Accounting Information Systems 8th Edition by James Hall

Exercise 15

Bait 'n Reel Superstore (Combination Networked Computers and Manual System) (Prepared by Matt Wisser, Lehigh University)
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 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, Jamie 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 a wide range of products. Roberts moved away from a cash-only business, 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. Even though 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 expenditure cycle is described in the following paragraphs.
Expenditure Cycle
Purchases System
The process begins when the purchasing manager checks the inventory subsidiary ledger on his computer terminal each morning. When inventory is deemed to be too low, he reviews the valid vendor file, also from his terminal, to select vendors for items to be purchased. Once a vendor is found, the clerk prepares a digital purchase order and prints two hard copies. One copy is sent to the vendor immediately, while the other is filed in the department. Immediately after this event, the digital purchase order is sent to terminals in the receiving and accounts payable departments.
When the goods arrive in the receiving department, the receiving clerk inspects them and reconciles the items to the information in the digital purchase order. If everything looks correct, the clerk manually prepares two hard copies of the receiving report. One of these copies accompanies the goods to the inventory control/storage department, where the clerk shelves the goods and update the inventory subsidiary account from his terminal. The clerk then files the receiving report in the department. The other copy of the receiving report is sent to the accounts payable department.
Upon receipt of the receiving report, the accounts payable clerk visually matches it to the respective digital purchase order from his terminal. He then updates the AP subsidiary ledger from his terminal to reflect the transaction. The clerk temporarily files the receiving report until the invoice arrives from the vendor. Typically, vendors provide a photocopy of the original purchase order along with the invoice so any discrepancies can immediately be identified. When the accounts payable clerk receives the invoice and purchase order copy, he pulls the receiving report from the temporary file and reconciles the three documents. At this time, the clerk updates the GL accounts payable control and the inventory control records from his terminal. The clerk then sends the invoice, receiving report, and the purchase order copy to the cash disbursements department.
Cash Disbursements System
Upon receipt of the documents from the accounts payable department, the cash disbursements clerk prepares a check for the invoiced amount. Once this is completed, he updates the check register, accounts payable subsidiary account, and the general ledger from his terminal. The AP packet and the check are sent to the assistant treasurer. The treasurer then signs the check, which is immediately sent to the vendor for payment. The invoice, purchase order copy, receiving report, and check copy 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 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.