Coastal Foods is a wholesale food distributor located on the Central Coast. It sells a variety of meat, frozen foods and grocery to foodservice organizations from Salinas to Camarillo. It is a privately owned corporation with a 30,000 square facility. It has 55 employees and virtually operates 24 hours a day, 6 days per week. The company generates approximately $30 million in annual sales and most sales are on credit. Coastal Foods used a distributed computerized ERP system and is considering an upgrade to a customized computer system designed by a local software company. The Company has hired your auditing firm to assess its operations and recommend improvements to its internal controls to reduce risk and improve the accounting system.

SALES ORDERS PROCEDURES

Wholesale customer orders are electronically sent to Coastal Foods by sales people in the field that contact their customers in person or phone. All orders must be received by 3 p.m. for the next days delivery. The sales manager approves credit limits for all of the customers. A digital copy of the sales order and picking slip is distributed to the warehouse manager. The warehouse manager prints out a copy of the picking slip and assigns the order assembly to a warehouse clerk. The warehouse clerk picks the selected items from the warehouse shelves and sends them to the loading dock for loading on the Coastal Foods delivery vehicles by the truck drivers, who sometimes pick items from the warehouse. The sales order is updated to reflect all items shipped and any items back ordered by the warehouse personnel. The sales order is released to the billing department for invoice creation. The invoice is created and a copy is forwarded to the accounts receivable department for posting to the customers subsidiary ledger. Another copy of the invoice is sent with the delivery to the customer. The warehouse maintains the inventory subsidiary records since they know what is in stock. Customers may enter the warehouse at times to pick up special orders which are needed immediately.

CASH RECEIPTS PROCEDURES

Customer payments consist of cash or checks collected by the drivers and checks received in the mail. The drivers put their cash receipts directly in a drop safe when they return from the customer delivery. The accounts receivable clerk manually prepares a remittance list of checks and cash. The accounts receivable clerk then updates the cash receipts journal and posts the receipts to the customers accounts receivable subsidiary ledger directly in the computer. The accounts receivable clerk then prepares the bank deposit. The Controller takes the deposit slip and deposit to the bank each day. To ensure the accuracy of accounting records, the Controller reconciles the bank statement each month.

QUESTIONS

a. Create a system flowchart of the existing system.

b. Create a data flow diagram for the Sales Orders Procedures.

c. Create a data flow diagram for the Cash Receipts Procedures.

d. Analyze the physical internal control weaknesses of the compabny for the revenue cycle using the six categories of physical control activities:

-Segregation of Duties:

-Transaction Authorization:

-Access Control:

-Supervision:

-Independent Verification:

-Accounting Records:

e. Describe the IT controls that should be in place in this system. Look at general and application controls.

f. Make any recommendations for improving the revenue cycle.

g. Discuss any apparent risks in the company and the direction of risk with the new software. Keep in mind the COSO five internal control components (Control Environment, Risk Assessment, Control Acitivites, Information and Communication and Monitoring).