A&V Safety, Inc. (Manual and Stand-Alone Computer Processing) (Prepared by Adam Johnson and Aneesh Varma, Lehigh University)

  

A&V Safety, Inc., is a growing company specializing in the sales of safety equipment to commercial entities. It currently employs 200 full-time employees, all of whom work out of their headquarters in San

  

Diego, California. During the summer, the company expands to include about 10 summer interns who are delegated smaller jobs and errands. A&V currently competes with Office Safety, Inc., and X-Safe, who lead the industry. Suppliers for A&V include Halotron Extinguishers, Kadelite, and Exit Signs, Inc. A&V attempts to maintain inventory levels sufficient to service two weeks of sales. This level has shown to avoid stock-outs, and the excess inventory is held in a warehouse in a suburb of San Diego.

  

A&V has a legacy accounting systemthat employs a  combination of manual procedures supported by stand-alone PC in the various departments. Recently, they have experienced business inefficiencies that have been linked to their antiquated accounting system. You have been retained by A&V management to review their procedures for compliance with the Sarbanes- Oxley Act and to provide recommendations for improvement. The A&V expenditure cycle is presented in the following paragraphs.

  

Expenditure Cycle

  

The company purchases safety devices such as fire extinguishers, exit signs, and sensors from many different suppliers. When the quantity on hand of a particular product falls to a low level, the warehouse clerk selects a vendor and manually prepares three hard copies of a purchase order. The clerk sends one  copy of the purchase order to the vendor, one copy to the general ledger department, and the third to the receiving department to be used to verify the goods when they arrive. When the goods arrive from the vendor, they first go to the receiving department. The receiving clerk matches the packing slip in the shipment to the purchase order that the warehouse clerk had previously sent. After comparing the quantities and products on the packing slip to those specified on the purchase order, the receiving clerk signs the purchase order and sends it to the accounting department. The receiving clerk then manually prepares a hard-copy receiving report, which he sends with the goods to the warehouse. From his department PC, the warehouse clerk uses the receiving report to update the inventory subsidiary ledger to reflect the receipt of the goods. 

  

Subsequently, the accounting department’s accounts payable clerk receives the supplier’s invoice, which she matches and reconciles to the previously received purchase order from the receiving clerk. From her department PC, the accounts payable clerk then updates the digital accounts payable subsidiary ledger to reflect the new liability and records the event in the digital purchases journal.

  

Cash Disbursements Procedures

  

The accounts payable clerk in the accounting department reviews the liabilities that are due by searching the accounts payable subsidiary ledger from the department PC. The clerk then prints out a hard-copy cash disbursement voucher for each item due for payment. The clerk then sends a cash disbursement voucher to the cash disbursements department for payment. At the end of the day the clerk prints a hard-copy accounts payable summary from the department PC and sends it to the general ledger department.

  

From his department PC, the cash disbursements clerk uses the cash disbursement voucher to record the payment in the digital check register and then prints a three-part check. The clerk signs the negotiable portion of the check and sends it to the vendor. One check copy is filed in the department, and the clerk sends the second check copy, along with the original cash disbursement voucher, to the accounting department accounts payable clerk. At the end of the day the clerk prints a hard-copy summary of the check register and sends it to the general ledger department.

  

From the accounting department PC, the accounts payable clerk uses the check copy and cash disbursement voucher to record the payment in the voucher register and to close out the liability in the accounts payable subsidiary ledger. The clerk then files the hard-copy cash disbursement voucher and check copy in the department. From the department PC, the general ledger clerk posts the summaries received from the accounting  and cash disbursement departments to the appropriate general ledger accounts. The clerk files the hardcopy summaries in the general ledger department.

  

Required

  

a. Create a data flow diagram of the current system.

  

b. Create a system flowchart of the existing system.

  

c. Analyze the physical internal control weaknesses in the system. Model your response according to the six categories of physical control activities specified in the COSO internal control model.

  

d. Describe the IT controls that should be in place in this system.

  

e. (Optional) Prepare a system flowchart of a redesigned computer-based system that resolves the control weaknesses that you identified. Explain your solution.