Page 287 - Accounting Information Systems

258 PART II Transaction Cycles and Business Processes

Since the expansion, USA Cycle has been plagued Using these documents, the clerk updates the digital
by inefficiency, and accounting errors. You have been check register and accounts payable subsidiary ledger
hired to evaluate their processes and internal controls from the department PC. The general ledger is automati-
for compliance with the Sarbanes-Oxley Act. The ex- cally updated by the system. The check is signed and
penditure cycle of one of its facilities is described in the mailed to the supplier. The check copy along with the
following paragraphs. purchase order, receiving report, and invoice are filed in
the closed accounts payable file.
Description of Purchases Procedures
Required
The purchases process begins when a clerk in the ware-
a. Create a data flow diagram of the current system.
house reviews the inventory subsidiary ledger from his
b. Create a system flowchart of the existing system.
PC. When inventory is needed, the clerk creates a digital
record in the purchase order file. Four copies of the pur- c. Analyze the internal control weaknesses in the
system. Model your response according to the six
chase order are printed. One copy is filed in the open pur-
categories of physical control activities specified in
chase order file, two copies are sent to the supplier, and
SAS 78/COSO.
one copy is forwarded to the accounts payable depart-
d. Prepare a system flowchart of a redesigned
ment and filed in the accounts payable pending file.
computer-based system that resolves the control
When the goods are received in the warehouse, the
weaknesses you identified. Explain your solution.
purchase order is pulled from the open purchase order
file and a clerk inspects, counts, and reconciles the
goods to the packing slip and what was ordered. The 10. New Born Candy Company
clerk places the goods on the warehouse shelves and (Comprehensive Case—Revenue and
uses the computer to prepare the receiving report. The Expenditure—Manual and Batch
information is saved in the digital receiving record file, Computer Processes)
and two hard copies of the receiving report are printed.
(Prepared by Gaurav Mirchandani and Matthew
One copy is forwarded to the accounts payable depart-
Demko, Lehigh University)
ment. The second copy, along with the purchase order
New Born Candy Company is the manufacturer and mar-
and packing slip, is used to update the digital inventory
keter of a premier line of candies. James Born, the cur-
subsidiary records from the department PC. The pur-
rent CEO of New Born Candy Company, took control of
chase order, packing slip, and receiving report are then
the family-run business in the 1970s, although New Born
filed in the closed purchase order file.
Candy Company has been in existence since the mid-
When the receiving report is received in the accounts
1930s. The company has grown to two plants on the East
payable department, it is filed in the accounts payable
Coast and 209 employees across the country.
pending file with the purchase order. Upon receipt of
As of the fiscal year ended 2008, New Born Candy
the invoice from the supplier, the accounts payable
Company experienced gross sales of almost $100 mil-
clerk pulls the receiving report and purchase order from
lion. In spite of its success, the CEO and management
the accounts payable pending file. The clerk uses these
team are concerned about recent cost overruns and pro-
documents to add a digital record to the purchases jour-
duction problems. For example, the rate of increase in
nal and to post the liability to the accounts payable sub-
cost of goods sold has been disproportionate with growth
sidiary ledger from the department PC. The accounts
in sales. Additionally, they have experienced raw mate-
payable computer system automatically updates the
rial stock-outs that have occasionally shut down produc-
appropriate accounts in the general ledger. The purchase
tion lines or prevented them from producing to capacity.
order, receiving report, and invoice are then filed in the
To get to the bottom of these issues James Born and
open accounts payable file.
his management team have hired GMD Consulting
Group to review New Born’s business processes and
Description of Cash Disbursements
accounting system. The following describes the relevant
Process business cycles under review.
Using the open accounts payable file, in which the source
documents are arranged by payment date, a clerk in the Revenue Cycle Description
accounts payable department searches for accounts com- New Born Candy Company receives orders from one of
ing due. When payments are due, the clerk removes the two places: they are delivered to the mail room where
purchase order, receiving report, and invoice from the file they are received and sorted, or the sales personnel receive
to manually prepare the vendor check and check copy. them directly. After the mail is received and sorted by the