Becoming a customer of MMG involves calling the toll-free number and speaking with one of the sales representatives, who establishes a new customer account. A customer’s account record contains the information about the school including, a contact person’s name, address, phone number, previous orders made with the company, and a sequentially assigned unique customer account number. MMG does not sell directly to teachers, only to the school. All sales are wholesale sales, so no sales taxes apply.

Customers place orders via the Internet. A sales representative then prepares a sales order record. John, in the billing department, reviews the sales orders, adds prices and shipping charges, and prints a copy (invoice) that is sent to the customer. John then records the sale in the sales journal.

Chris, a warehouse employee, verifies the information on the sales order, picks the goods, prints the packing slip, and updates the inventory subsidiary ledger. Chris then prepares the bill of lading for the carrier. The goods are then shipped.

Sandy in AR uses the remittance advices to update the customer accounts and general ledger control accounts. When customers make a payment on account, they send both the remittance advice (that was attached to the invoice) and a check with the account number on it.

Scott, a mail room clerk, opens all the mail. He separates the checks, cash, and remittance advices and prepares a remittance list, which, along with the checks and cash, is sent to the cash receipts department. He sends the remittance advices to Sandy.

Laura, the cash receipts clerk, reconciles the checks with the remittance list, prepares the deposit slip, updates the general ledger, and then deposits the checks in the bank. She sends the deposit slip to Sandy in the accounting department.

Upon receiving the bank receipt, Sandy files it and updates the cash receipts journal to record the amount deposited. The customer has a 15-day grace period, beginning upon the receipt of the equipment ordered. If, at the end of that period, a payment is received, it is understood that the goods have been accepted. If, on the other hand, the customer is dissatisfied with the product for any reason, they can return it to MMG at no charge. However, to return the equipment, the customer must contact MMG to obtain an authorization number. When the returned goods arrive, Chris prepares the return record and updates the inventory subsidiary ledger. Printed copies of the return record are sent to John and Sandy. John reviews the return record and updates the sales journal. Sandy credits the customer’s account and updates the general ledger to reverse the transaction.

Expenditure Cycle

The purchases system and the cash disbursements system compose MMG’s expenditure cycle. The three departments within the purchasing system are warehouse, purchasing, and accounting. The purchasing function begins in the warehouse, which stores the inventory of equipment. Jim, the warehouse manager, compares inventory records with the various demand forecasts of each week, which the market research analyst team provides, to determine the necessary orders to make. At the end of the week, Jim prepares the purchase requisition record.

Sara, the purchasing clerk, reviews the purchase requisitions, selects the suppliers, and prepares the purchase orders. Copies of the purchase orders are sent to the supplier and to accounting.

When the shipment arrives, Chris, the warehouse clerk, working from a blind copy of the purchase order, counts and inspects the goods for damage. He then prepares a receiving report and updates the inventory records.

Upon receipt of the supplier’s invoice, Diana, the accounting clerk, compares it to the respective purchase order and receiving report. If the invoice is accurate, Diana creates an AP record, sets a due date for payment, and updates general ledger accounts.

On the due date, Evan, the cash disbursements clerk, closes the AP record, cuts a check, and sends it to the supplier. He then updates the check register and the general ledger.

1. Analyze the physical internal control weaknesses in the current system (both cycles). Model your response according to the six categories of physical control activities specified in the COSO internal control model.

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