Bait 'n Reel was established in 1983 by Jamie Roberts, an avid fisherman and environmentalist. Growing up in Pennsylvania's Pocono Mountains region, Roberts was lucky enough to have a large lake right down the road, where he found himself fishing throughout the year. Unfortunately, he had to drive more than 15 miles to purchase his fishing supplies, such as lines, hooks, and bait, among other things. Throughout his early adulthood, Roberts frequently overheard other fishermen vocalizing their displeasure at not having a local fishing store to serve their needs. Because of this, Roberts vowed to himself that he would open his own store if he could ever save up enough money. By 1983, he had sufficient funds and the opportunity arose when a local grocery store went up for sale. He purchased the building and converted it into the ‘‘Bait 'n Reel'' fishing store. His early business involved cash only transactions with local fishermen. By the mid- 1990s, however, the building expanded into a superstore that sold a wide range of sporting products and camping gear. People from all over the county shopped at Bait 'n Reel as Roberts increased his advertising efforts, emphasizing his ability to provide excellent service and the wide range of products.
Roberts moved away from a cash-only business and began offering store credit cards to consumers and became a regional wholesaler to many smaller sporting goods stores. With the help of a friend, Roberts also installed a computer network. Although these computers did help to automate the company's business processes and facilitated the sharing of data between departments, much interdepartmental communication continued to be via hard-copy documents. Revenue increased sharply during the four years after the implementation of the computer system. In spite of this, Roberts had some questions about the quality of processes, as many of the subsidiary accounts did not match the general ledger control accounts. This didn't prove to be a material problem, however, until recently when the computers began listing supplies on hand that were not actually on the shelves. This created problems as customers became frustrated by stock-outs. Roberts knew something was wrong, but he couldn't put his finger on it.
You have been hired by Roberts to evaluate Bait 'n Reel's processes and internal controls and make recommendations for improvement. Bait 'n Reel's revenue cycle relating to the credit-based wholesale portion of the business is described in the following paragraphs. Revenue Cycle Sales Order Processing Procedures Wholesale customer orders are mailed or faxed to the sales department. When the order is received the sales clerk checks the customer's creditworthiness from a computer terminal. After the customer's credit is verified, the clerk then keys in the sales orders into his computer terminal. A digital copy of the order is distributed to the warehouse and the shipping department terminals for further processing. The computer system automatically records the sale in the sales journal. Finally, the clerk files the hard copy of the customer order in the sales department. Prompted by receipt of the digital sales order, the warehouse manager prints out two copies of it: the stock release and a shipping notice. Using the stock release copy, the warehouse clerk picks the selected goods from the shelves. The goods, accompanied by both documents, are sent to the shipping department. The manager then updates the inventory subsidiary ledger and the general ledger from his computer terminal. Once the shipping clerk receives the goods, the stock release, and the shipping notice, he matches them to the corresponding digital sales order from his terminal.
Assuming everything matches, he prints out three hard copies of the bill of lading and a packing slip. Two of the bill of lading copies and the packing slip are sent, along with the goods, to the carrier. The stock release copy and the shipping notice are sent to the accounts receivable department. The third bill of lading copy is filed in the shipping department. When the accounts receivable clerk receives the stock release and shipping notice he manually creates a hard-copy invoice, which is immediately mailed to the customer. After mailing the invoice, the clerk goes to his terminal and updates the accounts receivable subsidiary ledger and general ledger from the information on the stock release. After the records are updated, the clerk files the stock release and shipping notice in the accounts receivable department. Cash Receipts Procedures Customer payments come directly to the general mail room along with other mail items.
The mail clerk sorts through the mail, opens the customer payment envelope, removes the customer's check and remittance advice, and reconciles the two documents. To control the checks and remittance advices the clerk manually prepares two hard copies of a remittance list. He sends one copy to the accounts receivable department along with the corresponding remittance advices. The other copy of the remittance list accompanies the checks to the cash receipts department. Once the checks and remittance list arrive in the cash receipts department, the treasurer reconciles the documents, signs the check, and manually prepares three hard copies of the deposit slip. He then updates the cash receipts journal and the general ledger on his computer terminal. Next the treasurer sends checks and two copies of the deposit slip are sent to the bank. Finally, he files the third copy of the deposit slip and the remittance in the department.
When the accounts receivable clerk receives the remittance list and remittance advices from the mail room, he reconciles the two documents. Then, from his terminal, he updates the accounts receivable subsidiary ledger and the general ledger. Finally, the two documents are filed in the department.
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 SAS 78/COSO.
d. Prepare a system flowchart of a redesigned computer-based system that resolves the control weaknesses you identified. Explain your solution.