14-33 (Objective 14-4)The Meyers Pharmaceutical Company, a drug manufacturer, has the following internal controls for billing and recording accounts receivable:

1. An incoming customers purchase order is received in the order department by a clerk who prepares a prenumbered company sales order form on which is inserted the pertinent information, such as the customers name and address, customers account number, quantity, and items ordered. After the sales order form has been prepared, the customers purchase order is attached to it.

2. The sales order form is then passed to the credit department for credit approval. Rough approximations of the billing values of the orders are made in the credit department for those accounts on which credit limitations are imposed. After investigation, approval of credit is noted on the form.

3. Next, the sales order form is passed to the billing department, where a clerk uses a computer to generate the customers invoice. It automatically multiplies the number of items times the unit price and adds the extended amounts for the total amount of the invoice. The billing clerk determines the unit prices for the items from a list of billing prices. The invoice copies are designated as follows:

(a) Customers copy.

(b) Sales department copy, for information purposes.

(c) File copy.

(d) Shipping department copy, which serves as a shipping order. Bills of lading are also prepared as carbon copy by-products of the invoicing procedure.

4. The shipping department copy of the invoice and the bills of lading are then sent to the shipping department. After the order has been shipped, copies of the bill of lading are returned to the billing department. The shipping department copy of the invoice is filed in the shipping department.

5. In the billing department, one copy of the bill of lading is attached to the customers copy of the invoice and both are mailed to the customer. The other copy of the bill of lading, together with the sales order form, is then attached to the invoice file copy and filed in invoice numerical order.

6. A key-to-tape data entry device is connected to the billing machine so that cassette tapes ar created during the preparation of the invoices. The invoice records on the cassette tapes then become means by which the sales journal accounts receivable subsidiary ledger and perpetual inventory records.

The cassette tapes are fed to the computer in batches. One day's accumulation of tapes comprises a batch. After the types have been processed the computer, they are placed in files and held for about two years.

Required:

a. Flowchart the billing system as means of understanding the system?

b. Determine the weaknesses and recommended improvements in the system.

c. Specify the strengths in the system and describe the audit procedures you would perform in testing these strengths.