Question

After finishing new hire training you have been immediately placed on an internal control design improvement assurance project. The client has asked your company to evaluate the design of their existing sales order processing internal controls and then to provide recommendations for how to improve the design. The client has indicated that if they are happy with the deliverable, your company might be hired for a second assessment designed to test the operating effectiveness of the internal controls. Your manager has asked you to (1) create an as-is model in Visio of the current system based on client interviews and (2) assess weaknesses in the design of the company’s internal controls based on the as-is model. You have also been provided your company’s control design matrix template that you will use to document your control design assessment. You are supposed to wrap up all work and give your manager the as-is Visio model and the control design assessment matrix on the dates indicate in the project SOW (syllabus) – note that the as-is Visio model and the control design assessment matrix are due on different dates. As your deliverables will be handed to the client, it is important that they look professional and do not contain any spelling or grammatical errors.

You decide to start interviewing Jane Humphrey, the client’s Director of Operations, to get an overview of the sales order process and to get a list of contacts to talk to. The following is an abbreviated version of your notes from the interview with Jane.

Jane Humphrey, Director of Operations

You: Can you provide me a high-level overview of how you process sales orders?

Jane: All of our customers are large manufacturers that purchase our products on credit. We recently changed our system for how customers submit customer orders and I am now pleased to be able to say that we receive 100% of our customer orders electronically via an EDI interface. After receiving a customer order, it is printed and used to check the customer’s credit. Assuming the credit is approved, which is almost always the case, the goods are then moved from the warehouse to the shipping dock and shipped. We try to send out the customer invoice as soon as possible to minimize the time between shipping the goods and receiving the customer’s payment. We also have an accounting department that updates various accounting records, but I am not too familiar with this side of our business.

You: Are there any sales order processing issues that keep you up at night?

Jane: Well, we never used to have problems with receiving payments for shipped products, but after the recent financial crisis it seems like more and more customers are not able to pay for the products they have ordered. This is surprising to me as we do have a pretty stringent credit process in place. I am also concerned with over- and under-shipments of products. There seems to be some miscommunication between the warehouse and the shipping department, but I am not sure what is going on. While I am sure that accounting is doing things correctly I am also concerned with the time it takes for us to maintain a large number of different accounting records. It seems like many of these accounting records contain more or less the same information.

You: Thank you, I will keep these issues in mind in my review. Who do you suggest I talk to next? I would like to talk to at least one individual in each group that is involved in sales order processing, and preferably individuals that perform one or more of the processing steps.

Jane: Scott Taylor is our most experienced sales representative and he knows the sales process inside and out. Stephen Smith is our warehouse gang leader; he can point you in the right direction if you need to talk to a record clerk or order filler. Melissa Foster in shipping has been with us for a very long time and can tell you all you need to know about our shipping processes. I suggest you get in contact with our controller, Alicia Johnson, to find out more about the accounting processes. They already know that you are here and they expect to be contacted by you.

The following are excerpts from your interviews with Scott Taylor, Stephen Smith, Melissa Foster, and Alicia Johnson:

Scott Taylor, Sales Representative

You: Can you please explain the activities you perform in the sales department when you receive a new customer order?

Scott: We receive most customer orders via EDI. Being that they are electronic they go directly in to our customer order database from which we print hardcopy customer orders. We then use these hardcopies and pull the customer’s credit information, which includes outstanding orders, accounts receivable, and credit limit, from the customer master table, which is a database that is located in the sales department. In this step we compare the total of each customer’s current outstanding orders, current accounts receivable, and the new order to each customer’s respective credit limit. Assuming that the customer has enough credit we then make a note of the approval on the customer order and use the approved customer order to prepare a sales order using prenumbered sales order forms. One copy of the sales order is placed in the open sales order filing cabinet along with the original customer order. We also send copies of the sales orders to the warehouse and to accounting. Later in the process, after the shipping department has shipped the ordered goods, they send us an electronic shipping notification. We pull the corresponding sales order and customer order from file and compare the sales order to the shipping notification information. If they match then we store the sales order and the customer order in the closed sales order file in numeric order.             

You: Who is responsible for performing the credit check?

Scott: We prefer that the sales representative that is the owner of the account verifies the customer’s credit as they know their customer better than anyone else and as they can more quickly resolve any credit issues with the customer. However, if that person is not available then anyone that has time takes care of it so that we can start processing the order as quickly as possible.

Stephen Smith, Warehouse Gang Leader

You: Can you please explain the activities you perform in the Warehouse when you receive a new sales order?

Stephen: After we receive a stock release from the sales department, we compare the items ordered to the stock records to find the location of the items ordered by the customer. We then pick the items and for every item we pick we make a note on the stock release indicating that the item was picked.   After we have picked all available items on the stock release we send the goods and the stock release over to the shipping department. Actually, before sending this to the shipping department we first update our own inventory records to reduce the quantity of goods on hand.

You: You mentioned that you received a stock release from the sales department, is that the sales order copy from sales? Also what is the name of the record you use to keep inventory information?

Stephen: Yes, when we receive the sales order we simply refer to it as a stock release since it authorizes us to pick and remove goods from the warehouse. As far as the inventory information record, we simply call it the “stock records.” It is a small database that we use to keep track of goods received and removed from the Warehouse, the location of the goods, etc.

You: You also said that after you have picked all available items, does that mean that you sometimes send partially picked orders over to shipping?

Stephen:    Yes.

Melissa Foster, Shipping Clerk

You: Can you please explain the activities you perform in shipping when you receive goods and the stock release from the Warehouse?

Melissa: After receiving inventory from the warehouse, I first examine the goods and the stock release for errors, I then use the stock release to prepare a bill of lading and packing slip. To prepare the bill of lading and the packing slip I use a handheld device to look up information from the customer master database located in sales. The bill of lading and the packing slip are then given to the carrier who delivers the goods to the customer. I then use the stock release to create an electronic shipping notice that I email to the billing department and the sales department. We finally file the stock release in chronological order in a filing cabinet.

Alicia Johnson, Controller

You: Can you please provide a high-level overview of the role of the accounting department in sales order processing.

Alicia: The billing department both invoices the customer and updates the sales journal. We also have a department that posts transactions to the accounts receivable subsidiary ledger and the general ledger.

You: Are there any problems in sales order processing that keep you up at night?

Alicia: I am worried about our credit authorization processes. The company wants the sales department to control this activity to provide more personalized customer service. However, our sales department is paid partially on commission and this creates a conflict of interest.

You: Thank you, this is something that I will keep in mind during my review. Who do you suggest I talk to in the billing department and in the AR/GL department?

Alicia: Sue White in billing should be available today if you have time and I can contact Jim Harris in our “AR/GL department” as you called it.

The following are excerpts from your interviews with Sue White and Jim Harris:

Sue White, Billing Supervisor

You: Can you please explain the activities you perform in billing?

Sue: After the sales order arrives from the sales department we file it in numeric order in our filing cabinet while waiting to receive the shipping notice from the shipping department. After receiving the shipping notice, we reconcile the sales order and shipping notice information to verify that what was shipped was actually what was ordered. If the two documents match then we enter the sales order information into a computer program. The computer program then pulls information from the customer master table to create the invoice that is sent electronically to the customer. The sales order is then filed in chronological order in a filing cabinet, in which we store documents that we have not yet used to update our accounting books.

You: Do you do this?

Sue: Yes, I do this. However, I do not enter the sales order information for invoice preparation. Ken Weiss, who is my billing specialist, is responsible for doing this.

You: Can you describe how you update the accounting books?

Sue: I periodically pull sales orders from the filing cabinet and enter this information into the sales journal and the accounts receivable subsidiary ledgers. I then periodically also prepare a sales journal voucher and an accounts receivable summary based on the information in the sales journal and the accounts receivable subsidiary ledger, respectively. These two documents are then sent to Jim Harris.

Jim Harris, Assistant Controller

You: Can you please explain the activities you perform related to sales order processing?

Jim: I am responsible for keeping track of inventory and maintaining the general ledger. I update the inventory subsidiary ledger using the information on the sales journal voucher. I also reconcile the sales journal voucher and the accounts receivable summary to make sure there are no errors before I update the general ledger inventory and accounts receivable control accounts.

Case Requirements:

1) Create a system/document flowchart of the existing system.

Answer 1