i need to answer letter 6 (a-d)

204 PART II Transaction Cycles and Business Processes posts the voucher details to the journal voucher file northwest. You have been hired by Outdoor Adven- from the department terminal. ture to evaluate their processes, risks, and internal controls. The following paragraphs describe Outdoor Cash Receipts Procedures Adventure's revenue cycle procedures. Mail room clerks open customer cash receipts, Revenue Cycle reviews the check and remittance advices for com- pleteness, and prepares two copies of a remittance SALES ORDER PROCESSING PROCEDURES. list. One copy is sent with the checks to the cash Customer orders are mailed or e-mailed to the sales receipts department. The second copy and the remit- department. When the order is received the sales clerk tance advices are sent to the billing department. checks the customer's creditworthiness from a com- When the cash receipts clerk receives the checks puter terminal by running a validation application. and remittance list, he verifies the checks received The credit-check program determines if the custo- against those on the remittance list and signs the mer's account is up-to-date regarding payments and checks "For Deposit Only." Once the checks are the customer has not exceeded his or her credit limit. endorsed, he records the receipts in the cash receipts Computer controls in the application prevent further journal from his terminal. The clerk then fills out a processing of any transactions that fails the credit deposit slip and deposits the checks in the bank. At check. Under certain extenuating circumstances, the the end of the day, the clerk prints a hard-copy cash credit manager may override the validation control. receipts journal voucher and sends it to the general After the customer's credit is verified, the clerk ledger department. then records the sales order through his computer Upon receipt of the remittances, the billing terminal. A digital copy of the order is distributed department clerk records the amounts in the to the warehouse and the shipping department term- accounts receivable subsidiary ledger from the inals for further processing. The computer system department terminal. At day's end, the clerk also automatically records the sale in the sales journal. prints a hard-copy AR summary and sends it to the Finally, the clerk files the hard copy of the customer general ledger department. order in the sales department. The general ledger department verifies the AR The warehouse manager is prompted by receipt of summary with the journal vouchers and then updates the digital sales order on the warehouse terminal. The the journal voucher file and the general ledger with manager prints out two copies of order: the stock the verified transaction amounts. release and a shipping notice. Using the stock release copy, a warehouse clerk picks the selected items from Required the shelves and sends them to the shipping department a. Create a data flow diagram of the current system. along with stock release and the shipping notice. The b. Create a system flowchart of the existing system. warehouse manager then updates the inventory sub- c. Analyze the physical internal control weaknesses sidiary ledger and the general ledger control account in the system. from his computer terminal. d. Describe the IT controls that should be in place in When the shipping clerk receives the goods, the this system. stock release, and the shipping notice, he matches them to the corresponding digital sales order dis- e. (Optional) Prepare a system flowchart of a rede- played on his terminal. If everything matches, he signed computer-based system that resolves the prints out three hard copies of the bill of lading control weaknesses that you identified. Explain and a packing slip. your solution. Two copies of the bill of lading and the packing slip are sent, along with the goods, to the carrier. The 6. OUTDOOR ADVENTURE: WHITE stock release copy and the shipping notice are sent to WATER AND CAMPING SUPPLIES the accounts receivable department. The third bill of (NETWORKED COMPUTER SYSTEM lading copy is filed in the shipping department. AND MANUAL PROCEDURES) Upon receipt of the stock release and shipping notice, the accounts receivable clerk manually cre- Outdoor Adventure is a Montana-based wholesaler ates a hard-copy invoice, which is immediately of rafting and camping equipment that serves mailed to the customer. After mailing the invoice, outdoor sports camping retailers throughout the the clerk uses information on the stock release to update the accounts receivable subsidiary ledgerCHAPTER 4 The Revenue Cycle 205 and general ledger from his computer terminal. After classic car industry has grown significantly in recent the records are updated, the clerk files the stock years as the baby boomers age, become wealthier, release and shipping notice in the accounts receivable and want to relive fond memories. Classic car sales department. and restoration is a multibillion dollar industry that employs more than 30,000 people in the United Cash Receipts Procedures States. It is, however, a highly fragmented industry Customer payments come directly to the general mail that comprises many small businesses. Classic room along with other mail items. The mail clerk Restorations is headquartered in Los Angeles, sorts the mail, opens the customer payment envelope, California, ,and currently employs 95 full-time removes the customer's check and remittance advice, employees, including sales staff, sales representatives, and reconciles the two documents. To control the and general office staff. Classic Restorations's pri- checks and remittance advices, the clerk manually mary customer base consists of small restoration prepares two hard copies of a remittance list. He shops and classic car dealers on the west coast. They sends one copy to the accounts receivable department, source many of their parts from abroad, but a grow- along with the corresponding remittance advices. The ing percentage of these are now being manufactured other copy of the remittance list accompanies the in the United States. checks to the cash receipts department. Classic Restorations has a legacy accounting sys- Once the checks and remittance list arrive in the tem that employs a combination of manual proce- cash receipts department, the treasurer reconciles the dures supported by stand-alone PCs in various documents, endorses the checks, and manually pre- departments. Recently, they have experienced busi- pares three hard copies of a deposit slip. He then ness inefficiencies that have been linked to their anti- updates the cash receipts journal and the general led- quated accounting system. You have been retained by ger from his computer terminal. Next, the treasurer Classic Restorations management to review their pro- sends the checks and two copies of the deposit slip to cedures for compliance with effective internal control the bank. Finally, he files the third copy of the standards. Classic Restorations's revenue cycle proce- deposit slip and the remittance in the department. dures are presented in the following paragraphs. When the accounts receivable clerk receives the remittance list and remittance advices from the Sales Order Procedures mail room, he reconciles the two documents. He then updates the accounts receivable subsidiary led- Classic Restorations's sales department is at its head- quarters in Los Angeles. All customer orders go ger and the general ledger. Finally, he files the two through sales representatives who visit current and documents in the department. prospective customers in their sales districts. The orders are faxed, mailed, or delivered in person to Required the sales department by the representative at the a. Create a data flow diagram of the current system. end of each day. b. Create a system flowchart of the existing system. When the order is received the sales clerk checks c. Describe internal control weaknesses in the sys- the customer's creditworthiness from a computer ter- tem and discuss the risks associated with these minal by running a validation application against the weaknesses. credit history. The credit-check program determines d. (Optional) Prepare a system flowchart of a rede- if the customer's account is up-to-date regarding signed computer-based system that resolves the payments and the customer has not exceeded his or control weaknesses that you identified. Explain her credit limit. Computer controls in the application prevent further processing of any transactions that your solution. fails the credit check. Under certain extenuating cir- cumstances the credit manager may override the val- 7. CLASSIC RESTORATION (MANUAL idation control. Once validated the sales clerk AND STAND-ALONE COMPUTER prepares a three-part hard-copy sales order from PROCESSING) the computer terminal. The clerk sends the sales Classic Restorations specializes in the sale of original order copy to the billing department, the stock and reproduction restoration parts for classic sports release copy to the warehouse, and the packing slip cars and muscle cars of the 1960s and 1970s. The copy to the shipping department. The original cus- tomer order is filed in the sales department