PRE -SEEN CASE STUDY

Sunderland Cycle Company

Sunderland Cycle Company is one of the fastest-growing bicycle distributors in the United Kingdom, with headquarters in Kensington, London. Their primary business is distribution of cycles assembled in China, but they also have a smaller, custom-order business for which they build bicycles from parts purchased from various suppliers. Their product line includes mountain, comfort bikes and roads as well as a juvenile line with up to 24- inch frames. They also distribute trailer bikes, triycles as well as time trial bikes bicycles. In addition, they distribute various bicycle accessories such as helmets, clothing, lights, and spare parts for all of the models they carry.

Established in 1986, the company's first warehouses were in Kensington and Borough and supplied retail bicycle outlets primarily in the Sunderland. One year ago, Middle land Cycle Company expanded, adding two additional facilities in Westminster, Liverpool, Canterbury and Derby to meet the growing demand for their bicycles. They now also sell customized bicycles direct to retailers through the Internet as well as by conventional means.

The company's expansion to the West Coast was coupled with a planned increase in reliance on suppliers in China. Even though this resulted in decreased costs, some problems regarding inventory levels arose because of unexpected delays in shipping, primarily attributable to miscommunication and shipping conditions. Because the company does not want to carry excess inventory, they are sometimes forced to seek local suppliers at an increased cost.

Initially, Sunderland Cycle Company was a family-owned business. In need of capital, however, the company went public when they added the two facilities on the West Coast. The number of employees rose from 100 to 200 during the expansion.

Sunderland Cycle Company uses limited computer technology to process business transactions and record accounting data. Each of its facilities is similarly configured: The various departments in the facility employ manual procedures that are supported by non-networked PCs. Because this type of configuration does not permit departments to share data digitally, most interdepartmental communication is accomplished via hard-copy documents.

Since the expansion, Sunderland Cycle Company has been plagued by inefficiency and accounting errors. The revenue cycle of one of its facilities is described in the following paragraphs.

I.REVENUE CYCLE

Sales Order Procedures

The Sunderland Cycle Company sales order process begins when a sales representative takes an order from the customer over the phone or fax (for established customers) and prepares the customer order. The sales clerk uses a PCs to input the customer order into one of two different data files, either the custom-design order file or the regular order file. The system manager in the sales department periodically checks the Web server for orders that come in through the Internet and prints these orders for the sales clerk to enter as sales orders.

At the end of the day, the sales clerk updates the customer file from the regular sales order file and the custom design sales order file and prints three copies of the sales orders, including a factory order for each custom-design order. The clerk forwards the sales orders to the warehouse, where goods are retrieved from inventory and shipped to the customer. The clerk also sends the factory orders for custom-design bicycles to the factory for assembly. One copy of the sales order is filed in the open customer order file for use in answering customer inquiries. The last copy of the sales order is sent to the billing department for preparation of the sales invoice.

Once the warehouse receives a sales order, a warehouse worker retrieves the goods and accesses the warehouse department PC to update the inventory subsidiary ledger using an inventory-management application program. Another worker packs the goods and prepares two copies of the bill of lading as well as a packing slip. The packing slip is attached to the shipping container, and the two copies of the bill of lading are sent to the shipping company along with the goods. The worker also prepares a shipping notice that is sent to the billing department along with a bill of lading, sales order, and a factory order (if the goods were for a custom-designed bicycle).

When the factory receives a factory order for a custom- designed bicycle from the sales department, a factory worker prepares a material-release form and sends it to the warehouse for the materials. After the worker assembles the product according to the order specifications, the factory order and the finished product are sent to the warehouse, where the shipping documents are prepared, and the goods are shipped to the customer in the same way as other sales orders.

After receiving the sales order from the sales department, the billing/accounts receivable department clerk files it in a temporary file until the shipping notice, the bill of lading, and the sales order or factory order have arrived from the warehouse. Once the shipping notice and other documents have arrived, the clerk reviews these documents along with the sales order from the temporary file and prepares two copies of the sales invoice using the billing/accounts receivable department PC, which automatically records the sale in the sales journal and updates the accounts receivable subsidiary ledger and the general ledger. One copy of the sales invoice is mailed to the customer and the other is forwarded to the sales department, which closes the open customer order file. After closing the open customer order file, all documents in the file are sent to the billing/ accounts receivable department. These documents are then filed in the accounts receivable pending file along with other documents the billing/accounts receivable department receives to await customer payment.

Cash Receipts Procedures

All of Sunderland Cycle Company's mail arrives in the mail room in the cash receipts department. A cash receipts clerk in the mail room opens all the mail, separates the checks and remittance advices, and endorses all the checks ''For Deposit Only.'' Afterward, the clerk records each check on a remittance list and sends one copy of the remittance list to the billing/accounts receivable department along with the remittance advices. Then the clerk prepares a bank deposit slip and updates the cash receipts journal on the cash receipts department's PC. Later that day, the cash receipts manager deposits the checks in the bank. In the billing/accounts receivable department, a clerk updates customer accounts on the department's PC with the information from the remittance advices, which automatically updates the accounts receivable subsidiary and general ledger control accounts. The billing/ accounts receivable clerk also closes the accounts receivable pending file for invoices that have been paid in full. Finally, the clerk files all source documents along with the remittance list and remittance advices in the sales history file.

II.EXPENDITURE CYCLE

Purchases Procedures

The purchases process begins when a clerk in the warehouse reviews the inventory subsidiary ledger from his PC. When inventory is needed, the clerk creates a digital record in the purchase order file. Four copies of the purchase order are printed. One copy is filed in the open purchase order file, two copies are sent to the supplier, and one copy is forwarded to the accounts payable department and filed in the accounts payable pending file.

When the goods are received in the warehouse, the purchase order is pulled from the open purchase order file and a clerk inspects, counts, and reconciles the goods to the packing slip and what was ordered. The clerk places the goods on the warehouse shelves and uses the computer to prepare the receiving report. The information is saved in the digital receiving record file, and two

hard copies of the receiving report are printed. One copy is forwarded to the accounts payable department. The second copy, along with the purchase order and packing slip, is used to update the digital inventory subsidiary records from the department PC. The purchase order, packing slip, and receiving report are then filed in the closed purchase order file.

When the receiving report is received in the accounts payable department, it is filed in the accounts payable pending file with the purchase order. Upon receipt of the invoice from the supplier, the accounts payable clerk pulls the receiving report and purchase order from the accounts payable pending file. The clerk uses these documents to add a digital record to the purchases journal and to post the liability to the accounts payable subsidiary ledger from the department PC. The accounts payable computer system automatically updates the appropriate accounts in the general ledger. The purchase order, receiving report, and invoice are then filed in the open accounts payable file.

Cash Disbursements Process

Using the open accounts payable file, in which the source documents are arranged by payment date, a clerk in the accounts payable department searches for accounts coming due. When payments are due, the clerk removes the purchase order, receiving report, and invoice from the file to manually prepare the vendor check and check copy. Using these documents, the clerk updates the digital check register and accounts payable subsidiary ledger from the department PC. The general ledger is automatically updated by the system. The clerk signs the check using a signature block that displays the name of the assistant treasurer, Bartly Mayour.

Only Mayour's signature can validate a vendor check. Signed checks are mailed to the supplier. The check copy along with the purchase order, receiving report, and invoice are filed in the closed accounts payable file. The clerk then photocopies the check for audit trail purposes

Sunderland Cycle Company - Internal audit charter

Internal Audit is overseen by Sunderland's Audit Committee. The Chief Internal Auditor reports to Sisco Periso, the convener of the Audit Committee.

The Chief Internal Auditor is responsible for the management and organization of internal audit staff. Internal Audit investigations will be conducted in accordance with appropriate professional audit standards.

The members of the Internal Audit Department are granted unrestricted access to any records, locations and assets that they deem necessary in order to discharge their duties. They are also free to interview all staff and have a right to receive full cooperation whenever they do so.

Audit staff will submit a written report to the Chief Internal Auditor at the conclusion of each audit investigation. The Chief Internal Auditor will provide the Convener of the Audit Committee with a summary of all audit reports, in addition to copying the full reports to the Convener.

Internal audit reports will be used to provide feedback to managers who are responsible for the areas subject to audit. Where exceptions are noted, the managers responsible will agree a plan for rectification and the internal audit staff will ensure that agreed changes are implemented.

An internal audit plan will be developed each year and approved by the Audit Committee. The plan will focus on areas identified using a risk-based approach. The Chief Internal Auditor will seek authorization from the Convener of the Audit Committee before deviating from the plan. The Audit Committee has the authority to require revisions to the plan or to request special investigations that are deemed necessary.

Questions

1.Generate Context level data flow diagrams for sales order procedure, cash receipt procedure, purchase procedure, cash disbursement process, and internal audit charter.

2.Generate Level zero data flow diagrams for sales order procedure, cash receipt procedure, purchase procedure, cash disbursement process, and internal audit charter.

3.Analyze the internal control weaknesses in the system. Model your response according to the six categories of physical control activities specified in SAS 78/COSO