(CMA adapted, June 1993) PriceRight Electronics Inc. (PEI) is a wholesale discount supplier of a wide variety of electronic instruments and parts to regional retailers. PEI commenced operations a year ago, and its records processing has been on a manual basis except for stand-alone automated inventory and accounts receivable systems. The driving force of PEI’s business is its deep-discount, short-term delivery reputation that allows retailers to order materials several times during the month to minimize in-store inventories. PEI’s management has decided to continue automating its operations, but, because of cash flow considerations, this needs to be accomplished on a step-by-step basis.
It was decided that the next function to be automated should be sales order processing to enhance quick response to customer needs. PEI’s systems consultants suggested and implemented an off-the-shelf software package that was modified to fit PEI’s current mode of operations. At the same time, the consultants recommended and installed a computerized database of customer credit standings to permit automatic credit limit checks as the lingering recessionary climate has resulted in an increase in slow paying or delinquent accounts. The new systems modules are described below:
Marketing. Sales orders are received by telephone, fax, mail, or e-mail and entered into the sales order system by marketing personnel. The orders are automatically compared to the customer database for determination of credit limits. If credit limits are met, the system generates multiple copies of the sales order.
Credit. On a daily basis, the credit manager reviews new customer applications for creditworthiness, establishes credit limits, and enters them into the customer database. The credit manager also reviews the calendar month-end accounts receivable aging report to identify slow-paying or delinquent accounts for potential revisions to or discontinuance of credit. In addition, the credit manager issues credit memos for merchandise returns based on requests from customers and forwards copies of credit memos to Accounting for appropriate accounts receivable handling.
Warehousing. Warehouse personnel update the inventory master file for purchases and disbursements, confirm availability of materials to fill sales orders, and establish back-orders for sales orders that cannot be completed from stock on hand. Warehouse personnel assemble and forward materials with corresponding sales orders to Shipping and Receiving. They also update the inventory master file for merchandise returns that are received by Shipping and Receiving.
Shipping and Receiving.Shipping and Receiving accepts materials and sales orders from Warehousing, packs and ships the order with a copy of the sales order as a packing slip, and forwards a copy of the sales order to Billing. Merchandise returns received from customers are unpacked, sorted, inspected, and sent to Warehousing.
Accounting. The Accounting Department comprises three functions relevant to this narrative: Billing, Accounts Receivable, and General Accounting. Billing prices all sales orders received, which takes approximately five days after order shipment. To spread the work effort throughout the month, customers are segregated and placed in 30-day billing cycles. There are six billing cycles for which invoices are rendered during the month. Monthly statements, prepared by Billing, are sent to customers during the cycle billing period. Outstanding carry-forward balances reported by Accounts Receivable and credit memos prepared based on credit requests received from the credit manager are included on the monthly statement. Billing also prepares sales and credit memo journals for each cycle.
Copies of invoices and credit memos are forwarded to Accounts Receivable for entry into the accounts receivable system by customer account. An aging report is prepared at the end of each billing cycle and forwarded to the credit manager.
The accounts receivable journal reflecting total charges and credits processed through the accounts receivable system for each cycle is forwarded to General Accounting. General Accounting compares this information to the sales and credit memo journals and posts the changes to the general ledger. Based on the preceding narrative:
a. Identify at least two internal control strengths of PEI’s system. Indicate why each is a strength.
b. Identify at least three internal control weaknesses in PEI’s system. Explain the nature of each weakness and recommend a way to address it.
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