7. CLASSIC RESTORATION (MANUAL AND STAND-ALONE COMPUTER PROCESSING)

Classic Restorations specializes in the sale of original and reproduction restoration parts for classic sports cars and muscle cars of the 1960s and 1970s. The

classic car industry has grown significantly in recent years as the baby boomers age, become wealthier, and want to relive fond memories. Classic car sales and restoration is a multibillion dollar industry that employs more than 30,000 people in the United States. It is, however, a highly fragmented industry that comprises many small businesses. Classic Restorations is headquartered in Los Angeles, California, and currently employs 95 full-time employees, including sales staff, sales representatives, and general office staff. Classic Restorationss pri- mary customer base consists of small restoration shops and classic car dealers on the west coast. They source many of their parts from abroad, but a grow- ing percentage of these are now being manufactured in the United States.

Classic Restorations has a legacy accounting sys- tem that employs a combination of manual proce- dures supported by stand-alone PCs in various departments. Recently, they have experienced busi- ness inefficiencies that have been linked to their anti- quated accounting system. You have been retained by Classic Restorations management to review their pro- cedures for compliance with effective internal control standards. Classic Restorationss revenue cycle proce- dures are presented in the following paragraphs.

Sales Order Procedures

Classic Restorationss sales department is at its head- quarters in Los Angeles. All customer orders go through sales representatives who visit current and prospective customers in their sales districts. The orders are faxed, mailed, or delivered in person to the sales department by the representative at the end of each day.

When the order is received the sales clerk checks the customers creditworthiness from a computer ter- minal by running a validation application against the credit history. The credit-check program determines if the customers account is up-to-date regarding payments and the customer has not exceeded his or her credit limit. Computer controls in the application prevent further processing of any transactions that fails the credit check. Under certain extenuating cir- cumstances the credit manager may override the val- idation control. Once validated the sales clerk prepares a three-part hard-copy sales order from the computer terminal. The clerk sends the sales order copy to the billing department, the stock release copy to the warehouse, and the packing slip copy to the shipping department. The original cus- tomer order is filed in the sales department.

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CHAPTER 4 TheRevenueCycle 205

206 P A R T I I Transaction Cycles and Business Processes

Upon receipt of the sales order, the billing clerk records the sale in the digital sales journal using the department PC. The clerk then prints a hard-copy invoice, which is sent to the customer. Next, the clerk sends the sales order to the accounts receivable department for further processing. At the end of the day, the clerk prints a hard-copy sales journal voucher from the PC and sends it to the general led- ger department.

The warehousing clerk uses the stock release copy to pick the goods from the shelves and then updates the digital inventory subsidiary ledger using the warehouse PC. Next, the clerk sends the goods and the stock release to the shipping department. At the end of the business day, the clerk prints an inventory summary from the PC and sends it to the general ledger department.

The shipping clerk reconciles the packing slip sent from the sales department with the stock release and goods received from the warehouse. If all is correct, the clerk manually prepares a hard-copy bill of lad- ing. He then attaches the packing slip and bill of lading to the goods, which go to the carrier for deliv- ery to the customer. Finally, the clerk files the stock release in the department.

The accounts receivable clerk receives the sales order from the billing department and uses it to update the digital AR sub-ledger from the depart- ment PC. The sales order is then filed in the depart- ment. At the end of the day, the clerk prints an AR summary from the PC and sends it to the general ledger department.

CASH RECEIPTS PROCESS. Customer pay- ments come into the mail room where mail clerks open the envelopes and send the checks and remit- tance advices to the accounts receivable department. The accounts receivable clerk reconciles the remit- tance advice with the check and updates the custo- mers account in the digital accounts receivable subsidiary ledger. The clerk then files the remittance advices in the department and sends the checks to the cash receipts department. As previously mentioned, at the end of the day, the accounts receivable clerk prints a hard-copy accounts receivable summary from the department PC and sends it to the general ledger department.

The cash receipt clerk receives the checks and records the payments in the digital cash receipts jour- nal. The clerk then manually prepares a hard-copy deposit slip and sends the checks and deposit slip to the bank. At the end of the day, the clerk prints a

cash receipts journal voucher from the department PC and sends it to the general ledger department.

The general ledger clerk receives the sales journal voucher, cash receipts journal voucher, accounts receivable summary, and inventory summary. The clerk reconciles these documents and posts them to the appropriate control accounts in the digital gen- eral ledger from the department PC. Finally, the gen- eral ledger clerk files the summaries and journal vouchers in the department.

CASE QUESTIONS: a. Prepare an As-ls Data Flow Diagram and identify, circle and number it on the As-ls System Flowchart at where the exposure is, give at least 4 and a maximum of 6 exposures. b. In tabular form, against each numbered exposure, describe ONE possible risk and suggest ONE control procedure that can mitigate the exposure identified. (given: The company does not have the resources for any computerization or networking the stand-alone computers) c. Prepare a To-Be System Flowchart that incorporates your recommendations in c above. CASE QUESTIONS: a. Prepare an As-ls Data Flow Diagram and identify, circle and number it on the As-ls System Flowchart at where the exposure is, give at least 4 and a maximum of 6 exposures. b. In tabular form, against each numbered exposure, describe ONE possible risk and suggest ONE control procedure that can mitigate the exposure identified. (given: The company does not have the resources for any computerization or networking the stand-alone computers) c. Prepare a To-Be System Flowchart that incorporates your recommendations in c above