In 1997, J. D. Orbits opened a cell phone accessory manufacturing plant named Orbits.

Although the company began its operations at the local level with only 40 employees, 3 vendors

and 5 main customers, it experienced rapid success. By 2001, gross sales tripled, and the

enterprise expanded its customer, vendor and employee base. It now serves all major cell phone

manufacturers. Currently, Orbits employs more than 120 individuals, including executives,

directors, sales representatives, office personnel, and production workers. Customers: Orbits

sells to the outlets stores of distributors such as Verizon, MCI, Cingular and AT&T cellular

phone in the tri-state area.

Materials and Suppliers: Manufacturing hands-free cell phone devices requires several

different materials, none of which is made in-house. Most parts are purchased from 25 vendors.

The more complex components used in the manufacturing process are purchased through

contracts with vendors. Raw materials are purchased from vendors according to price without

a formal contract.

Accounting System

Orbits' s accounting system is comprised of manual procedures that are supported by stand-

alone PCs (not networked) in several departments. Key elements of the sales order processing,

purchasing, fixed assets, and payroll systems are described in the following paragraphs.

Purchases System

The process begins in the purchasing and inventory control department. Using the department

PC, a clerk monitors the inventory levels in the digital inventory ledger. When the inventory

on hand falls below the reorder point, the clerk prints two copies of a purchase requisition. The

clerk sends one copy to the accounts payable department, where the account payable clerk files

it in the account payable pending file. The clerk hands the second copy of the requisition to his

co-worker (the purchasing clerk) in the department, who manually prepares a four-part

purchase order. The purchasing clerk sends one copy of the purchase order to the account's

payables department (where it filed in the account payable pending file) and two copies to the

vendor. The clerk sends the final purchase order copy, along with the original purchase

requisition, to another co-worker in the department (the inventory control clerk) who, using the

department PC, updates the inventory ledger to record the inventory increase. The inventory

control clerk then files the requisition and purchase order in the department.

When the products arrive, the receiving department clerk inspects, counts and reconciles them

to the packing slip. The clerk then prepares three copies of a receiving report, which contains

quantities, prices, and freight charges transcribed from the packing slip. One copy of the

receiving report is sent with then inventory to the storeroom. Another copy is sent to the

accounts payable department, where it filed in the accounts payable pending file. The final

copy is filed in the receiving department.

Once the accounts payable clerk receives the purchase requisition, purchase order, and

receiving report, she accesses the department PC, records the liability in the purchases journal,

and posts it to the supplier's account in the account payable subsidiary ledger. The clerk then

transfers the hard-copy purchase requisition, purchase order, and receiving report to the open

accounts payable file. The accounts payable clerk then prints a journal voucher from PC

summarizing the transactions in the purchases journal for the period and sends it to general

ledger department. The general ledger clerk receives the hard-copy journal voucher and the

invoice from the vendor. The clerk then uses the department PC to post to the inventory and

accounts payable control accounts.

Cash Disbursement Process

Periodically, the account payable clerk reviews the hard-copy documents in the open account

payable file and identified items to be paid. The clerk accesses the departments PC, prints a

hard-copy cash disbursement voucher, and send it to the cash disbursements department. The

clerk then removes the liability from the digital accounts payable subsidiary ledger. Finally,

the clerk files the hard-copy documents in the closed accounts payable file.

Upon receipt of the cash disbursement voucher, the cash disbursement clerk accesses the

department PC, print a vendor check, and records the check in the in the digital check register.

Next, the clerk sends the check to the vendor and sends the hard-copy cash disbursement

voucher to the general ledger department. The general ledger clerk receives the cash

disbursement voucher and posts to the general ledger cash and account payables accounts,

using the department PC. Finally, the general ledger clerk files the voucher in the department.

Payroll System

Production

Each week the production department supervisor submits employee timecards to the payroll

department for processing. The supervisor also sends the job tickets to the cost accounting

department, which uses them to allocate labour and manufacturing overheads costs to work-in-

process account.

Payroll

The payroll department clerk receives the timecards and uses the department PC to update the

employee payroll records. The clerk also prints the employee pay checks and a payroll register.

A copy of the payroll register is sent to the account payables, and the pay checks are signed

and sent to the supervisors for distribution to the employees. A copy of the payroll registers

and timecards are filed in the department.

Accounts Payable

The accounts payable department uses the payroll register to manually prepare two copies of a

cash disbursement voucher. One copy of the voucher and the payroll register are sent to the

cash disbursement department. The second copy of the voucher is sent to the general ledger

department.

Cash Disbursements

The cash disbursements department uses the payroll register and the cash disbursement voucher

to manually prepare a check for a total payroll. The payroll check is signed and sent to the bank

for deposit into the payroll imprest account. The voucher, the payroll check copy, and the

payroll register are filed in the department.

General Ledger

The general ledger uses the cash disbursement voucher to update the digital general ledger

payroll account from the department PC. The voucher is then filed in the department.

Fixed Asset System

Purchasing

At Orbits, the purchasing department is responsible for ordering fixed assets for user

departments based on a user-generated purchase requisition. When the purchasing department

clerk receives the purchase requisition from the user department, she creates a purchase order

and send it to the vendor. The purchase requisition is filed in the purchasing department.

When the asset is shipped, the vendor sends the invoice to the accounts payable department

and delivers the assets directly to the user department, where it is reconciled to the packing slip

and placed into service. The user then sends the packing slip to the fixed asset department.

Accounts Payable

Upon receipt of the invoice from the vendor, the accounts payable clerk assesses the department

PC, determines a due date for payment, records the liability in the accounts payable subsidiary

ledger, and files the invoice in the open accounts payable file. Periodically, the clerk reviews

the open accounts payable file for items to be paid. When an account payable is due, the clerk

assesses the department PC, prints a hard-copy cash disbursement voucher, and sends it to the

cash disbursement department. The clerk then removes the liability from the digital account

payable subsidiary ledger. Finally, the clerk files the hard-copy invoice in the closed accounts

payable file.

Cash Disbursements

Upon receipt of the cash disbursement voucher, the cash disbursements clerk accesses the

department PC, prints a vendor check, and records the check in the digital check register. Next,

the clerk sends the check to the vendor and sends the hard-copy cash disbursement voucher to

the general ledger department.

Fixed Asset Department

When the fixed asset department clerk receives the packing slip from the user department, he

accesses the department computer and records the asset in the fixed asset subsidiary ledger.

Periodically, the clerk prepares an account summary that he sends to the general ledger. Note:

The fixed asset department has additional procedures to manage the maintenance and disposal

of fixed assets. These procedures are not part of this assignment.

General Ledger Department

The general ledger receives the cash disbursement voucher from the cash disbursement and the

account summary from the fixed asset department. The general ledger then accesses the

department PC and posts to the cash, accounts payable control, and fixed asset control accounts.

Finally, the general ledger clerk files the voucher and account summary in the department.

Sales Order System

The sales department receives customer orders via fax, mail and e-mail. A sales clerk using the

sales department PC records the orders in the sales order file and prints a stock release, invoice,

ledger copy, and packing slip. The documents are distributed as follows:

The invoice and ledger copy are sent to billing, where the clerk records the sales record

the sale in the digital sales journal form the department computer. The clerk then sends

the invoice to the customer and the ledger copy to the account receivable department.

The stock release is sent to the warehouse, where the goods are picked and the

warehouse clerk updates the stock records from the department PC. The clerk then

sends the stock release and the goods to the shipping department.

The packing slip is sent to the shipping department, where it is reconciled to the stock

release. The shipping clerk then manually prepares a bill of lading, the product, and

packing slip to the carrier. The stock release is sent to the purchasing department and

inventory control department, where it is used to update the inventory subsidiary ledger.

The inventory control clerk then files the stock release and prepares an account

summary, which is sent to the general ledger department.

The account receivable clerk receives a ledger copy document. The clerk then accesses the

department PC to update the accounts receivable subsidiary ledger. The clerk then files the

ledger copy and prepares an account summary, which sends to the general ledger department.

a) Analyse the physical internal control weaknesses in the system. Model your response

according to the six categories of physical control activities. (18 marks)

b) Describe the IT controls should be place in this system.