A&V Safety,

Inc.
Case Analysis

January, 2020

Submitted to:
Jess Anthony Casagan, CPA

Submitted by:
Lape, Bryle Jay P.
Migue, Ai-rah Marie
 Rationale

A&V Safety Company has been leading the industry in the sales of safety
equipment. However, with an outdated accounting system, it experienced
business inefficiencies. The management reviewed its current system and
discovered some flaws in its internal controls. To adhere these lapses, this
study tried to provide some revisions to their system introducing
computer-based accounting system (CBAS). This study came up with
alternatives to improve the current system of the company using the concept
of CBAS. Evaluating these alternatives, this study suggested the first
alternative course of action which benefited the company most. This
alternative completely eliminated their internal control weaknesses, therefore,
providing better internal controls, reducing potential risks, and making the firm
more efficient and effective than before.

Chapter 1. Background of the Study

A&V Safety, Inc., was a growing company specializing in the sales of

safety equipment to commercial entities. It employed 200 full-time employees,
all of whom work out of their headquarters in San Diego, California. During the
summer, the company expanded to include about 10 summer interns who
were delegated smaller jobs and other errands. A&V competed with Office
Safety, Inc., and X-Safe, who led the industry. Suppliers for A&V include
Halotron Extinguishers, Kadelite, and Exit Signs, Inc. A&V attempted to
maintain inventory levels sufficient to service two of sales. This level has been
shown to avoid stockouts, and the excess inventory was held in a warehouse
in a suburb of San Diego.
A&V had a legacy accounting system that employed a combination of
manual procedures supported by standalone PCs in the various departments.
Recently it had experienced business inefficiencies that have been linked to
its antiquated accounting system. The management reviewed its procedures
for compliance with the Sarbanes-Oxley Act and assessed the things needed
to be improved.
Chapter 2. Statement of the Problem

How can A&V Safety company improve or revise their current systems or
internal control to prevent business inefficiencies?

Chapter 3. Point of View

This case has been viewed through A&V Safety Company’s perspective.

Chapter 4. Objectives

1. To analyze the company’s current system regarding its expenditure cycle.

2. To provide necessary revisions to the internal control of the company.
3. To apply the revisions with computer-based system for better
management control and efficiency.

Chapter 5. Relevant Facts

Expenditure Cycle (Current)

1. The warehouse clerk selects a vendor and manually prepares three hard
copies of purchase order when the quantity on-hand of a particular
product falls to a low level.
2. The clerk sends one copy to the vendor, general ledger department, and
to the receiving department.
3. When the goods arrive from the vendor, the receiving clerk matches the
packing slip to that of the purchase order that he previously received. He
then manually prepares a hard-copy receiving report and sends it to the
warehouse together with the goods.
4. The warehouse clerk updates the inventory of the goods.
5. The accounting department’s AP clerk, upon receiving the supplier’s
invoice, updates the digital accounts payable subsidiary ledger to
reflect the new liability and records the event in the digital purchase
journal.
 Inventory Sub Ledger

Supplier
Low Inventory Level
General Ledger
PO1 Prepare
Purchase PO2 Post to
Order
General
ledger
PO3

Supplier’s
Set Up Invoice
Accounts
Packing Slip Payable
Receive
Goods AP Sub Ledger
Receiving
Purchase Order
Report

Open AP File
Warehouse

Update Supplier
Inventory
records

Inventory Sub
Ledger

Figure 1. Current Expenditure Cycle Data Flow Diagram

Internal Control Weaknesses

 Lack of segregation of duties

In the current system, the inventory clerk in the warehouse department
has asset custody; is responsible for transaction authorization; and also has
record keeping responsibility. This may possibly results into fraudulent
activities by the clerk which will consequently may cause damage to the
company. In order for a firm to have a better internal control system, it must
have proper segregation of duties and this includes separating authorization
of transactions and the custody or disposal of the same asset in the
transaction.
 No Transaction Authorization
There is no control over which supplier is being used to order supplies
from. Transaction authorization must be needed by having a reference file of
all authorized suppliers. On the other hand, inventory control should have
procedures to reorder materials by means of a purchase requisition order,
which facilitates an audit trail and ensures transaction authorization.
 Lenient reporting practice in receiving department
The receiving clerk prepares the receiving report from the packing slip
information itself. This is not the proper way of reporting because the packing
slip may not show the actual amount of goods which were received. Not being
able to count and confirm the goods with the packing slip will lead to
inefficiency in operations in case of discrepancies. The receiving department
clerk should instead receive a ‘blind copy’ of the purchase order, which is also
an access control, to force the receiving clerk to count and inspect the items
before preparing the receiving report.
 Improper verification in accounts payable department
Accounts Payable does not verify that the goods have been received via
the receiving report. The payment approval is based only on a purchase order
and invoice only. A/P should have been able to receive copies of the
purchase requisition, purchase order, receiving report, and the supplier’s
invoice. A/P should have then reconciled these documents, posted to the
purchase journal, and recorded the liability in the accounts payable subsidiary
ledger. Not being able to reconcile these documents will lead to problems in
case the goods were not received or goods were returned due to quality
inspections.
 General Ledger updating
In the current system, copy of the purchase order is sent to the General
Ledger. Its use is unclear from the case but it is presumably done for general
ledger updating. This is not proper because only journal vouchers, which have
passed through all the processes of review, verification, approval, and
confirmations, should be used to update the general ledger accounts to
ensure access control and also to provide accounting records for an audit trail.
Chapter 6. Alternative Courses of Actions

Shown below were the revised data flow diagrams and system flowcharts
using the computer-based accounting system (CBAS).

Alternative Course of Action No. 1

Figure 2. Revised Computer-Based Expenditure Cycle Data Flow

Diagram (ACA #1)
 Terminal Rec. Rec.
Purchase Report Report Vendor
Requisition Invty. File

Invty. Sub. Purchas

Ledger Open PO e Order
Rec. Report Supplier
Prepare File
PO Vendor File Invoice
Purchase
Requisition PO (Blind
Updated Close PO
Copy)
Invty.
AP
Due
Level Check
PO Trigger Vendor
Prepar
PO Voucher
Prepare e Rec.
PO Report
PR
PO Reconcile
Supplier
Purchase AP + Invoice
Invoice Prepare
Order PR
Terminal Voucher
Purchase
Requisitio
RR
Vendor
Purchase Voucher RR
Voucher File
Order RR
PO Open PR
RR Receiving
PR Report
Terminal PO
Receiving Update JV History
Report Program
Update Invoic
Program
Voucher
File Stores
General
Open PO Close PR File Ledger File
Advantages:

1. Better Internal Controls

- The presence of a valid vendor file as reference to request a purchase
depicts the transaction authorization. Segregation of duties has been
implemented by separating the asset custody from the purchasing
department. Reporting practice in the receiving department is now tight by
giving a ‘blind copy’ of the purchase order as an access control. And,
reconciliation of proper documents in the Accounts Payable is sufficient to
acquire independent verification.
2. General Ledger Updating
- Rather than using employees to input financial transaction into the
general ledger, they can import these information electronically allowing
the management to spend more time on reporting and analyzing
information.
3. Manual Control over Ordering Process
- Purchasing agent reviews the requisitions before placing the order which
reduces the risk of placing unnecessary orders with vendors in case of
computer error.

Disadvantages:

1. Computerized AIS
- Computer system might be crashed or hacked.
2. Manual Control over Ordering Process
- Manual intervention creates a bottleneck and delays the ordering
process.
3. System Transition
- Takes time for the employees to make use of the new system.
 Alternative Course of Action No. 2

Update
Inventory Sub
Program
Ledger
Open PO File
Supplier

Valid Vendor File

Inventory Sub
Ledger

Monitor
Inventory
Goods Update
Warehouse Inventory
Records
Open/Close PO File

Automatically
Prepare PO1 (Blind Copy)
Receive
Purchase Goods Rec Report File
Orders

PO2 Setup Supplier

Accounts
Payable

Journal Voucher Open AP File

File (Voucher Payable)

Post AP Pending File

to G/L

General Ledger AP Sub Ledger

(Voucher Register) Purchases Journal

Figure 4. Revised Computer-Based Expenditure Cycle Data Flow

Diagram (ACA #2)
 Rec.
Termina Report
Invty. File Rec.
PO Report Vendor
PO Invty. Sub.
Ledger Open PO File
PO
PO
Rec. Report PO
Purchase File Supplier
Vendor (Blind
Order Invoice
Updated Close PO AP Due
Invty. File File
Vendo

Level Check
Review Trigger PR File
and Program Supplier Prepare
Distribute Reconcile
Invoice Re.
AP +
Voucher Invoice Report
Prepare PO
Prepare
Voucher
PO Voucher
PO RR
PO Termina
PO PO RR
Purchase PO RR Rec.
Order Report
Purchase Voucher PO
Order
Invoice
Termina
Voucher
Update Update
File
Program JV History Stores
Vendor Program File
File

Open PO
General Ledger
Advantages:

1. Inventory Ordering Process

- The need for specific authorization in the purchasing department in
preparing purchase orders might be demoted since PO’s were prepared
automatically.
2. Better Internal Controls
- Provides better internal control and eliminates possibilities of fraudulent
activities.
3. Accessibility
- Gives timely and quick information on inventory status and avoids
monotonous manual work that has been invested in creating too many
documents and preparing summarized reports.

Disadvantages:

1. Inventory Ordering Process

- Increases the risk of placing unnecessary orders caused by computer
errors unless sufficient computer control has been implemented.
2. Less Physical Audit Trail
- Physical purchase requisitions are not needed in this system. In case of
potential system crash, digital purchase requisitions file might be affected
leaving untraceable audit trails.
3. System Transition
- Takes time for the employees to make use of the new system.
 Alternative Course of Action No. 3

Update
Inventory Sub Supplier
Program Valid Vendor File
Ledger

Open PO File

Monitor
Inventory Sub Purch. Dept. File Inventory
Ledger Goods

Review Transaction List

Update
Inventory Warehouse Transaction
List
Records

Automatically
Receive Prepare
Goods Purchase
PO1 (Blind Copy) Orders
Rec Report File

Open/Close PO File
Supplier

Setup PO2
Accounts
Payable
Open AP File
Journal Voucher
(Voucher Payable)
File

AP Pending File Post

to G/L

General Ledger
AP Sub Ledger
Purchases Journal (Voucher Register)

Figure 6. Revised Computer-Based Expenditure Cycle Data Flow

Diagram (ACA #3)
 Rec.
Terminal Report
Rec.
Report Vendor
Transaction Invty. Sub.
List Ledger Open PO File
PO
Rec. Report PO (Blind
File Copy) Supplier
Vendor
Invoice
Updated Close PO AP Due
Invty. File File
Vendor
Review
and File Level Check
Trigger PR File
Program Supplie Prepare
Reconcile
r Rec.
AP +
Voucher Invoice Report
Prepare PO
Prepare
Voucher
Transaction
List PO Voucher
RR
Termina
PO Terminal RR
PO RR Rec.
Report
Transaction Voucher File PO
File List Update
Invoice
Program
Voucher
Update
JV History File Stores
Program
Vendor File

Open PO
General Ledger
Advantages:

1. Inventory Ordering Process

- The system itself sends the purchase order directly to the vendors which
reduces the time-lag of reviewing it in the purchasing department and
minimizes any cost of doing such related-activities.
2. Internal Controls
- Increases the efficiency of the management by eliminating frauds and
installing automated controls.
3. Accessibility
- Provides timely and accessible information on inventory or stock levels
and avoids monotonous work from paperwoks.

Disadvantages:

1. Segregation of Duties
- The major downfall of this system is the segregation of duties because it
bypasses the purchasing department completely. The involvement of
purchasing agent to this system is crucial since source documents (e.g.
purchase orders and purchase requisition) has to be reviewed before
being placed into order to avoid unnecessary orders in case of computer
errors.
2. Less Physical Audit Trail
- Physical purchase requisitions are not needed in this system. In case of
potential system crash, digital purchase requisitions file might be affected
leaving untraceable audit trails, unless backup file is still accessible.
3. System Transition
- Takes time for the employees to make use of the new system.
Chapter 7. Recommendation

In order to prevent any business inefficiencies regarding its expenditure

cycle, it is recommended that the A&V Safety Company should follow the ACA
#1 for it will completely approach the company’s weaknesses in terms of
purchasing activities and improving its internal controls. It will also take a
lesser time to update the general ledger as it uses computerized base system.
Furthermore, by manually controlling the ordering process, it would
undeniably lift the hassle of placing unneccessary orders and having
unqualified suppliers in case of system lapses. Meanwhile, ACA #2 and ACA
#3 tried to eliminate the manual ordering process which deprived some
department functions (purchasing agent) and this construed against control
activity mainly the segregation of duties.
However, ACA #1 also have some disadvantages such as manually
delaying the ordering process, potential system crash, and substantial time to
train employees and staffs to get used to the new system. But amidst to its
shortcomings, this revised and suggested computer-based accounting system
can still be bound to success with the right people to lead together with a clear
and directive system process for their company.

Chapter 8. Conclusion

A&V Safety company could improve their weaknesses with the aid of the
provided revisions on their current system utilizing the computer-based
accounting system (CBAS). This new system could help the company stay in
the business with a tight competition and could provide some procedures and
measures for compliance. In addition, it would support the firm to run
operations potently by getting rid of those internal defects, therefore,
preventing inefficiencies.