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CHAPT E R 4 The Revenue Cycle 215

categories of physical control activities specified in departments to share data digitally, most interdepart-
SAS 78/COSO. mental communication is accomplished via hard-copy
d. Prepare a system flowchart of a redesigned com- documents.
puter-based system that resolves the control weak- Since the expansion, USA Cycle has been plagued
nesses you identified. Explain your solution. by inefficiency and accounting errors. You have been
hired to evaluate their processes and internal controls
for compliance with the Sarbanes-Oxley Act. The reve-
9. USA Cycle Company (Comprehensive
nue cycle of one of its facilities is described in the fol-
Case, Sales, Sales Returns, Cash lowing paragraphs.
Receipts—Manual Procedures and
Stand-Alone PCs) Description of Sales Order Procedures
(Prepared by Byung Hee Pottenger, Lehigh University) The USA Cycle Company sales order process begins
USA Cycle Company is one of the fastest-growing when a sales representative takes an order from the cus-
bicycle distributors in the United States, with headquar- tomer over the phone or fax (for established customers)
ters in Chicago, Illinois. Their primary business is dis- and prepares the customer order. The sales clerk uses a
tribution of bicycles assembled in China, but they also PCs to input the customer order into one of two different
have a smaller, custom-order business for which they data files, either the custom-design order file or the regu-
build bicycles from parts purchased from various sup- lar order file. The system manager in the sales depart-
pliers. Their product line includes mountain, road, and ment periodically checks the Web server for orders that
comfort bikes as well as a juvenile line with up to 24- come in through the Internet and prints these orders for
inch frames. They also distribute BMX bicycles as well the sales clerk to enter as sales orders.
as tricycles and trailer bikes. In addition, they distribute At the end of the day, the sales clerk updates the cus-
various bicycle accessories such as helmets, clothing, tomer file from the regular sales order file and the custom-
lights, and spare parts for all of the models they carry. design sales order file and prints three copies of the sales
Established in 1985, the company’s first warehouses orders, including a factory order for each custom-design
were in Illinois and Wisconsin and supplied retail bicycle order. The clerk forwards the sales orders to the ware-
outlets primarily in the Midwest. One year ago, USA house, where goods are retrieved from inventory and
Cycle Company expanded, adding two additional facili- shipped to the customer. The clerk also sends the factory
ties in Sacramento, California, and Redmond, Washing- orders for custom-design bicycles to the factory for as-
ton, to meet the growing demand for their bicycles. They sembly. One copy of the sales order is filed in the open
now also sell customized bicycles direct to retailers customer order file for use in answering customer
through the Internet as well as by conventional means. inquires. The last copy of the sales order is sent to the bill-
The company’s expansion to the West Coast was ing department for preparation of the sales invoice.
coupled with a planned increase in reliance on suppliers Once the warehouse receives a sales order, a ware-
in China. Even though this resulted in decreased costs, house worker retrieves the goods and accesses the ware-
some problems regarding inventory levels arose because house department PC to update the inventory subsidiary
of unexpected delays in shipping, primarily attributable ledger using an inventory-management application pro-
to miscommunication and shipping conditions. Because gram. Another worker packs the goods and prepares two
the company does not want to carry excess inventory, copies of the bill of lading as well as a packing slip. The
they are sometimes forced to seek local suppliers at an packing slip is attached to the shipping container, and the
increased cost. two copies of the bill of lading are sent to the shipping
Initially, USA Cycle Company was a family-owned company along with the goods. The worker also prepares
business. In need of capital, however, the company a shipping notice that is sent to the billing department
went public when they added the two facilities on the along with a bill of lading, sales order, and a factory
West Coast. The number of employees rose from 100 to order (if the goods were for a custom-designed bicycle).
200 during the expansion. When the factory receives a factory order for a cus-
USA Cycle Company uses limited computer technol- tom-designed bicycle from the sales department, a fac-
ogy to process business transactions and record account- tory worker prepares a material-release form and sends
ing data. Each of its facilities is similarly configured: it to the warehouse for the materials. After the worker
The various departments in the facility employ manual assembles the product according to the order specifica-
procedures that are supported by non-networked PCs. tions, the factory order and the finished product are sent
Because this type of configuration does not permit to the warehouse, where the shipping documents are