once the salesperson takes an order, it is sent directly
The company deals with retailing firms that buy small to
to the cash disbursement department, where commis-
medium quantities of fans. The president, Chuck Breezy,
sion is calculated and promptly paid. Sales staff com-
was very pleased with the marked increase in sales over
pensation is tied directly to their sales (orders taken)
the past couple of years. Recently, however, the accoun-
figures. The order is then sent to the billing department,
tant informed Chuck that although net income has
where the sale is recorded, and finally to the shipping
increased, the percentage of uncollectibles has tripled.
department for delivery to the customer. Sales staff are
Because of the small size of the business, Chuck fears he
also compensated for travel expenses. Each week they
may not be able to sustain these increased losses in the
submit a hard-copy spreadsheet of expenses incurred to
future. He asked his accountant to analyze the situation.
the cash disbursements clerk. The clerk immediately
writes a check to the salesperson for the amount indi- Background
cated in the spreadsheet. In 1998, the sales manager, John Breezy, moved to Alaska,
Bern’s financial statements for the December year- and Chuck hired a young college graduate to fill the posi-
end reflect an unprecedented jump in sales for the tion. The company had always been a family business and,
month of October (35 percent higher than the same pe- therefore, measurements of individual performance had
riod in the previous year). On the other hand, the state- never been a large consideration. The sales levels had been
ments show a high rate of product returns in the months relatively constant because John had been content to sell to
of November and December, which virtually offset the certain customers with whom he had been dealing for
jump in sales. Furthermore, travel expenses for the years. Chuck was leery about hiring outside the family for