Classic Restorations (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 comprising 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 Restorations primary customer base consists of small restoration shops and classic car dealers on the west coast. The company sources many of its parts from abroad, but a growing percentage of these are now being manufactured in the United States.

Classic Restorations has a legacy accounting system that employs a combination of manual procedures supported by stand-alone PCs in various departments. Recently, the company has experienced business inefficiencies that have been linked to its antiquated accounting system. You have been retained by Classic Restorations management to review their procedures for compliance with effective internal control standards. Classic Restorations expenditure cycle procedures are presented in the following paragraphs.

Expenditure Cycle

When the quantity on hand of a particular product falls to a low level, the warehouse clerk selects a vendor and manually prepares two hard copies of a purchase order. The clerk sends one copy of the purchase order to the vendor and the other to the receiving department. When the goods arrive from the vendor, the receiving clerk matches the packing slip in the shipment to the purchase order that the warehouse clerk had previously sent. If everything is in order, the receiving clerk signs the purchase order and sends it to the accounting department. The 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 departments AP clerk receives the suppliers invoice, which she matches and reconciles to the previously received purchase order from the receiving clerk. From her department PC, the AP clerk then updates the digital AP subsidiary ledger to reflect the new liability and records the event in the digital purchases journal.

Cash Disbursements Procedures

The AP clerk in the accounting department reviews the liabilities that are due by searching the AP 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 AP 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 AP 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 AP 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 AP 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 GL accounts. The clerk files the hard-copy 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.