POSAVEK REMODELING

AND BULDING SUPPLY COMPANY

(CENTRALIZED SMALL BUSINESS ACCOUNTING SYSTEM)

A CASE STUDY

MEMBERS:

JEEVY A. TORREFEIL

CHARLES JAY A. SEREÑO

JAY EDISON GARCIA

AIRA O. TUBO

JANINE JUATON

SUBMITTED TO:

JESSIE R. LUMINARIAS, CPA

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Posavek Remodeling and Building Supply Company

Posavek is a wholesale supplier of building supplies building contractors, hardware

stores, and home improvement centers in the Boston metropolitan area. Over the years,
Posavek has expanded its operations to serve customers across the nation and now employs
over 200 people as technical representatives, buyers, warehouse workers, and sales and office
staff. Most recently, Posavek has experienced fierce competition from the large online discount
stores. In addition, the company is suffering from operational inefficiencies related to its
archaic information system. Posavek revenue cycle procedures are described in the following
paragraphs.

Revenue Cycle

The revenue cycle encompasses all administrative and clinical processes that contribute
to the capture, management, and collection of patient service fees. This is the whole life of a
patient account, from creation to payment, in the most simplistic and basic terms.

The revenue cycle is a collection of firm activities and related data processing activities
that continue to provide goods and services to customers while collecting cash from sales. It's
an income process that starts with credit approval and ends with taking inventory, receiving
goods, billing, and cash receipts.

The revenue cycle is a method for identifying and maintaining the processes that are
used to finish an accounting process for recording revenue generated by a company's services
or products. It encompasses the accounting process of tracking and recording transactions from
beginning to end, which often begins with receiving a customer's order or entering into an
agreement with a customer and ends with receiving payment from the customer.

Expenditure Cycle

The expenditure cycle refers to a set of routine business actions and data processing
procedures associated with the purchase and payment of goods and services. This section
focuses on the acquisition of raw materials, finished items, supplies, and services.

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 In the expenditure cycle, suppliers are the primary source of external data (vendors).
The general ledger and reporting function receive data from the expenditure cycle, which is
used in financial statements and management reports. The primary goal of the expenditure
cycle is to reduce the total cost of purchasing and maintaining goods, suppliers, and the
numerous services that the company needs.

The expenditure cycle includes both ordering products and services from vendors and
making payments to them. The generic transaction flow of the expenditure cycle is as follows:
inventory control evaluates inventory records to determine order requirements. Purchase
orders are created and delivered to the purchasing department. The goods and amounts
required are specified in the request. The purchasing department selects vendors from the
company's approved supplier list or any other standard operating procedure. After deciding on
a supplier, a purchase order is created and sent to them. To notify the inventory control
department that products are on their way, a copy of the purchase order is delivered. The
things are delivered to the customer by the provider.

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REVENUE CYCLE

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Revenue Cycle Process Scenario

Posavek's sales department representatives receive orders via traditional mail, e-mail,
telephone, and the occasional walk-in customer. Because Posavek is a wholesaler, the vast
majority of its business is conducted on a credit basis. The process begins in the sales
department, where the sales clerk enters the customer's order into the centralized computer
sales order system. The computer and file server are housed in Posavek's small data processing
department.

If the customer has done business with Posavek in the past his or her data are already
on file. If the customer is a first-time buyer, however, the clerk creates a new record in the
customer account file. The system then creates a record of the transaction in the open sales
order file. When the order is entered, an electronic copy of it is sent to the customer's e-mail
address as confirmation.

A clerk in the warehouse department periodically reviews the open sales order file from
a terminal and prints two copies of a stock release document for each new sale, which he uses
to pick the items sold from the shelves. The warehouse clerk sends one copy of the stock
release to the sales department and the second copy, along with the goods, to the shipping
department. The warehouse clerk then updates the inventory subsidiary file to reflect the items
and quantities shipped. Upon receipt of the stock release document, the sales clerk accesses
the open sales order file from a terminal, closes the sales order, and files the stock release
document in the sales department. The sales order system automatically posts these
transactions to the sales, inventory control, and cost-of-goods-sold accounts in the general
ledger file.

Upon receipt of the goods and the stock release, the shipping department clerk
prepares the goods for shipment to the customer. The clerk prepares three copies of the bill of
lading. Two of these go with the goods to the carrier and the third, along with the stock release
document, is filed in the shipping department.

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 The billing department clerk reviews the closed sales orders from a terminal and
prepares two copies of the sales invoice. One copy is mailed to the customer, and the other is
filed in the billing department. The clerk then creates a new record in the accounts receivable
subsidiary file. The sales order system automatically updates the accounts receivable control
account in the general ledger file.

`Cash Receipts Procedures

Mail room clerks open customer cash receipts, reviews the check and remittance
advices for completeness, and prepares two copies of a remittance list. One copy is sent with
the checks to the cash receipts department. The second copy of the remittance advices are sent
to the billing department.

When the cash receipts clerk receives the checks and remittance list, he verifies the
checks received against those on the remittance list and signs the checks "For Deposit Only."
Once the checks are endorsed, he records the receipts in the cash receipts journal from his
terminal. The clerk then fills out a deposit slip and deposits the checks in the bank.

Upon receipt of the remittances, the billing department clerk records the amounts in
the accounts receivable subsidiary ledger from the department terminal. The system
automatically updates the AR control account in the general ledger

Posavek has hired your public accounting firm to review its sales order procedures for
internal control compliance and to make recommendations for changes.

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Data Flow Diagram of the Existing System

Invoice 1

Customer Customer File A/R Subsidiary File

Closed Order Bill
Item
Customer
Quantity
Invoice File
Invoice 2
Prepare Customer Open/Closed
Sales Order Sales Order Order

Open Order
Update
General Ledger
Accounts

Pick
Goods Close Sales
Stock Release 1
Items and Order General Ledger
Quantity
File

Inventory
Subsidiary File Stock Release 2 Ship BOL &Stock Release
Department File
Goods

BOL

Carrier

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Data Flow Diagram of the Existing System (Cash Receipts Procedure)

Payment Amount
Check and Received Accounts Receivable
Remittance Advice Subsidiary Ledger
Customer
Remittance Advice
Accounts Receivable
and Remittance List
Summary
Update Accounts
Receivable Records

Check and
Remittance list
Open Mail Prepare Update General
Remittance List Ledger

Record and
General Ledger
Deposit Check
Records
Remittance List
Check and Deposit Slip
Bank
Cash Receipts
Journal

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System Flowchart of the Existing System

SALES DEPARTMENT WAREHOUSE DATA PROCESSING SHIPPING BILLING

DEPARTMENT DEPARTMENT
Customer Prints Hard Copy A D
B
Review Closed
SO
Customer Order Stock Release Sales Order System Stock Release
Stock Release

Customer
D
Prepare Sales Prepare Bill
Order Pick Items
of Lading
from Open/Closed Sales Invoice Invoice
Order and Ship
Shelves
A B
Inventory
Stock Release
BOL
Closed Sales Stock Release Accounts Receivable BOL
Order
Customer
General Ledger Stock
Release
Stock Released Update Inventory BOL
Customer File

Carrier

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System Flowchart of the Existing System (Cash Receipts Procedure)

MAIL ROOM CASH RECEIPTS DEPARTMENT BILLING DEPARTMENT COMPUTER ROOM

Check
A B
Remittance List
Remittance
Advice Check

Remittance List Accounting System

Review and Remittance

Prepare Verifies Advice
Remittance and Signs
List
Cash Receipts
Update Accounts Journal
Remittance List Check Receivable

Check Deposit Slip

Remittance List Accounts Receivable

B Subsidiary Ledger
Remittance
Advice
Bank
General Ledger
Update
Cash
A

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Physical Internal and IT Control Weakness

The following are the Physical Internal and IT Control Weakness:

1. The company does not perform Credit Check.

2. There is also a problem in the segregation of duties with warehouse clerk. The clerk is
responsible for asset custody, he/she should not also update the inventory records.

3. Customers should be billed only when there is a shipping notice. However, they are
billed before the goods are shipped to them in the current system.

4. Sales are recorded before they are actually shipped because the sales clerk closes the
open sales order.

5. There is inaccuracy of entered items or quantities to be shipped because the shipping

clerk does not reconcile the stock release with the original order.

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Internal Control Recommendations

These are the internal control recommendations that must be applied:

1. The company should establish the credit worthiness of the customer through credit
check.

2. After checking the data must go to a log called credit records, while customer order file
should go to a log of the same name.

3. The warehouse clerk’s printed hard copy should directly go to Sales Order System. The
system should now the one to update inventory records.

4. The sales clerk should no longer need to close the open sales order so the goods are
recorded when they are actually shipped.

5. Sales order will have to ship first before the customers are billed.

6. The shipping clerk should reconcile the stock release with the original order for the
accuracy of the items and quantities to be ship.

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Corrected System Flowchart

SALES DEPARTMENT WAREHOUSE DATA PROCESSING SHIPPING BILLING

DEPARTMENT DEPARTMENT

Customer A A D
C B
Prints Hard Copy Review Closed
SO
Customer Order Sales Order System Stock Release
Shipping Notice
Stock Release D
Stock Release
Customer
Check Credit Prepare Bill
Credit Records of Lading Invoice Invoice
and Ship
Pick Items Open/Closed Sales
from Order
Customer Shelves
Order File BOL
B
Inventory BOL
Stock Release
Stock Release
Accounts Receivable Customer
Shipping Notice Stock Release Shipping
Stock
Notice
Release
C General Ledger
A BOL

Update Inventory Customer File Carrier

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Corrected System Flowchart (Cash Receipts Procedure)

MAIL ROOM CASH RECEIPTS DEPARTMENT BILLING DEPARTMENT COMPUTER ROOM

Check
A B
Remittance List
Remittance
Advice Check

Remittance List Accounting System

Review and Remittance

Prepare Verifies Advice
Remittance and Signs
List
Cash Receipts
Update Accounts Journal
Remittance List Check Receivable

Check Deposit Slip

Remittance List Accounts Receivable

Subsidiary Ledger
Remittance
Advice B
Bank
General Ledger

A
Update
Cash

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EXPENDITURE CYCLE

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Expenditure Cycle Process Scenario

Posavek 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/AP system that is from a small data
processing department. All accounting records are maintained on centralized computer files
that are stored on a file server in the 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.

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Accounts Payable

Once the AP 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 AP 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 AP and cash GL
accounts.

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Data Flow Diagram of the Existing System

Inventory Sub-Ledger Close Vendor Check Register

Check
Inventory
Invoice Payment
Levels

Review Open
Review Inventory Accounts
Records PO & Receiving
Report
Purchase
Requisition
Amount Due & Due Date Open Vendor
Setup
Invoice
A/P Invoice Record
P.O. Vendor
Create
P.O.
Update A/P
Packing Slip & Control Accounts
P.O.

General Ledger
Receive
Update Inventory
Goods Receiving
Report Records

P.O. Quantity
Received Update Inventory
Close P.O. File Control Accounts
Inventory Sub-Ledger

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System Flowchart of the Existing System

PURCHASING DATA PROCESSING RECEIVING WAREHOUSE ACCOUNTS PAYABLE

Purchasing B A Digital Receiving A Invoice

Agent PO Report
Purchases/AP
System Packing
Purchase Order
Slip
Inventory Levels Reconcile Receiving Report
Items
Open/Close PO Reconcile
File Goods
Review Items, Select
Vendor and Creates PO Update Reconcile
Inventory Sub- Inventory Invoice
Ledger Prepares
RR
Purchase Order Vendor
Receiving Report Invoice
Purchase Order Review and
File B Write Checks
Receiving
Report B
Open/Close Cash
Disbursement

Vendors A General Ledger Check C

C Check Register

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Physical Internal and IT Control Weakness

The following are the Physical Internal and IT Control Weakness:

1. All accounting records are stored in one centralized computer. It is not safe to have all
accounting records of the firm to be stored on one centralized computer that is in one
location.

2. Each terminal has access to the Purchases / Accounts Payable System. This can create
fake payables.

3. Open Access to Computer and File Server. Anyone can modify/delete records or data.

4. Purchasing Agent selects vendors. He/she might show preference to particular vendor
based on personal agendas.

5. The same clerk that checks the inventory levels also buys the inventory. This could
create issue if someone wants to purchases goods and just write it off as needing more
inventories.

6. Receiving Department clerk has access to original purchase order. The clerk may not
actually count the inventory resulting in lost or stolen goods or deliveries being shorted
by vendor.

7. Warehouse clerk updates the inventory subsidiary ledger which then automatically the
general ledger account. The clerk may intentionally understate the actual amount of
goods that were received.

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Internal Control Recommendations

These are the internal control recommendations that must be applied:

1. Accounting records should at least be duplicated and stored in an external location in

case of data breach or physical harm to the system.

2. Have separate tasks assigned user instead of terminals.

3. Locked / Secure data processing center.

4. Have vendors populate automatically based on items needed to order, if large quantity
or amount of order should have bid documents in place to allow for competitive pricing.

5. There should be inventory control department that separates the duties of the
purchasing agent, so that he will only execute the purchase transaction.

6. Receiving Department Clerk should receive a blind copy of the purchase order and note
the number of items actually received.

7. A copy of the receiving report should be sent to the inventory department where the
subsidiary ledger should be updated.

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Corrected System Flowchart

INVENTORY PURCHASING DATA PROCESSING RECEIVING WAREHOUSE ACCOUNTS PAYABLE

CONTROL

Purchasing B E Receiving D Invoice

Agent R Report
Inventory PO (Blind
A
Levels Purchases/AP Copy
Purchase Order
System
Packing Reconcile Receiving Report
Slip Items
Creates PO
Review Open/Close PO File
Items

Reconcile
Purchase Order Inventory Sub- Goods Update Reconcile
Ledger Inventory Invoice
Purchase Order
Purchase
Purchase Order
Requisition
Vendor
Purchase Order Receiving Report Prepares RR
Invoice
(Blind Copy) File
Review and
B Write Checks

Valid Vendor B
Open/Close Cash Receiving Report
Vendor File E Disbursement
R Receiving Report
Receiving Report
Packing Slip
C General Ledger Check
Invoice

Check Register C
A D

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