USA Cycle Company is one of the fastest growing bicycle distributors in the United States, with headquarters in Chicago, Illinois. Their primary business is distribution of bicycles assembled in China, but they also have a smaller, custom order business for which they build bicycles from parts purchased from various suppliers. Their product line includes mountain, road, and comfort bikes as well as a juvenile line with up to 24 inch frames. They also distribute BMX bicycles as well as tricycles and trailer bikes. In addition, they distribute various bicycle accessories such as helmets, clothing, lights, and spare parts for all of the models they carry. Established in 1985, the company’s first warehouses were in Illinois and Wisconsin and supplied retail bicycle outlets primarily in the Midwest. One year ago, USA Cycle Company expanded, adding two additional facilities in Sacramento, California, and Redmond, Washington, to meet the growing demand for their bicycles. They now also sell customized bicycles direct to retailers through the Internet as well as by conventional means. The company’s expansion to the West Coast was coupled with a planned increase in reliance on suppliers in China. Although this resulted in decreased costs, some problems regarding inventory levels arose because of unexpected delays in shipping, primarily attributable to miscommunication and shipping conditions. Because the company does not want to carry excess inventory, they are sometimes forced to seek local suppliers at an increased cost. Initially, USA Cycle Company was a family owned business. In need of capital, however, the company went public when they added the two facilities on the West Coast. The number of employees rose from 100 to 200 during the expansion. USA Cycle Company uses limited computer technology to process business transactions and record accounting data. Each of its facilities is similarly configured: The various departments in the facility employ manual procedures that are supported by non networked PC. Because this type of configuration does not permit departments to share data digitally, most interdepartmental communication is accomplished via hard copy documents. Since the expansion, USA Cycle has been plagued by inefficiency, and accounting errors. You have been hired to evaluate their processes and internal controls for compliance with the Sarbanes Oxley Act. The expenditure cycle of one of its facilities is described in the following paragraphs. Description of Purchases Procedures The purchases process begins when a clerk in the warehouse reviews the inventory subsidiary ledger from his PC. When inventory is needed, the clerk creates a digital record in the purchase order file. Four copies of the purchase order are printed. One copy is filed in the open purchase order file, two copies are sent to the supplier, and one copy is forwarded to the accounts payable department and filed in the accounts payable pending file. When the goods are received in the warehouse, the purchase order is pulled from the open purchase order file and a clerk inspects, counts, and reconciles the goods to the packing slip and what was ordered. The clerk places the goods on the warehouse shelves and uses the computer to prepare the receiving report. The information is saved in the digital receiving record file, and two hard copies of the receiving report are printed. One copy is forwarded to the accounts payable department. The second copy, along with the purchase order and packing slip, is used to update the digital inventory subsidiary records from the department PC. The purchase order, packing slip, and receiving report are then filed in the closed purchase order file. When the receiving report is received in the accounts payable department, it is filed in the accounts payable pending file with the purchase order. Upon receipt of the invoice from the supplier, the accounts payable clerk pulls the receiving report and purchase order from the accounts payable pending file. The clerk uses these documents to add a digital record to the purchases journal and to post the liability to the accounts payable subsidiary ledger from the department PC. The accounts payable computer system automatically updates the appropriate accounts in the general ledger. The purchase order, receiving report, and invoice are then filed in the open accounts payable file. Description of Cash Disbursements Process Using the open accounts payable file, in which the source documents are arranged by payment date, a clerk in the accounts payable department searches for accounts coming due. When payments are due, the clerk removes the purchase order, receiving report, and invoice from the file to manually prepare the vendor check and check copy. Using these documents, the clerk updates the digital check register and accounts payable subsidiary ledger from the department PC. The general ledger is automatically updated by the system. The check is signed and mailed to the supplier. The check copy along with the purchase order, receiving report, and invoice are filed in the closed accounts payable file. Required
a. Create a data flow diagram of the current system.
b. Create a system flowchart of the existing system.
c. Analyze 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.