One the the 5. GENERATORS R US (CENTRALIZED SYSTEM WITH DISTRIBUTED use om TERMINALS) mon les Generators R Us (GRU) is a leading manufacturer the of partible electric generators used for emergencyCHAPTER 5 The Expenditure Cycle Part 1: Purchases and Cash Disbursements Procedures 247 power supply in both civil and private disaster situa- RU's primary customers are disaster recov sent to the vendor, and a copy is sent to cash disbur- ery companies that assist home owners following sements, where it is filed. Next, the system adds a flooding and other natural disasters. GRU also record to the check register file and removes the lia- sells to building contractors, municipalities, and bility in the AP subsidiary ledger. Finally, the system rental companies. The company purchases its raw automatically updates the GL accounts. materials including bearings, copper wire, and insu- lating materials inventory directly from the manufac Required tures. GRU's headquarters and manufacturing a. Create a data flow diagram of the current system. facilities are in Dallas, Texas, where they employ b. Create a system flowchart of the existing system. 125 manufacturing and clerical staff. c. Analyze the physical internal control weaknesses GRU uses a centralized computer system with in the system. distributed terminals in its various departments. d. Describe the IT controls that should be in place in Recently they have experienced operational pro- blems with their system and GRU management has this system. hired your auditing firm to assess its operations and e. (Optional) Prepare a system flowchart of a rede- internal control procedures. signed computer-based system that resolves the control weaknesses that you identified. Explain Purchasing System your solution. When an inventory item falls to the reorder point, a 6. OUTDOOR ADVENTURE: WHITE purchase requisition is automatically created and printed on the terminal in the purchasing depart- WATER AND CAMPING SUPPLIES ment. The clerk in the department selects suppliers (NETWORKED COMPUTER SYSTEM and prepares a purchase order. A copy of the PO is AND MANUAL PROCEDURES) sent to the vendor, and a copy is sent to the receiving Outdoor Adventure is a Montana-based wholesaler department. Then, the clerk adds a record to the of rafting and camping equipment that serves out- open/closed purchase order file through an update door sports camping retailers throughout the north- program in the data processing department. west. You have been hired by Outdoor Adventure to When the receiving clerk receives the inventories, evaluate its processes, risks, and internal controls. he reconciles the goods with the packing slip and the The following paragraphs describe Outdoor Adven- purchase order. After the reconciliation, the receiv- ture's expenditure cycle procedures. ing clerk prepares a hard-copy receiving report recording the quantity and quality of the goods Purchases System received. A copy of the receiving report accompanies the goods to the warehouse, and a copy is filed in the The process begins when the purchasing clerk checks receiving department. Using the department termi- the inventory subsidiary ledger on his computer ter- nal, the receiving clerk adds a record to the digital minal each morning. When an item is deemed to be receiving report file. The system then automatically too low, the clerk selects a vendor from the valid closes the purchase order. Upon receiving the inven- vendor file and prepares a digital purchase order. tories, the warehouse clerk updates the inventory The clerk prints two hard copies: one copy is sent subsidiary ledger through the terminal in the to the vendor, and the other is filed in the depart- ment. Digital purchase order record is added to the warehouse. When the supplier's invoice arrives, the AP clerk PO File. adds a record to the supplier invoice file, which trig- When the goods arrive in the receiving depart- gers the system to automatically set up a liability in ment, the receiving clerk inspects them and recon- the AP subsidiary ledger based on the financial infor- ciles the items against the information in the digital mation contained in the invoice. The system then PO and the packing slip. The clerk then manually automatically updates all affected GL accounts. prepares two hard copies of the receiving report. One of these accompanies the goods to the inventory Cash Disbursements System warehouse, where the clerk shelves the goods and updates the inventory subsidiary ledger from his ter- Each day, the system scans the AP ledger for items minal. The clerk then files the receiving report in the due to be paid and prints the checks. The check is department. The other copy of the receiving report is