Required:

a. Make a document flowchart of the existing system.

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

1.Transaction Authorization

2.Segregation of Duties

3.Supervision

4.Accounting Records

5.Access Control

6.Independent Verification (Definitions at the end)

Bella Windows Co. is a window manufacturer located in eastern Pennsylvania with roughly 150 employees in its facility. The Smith family founded it in 1994 because their children, who were architects, needed a specific window design that did not exist in the current market.

The parents thought this window would be very successful, so they started a company that made specialty windows. Bella Windows Co.'s motto became "Quality Products, Quick Delivery." This drew a lot of retail customers from their competitors, which allowed them to rapidly grow to $50 million in sales the last three years. Bella Windows Co. developed a strong relationship with its customers and allowed them to purchase windows on account with the terms 2/10/30.

In the past, the Smith family has had the purchasing agent purchase parts from a list of acceptable suppliers. In the beginning of each year, the Smith family researches different suppliers to find which have the parts best suited to their needs. When the purchasing agent needs to reorder wood, glass, or metal pieces, the agent uses a low-cost strategy to choose which supplier to purchase parts from. Recently the Smiths noticed that customers are not getting their products on time due to stockouts in the factory. In addition, customers have been complaining about a lot of incorrect charges on their accounts.

When the company started, the Smith family devoted most of its time to designing quality products and did not invest much time into its accounting practices or computer technology. The Smiths use only low-level technology to facilitate their normal operations.

At first, the Smith family thought the company was unprofitable because it spent a lot of money on product design and branding, but now that it has remained unprofitable even with the sales increase, the family is questioning whether there is something wrong with its business structure. Therefore, they hired a consulting firm.

Sales Processing System

Bella Windows Co. sales process begins when the customer calls to place an order with the sales representative. The sales representative keys the information into a terminal, which automatically performs a credit check by looking into the customer's account history. After the credit is approved, the sales order is prepared. The representative prepares a stock release and sends it to the warehouse; and a packing slip, a shipping notice, a file copy, and an invoice, and sends them to the shipping department. A copy of the customer order is also filed.

The warehouse is located in a lot separate from the factory. There is an alarm system in place, but it has been malfunctioning for the past three months. The supervisor, who frequently travels, has not called in the problem yet. Inside, the warehouse clerk uses the stock release to pick up the goods to send to the carrier and updates the direct access inventory account file.

After updating the account, a clerk prepares a journal voucher and sends it to the accounting department. The warehouse clerk then places the stock release in a file.

The shipping department uses the packing slip to create two copies of the bill of lading and completes the packing slip to send to the carrier. The clerk uses the shipping notice to update the direct access shipping log. (The copy file of the shipping notice will be filed.) The clerk also updates the direct access sales journal and prepares a journal voucher. The journal voucher is sent to the accounting department, and the invoice is sent to the customer. The accounting department uses the sales journal voucher to update the direct access account receivable subsidiary ledger and prepares an account receivable summary. The account receivable summary, along with the inventory journal voucher, is used to post to the general ledger and then filed into a control accounts file.

Cash Receipt System

The cash receipt system begins when the customer sends the check and the remittance advice to the mailroom. The mailroom clerk has sole responsibility to reconcile the two documents and prepares three remittance lists in his assigned computer terminal. Because he has worked for the Smiths for many years, there is limited verification on his duties. The check and a remittance list are sent to the cash receipts department to process. The remittance advice and remittance list are sent to the accounting department. A copy of the remittance list is filed.

The cash receipt clerk uses the check and remittance list and inputs this data in order to process the cash receipt. The clerk prepares three deposit slips. Two deposit slips, along with the check, are sent to the bank, and the third deposit slip is filed, along with the remittance list. The clerk updates the direct access cash-receipt journal and prepares a journal voucher to send to the accounting department.

The accounting department uses the remittance advice and the remittance list to update the direct access account receivable subsidiary ledger through the use of a computer terminal, and prepares the account receivable summary. Both the remittance advice and remittance list are filed. The account receivable summary, along with the cash receipt journal voucher, is used to post to the general ledger, which is stored on magnetic tape. After the posting, the summary and voucher are filed into a control accounts file.

Definitions

Transaction Authorization - Use to ensure that employees are carrying out only authorized transactions

Segregation of Duties - In manual system seperates the custody of the asset, authorization of the transaction, and recording of transaction In computerized systems, seperation between program coding, processing and maintenance

Supervision- A compensation for lack of segregation; some are built into computer systems

Accounting records - provides an audit trail Access Control - helps to safeguard assets by restricting physical access to them

Independent Verification - reviewing batch totals or reconciling subsidiary accounts with control accounts