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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.