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, bases, subwoofers, and other equipment. Currently Music Source is operating at $135 million 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.

Revenue Cycle Music Source, Inc., has sales departments with seven full-time employees and several part-time sales clerks at each of its sales offices disbursed throughout the nation. The retailers can use different methods to order stereo equipment from Music Source. They can come to the sales centers, where they can see the equipment on display before they place an order and they can even purchase the merchandise that day. Retailers can also place their orders by phone or through Music Source’s website.

Orders start in the sales department. As customer orders come in from new and past customers, the sales clerk first checks to see if the customer already has a customer record on file. The sales clerk enters the customer order into the computer as a new sales order along with the orders that have come in since the last computer entry. Sales clerks enter the customer orders into a computerized sales order system periodically throughout the day. As soon as the sales orders are entered, electronic copies of the sales order are sent to the customer, manufacturing plant, and shipping department, and one is filed in the sales department in the open sales order file.

The manufacturing plant makes two hard copies of the sales order. These copies are used as stock release forms that are used to collect raw materials needed and to ensure correct production of the ordered goods.

They are sent along with the finished goods to the shipping department. The clerk in the manufacturing department confirms that the correct goods are being moved to the shipping department, signs the two copies of the stock release, and files the electronic copy of the sales order in the completed order file.

After filing the sales order, the clerk inputs the updated amount of inventory used for that order into the computer terminal, which then generates a journal voucher that will be used to update the general ledger.

When the shipping department receives two copies of the stock release forms from the manufacturing plant, they are verified with the electronic sales order from the sales department.

After verification, one stock release form is used as the packing slip and is sent with the goods to the carrier. The other copy of the stock release has shipping charges and other relevant information added on to it that the billing department needs. This becomes a shipping slip that is sent on to the billings/AR department as proof that the order has been sent. In the shipping department, three copies of the bill of lading are prepared. Two copies of the bill of lading are sent with the packing slip and the goods to the carrier and the other is filed in the shipping department. The electronic copy of the sales order is filed in the shipping department as well.

Once the shipping slip arrives in the billing/AR department, the customer can be billed. The billing clerk prepares a sales invoice from the information on the shipping slip. One copy is sent to the customer as an official bill. The electronic copy is filed in the billing/AR department in the open invoice file. The shipping document is sent back to the sales department to be used to close the open sales order file. After the sales invoice is sent, the information from the sales invoice is input in to the computer terminal to update the sales journal and the AR subsidiary ledger and generates a journal voucher that will be used to update the general journal.

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.