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C H A P TER 5      The Expenditure Cycle Part I: Purchases and Cash Disbursements Procedures  251

                         Each day, the clerk visually searches the cash dis-  els from his department terminal and searches for items
                       bursements voucher file from her terminal for open  that have fallen to their reorder points and need to be
                       invoices that are due to be paid. From her computer ter-  replenished. The purchasing agent then selects the ven-
                       minal, the clerk prepares the check and records it in the  dors and creates digital purchase orders in the purchase
                       check register. The negotiable portion of the check is  order file. He then prints two hard copies of each pur-
                       mailed to the vendor, and a check copy is filed. The clerk  chase order and sends them to the respective vendors.
                       then closes the voucher register and updates the accounts
                       payable control and cash accounts in the general ledger.  Receiving
                       Required                                       When the items are received, the receiving department
                       a. Create a data flow diagram of the current system.  clerk reconciles the goods with the attached packing slip
                       b. Create a system flowchart of the existing system.  and the digital purchase order, which he accesses from
                                                                      his computer terminal. The clerk then creates a digital
                       c. Analyze the internal control weaknesses in the
                         system. Model your response according to the six  receiving report, stating the condition of the materials
                         categories of physical control activities specified in  received. The system automatically closes the purchase
                         SAS 78/COSO.                                 order previously created by the purchasing agent. In
                                                                      addition, the receiving clerk prints a hard copy of the
                       d. Prepare a system flowchart of a redesigned computer-
                         based system that resolves the control weaknesses  receiving report, which he sends with the inventory to
                         you identified. Explain your solution.       the warehouse where the items are stored.
                                                                      Warehouse
                       3. ABE Plumbing, Inc. (Centralized Small
                                                                      Upon receipt of the inventory, the warehouse clerk rec-
                       Business Accounting System)
                                                                      onciles the items with the receiving report and updates
                       ABE Plumbing, Inc., opened its doors in 1979 as a
                                                                      the inventory subsidiary ledger. The accounting system
                       wholesale supplier of plumbing equipment, tools, and
                                                                      automatically and immediately updates the inventory
                       parts to hardware stores, home-improvement centers,
                                                                      control account in the general ledger.
                       and professional plumbers in the Allentown-Bethlehem-
                       Easton metropolitan area. Over the years they have
                       expanded their operations to serve customer across the  Accounts Payable
                       nation and now employ over 200 people as technical  Once the accounts payable clerk receives the vendor’s
                       representatives, buyers, warehouse workers, and sales  invoice, she reconciles it with the purchase order and
                       and office staff. Most recently ABE has experienced  receiving report from her terminal. The clerk then cre-
                       fierce competition from the large online discount stores  ates a digital cash disbursement voucher record and sets
                       such as Harbor Freight and Northern Supply. In  a due date for payment. The system automatically
                       addition the company is suffering from operational inef-  updates the AP control account in the general ledger.
                       ficiencies related to its archaic information system.  Daily, the accounts payable clerk reviews the open cash
                       ABE’s expenditure cycle procedures are described in  disbursement voucher records from her terminal looking
                       the following paragraphs.                      for items that need to be paid. The clerk then creates a
                                                                      record for the payment in the digital check register and
                       Expenditure Cycle                              closes the open cash disbursement voucher. Finally, the
                       ABE uses a centralized accounting system for managing  clerk prints a hard copy of the check and sends it to the
                       inventory purchases and recording transactions. The  vendor. The system automatically updates the accounts
                       system is almost entirely paperless. Each department  payable and cash general ledger accounts.
                       has a computer terminal that is networked to the ‘‘Pur-  Required
                       chases/Accounts Payable System’’ that is run from a  a. Create a data flow diagram of the current system.
                       small data processing department. All accounting
                                                                      b. Create a system flowchart of the existing system.
                       records are maintained on centralized computer files
                                                                      c. Identify the internal control weaknesses in the
                       that are stored on a file server in the data processing
                                                                         system. Model your response according to the six
                       department.
                                                                         categories of physical control activities specified in
                                                                         SAS 78/COSO.
                       Purchasing
                                                                      d. Prepare a system flowchart of a redesigned computer-
                       The process begins in the purchasing department. Each  based system that resolves the control weaknesses
                       morning the purchasing agent reviews the inventory lev-  you identified. Explain your solution.
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