Accounting Information Systems 8th Edition by James Hall

Exercise 6

WALKER BOOKS, INC. (STAND ALONE PC SYSTEM WITH MANUAL PROCEDURES) (Prepared by Matt Wisser, Lehigh University)
Walker Books, Inc., is a fast-growing US book distributor. Established in 1981 in Palo Alto, California, Walker Books was originally a side project of founder and current president Curtis Walker, who at the time was employed by a local law firm. Because reading was much more than just a hobby of his, he decided to use some of his savings to buy an abandoned restaurant and convert it into a neighborhood bookstore, mainly selling used books that were donated or obtained from flea markets. When the doors first opened, Walker's wife, Lauren, was the only employee during the week, and Curtis worked weekends. At the end of the first fiscal year, Walker Books had grossed $20,000 in sales.
As the years passed, Curtis Walker quit the law firm and began concentrating fully on his bookstore. More employees were hired, more books were traded in, and more sales were attained each year that passed. During the mid-1990s, however, Walker was faced with two problems: many large, upscale bookstores were being built in the area, and the use of the Internet for finding and ordering books was becoming cheaper and more popular for current customers. In 1995, Walker's sales started to decline. Deciding to take a risk because of the newfound competition, he closed his doors to the neighborhood, invested more money to expand the current property, and transformed his company from simply selling used books to being a distributor of new books. His business model was to obtain books from publishers at a discount, store them in his warehouse, and resell them to large bookstore chains.
Walker Books, Inc., has rapidly increased its business. Although still at the original location in Palo
Alto, California, the company distributes books to all 50 states, and because of that, it now sees gross sales of about $105,000,000 per year. When Mr. Walker is asked about his fondest memory, he always responds that he will never forget how the little bookstore, with two employees, has expanded to now have more than 145 employees.
Under his current business model, all of Walker's customers are large-chain bookstores who themselves see many millions of dollars in revenue per year. Some of these customers, however, are now experiencing problems with Walker Books that threaten their business relationship. Such problems as books being ordered but not sent, poor inventory management by Walker causing stock-outs, and the inability of Walker to provide legitimate documentation of transactions have become common.
One potential source of these problems rests with Walker's antiquated accounting system, which is a combination of manual procedures supported by stand-alone PC work stations. These computers are not networked and cannot share data between departments. All interdepartmental communication takes place through hard-copy documents.
You have been hired as an independent expert to express an opinion on the appropriateness of Walker Books' business processes and internal controls. The revenue cycle is described below:
Revenue Cycle
SALES ORDER PROCESSING SYSTEM. The sales order process begins when a customer calls in his or her order to an experienced sales representative, who then manually transcribes the necessary customer information, ISBN, and quantity and type of books requested onto a formal customer order document. Because of recent problems the company has been having with uncollectable accounts, Walker Books has set up a computer terminal in the department for the sales representative to check the customer's credit with an online credit bureau. If the credit rating falls below the sales representative's expectations, the transaction is disallowed; if the sales representative concludes, however, that the credit rating is acceptable, he proceeds to manually prepare five hard copies of the sales order.
Once prepared, one copy of the sales order is sent over to the warehouse to be used as the stock release. Another copy of the sales order, the shipping notice, is sent to the shipping department. Two of the copies (invoice and ledger copies) are sent to the billing department, and the final copy of the sales order is stapled to the corresponding customer order, which is then filed in the sales department. Once the documents are sent to their designated locations, the sales representative updates the digital sales journal from the department PC to record the transaction. At the end of the day the sales representative prints a hardcopy journal voucher and sends it to the general ledger department.
When the warehouse clerk receives the stock release copy, he reviews the document for clerical accuracy. He then records the appropriate decrease in inventory in the digital inventory subsidiary ledger from the PC located in the warehouse. He then picks the goods and sends them and the stock release document to the shipping department. At the end of the day, the warehouse clerk prints a hard-copy account summary from the PC, which he sends to the general ledger department.
The shipping clerk receives the shipping notice from the sales department, and the stock release and goods from the warehouse. The clerk reconciles the documents with the books being shipped and, if all is correct, the clerk creates a digital bill of lading record using the shipping department PC. The computer automatically prints out a hard-copy packing slip and bill of lading, which accompany the goods to the carrier. The shipping notice is then sent to the billing department, and the stock release is filed in the shipping department.
The billing department clerk receives the customer invoice and ledger copy of the sales order from the sales department and the shipping notice from the shipping department. The billing clerk then adds prices and other charges to the invoice, which she sends to the customer. The clerk files the shipping notice in the department and sends the ledger copy to the accounts receivable department.
The clerk in the AR department receives ledger copy of the sales order and uses it to update the digital AR subsidiary ledger. The clerk then files the ledger copy in the department. At the end of the day, the AR clerk prints an account summary from the department PC and sends it to the general ledger department.
Upon the receipt of the journal vouchers and the AR summary, the general ledger department clerk reconciles the documents and updates the appropriate control accounts in the digital general ledger via his PC. The documents are then filed in the department.
Cash Receipts System
The cash receipts process begins in the mail room, which is staffed with many employees who have the responsibility of receiving and opening both routine mail (catalogs, advertisements) and mail containing customer payments. Each mail clerk opens the envelope and separates the check and remittance advice. The clerk reconciles the two and then manually adds each receipt to a common remittance list. When all customer payments have been so processed, the finished remittance lists and the associated checks are sent to the cash receipts department. The remittance advices are sent to the accounts receivable department.
The cash receipts clerk receives the checks and the remittance list, which he reconciles. At that time he endorses each check "For Deposit Only" and records it in the digital cash receipts journal. He then sends the signed checks and remittance list to the accounts receivable department. At the end of the day, the clerk prints a hard-copy journal voucher from the department PC and sends the voucher to the general ledger department.
The AR clerk receives the remittance advices, the checks, and the remittance list. He reconciles them and posts the amounts received to the customer accounts in the AR subsidiary ledger. The clerk files the remittance advices and the remittance list in the department. He next prepares a deposit slip and sends it, along with the checks, to the bank. Finally, the clerk prints a hard-copy account summary, which he sends to the general ledger department.
The general ledger department receives the account summary and the journal voucher from the AR department and cash receipts, respectively. The clerk reviews the two documents and updates the control accounts in the general ledger via the department PC. Finally, the clerk files the account summary and journal voucher 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 physical 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.
d. Describe the IT controls that should be in place in this system.
e. (Optional) Prepare a system flowchart of a redesigned computer-based system that resolves the control weaknesses that you identified. Explain your solution.