SMITH’S MARKET (SMALL BUSINESS 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 andorchard. 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-rangefarmers’ market with a strong local customer base. Indeed, the market’s reputation forlow prices and high quality draws customers from other Pennsylvania cities and evenfrom the neighboring state of New Jersey. Currently Smith’s has 40 employees. Theseinclude sales staff, shelf Stockers, farm laborers, shift supervisors, and clerical staff.Recently, Smith has noticed a decline in profits and sales, while his purchases ofproducts for resale have continued to rise. Although the company does not prepareaudited financial statements, Robert Smith has commissioned your public accountingfirm to assess his company’s sales procedures and internal controls. Smith’s marketexpenditure cycle procedures are described below.Expenditure CycleThe expenditure cycle begins in the warehouse adjacent to the market, where Smith’skeeps its inventory of nonperishable goods such as canned goods and paper products.The company also maintains a one-day inventory of produce and other perishableproducts in the warehouse so clerks can quickly restock the shelves when necessary.At close of business each evening, the warehouse clerk reviews the market shelves foritems that need to be replenished. The clerk restocks the shelves and adjusts thedigital stock records accordingly from the warehouse PC. At this time, the clerk takesnote of what needs to be reordered from the suppliers and prints purchase ordersfrom the PC. Depending upon the nature of the product and urgency of the need, theclerk either mails the purchase order to the supplier or orders by phone. Phone ordersare followed up by faxing the purchase order to the supplier. When the goods arrivefrom the vendor, the warehouse clerk reviews the packing slip, restocks thewarehouse shelves, and updates the stock records from the PC. At the end of the daythe clerk prepares a hard-copy purchases summary from the PC and sends it to thetreasury clerk for posting to general ledger. The vendor’s invoice is sent to the accounting clerk. She examines it for correctnessand files it in a temporary file until it is due to be paid. The clerk reviews thetemporary file daily, looking for invoices to be paid. Using the accounting departmentPC, the clerk prints a check and records it in the digital check register. She then filesthe invoice and mails the check to the supplier. At the end of the day she prints a hardcopy 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 purchasessummary information to the appropriate GL accounts.Requireda. Create a data flow diagram of the current system.b. Create a system flowchart of the current system.c. Analyze the physical internal control weaknesses in the system. Model yourresponse according to the six categories of physical control activities specified inthe Committee of Sponsoring Organizations of the Treadway Commission(COSO) internal control model.d. Describe the IT controls that should be in place in this system.
SMITH’S MARKET (SMALL BUSINESS 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 its inventory of nonperishable goods such as canned goods and paper products.
The company also maintains a one-day inventory of produce and other perishable
products in the warehouse so clerks 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 hardcopy 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 GL accounts.
Required
a. Create a data flow diagram of the current system.
b. Create a system flowchart of the current system.
c. Analyze the physical internal control weaknesses in the system. Model your
response according to the six categories of physical control activities specified in
the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) internal control model.
d. Describe the IT controls that should be in place in this system.
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