Walker Books, Inc.

(Prepared by Matt Wisser, Lehigh University)

Company Background Walker Books, Inc., is currently one of the largest book distributors in the United States.

Established in 1981 in Palo Alto, California, Walker Books was originally a side project of founder and current president Curtis Walker, who at the time was employed by a local law firm. Because reading was much more than just a hobby of his, he decided to use some of his savings to buy an abandoned restaurant and convert it into a neighborhood bookstore, mainly selling used books that were donated from friends and family. When the doors first opened, Curtis’s wife, Lauren, was the only employee during the week; Curtis was the only employee on the weekends.

As the years passed, Curtis quit the law firm and began concentrating fully on his bookstore. More employees were hired, more books were traded in, and more sales were attained each year. However, during the mid-

1990s, Curtis was faced with two problems:

(1) many large, upscale bookstores were being built in the area and (2) the use of the Internet for finding and ordering books was becoming cheaper and more popular for current customers. In 1995, Curtis’s sales finally started to decline.

Deciding to take a risk because of the newfound competition, Curtis closed his doors to the neighborhood, invested more money to expand the current property, and transformed his company from simply selling used books to being a distributor of new books. Publishers began sending books to his warehouse where he stores them and then resells them to large bookstore chains upon request. This was the beginning of Walker Books, Inc., rapidly becoming one of the largest book distributors in the country. Although it is still located in Palo Alto, California, the company distributes books to each of the 50 United States and because of that, it now sees sales of about $105 million per year. When Curtis is asked about his fondest memory, he always responds that he will never forget how the little bookstore expanded from two employees to now more than 145 employees.

While Walker Books has been successful dealing with large, chain bookstores who themselves see many millions of dollars in revenue per year, some of these bookstores have become displeased with their relationships with Walker Books in the past year. There have been many disputes between them, such as books not being delivered even though they were ordered, Walker’s poor inventory management, and the company’s inability to provide legitimate documentation of transactions.

According to projections of this year’s financials, the sour relationships between Walker Books and many of its customers are going to take a toll on year-end revenue. Curtis has stated time after time that because of his law background, he “clearly knows the difference between right and wrong, including those of internal controls.” You have been hired to inspect the internal controls currently in place at Walker Books, Inc., to determine if the customers have a legitimate claim against the company.

Revenue Cycle Sales Order Processing System At Walker Books, Inc., the sales order process begins when a customer calls in his or her order to an experienced sales representative, who then transcribes the necessary customer information and also the quantity and type of goods requested onto a formal customer order document. Because of recent problems the company has been having with overstated AR, Walker Books has set up a computer terminal in the department for the sales representative to check the customer’s credit before going any further. If the credit is below the sales representative’s subjective assessment, the transaction is not allowed;

however, if the sales representative believes that the credit limit is acceptable, he proceeds to prepare five hard copies of the sales order.

Because five copies must be made for each sale, blank sales forms are always available in a storage cabinet in the break room across from the sales representative’s office;

therefore, there is never an issue of running out. Once prepared, one copy of the sales order is sent over to the warehouse to be used as the stock release. Another copy of the sales order, the shipping notice, is sent to the shipping department. Two of the copies are sent to the billing department, and the final copy of the sales order is stapled to the corresponding customer order, which is then filed in the sales department. Once the documents are sent to their designated locations, the sales representative updates the sales journal to record the transaction.

A journal voucher is prepared and sent to the general ledger department.

When the clerk in the warehouse receives the stock release copy, he checks over the document for clerical accuracy. If everything looks right, he records the appropriate decrease in inventory in the stock records that are maintained in the warehouse. Once recorded, he hands off the stock release to the inventory manager, who is the only person who has access to the physical inventory. The manager picks the goods from the shelves to the degree that they are actually in inventory on that given day. The warehouse manager then sends the goods and the stock release document to the shipping department.

Once the shipping department receives the shipping notice from the sales department, the clerk takes the time to make sure the document was filled out in accordance with company standards. When the clerk receives the goods and the stock release, he hands the two documents (shipping notice and stock release) to the shipping supervisor to reconcile. If they do, the supervisor logs on to a computer terminal and opens up a new relational database developed by interns that the company hired last summer.

The supervisor enters the data from the documents into the program, which automatically produces a packing slip and a bill of lading. The supervisor proceeds to print out these two documents, placing the packing slip in the box with the physical goods, and giving the bill of lading to the carrier, who then delivers the box of goods to the customer.

When the carrier takes the goods away, the supervisor goes back to his computer with the shipping notice and stock release documents in hand for reference and sends an electronic notification to the billing department, letting them know that the goods have been sent.

The shipping notice is filed in the shipping department, while the stock release is sent to inventory control.

The billing department clerk receives the customer invoice and ledger copy of the sales order from the sales department. Because the clerk’s job is very important, he has his own computer terminal, where he waits to receive notification from the shipping department that the goods have been sent. When the notification is received, he compares what is on the computer screen to the invoice and the ledger copy of the sales order to make sure that everything reconciles. If everything is correct, he adds the tax and final prices to the two documents. The invoice is then sent out to the customer as his bill, and the ledger copy of the sales order is sent to the AR department.

Because of their importance, the company hires only the most skilled and competent individuals for their inventory control and AR departments. In inventory control, there are only two clerks. The first clerk receives the stock release document from the shipping department and updates the inventory subsidiary ledger to reflect the change.

He then hands the stock release to the second clerk, who updates the general ledger via a computer terminal. The computer is password-protected to ensure that only this clerk can update the general ledger and no one else. The second clerk then files the stock release.

In the AR department, there is only one clerk who both receives the ledger copy of the sales order and then proceeds to update the AR subsidiary ledger. Each ledger copy is filed in the department, and then at the end of the day, the clerk prepares an AR summary and sends it to the general ledger department.

Upon the receipt of the journal voucher from the sales department and the AR summary, the general ledger department clerk reconciles and updates the appropriate general ledger control accounts via his computer terminal. The two documents are then filed in the department.

Cash Receipts System Because Walker Books receives both payments from customers and a lot of junk mail from publishers, the company has decided to set up two separate mail rooms with different post office box addresses. Mail room A is staffed with many employees who have the responsibility of receiving and opening routine mail

(catalogs, advertisements). Mail room B has only four employees who only receive customer payments. Because there are more employees working in the more hectic mail room A, the company has decided to concentrate supervision duties here and not in mail room B because there are very few employees who are each highly trusted by management.

When a clerk in mail room B receives customer payments, he opens the envelope and pulls out the check and remittance advice.

The clerk reconciles the two and then updates the remittance list file via computer terminal in the mail room. At the end of the day, the finished remittance list is automatically sent to the clerk in the cash receipts department.

The check is then sent to the cash receipts department, and the remittance advice is sent to the AR department.

When the cash receipts clerk receives the check, he accesses the remittance list via computer and prints out a hard copy. As long as the amount on the check reconciles with the amount on the remittance list, the clerk endorses the check “For Deposit Only.” The clerk then records the check amount in the cash receipts journal and prepares a voucher, which is sent to the general ledger department.

He then takes the check and the remittance list and sends them over to the AR department.

Once the AR clerk receives it, the remittance advice is reconciled with the remittance list and the check; next, the clerk updates the AR subsidiary ledger to recognize the customer’s payment. The clerk then prepares an accurate deposit slip and sends it along with the check to the bank. At the end of the day, the department prepares an account summary, which is then sent to the general ledger department. The remittance list and remittance advice are filed in the AR department.

The general ledger department receives the account summary and the journal voucher from the AR department and cash receipts, respectively. The clerk looks over the two documents and then updates the general ledger accounts through his terminal. The clerk then files the account summary and journal voucher.

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.