ARCHITECTS DEPOT

(Networked Computer System with Manual Procedures)

THE EXPENDITURE CYCLE PART 1 CASE STUDY

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Architects Depot (AD) is an online company that supplies a range of architectural products to building contractors and private individuals. Its product line includes such items as gable vents, shutters, vinyl sidings, and decorative trim in various materials.

The company employs a combination of manual procedures and a networked accounting system with distributed terminals in several departments. After years of satisfactory performance, however, AD is now experiencing operational inefficiencies and accounting errors. Your firm has been hired to evaluate ADs business processes and internal controls. ADs expenditure cycle is described in the following paragraphs.

Purchase System Procedures

ADs purchase transactions are initiated when the purchasing department clerk reviews the inventory file for items that need to be replenished. The clerk selects a vendor, adds a record to the digital PO File and prints four hard copies of the purchase order. One copy is filed in the department; the second copy is sent to the receiving department; the third copy is sent to the AP department; and the final copy is sent to the vendor.

When the goods and the packing slip arrive at the receiving department, the receiving clerk examines the items for condition and verifies the quantities received against the packing slip. Upon completion of the inspection, the clerk manually creates two hard copies of a receiving report. One copy is filed in the department and the second accompanies the goods to the warehouse.

In the warehouse, the clerk receives and shelves the goods. In addition, the clerk updates the inventory file by posting the amounts received to the various inventory record affected.

When the AP clerk department receives the invoice from the supplier, he visually matches it to the hard-copy purchase order on file. The clerk then adds a record to the vendor invoice file, which serves as the AP subsidiary ledger and sets a due date for payment.

Finally at the end of each day, the warehouse clerk and the AP clerk create digital journal vouchers to reflect the days transactions. The system automatically posts the journal vouchers to the relevant GL accounts.

The AP journal voucher is supported by the original suppliers invoice and a photocopy of the purchase order.

The original AP journal voucher and supporting documents are forwarded to the Cash Disbursements Clerk for processing of payment. A duplicate copy of the AP journal voucher is kept at the AP Department.

Cash Disbursements Procedures

The Cash Disbursements clerk upon receipt of the AP journal voucher with supporting documents, prepares the check voucher in two copies and the check based on the payment due dates using the Check Disbursement System.

The check is forwarded to the designated signatories who are members of the board of directors for signature.

Signed checks are then mailed to the vendors.

The Check Disbursement System is a partially automated system whereby after the processing of the check and the check voucher, the corresponding entries readily gets posted to the General Ledger.

The Check Disbursement clerk files the original check voucher and the supporting documents in a file maintained based on vendors name. The duplicate copy of the check voucher is filed based on the serial number of the check voucher.

Source: Lifted with some revisions from the Accounting Information Systems by James Hall, 10th edition. Chapter 5.

REQUIREMENTS:

1. Create a system flowchart of the existing system.

2. Based on the flowchart in no.1, identify the control weaknesses in the entire expenditure cycle.

3. What IT and physical controls must be present to improve the system?

4. Prepare a system flowchart of the redesigned computer-based system to resolve the weaknesses that you identified. Explain your solution