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ABE PLUMBING INC. (CENTRALIZED SMALL BUSINESS ACCOUNTING SYSTEM) ABE Plumbing Inc. ope...

ABE PLUMBING INC. (CENTRALIZED SMALL BUSINESS ACCOUNTING SYSTEM)

ABE Plumbing Inc. opened its doors in 1979 as a wholesale supplier of plumbing equipment, tools, and parts to hardware stores, home-improvement centers, and professional plumbers in the Allentown- Bethlehem-Easton metropolitan area. Over the years they have expanded their operations to serve customers across the nation, and now employ over 200 people as technical representatives, buyers, warehouse workers, and sales and office staff. Most recently, ABE has experienced fierce competition from the large online discount stores such as Harbor Freight and Northern Supply. In addition, the company is suffering from operational inefficiencies related to its archaic information system. ABE’s expenditure cycle procedures are described in the following paragraphs.

Expenditure Cycle

ABE uses a centralized accounting system for managing inventory purchases and recording transactions. The system is almost entirely paperless. Each department has a computer terminal that is networked to the purchases/ accounts payable system that is run from a small data processing department. All accounting records are maintained on centralized computer files that are stored on a file server in the data processing department.

Purchasing

The process begins in the purchasing department. Each morning the purchasing agent reviews the inventory levels from his department terminal and searches for items that have fallen to their reorder points and need to be replenished. The purchasing agent then selects the vendors and creates digital purchase orders in the purchase order file. He then prints two hard copies of each purchase order and sends them to the respective vendors.

Receiving

When the items are received, the receiving department clerk reconciles the goods with the attached packing slip and the digital purchase order, which he accesses from his computer terminal. The clerk then creates a digital receiving report, stating the condition of the materials received. The system automatically closes the purchase order previously created by the purchasing agent. In addition, the receiving clerk prints a hard copy of the receiving report, which he sends with the inventory to the warehouse where the items are stored.

Warehouse

Upon receipt of the inventory, the warehouse clerk reconciles the items with the receiving report and updates the inventory subsidiary ledger. The accounting system automatically and immediately updates the inventory control account in the general ledger.

Accounts Payable

Once the accounts payable clerk receives the vendor’s invoice, she reconciles it with the purchase order and receiving report from her terminal. The clerk then creates a digital vendor invoice record and sets a due date for payment. The system automatically updates the AP control account in the general ledger. Daily, the accounts payable clerk reviews the open vendor invoice records from her terminal, looking for items that need to be paid. The clerk then records the payment in the digital check register and closes the open vendor invoice. Finally, the clerk prints a hard copy of the check and sends it to the vendor. The system automatically updates the accounts payable and cash general ledger accounts

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.

Solution 1

Step #1 of 3

ABE plumbing

Data Flow Diagram of ABE Plumbing Company’s Existing system

The Company’s existing system has a purchasing department which performs the purchase process. In the purchase process, firstly the purchasing agent examines the inventory level from his system and finds out the items that are to be refilled.

After finding the items, the purchasing agent chooses the vendor and generates the digital purchase order from the system. Then two hard copies of the purchase order is printed and sent to the vendors. Then the vendor sends the required items to the company which is received by the receiving clerk.

The receiving clerk will now reconcile the goods with the packing sips and the digital purchase order. After this, a receiving report is prepared by the receiving clerk and sent along with the goods to the warehouse. Now the warehouse clerk reconciles the receiving report with the goods received and updates the inventory subsidiary ledger.

Now, the accounts payable clerk will reconcile the vendor invoice received with the purchase order and receiving reports that are present in the system. Then a digital invoice record is created and a date for payment is set up. Now the accounts payable control account in the general ledger is updated. Then the accounts payable clerk will review the invoices for payment dues and prepare check for the required.

The check is sent to the vendor and simultaneously the payment is recorded in the digital check register and the invoice is closed. Finally, the accounts payable and cash ledger accounts are automatically updated.

Data Flow Diagram of ABE Plumbing Company’s Existing system is shown below:

System Flowchart of ABE Plumbing Company’s Existing system:

System Flowchart of ABE Plumbing Company’s Existing system is shown below:

PO = Purchase Order; R = Report on goods received; AP = Accounts payable

Step #2 of 3

Physical Internal control weakness of the company’s existing system

The physical internal control weakness of the existing system of the company as per COSO internal control model is:

1. Supervision: The supervising activity should be properly done by the persons who are receiving the goods from the vendors.

2. Inspection of parts or goods: In the company’s existing system, the goods are received by the receiving department. The receiving clerk receives the ordered goods and packaging slips from the vendor.

Here the clerk should physically count the quantity of the goods and inspect the quality of the materials received for preparing the receiving report. There are certain instances where the clerks will merely write the details present in the PO into the receiving report by not performing the physical inspection of the materials received. This will result in accepting the damaged or less number of materials to be accepted by the company unintentionally.

IT controls to be placed in the existing system

The various IT controls that can be placed in the existing system of the company are:

1. Input Controls: The input controls are mainly for ensuring the integrity of the data that is entered into the application. The controls for checking the omitted data, Alpha-numeric data and invalid data values can be implemented for reducing data entry errors that occur while preparing purchase order, checks in the accounts payable departments. The check digit control can be implemented in the accounts payable department for reducing the errors in accessing wrong accounts of vendors.

2. Process controls: They are the control that controls the logic of the system application.

Error messages – In this company, the receiving department reconciles the purchase order with the received goods and packaging slips. The error messages can be shown when the purchase order detail does not match with the details in packaging slips of the received materials.

Passwords - The inventory control system in the inventory department, the accounts payable subsidiary ledger in the accounts payable department, general ledger account in the general ledger department should have passwords for accessing the records.

Step #3 of 3

System flowchart of redesigned system:

The redesigned system of the company includes a supervisor who oversees the receiving clerk on whether the person is performing the counting process of goods physically or not. In the existing system the receiving clerk may or may not do the physical counting of goods received. Hence in the redesigned system, a step is included by appointing a supervisor for overseeing the activities of the receiving clerk.

System flowchart of redesigned system is shown below:

PO = Purchase Order; R = Report on goods received; AP = Accounts payable

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