Reference no: EM131161552

A&V Safety, Inc., is a growing company specializing in the sales of safety equipment to commercial entities. It currently employs 200 full-time employees, all of whom work out of their headquarters in San Diego, California. During the summer, the company expands to include about 10 summer interns who are delegated smaller jobs and other errands. A&V currently competes with Office Safety, Inc., and X-Safe, who lead the industry. Suppliers for A&V include Halotron Extinguishers, Kadelite, and Exit Signs, Inc. A&V attempts to maintain inventory levels sufficient to service two weeks of sales.

This level has shown to avoid stock-outs, and the excess inventory is held in a warehouse in a suburb of San Diego. A&V has a legacy accounting system that employs a combination of manual procedures supported by standalone PCs in the various departments. Recently they have experienced business inefficiencies that have been linked to their antiquated accounting system. You have been retained by A&V management to review their procedures for compliance with the Sarbanes-Oxley Act and to provide recommendations for improvement. The A&V expenditure cycle is presented in the following paragraphs. Revenue Cycle A&V Safety, Inc., has one sales department at its headquarters in San Diego.

Sales representatives visit current and potential clients in sales districts and all customer orders go through a sales representative. The orders are faxed, mailed, or delivered in person to the sales department by the representative at the end of each day. In the sales department a sales clerk receives the orders and manually prepares a three-part hard-copy sales order. The clerk sends one sales order copy to the billing department, the stock release copy to the warehouse, and the packing slip copy to the shipping department. The original customer order is filed in the sales department.

Upon receipt of the sales order, the billing clerk records the sale in the digital sales journal using the department PC. The clerk then prints a hard-copy invoice, which is sent to the customer. Next, the clerk sends the sales order to the accounts receivable department for further processing. At the end of the day the clerk prints a hard-copy sales journal voucher from the PC and sends it to the general ledger. The warehousing clerk uses the stock release copy to pick the goods from the shelves and then updates the digital inventory subsidiary ledger using the warehouse PC. Next the clerk sends the good and the stock release to the shipping department.

At the end of the business day the clerk prints an inventory summary from the PC and sends it to the general ledger department. The shipping clerk reconciles the packing slip sent from the sales department with the stock release and goods received from the warehouse. If all is correct, the clerk manually prepares a hard copy bill of lading. He then attaches the packing slip and bill of lading to the goods, which go to the carrier for delivery to the customer. Finally, the clerk files the stock release in the department. The accounts receivable clerk receives the sales order from the billing department and uses it to update the digital AR sub ledger from the department PC. The sales order is then filed in the department.

At the end of the day the clerk prints an AR summary from the PC and sends it to the general ledger department. Customer payments come into the mail room where mail clerks open the envelopes and send the checks and remittance advices to the accounts payable department. The accounts receivable clerk reconciles the remittance advice with the check and updates the customer's account in the digital accounts receivable subsidiary ledger. The clerk then files the remittance advices in the department and sends the checks to the cash receipts department. As previously mentioned, at the end of the day the accounts receivable clerk prints a hard-copy accounts receivable summary from the department PC and sends it to the general ledger department. The cash receipt clerk receives the checks and records the payments in the digital cash receipts journal.

The clerk then manually prepares a hard-copy deposit slip and sends the checks and deposit slip to the bank. At the end of the day the clerk prints a cash receipt journal voucher from the department PC and sends it to the general ledger department. The general ledger clerk receives the sales journal voucher, cash receipts journal voucher, the accounts receivable summary, and the inventory summary. The clerk reconciles these documents and posts to the appropriate control accounts in the digital general ledger from the department PC. Finally, the general ledger clerk files the summaries and journal vouchers in the department.

Required
a. Create a data flow diagram of the current system.
b. Create a system flowchart of the existing system.
c. Identify the internal control weaknesses in the system. Model your response according to the six categories of physical control activities specified in SAS 78/COSO.
d. Prepare a system flowchart of a redesigned computer- based system that resolves the control weaknesses you identified. Explain your solution.