A&V Safety, Inc.

(Prepared by Adam Johnson and Aneesh Varma, Lehigh University)

A&V Safety Inc. is a growing company specializing in the sales of safety equipment to commercial entities. It currently employs 200 full-time employees who all work out of their headquarters in San Diego, California. During the summer, the company expands to include about 10 summer interns who are delegated smaller jobs and other errands. A&V currently competes with Office Safety, Inc., and X-Safe, who leads the industry. Suppliers for A&V include Halotron Extinguishers, Kadelite, and Exit Signs, Inc., and there have been no issues requiring redress. The terms of trade used by A&V are 2–10 net 30 with FOB delivery. This is used with all suppliers, and inventory is kept at a level that will service two weeks. This level has shown to avoid stock-outs, and the excess inventory is held in a warehouse in a suburb of San Diego.

The company has growing revenue, which has recently topped $23 million and has a return on investment of 14% and net margin of slightly over 20%. While the company has been operating efficiently in the past, new systems problems have arisen due to the strain put on these legacy systems from recent growth.

Expenditure Cycle The expenditure cycle consists of a purchasing procedure and cash disbursements procedure.

The company has allocated its purchasing to three departments: warehouse, purchasing, and accounting.

The company has to buy safety devices such as fire extinguishers, exit signs, and sensors.

The company maintains a basic inventory control process with triggers. When a certain product is low in inventory, the inventory clerk prepares a standard PO. The clerk then sends this PO to the respective vendor from where the current supply of the product was obtained. A copy of this PO is also sent to the general ledger and the receiving department to verify the goods when they arrive. When the required shipment arrives from the vendor, it first goes to the docks of the receiving department.

The clerk at the receiving department matches the packing slip in the shipment to the PO that the inventory clerk sent earlier.

After comparing the numbers on the packing slip to the numbers required on the PO, he signs the PO, which moves to the accounting department. The receiving clerk also prepares a receiving report that is sent to the inventory department, where the update program adds this information to inventory ledger.

Meanwhile, the supplier sends an invoice of the goods that were just shipped. Upon reaching A&V Safety, the invoice is sent to the accounting department. The accounting department has previously received the signed PO from the receiving clerk that indicates that such goods were received. The invoice is then matched and reconciled against the receiving clerk’s signed PO. The clerk in the accounting department then updates the AP subsidiary ledger for these new liabilities and the purchasing journal using this information.

The cash disbursements procedure involves the AP department, the cash disbursements department, and the general ledger. The AP reviews the liabilities that are due by searching the AP subsidiary ledger. Those items that are due are then written up into a cash disbursements voucher, and a matching AP summary is made that is sent to the general ledger. The cash disbursements voucher is sent to the cash disbursements department. Here the checks are prepared payable to the vendor. The check register is updated to reflect the amounts, check number, and payee information. A summary of this information is also sent to the general ledger.

The prepared checks are then approved by the cash disbursements department. The original check is mailed to the vendor. A copy of the check is locally filed at the cash disbursements department. Another copy of the check and the original cash disbursements voucher for the check are sent to the AP department.

At the AP department, the cash disbursements voucher and the copy of the check are used to update the cash disbursements voucher register. The AP subsidiary ledger is also updated to close out the liability that was originally placed. These documents are then locally filed. At the general ledger, all summaries that are received from each department are used to update the general ledger through the update program. Eventually a summary of the update is prepared and filed locally.

Required:

a. Create a data flow diagram of the current system.

b. Create a document flowchart of the existing system.

c. Analyze the internal control weaknesses in the system. Model your response according to the six categories of physical control activities specified in SAS 78.

d. Prepare a system flowchart of a redesigned computer-based system that resolves the control weaknesses you identified.