Camila Restituyo

20-0581

Examen final

5. CMA 688 5–2

Internal Controls

Jem Clothes, Inc., is a 25-store chain concentrated in the northeastern United States that sells ready-to-wear
clothes for young men and women. Each store has a full- time manager and an assistant manager, both of
whom are paid a salary. The cashiers and sales personnel are typically young people working part-time who
are paid an hourly wage plus a commission based on sales vol- ume. The accompanying flowchart for
Problem 5 depicts the flow of a sales transaction through the organization of a typical store. The company
uses unsophisticated cash registers with four-part sales invoices to record each transaction. These sales
invoices are used regardless of the payment type (cash, check, or bank card).

On the sales floor, the salesperson manually records his or her employee number and the transaction (clothes,
class, description, quantity, and unit price), totals the sales invoice, calculates the discount when appropriate,
calculates the sales tax, and prepares the grand total. The salesperson then gives the sales invoice to the
cashier, retaining one copy in the sales book.

The cashier reviews the invoice and inputs the sale. The cash register mechanically validates the invoice,
automatically assigning a consecutive number to the transaction. The cashier is also responsible for getting
credit approval on charge sales and approving sales paid by check. The cashier gives one copy of the invoice
to the customer and retains the second copy as a store copy and the third for a bank card, if a deposit is
needed. Returns are handled in exactly the reverse manner, with the cashier issuing a return slip.

At the end of each day, the cashier sequentially orders the sales invoices and takes cash register totals for
cash, bank card, and check sales, and cash and bank card returns. These totals are reconciled by the assistant
manager to the cash register tapes, the total of the consecutively numbered sales invoices, and the return slips.
The assistant manager prepares a daily reconcilia- tion report for the store manager’s review.

The manager reviews cash, check, and bank card sales and then prepares the daily bank deposit (bank card
sales invoices are included in the deposit). The manager makes the deposit at the bank and files the validated
deposit slip.

The cash register tapes, sales invoices, and return slips are forwarded daily to the central data processing
depart- ment at corporate headquarters for processing. The data processing department returns a weekly sales
and com- mission activity report to the manager for review.

Required

1. Identify six strengths in the Jem Clothes system for controlling sales transactions.
2. For each strength identified, explain what problem(s) Jem Clothes has avoided by incorporating the
strength in the system for controlling sales transactions.

Use the following format in preparing your answer.

3. ABE Plumbing, Inc. (Centralized Small

Business Accounting System)

ABE Plumbing, Inc., opened its doors in 1979 as a wholesale supplier of plumbing equipment, tools, and
parts to hardware stores, home-improvement centers, and professional plumbers in the Allentown-Bethlehem-
Easton metropolitan area. Over the years they have expanded their operations to serve customer across the
nation and now employ over 200 people as technical representatives, buyers, warehouse workers, and sales
and office staff. Most recently ABE has experienced fierce competition from the large online discount stores
such as Harbor Freight and Northern Supply. In addition the company is suffering from operational inef-
ficiencies related to its archaic information system. ABE’s expenditure cycle procedures are described in the
following paragraphs.

Expenditure Cycle

ABE uses a centralized accounting system for managing inventory purchases and recording transactions. The
system is almost entirely paperless. Each department has a computer terminal that is networked to the ‘‘Pur-
chases/Accounts Payable System’’ that is run from a small data processing department. All accounting
records are maintained on centralized computer files that are stored on a file server in the data processing
department.

Purchasing

The process begins in the purchasing department. Each morning the purchasing agent reviews the inventory
lev els from his department terminal and searches for items that have fallen to their reorder points and need to
be replenished. The purchasing agent then selects the ven- dors and creates digital purchase orders in the
purchase order file. He then prints two hard copies of each pur- chase order and sends them to the respective
vendors.

Receiving

When the items are received, the receiving department clerk reconciles the goods with the attached packing
slip and the digital purchase order, which he accesses from his computer terminal. The clerk then creates a
digital receiving report, stating the condition of the materials received. The system automatically closes the
purchase order previously created by the purchasing agent. In addition, the receiving clerk prints a hard copy
of the receiving report, which he sends with the inventory to the warehouse where the items are stored.

Warehouse
Upon receipt of the inventory, the warehouse clerk rec- onciles the items with the receiving report and
updates the inventory subsidiary ledger. The accounting system automatically and immediately updates the
inventory control account in the general ledger.

Accounts Payable

Once the accounts payable clerk receives the vendor’s invoice, she reconciles it with the purchase order and
receiving report from her terminal. The clerk then cre- ates a digital cash disbursement voucher record and
sets a due date for payment. The system automatically updates the AP control account in the general ledger.
Daily, the accounts payable clerk reviews the open cash disbursement voucher records from her terminal
looking for items that need to be paid. The clerk then creates a record for the payment in the digital check
register and closes the open cash disbursement voucher. Finally, the clerk prints a hard copy of the check and
sends it to the vendor. The system automatically updates the accounts payable and cash general ledger
accounts.

Required

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

2. Create a system flowchart of the existing system.

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

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