Chapter 7, Problem 1ICC

Internal Control Cases

UTICA LIGHTING COMPANY (CENTRALIZED SYSTEM WITH DISTRIBUTED TERMINALS)

Utica Lighting Company (ULC) is a manufacturer of outdoor lighting systems for patios, walkways, and public areas. It markets its product to landscaping companies and local municipalities. ULC employs a centralized computer system with distributed terminals in the various departments. Recently the company has been having manufacturing delays and cost overruns. ULC has hired your auditing firm to assess its operations and internal control procedures.

ULC’s conversion cycle is triggered by a report from the finished goods warehouse. The warehouse clerk periodically reviews the inventory records in a search for low-stock items. When the quantity on hand of an inventory item in the finished goods warehouse falls below its pre-established minimum, the warehouse clerk sends a digital inventory status report from the warehouse terminal to production planning and control advising them to schedule a production batch run for the item in question.

Upon receipt of the report the production planning and control department clerk accesses the digital bill of materials and the routing sheet files for the items to be produced and adds the production details to the digital production schedule. The system automatically adds a record to the open work order file and sends a digital work order to the work center supervisor’s terminal and to the cost accounting clerk’s terminal.

The work center supervisor accesses the work order from his terminal and prints hard-copy move tickets and material requisitions for each stage in the production process. Production employees take the materials requisitions to the storekeeper and secure the components, subassemblies, and raw materials needed to perform their production tasks. If excess materials beyond the standard amount are needed, the supervisor prepares additional materials requisitions. The employees also complete job time tickets after each stage in the process to reflect the time spent on the job. When the employees complete their tasks, they send the move tickets and time tickets to the cost accounting department.

The storekeeper receives the materials requisitions and releases the materials into production. He then updates the raw material inventory records and sends the requisition to cost accounting. When inventories of component parts and raw materials fall to their reorder points, the storekeeper prepares purchase orders and sends them to the respective vendors. Vendors deliver raw material inventories directly to the storeroom, at which time the storeroom clerk inspects them and updates the digital raw materials subsidiary ledger. Each day the storekeeper prepares a journal voucher and posts to the general ledger raw material control account.

The cost accounting clerk receives the digital work order and initiates a new WEP account for the batch. During the production process, the clerk receives hard-copy move tickets, materials requisitions, and job tickets from the work centers, which the clerk uses to update WIP account. When production is complete, the clerk closes the WIP account for the batch and transfers it to the finished good inventory subsidiary ledger.

At the day’s end, the cost accounting clerk prepares a digital journal voucher reflecting the WIP status and any transfers from WIP to finished goods inventory. The clerk then posts the journal voucher to the WEP and FG general ledger control accounts.

Required

1. a. Prepare a data flow diagram of the current system.
2. b. Prepare a system flowchart of the existing system.
3. c. Describe the internal control weaknesses.