Create a data flow diagram of the current system. Create a system flowchart of the current system. Analyze the internal control weaknesses in the system. Model your response according to the six categories of physical control activities specified in the COSO internal control model.
Smith’s Market (Small Business Cash Sales Accounting System)
In 1989 Robert Smith opened a small fruit and vegetable market in Bethlehem, Pennsylvania. Originally Smith sold only produce grown on his family farm and orchard. As the market’s popularity grew, however, he added bread, canned goods, fresh meats, and a limited supply of frozen goods. Today Smith’s Market is a full-range farmers’ market with a strong local customer base. Indeed, the market’s reputation for low prices and high quality draws customers from other Pennsylvania cities and even from the neighboring state of New Jersey. Currently Smith’s has 40 employees. These include sales staff, shelf stockers, farm laborers, shift supervisors, and clerical staff. Recently Smith has noticed a decline in profits and sales, while his purchases of products for resale have continued to rise. Although the company does not prepare audited financial statements, Robert Smith has commissioned your public accounting firm to assess his company’s sales procedures and internal controls. Smith’s Market expenditure cycle procedures are described below:
Expenditure Cycle
The expenditure cycle begins in the warehouse adjacent to the market where Smith’s keeps their inventory of nonperishable goods such as canned goods and paper products. They also maintain a one-day inventory of produce and other perishable products in the warehouse where they can quickly restock the shelves when necessary. At close of business each evening the warehouse clerk reviews the market shelves for items that need to be replenished. The clerk restocks the shelves and adjusts the digital stock records accordingly from the warehouse PC. At this time the clerk takes note of what needs to be reordered from the suppliers and prints purchase orders from the PC. Depending upon the nature of the product and urgency of the need, the clerk either mails the purchase order to the supplier or orders by phone. Phone orders are followed up by faxing the purchase order to the supplier.
When the goods arrive from the vendor the warehouse clerk reviews the packing slip, restocks the warehouse shelves, and updates the stock records from the PC. At the end of the day the clerk prepares a hard-copy purchases summary from the PC and sends it to the treasury clerk for posting to general ledger.
The vendor’s invoice is sent to the accounting clerk. She examines it for correctness and files it in a temporary file until it is due to be paid. The clerk reviews the temporary file daily looking for invoices to be paid. Using the accounting department PC, the clerk prints a check and records it in the digital check register. She then files the invoice and mails the check to the supplier. At the end of the day she prints a hard-copy journal voucher from the PC, which summarizes the day’s cash disbursements, and sends it to the treasury clerk for posting to the general ledger.
Using the department PC, the treasury clerk posts the journal voucher and purchases summary information to the appropriate general ledger accounts.
Required
- Create a data flow diagram of the current system.
- Create a system flowchart of the current system.
- Analyze the internal control weaknesses in the system. Model your response according to the six categories of physical control activities specified in the COSO internal control model.
- Describe the IT control that should be in place in this system.
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