B. Expenditure Cycle System Design (20 points)

Reliable, Inc., located in Chicago, Illinois, is a wholesaler of electronic components used in commercial and industrial applications. The companys accounting systems employ a combination of manual procedures supported by standalone PCs in the various departments. Until recently, the system had functioned satisfactorily, but Reliable, Inc. is now experiencing operational inefficiencies and accounting errors. Reliable Inc.s management has hired your firm to evaluate its operations and internal control procedures over its expenditure cycle procedures.

Purchases System Procedures

When the quantity on hand of a particular product falls to a low level the warehouse clerk selects a vendor and manually prepares two hard copies of a purchase order. The clerk sends one copy of the purchase order to the vendor and the otherer to the receiving department. When the goods arrive from the vendor, the receiving clerk matches the packing slip in the shipment to the purchase order that the warehouse clerk had previously sent. If everything is in order, the receiving clerk signs the purchase order and sends it to the accounting department. The clerk then manually prepares a hard-copy receiving report, which he sends with the goods to the warehouse. From his department PC, the warehouse clerk uses the receiving report to update the inventory subsidiary ledger to reflect the receipt of the goods.

Subsequently, the accounting departments accounts payable clerk receives the suppliers invoice, which she matches and reconciles to the previously received copy of the purchase order from the receiving clerk. From her department PC, the accounts payable clerk then updates the digital accounts payable subsidiary ledger to reflect the new liability and records the event in the digital purchases journal.

Cash Disbursements Procedures

The accounts payable clerk in the accounting department reviews the liabilities that are due by searching the accounts payable subsidiary ledger from the department PC. The clerk then prints out a hard-copy cash disbursement voucher for each item due for payment. The clerk then sends a cash disbursement voucher to the cash disbursements department for payment. At the end of the day, the clerk prints a hard-copy accounts payable summary from the department PC and sends it to the general ledger department.

From his department PC, the cash disbursements clerk uses the cash disbursement voucher to record the payment in the digital check register and then prints a three-part check. The clerk signs the negotiable portion of the check and sends it to the vendor. One check copy is filed in the department, and the clerk sends the second check copy, along with the original cash disbursement voucher, to the accounting department accounts payable clerk. At the end of the day, the clerk prints a hard-copy summary of the check register and sends it to the general ledger department.

From the accounting department PC, the accounts payable clerk uses the check copy and cash disbursements voucher to record the payment in the voucher register and to close out the liability in the accounts payable subsidiary ledger. The clerk then files the hard-copy cash disbursement voucher and check copy in the department.

From the department PC, the general ledger clerk posts the summaries received from the accounting and cash disbursements departments to the appropriate general ledger accounts. The clerk files the hard-copy summaries in the general ledger department.

Payroll Procedures

Employees manually register their hours on timesheets. Each Friday afternoon they submit the time sheets to their department supervisor for review and approval. The supervisor then forwards the times sheets to the payroll clerk, who manually prepares checks for each employees approved timesheets. The clerk, using a laptop computer, then posts to the digital employee records. The clerk then mails the check to the employee and files a copy of the check in the department. Finally, the clerk prints two payroll summaries from his computer. One of these he sends to the accounts payable department, and the other to the general ledger department.

The accounts payable clerk receives the payroll summary, approves it, and writes a check to cover the entire payroll. The clerk then sends the check to the bank where it is deposited into the payroll imprest account.

The general ledger clerk receives the payroll summary and posts to the related accounts in the digital general ledger, using the department PC.

Required: What are the internal control weaknesses in Reliable Inc.s Purchases, Cash Disbursements, and Payroll procedures, if any?