Business Information
Bones & Narble Books is a large book distributor whose office is located in Springvale. It was established in 1982 by two friends (Bob and Nick) who invested some of their savings to buy an abandoned warehouse and convert it into a bookstore, mainly selling used books that were donated by friends and family. The business proved to be very popular and by the end of the first financial year it had grossed $20,000 in sales.
Over the next decade more employees were hired, more books were traded in and more sales were achieved each passing year. However, during the mid-1990s the business was faced with two problems: many large, upscale book-stores were being built in the area, and the use of the Internet for finding and ordering books was becoming cheaper and more popular for current customers. In 1995 sales finally started to decline.
Deciding to take a risk because of the newfound competition, Bob and Nick closed their doors to the local trade, invested more money to expand the building and transformed the business from just selling used books to being a distributor of new books. The business now stores books that have been sent to it by publishers and then resells the books to large bookstore chains upon request.
Bones & Narble has rapidly become one of the largest book distributors in Australia. Although the business is still at its original location in Springvale, it distributes books to each state and territory of Australia, making over $1 million per year. From simple beginnings of two workers, the business has expanded to now having more than 145 employees.
As already mentioned, all of Bones & Narble’s customers are large-chain bookstores who themselves see many millions of dollars in revenue per year. However, some of these bookstores have had bad relationships with the business in the past year. There have been many disputes between them, such as books that were ordered from Bones & Narble but were never sent, poor inventory management by Bones & Narble, and the inability of the business to provide legitimate documentation of transactions. According to projections of this year’s financials, the sour relationship that Bones & Narble Book and many of its customers have is going to take a toll on year-end revenue. Bob is convinced that some of the business’s problems are due to lack of proper internal controls. You have been hired as an independent expert to inspect and analyse the internal controls currently in place at Bones & Narble Books. You start by documenting the existing systems to better understand the people, processes and documents involved.
Expenditure Cycle
Purchases System
The purchases process begins with the purchasing agent, who monitors the levels of books available via a computer terminal listing current inventory. Upon noticing a deficiency in one inventory item, the agent generates four copies of a Purchase Order: one is sent to Accounts Payable, one is sent to the vendor, one is sent to the receiving department and the last is filed away in numerical order within the department.
Vendors will generally ship the products within five business days of the order. When the books arrive in the receiving department, the corresponding packing slip always accompanies them. The receiving department clerk unloads the books and then reconciles the packing slip with the Purchase Order. After unloading the books, three copies of the receiving report are generated. One copy goes with the books to the warehouse, another is sent to the purchasing department and the final copy is filed away in numerical order in the receiving department. In the warehouse, the copy is simply filed in chronological order once the books have been stored on the shelves. In the purchasing department, the clerk receives a copy of the receiving report and files it with the Purchase Order.
When the Accounts Payable department receives the Purchase order, it is temporarily filed until the respective invoice arrives from the vendor. Upon receipt of the invoice, the Accounts Payable clerk takes the Purchase Order out of the temporary file and reconciles the two documents. This event triggers Bones & Narble Books to record a liability in the Accounts payable subsidiary ledger. At the same time, a journal voucher is created and sent to the general ledger department. The documents (Purchase order and invoice) are placed in the open Accounts Payable file in the department.
Once the general ledger department receives the journal voucher, the clerk examines it for any obvious errors and then inputs the information into a computer terminal. Once all the information is entered into the computer system, the clerk clicks the finalise button, which permanently updates the general ledger file stores on the mainframe in the department.
Cash Disbursements System
The Accounts Payable clerk periodically reviews the open Accounts Payable file for liabilities that are due. In order to maximise returns on invested cash, yet still take advantage of vendor discounts, the clerk will pull the invoice two days before its applicable due date. Upon finding an open Accounts Payable file in need of payment, the clerk prepares a cheque for the amount due as per the invoice. The Accounts Payable ledger is also updated by the Accounts Payable clerk. The cheque number, dollar amount, and other pertinent data are recorded in the cheque register. The cheque is subsequently sent to the cash disbursements department. The invoice is then thrown away as it no longer has any relevant information that hasn’t already been recorded elsewhere.
When the cash disbursements clerk receives the unsigned cheque, she examines it to ensure that no one has tampered with any of the information and that no errors have been made. As she is familiar with all of the vendors that Bones & Narble deals with, she can identify any false vendors or any payment amounts that seem too high or too low for that particular vendor. Assuming everything looks good, she signs the check using a signature stamp that displays the name of the assistant treasurer, Matthew Taylor. Taylor’s signature is the only one that can be put onto a cheque for it to be deemed valid. The cash disbursements clerk then photocopies the cheque for audit trail purposes.
Once the cheque is signed, it is sent directly to the supplier. The photocopy of the cheque is marked as paid and then file in the cash disbursements department, in cheque number order. The clerk then creates a journal voucher, which is sent to the general ledger department. Upon receipt of the journal voucher, the general ledger clerk inputs the information into the computer system, which permanently updates the general ledger file.
Required:
Using Microsoft Visio:
a)
create a physical data flow diagram of the Purchases system
b)
create a logical data flow diagram of the Cash Disbursements system
c)
create a systems flowchart of the existing systems (both purchases and cash disbursements).