Name: Argallon, Glydel M. Instructor: Mr. Bernie I.

Mullon, CPA
Course and section: BSA 2 Subject: ACCTG 221(3:00-4:30pm TTH)

Problem 1.

Which, if any, of the following situations represent improper segregation of functions? (Please provide
an explanation for your answer)

a. The billing department prepares the customers’ invoices, and the accounts receivable department
posts to the customers’ accounts.

b. The sales department approves sales credit memos as the result of product returns, and subsequent
adjustments to the customer accounts are performed by the accounts receivable department.

c. The shipping department ships goods that have been retrieved from stock by warehouse personnel.

d. The general accounting department posts to the general ledger accounts after receiving journal
vouchers that are prepared by the billing department.

"Segregation of functions" means dividing the functions among the different individuals or departments
of the organization. The advantage of segregation of functions is that single individual or department
cannot control the one function from the starting to the end.

The improper segregation of functions is:

Correct Answers:
d)The general accounting department posts to the general ledger accounts after receiving journal
vouchers that are prepared by the billing department because journal voucher is not prepared by billing
department.
Incorrect Answers:
a) The billing department prepares the customers' invoices, and the accounts receivable department
posts to the customers' accounts.
b) The sales department approves sales credit memos as the result of product returns, and subsequent
adjustments to the customer accounts are performed by the accounts receivable department.
c)The shipping department ships goods that have been retrieved from stock by warehouse personnel.
PROBLEM 2

Revenue Cycle

ABE’s sales department consists of 17 full-time and part-time employees. They receive orders via
traditional mail, e-mail, telephone, and the occasional walk-in. Because ABE is a wholesaler, the vast
majority of its business is conducted on a credit basis. The process begins in the sales department,
where the sales clerk enters the customer’s order into the centralized computer sales order system. The
computer and file server are housed in ABE’s small data processing department. If the customer has
done business with ABE in the past his or her data are already on file. If the customer is a first-time
buyer, however, the clerk creates a new record in the customer file. The system then creates a record of
the transaction in the open sales order file. When the order is entered, an electronic copy of it is sent to
the customer’s e-mail address as confirmation.

A clerk in the warehouse department periodically reviews the open sales order file from a terminal
and prints two copies of a stock release document for each new sale, which he uses to pick the items
sold from the shelves. The warehouse clerk sends one copy of the stock release to the sales department
and the second copy, along with the goods, to the shipping department. The warehouse clerk then
updates the inventory subsidiary file to reflect the items and quantities shipped. Upon
receipt of the stock release document, the sales clerk accesses the open sales order file from a terminal,
closes
the sales order, and files the stock release document in the sales department. The sales order system
automatically posts these transactions to the sales, inventory control, and cost-of-goods sold accounts in
the general ledger file.
Upon receipt of the goods and the stock release, the shipping department clerk prepares the goods for
shipment to the customer.

The clerk prepares three copies of the bill of lading. Two of these go with the goods to the carrier
and the third, along with the stock release document, is filed in the shipping department. The billing
department clerk reviews the closed sales orders from a terminal and prepares two copies of the sales
invoice. One copy is mailed to the customer and the other is filed in the billing department. The clerk
then creates a new record in the account receivable subsidiary file. The sales order system automatically
updates the account receivable control account in the general ledger file. ABE has hired your public
accounting firm to review its sales order procedures for internal control compliance and to make
recommendations for changes.

Required:

a. Create a data flow diagram of the current system.

b. Create a system flowchart of the existing system.

c. Analyze the internal control weaknesses in the system. Model your response according to the six
categories of physical control activities specified in the SAS 78/COSO control model.
d. Prepare a system flowchart of a redesigned computer-based system that resolves the control
weaknesses that you identified. Explain your solution.

Answers

a. Create a data flow diagram of the current system

b. Create a system flowchart of the existing system

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

Transaction Authorization:

➢ The Sales Clerk closes the open sales order, allowing the sales to be restored before the goods
are distributed.

Supervision:

➢ The warehouse clerk has asset custody and shall not hold stock records as well that.

Accounting Records:

➢ Before the goods are transported the customer is payable. Shipping notification can generate
statement. Alternatively, the customer’s receipt is printed out of the closed selling order ready
for the transportation of the goods.

Access Control:

➢ No credit is being carried out

Independent Verification:

➢ In way of the original order, the shipping clerk does not combine stock release. This promotes
the inappropriate goods and the quantity to be transported.

d. Prepare a system flowchart of a redesigned computer-based system that resolves the control
weaknesses that you identified. Explain your solution.

The redesigned computer-based system that would resolves the control weaknesses should consist
following measures:

➢ The inventory control system with the functions of preparing purchase requisition and
maintaining inventory of subsidiary ledger.
➢ The general ledger department for the reconciliation of the journal voucher and the summary
report. The department also maintaining the general ledger accounts.
➢ The inspection of inventory items received should be carried forward with use of blind copy of
purchase order.

The redesigned computer-based system should constitute of IT controls including multilevel security,
password protections, and automated processes for better efficiency and improved control.