Music Source, Inc.

(Prepared by Jeff Davis, Gen Feldman, and Denise Nuccio, Lehigh University)

Company Information Music Source, Inc., is a manufacturer of stereo equipment with six sales offices nationwide and one manufacturing plant in Pennsylvania.

Currently, employment is at approximately 200 employees. Music Source focuses on the production of high-quality stereo equipment for resale by retailers. Its larger competitors include Sony, Panasonic, and Aiwa. Music Source’s suppliers are Nalequip, Inc., and Uniview. Production includes speakers, basses, subwoofers, and other equipment. Currently Music Source is operating at $135,000,000 in annual sales with revenue growth at a rate of 3 percent. Unfortunately, the company has recently been experiencing several operational problems that may be fixed through the improvement of its systems.

Expenditure Cycle Music Source reduces its inventory by transferring raw materials into the production process in the manufacturing plant and through the sale of finished equipment to the customers.

Music Source’s purchasing department works along with the inventory and production control functions to provide the most efficient level of inventory for use in production.

The purchasing department closely monitors inventory levels and material reorder points.

As soon as the inventory level drops below the reorder point, the purchasing function inputs a PO into the computer. An electronic notification is sent to AP and the receiving department to notify them of the order and provide them access to view the inputted data on their computer terminals. The purchasing clerk then mails two hard copies of the PO to the vendor.

When the raw materials are received, the receiving department reconciles the goods with the packing slip and the PO on the computer. From the terminal in the department, the clerk then creates a digital receiving report, stating the condition of the materials received. An electronic notification, granting access to view the document, is sent to purchasing and inventory control. In purchasing, the receiving report is reconciled with the open PO record. The inventory control clerk uses the receiving report to update the inventory subsidiary account and the general ledger control account. Another notification is sent to AP.

Once the AP clerk receives the vendor’s invoice, she reconciles it with the PO and receiving report. The clerk then creates a digital cash disbursement voucher record and updates the general ledger. The AP department sends electronic notification to the cash disbursements department that it is granted access to view a new cash disbursement voucher.

The notification is received by the cash disbursements clerk, who reviews the document for clerical accuracy. The clerk then prepares a check and records it in the digital check register. Next the clerk records the check number in the voucher register and transfers the voucher to the closed voucher file. The negotiable portion of the check is mailed to the vendor, and a copy of the check is filed in the department. Finally, the clerk updates the general ledger accounts.

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.