Accounting Information Systems 8th Edition by James Hall

Exercise 17

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 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 workstations. 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 consultant to express an opinion on the appropriateness of Walker Books' business processes and internal controls. The expenditure cycle is described below.
Expenditure Cycle
Purchases System
The purchases process begins with the purchasing agent, who monitors the levels of books available via a computer terminal listing current inventory. Upon noticing deficiencies in inventory levels, the agent manually generates four hard copies of a purchase order: one is sent to accounts payable, one is sent to the vendor, one is sent to the receiving department, and the last is filed within the department.
Vendors will generally ship the products within five business days of the order. When goods arrive in the receiving department, the corresponding packing slip always accompanies them. The receiving department clerk unloads the goods and reconciles the packing slip with the purchase order. After unloading the goods, the clerk manually prepares three hard copies of the receiving report. One copy goes with the goods to the warehouse, another is sent to the purchasing department, and the final copy is filed in the receiving department. In the warehouse, the copy is simply filed once the goods are stored on the shelves. In the purchasing department, the clerk receives this copy of the receiving report and files it with the purchase order.
When the accounts payable department receives the purchase order, it is temporarily filed until the vendor invoice arrives. Upon receipt of the invoice, the accounts payable clerk removes the purchase order from the temporary file and reconciles the two documents. The clerk then updates the digital AP subsidiary record from the department PC. Finally, the clerk files the purchase order and invoice in the open accounts payable file in the department. At the end of the day, the clerk prints a hard-copy AP summary and sends it to the general ledger department.
Once the general ledger department receives the AP summary, the clerk examines it for any obvious errors and then updates the appropriate general ledger accounts from the department PC.
Cash Disbursements System
The accounts payable clerk periodically reviews the AP subsidiary ledger for liabilities that are due. To maximize returns on invested cash yet still take advantage of vendor discounts, the clerk pulls the invoice two days before its applicable due date. Upon finding an item due for payment, the clerk manually prepares a check for the amount due per the invoice. The AP clerk then updates AP subsidiary ledger. The check number, dollar amount, and other pertinent data are manually recorded in the hard-copy check register, and the check is sent to the cash disbursements department. Finally, the invoice is discarded as it no longer has any relevant information that hasn't already been recorded elsewhere.
When the cash disbursements clerk receives the unsigned check, she examines it; because she is familiar with all of the vendors with whom Walker deals, she can identify any false vendors or any payment amounts that seem excessive. Assuming everything appears in order, she signs the check using a signature block that displays the name of the assistant treasurer, Tyler Matthews. Only Matthews' signature can validate a vendor check. The cash disbursements clerk then photocopies the check for audit trail purposes.
Once the check is signed, it is sent directly to the supplier. The photocopy of the check is marked as paid and then filed in the cash disbursements department. The clerk then creates a hard-copy journal voucher, which is sent to the general ledger department. Once the general ledger department receives the journal voucher, the clerk examines it for any obvious errors and then updates the relevant GL accounts from the department PC.
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.