Name: Glenndel Rosauro Course & Year: BSA 2

Teacher: Mr. Bernie I. Mullon, CPA Subject & Schedule: ACCTG 221(5:00-6:30PM MW)

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.

Answer:

The following situations above represent proper segregation of functions except for the letter b, which 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. The sales department shouldn't have the authority to approve credit memos since it might
overestimate sales in one period to fulfill quotas and raise allowances and then reverse them in another time period where they
already met. The source document for credit memos should be the receiving report confirming that returned products have been
received by the receiving department, and it should be approved by a party outside of the sales department.
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.

Sales Department Warehouse Data Processing Shipping Department Billing Department

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 up the open sales order so that the sales to be restored before the goods are eventually distribution.

Supervision:

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

Purchasing Inventory Control Computer Center Receiving Accounts Paybale Cash Disbursement
Department Department
The redesigned computer-based system that would resolves the control weaknesses should consist following measures:

 The inventory control system with the fiunctions of preparing purchase requisition and maintaining inventory of subsidiary
ledger.
 The general ledger departent 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.