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CLASSIC RESTORATIONS (MANUAL AND STAND-ALONE COMPUTER PROCESSING) Classic Restorations specializes in the sale of original and reproduction restoration parts for classic sports cars and muscle cars of the 1960s and 1970s. The classic car industry has grown significantly in recent years as the baby boomers age, become wealthier, and want to relive fond memories. Classic car sales and restoration is a multibillion dollar industry that employs more than 30,000 people in the United States. It is, however, a highly fragmented industry comprising many small businesses. Classic Restorations is headquartered in Los Angeles, California, and currently employs 95 full-time employees, including sales staff, sales representatives, and general office staff. Classic Restorations’ primary customer base consists of small restoration shops and classic car dealers on the west coast. The company sources many of its parts from abroad, but a growing percentage of these are now being manufactured in the United States. Classic Restorations has a legacy accounting system that employs a combination of manual procedures supported by stand-alone PCs in various departments. Recently, the company has experienced business inefficiencies that have been linked to its antiquated accounting system. You have been retained by Classic Restorations management to review their procedures for compliance with effective internal control standards. Classic Restorations’ expenditure cycle procedures are presented in the following paragraphs. Expenditure Cycle When the quantity on hand of a particular product falls to a low level, the warehouse clerk selects a vendor and manually prepares two hard copies of a purchase order. The clerk sends one copy of the purchase order to the vendor and the other to the receiving department. When the goods arrive from the vendor, the receiving clerk matches the packing slip in the shipment to the purchase order that the warehouse clerk had previously sent. If everything is in order, the receiving clerk signs the purchase order and sends it to the accounting department. The clerk then manually prepares a hard-copy receiving report, which he sends with the goods to the warehouse. From his department PC, the warehouse clerk uses the receiving report to update the inventory subsidiary ledger to reflect the receipt of the goods. Subsequently, the accounting department’s AP clerk receives the supplier’s invoice, which she matches and reconciles to the previously received purchase order from the receiving clerk. From her department PC, the AP clerk then updates the digital AP subsidiary ledger to reflect the new liability and records the event in the digital purchases journal. Cash Disbursements Procedures The AP clerk in the accounting department reviews the liabilities that are due by searching the AP subsidiary ledger from the department PC. The clerk then prints out a hard-copy cash disbursement voucher for each item due for payment. The clerk then sends a cash disbursement voucher to the cash disbursements department for payment. At the end of the day, the clerk prints a hard-copy AP summary from the department PC and sends it to the general ledger department. From his department PC, the cash disbursements clerk uses the cash disbursement voucher to record the payment in the digital check register and then prints a three-part check. The clerk signs the negotiable portion of the check and sends it to the vendor. One check copy is filed in the department, and the clerk sends the second check copy, along with the original cash disbursement voucher, to the accounting department AP clerk. At the end of the day, the clerk prints a hard-copy summary of the check register and sends it to the general ledger department. From the accounting department PC, the AP clerk uses the check copy and cash disbursement voucher to record the payment in the voucher register and to close out the liability in the AP subsidiary ledger. The clerk then files the hardcopy cash disbursement voucher and check copy in the department. From the department PC, the general ledger clerk posts the summaries received from the accounting and cash disbursement departments to the appropriate GL accounts. The clerk files the hard-copy summaries in the general ledger 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. d. (Optional) Prepare a system flowchart of a redesigned computer-based system that resolves the control weaknesses that you identified. Explain your solution.

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Accounting Information Systems

10th Edition
Hall + 1 other
Publisher: Cengage Learning,
ISBN: 9781337619202

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Chapter
Section
BuyFindarrow_forward

Accounting Information Systems

10th Edition
Hall + 1 other
Publisher: Cengage Learning,
ISBN: 9781337619202
Chapter 5, Problem 7ICC
Textbook Problem
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CLASSIC RESTORATIONS (MANUAL AND STAND-ALONE COMPUTER PROCESSING)

Classic Restorations specializes in the sale of original and reproduction restoration parts for classic sports cars and muscle cars of the 1960s and 1970s. The classic car industry has grown significantly in recent years as the baby boomers age, become wealthier, and want to relive fond memories. Classic car sales and restoration is a multibillion dollar industry that employs more than 30,000 people in the United States. It is, however, a highly fragmented industry comprising many small businesses. Classic Restorations is headquartered in Los Angeles, California, and currently employs 95 full-time employees, including sales staff, sales representatives, and general office staff. Classic Restorations’ primary customer base consists of small restoration shops and classic car dealers on the west coast. The company sources many of its parts from abroad, but a growing percentage of these are now being manufactured in the United States.

Classic Restorations has a legacy accounting system that employs a combination of manual procedures supported by stand-alone PCs in various departments. Recently, the company has experienced business inefficiencies that have been linked to its antiquated accounting system. You have been retained by Classic Restorations management to review their procedures for compliance with effective internal control standards. Classic Restorations’ expenditure cycle procedures are presented in the following paragraphs.

Expenditure Cycle

When the quantity on hand of a particular product falls to a low level, the warehouse clerk selects a vendor and manually prepares two hard copies of a purchase order. The clerk sends one copy of the purchase order to the vendor and the other to the receiving department. When the goods arrive from the vendor, the receiving clerk matches the packing slip in the shipment to the purchase order that the warehouse clerk had previously sent. If everything is in order, the receiving clerk signs the purchase order and sends it to the accounting department. The clerk then manually prepares a hard-copy receiving report, which he sends with the goods to the warehouse. From his department PC, the warehouse clerk uses the receiving report to update the inventory subsidiary ledger to reflect the receipt of the goods.

Subsequently, the accounting department’s AP clerk receives the supplier’s invoice, which she matches and reconciles to the previously received purchase order from the receiving clerk. From her department PC, the AP clerk then updates the digital AP subsidiary ledger to reflect the new liability and records the event in the digital purchases journal.

Cash Disbursements Procedures

The AP clerk in the accounting department reviews the liabilities that are due by searching the AP subsidiary ledger from the department PC. The clerk then prints out a hard-copy cash disbursement voucher for each item due for payment. The clerk then sends a cash disbursement voucher to the cash disbursements department for payment. At the end of the day, the clerk prints a hard-copy AP summary from the department PC and sends it to the general ledger department.

From his department PC, the cash disbursements clerk uses the cash disbursement voucher to record the payment in the digital check register and then prints a three-part check. The clerk signs the negotiable portion of the check and sends it to the vendor. One check copy is filed in the department, and the clerk sends the second check copy, along with the original cash disbursement voucher, to the accounting department AP clerk. At the end of the day, the clerk prints a hard-copy summary of the check register and sends it to the general ledger department.

From the accounting department PC, the AP clerk uses the check copy and cash disbursement voucher to record the payment in the voucher register and to close out the liability in the AP subsidiary ledger. The clerk then files the hardcopy cash disbursement voucher and check copy in the department.

From the department PC, the general ledger clerk posts the summaries received from the accounting and cash disbursement departments to the appropriate GL accounts. The clerk files the hard-copy summaries in the general ledger department.

Required

  1. a. Create a data flow diagram of the current system.
  2. b. Create a system flowchart of the existing system.
  3. c. Analyze the physical internal control weaknesses in the system.
  4. d. (Optional) Prepare a system flowchart of a redesigned computer-based system that resolves the control weaknesses that you identified. Explain your solution.

a.

To determine

Prepare a data flow diagram of the current system.

Explanation of Solution

Cash Disbursement System:

The cash disbursement system carries out the responsibility of processing the authorized payments due by organization for the purchase transactions. The prime objective of the system is to provide accurate due payments and at the reliable time to the valid creditors only.

Data flow diagram of the current system is given below:

b.

To determine

Prepare the system flowchart of the existing system.

c.

To determine

Explain the physical internal control weaknesses in the system.

d.

To determine

Create a system flowchart of a redesigned computer-based system that resolves the control weaknesses identified.

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Chapter 5 Solutions

Accounting Information Systems
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Ch. 5 - What is the purpose of the blind copy of a PO?Ch. 5 - Give one advantage of using a vouchers payable...Ch. 5 - What documents constitute the AP packet? What...Ch. 5 - In the basic technology system, the inventory...Ch. 5 - Discuss the importance of supervision controls in...Ch. 5 - The level of day-to-day department activity in...Ch. 5 - Discuss the following statement: even in advanced...Ch. 5 - What is central to a successful EDI...Ch. 5 - Discuss the objective of eliminating the receiving...Ch. 5 - What purpose does multilevel security control play...Ch. 5 - You are conducting an end-of-year audit. Assume...Ch. 5 - How does the general control area of systems...Ch. 5 - Which of the following statements is correct? a....Ch. 5 - Which of the following represents incompatible...Ch. 5 - Which document typically triggers the three-way...Ch. 5 - Which one of the following departments does not...Ch. 5 - Which control helps to ensure that the inventory...Ch. 5 - Which of the following expenditure cycle tasks...Ch. 5 - Which of the following describe incompatible...Ch. 5 - Which of the following tasks should the cash...Ch. 5 - Which ledger can be updated solely from the...Ch. 5 - Which of the following documents would most likely...Ch. 5 - INTERNAL CONTROLS AND RISK Review the following...Ch. 5 - INVENTORY ORDERING ALTERNATIVES The flowchart for...Ch. 5 - SYSTEM FLOWCHART ANALYSIS Using the flowchart...Ch. 5 - FLOWCHART ANALYSIS CONTROLS Refer to the system...Ch. 5 - RISK ANALYSIS AND INTERNAL CONTROL The following...Ch. 5 - PURCHASES SYSTEMRISKS AND CONTROLS Review the...Ch. 5 - IT CONTROLSCENTRALIZED SYSTEM Using the flowchart...Ch. 5 - PHYSICAL CONTROLS Using the flowchart of a...Ch. 5 - IT CONTROLSDISTRIBUTED SYSTEM Using the flowchart...Ch. 5 - INTERNAL CONTROL The following is a description of...Ch. 5 - ACCOUNTING DOCUMENTS Required Answer the following...Ch. 5 - UNRECORDED LIABILITIES You are auditing the...Ch. 5 - SMITHS MARKET (SMALL BUSINESS ACCOUNTING SYSTEM)...Ch. 5 - POSAVEK REMODELING AND BUILDING SUPPLY COMPANY...Ch. 5 - GREEN POND NURSERY (STANDALONE PC-BASED ACCOUNTING...Ch. 5 - CUSTOM FABRICATIONS INC. (STAND-ALONE PC-BASED...Ch. 5 - GENERATORS R US (CENTRALIZED SYSTEM WITH...Ch. 5 - OUTDOOR ADVENTURE: WHITE WATER AND CAMPING...Ch. 5 - CLASSIC RESTORATIONS (MANUAL AND STAND-ALONE...Ch. 5 - ARCHITECTS DEPOT (NETWORKED COMPUTER SYSTEM WITH...

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