Reading 1) review questions
a) What is a flowchart? Describe four different kinds of flowcharts and explain which are most often used in an accounting information system. A flowchart is a graphic depiction of a set of instructions, a collection of equipment or a group of processes. Four specific types include the systems flowchart, which provide a high-level overview of an information system, program flowcharts, which show the sequence of instructions in a computer program, document flowcharts, which show how documents flow through an information system and hardware flowcharts, which focus especially on a systems hardware components. Of the four, systems and document flowcharts are most often used in documenting accounting information systems. b) Summarize the rules and conventions commonly observed in the preparation of flowcharts. Flowcharts should be logically laid out and easy to read. In general, they should proceed from left to right, top to bottom. Systems and document flowcharts are often organized in columns depicting areas of responsibility. c) List and explain the meaning and use of ten common flowcharting symbols. What sources would you consult for learning about additional symbols not on your list? Representative symbols are shown below; they are illustrative, not definitive.
Process Manual operation Decision Terminator
Sort
Stored data On-page connector Document Off-page connector Merge
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Additional symbols are available in virtually any software capable of creating flowcharts. d) How are flowcharts used in working with accounting information systems? Flowcharts can be used to reach a shared understanding of how a system is supposed to work and / or how it actually works. They can also be used as a tool for analyzing internal controls, particularly when combined with a risk / control matrix. e) Respond to the questions for this chapters opening vignette. i) What is cross-function process information? Why is it important in business? Cross-function process information, as the name implies, refers to information that is needed / shared by more than one function in the organization. Functions often are represented by departments, such as Accounting, Marketing and Information Systems. Cross-function information is important in business because few, if any, problems can be solved by looking at one function in isolation. For example, if the marketing department proposed developing a new product, accounting would need to forecast costs and revenues. ii) What is the role of an audit committee? How might an audit committee use a flowchart? An audit committee is a subset of a corporations board of directors; its primary responsibility is interacting with the external auditors. The Sarbanes-Oxley Act puts some conditions on the qualifications of audit committee members; for example, at least one must have some formal background in accounting or finance. An audit committee might use a flowchart to understand how the audit will be conducted; they might also use it to discuss business processes and needed controls with the auditors. iii) How can a well-prepared flowchart promote good decision making? A wellprepared flowchart promotes good decision making by ensuring that everyone has the same information about how a business process actually works. Without a flowchart, discussions of business processes may rely solely on whats inside someones head, which may be significantly different from reality.
2) Reading review problem
a) What kind(s) of flowchart(s) would be useful to Zions? Explain your response. Zions would almost certainly use systems flowcharts to understand and depict its business
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processes. Since documents are so important in banking, they might also use a document flowchart. A hardware flowchart could be useful for designing and / or changing their computer network. b) Consider the four-step risk management process. Identify three to five symbols you would use to create a flowchart of that process; explain your choices. A generic process symbol would certainly be used in a flowchart of Zions risk management process; they might also use a predefined process symbol if they have some standardized methodology for carrying out one or more of the four steps. Every flowchart needs two terminator symbols (start and end). The process involves documents as well, so a document symbol would likely be used. A decision symbol would be important in the third step, where they identify actions needed to close control graps. c) Visit Zions web site. Create a risk / control matrix for three risks they might experience.
Risk Bad debts for loans made Network infected with virus Risk category credit risk Internal control strict credit evaluation procedures firewall, anti-virus software strategic plan; balanced scorecard or other performance evaluation system Internal control purpose preventive preventive, detective, corrective
systems risk
Opening too many branches too quickly
business strategy risk
preventive, detective
3) Making choices and exercising judgment
Compare and contrast Smartdraw, Microsoft Visio and one other flowcharting program (if you completed reflection and self-assessment 5.2, you could use one of the programs you identified there). Prepare a paper and / or PowerPoint presentation that includes a recommendation regarding your preferred flowcharting software; justify your recommendation. Smartdraw is inexpensive and easy to use; it is very intuitive and can be mastered fairly quickly. Additionally, users can take advantage of a free trial for a limited period before purchasing the software. Visio is a Microsoft product, often included in the Microsoft Office Suite. While more expensive and more complex than Smartdraw, it does interface more easily with other components of the suite. Download.com also lists FlowBreeze, published by BreezeTree software. According to the web site, users can create flowcharts simply by typing text. Flowcharts can be customized after text entry as well. The software seems intuitive, and also offers a free download. It is also less expensive than Visio. Overall, among those three packages, my personal preference is Smartdraw, primarily for its ease of use and intuitive nature.
4) Field exercises
Because the field exercises involve original research and will vary significantly from student to student, Im not including any suggested solutions to them. If your students
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produce particularly outstanding responses and youd like to send them to me, Ill post them on the books web site. Let me know if this lack of suggested responses to field exercises is a major inconvenience for you.
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5) Flowchart creation
Create a flowchart based on each of the following independent situations (one flowchart per situation). a) Using Figure 5.2 (partial flowchart for Coris Catering Service) and the narrative provided in the chapter, complete the flowchart. b)
Coris Catering Service: delivery through bank deposit Cori Client
Bank
Deliver food.
Receive delivery.
Bill client.
Invoice
Remittance advice & payment
Pay invoice.
Prepare deposit.
Receive deposit.
c) Using Figure 5.3 (partial flowchart for University Bookstore) and the narrative provided in the chapter, complete the flowchart.
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Campus bookstore: receiving through stocking
Publisher
Receiving Dept. B
Accounting Dept.
Stocking
Ship books.
Receive books.
Receiving report B
Invoice Receiving report Bill client.. P.O. originates in purchasing dept. Purchase order A
Sort & stock books.
A
Date
Merge documents.
Receive payment.
Pay invoice.
d) Horacio is a college student at Feng Shui University. He rents an apartment from the University for $600 a month. On the 15th of every month, Horacio writes a check for the rent. He mails the check to the Housing Services office on campus; in turn, Housing Services sends an e-mail receipt back to Horacio. The mailroom staff in Housing Services makes a copy of the check for Horacios file and sends the original, with all the other rent checks for the month, to the bank. Once a month, the treasurer of Housing Services reconciles the bank statement. Prepare flowchart a of the preceding scenario.
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Feng Shui University rent payment process
Horacio
Housing Svcs. mailroom Original checks
Bank
Housing Svcs. treasurer
Write check.
Prepare bank statement
Copy check Bank statement Copied check Reconcile bank statement
Name Customer database Send checks to bank.
e) Consider the process you use to register for classes every term. At Cal Poly Pomona (my university), students see an advisor to determine which classes they need and check their e-mail for their registration appointment time. They then compare the list of needed classes with the offerings for the upcoming term and their personal scheduling constraints and preferences. The students register online or over the phone. The university generates a fee bill, which may include parking, and e-mails it to the student. Students can pay their fee bills electronically with a credit card or in person with cash or check. Prepare a flowchart of the Cal Poly Pomona registration process and of your universitys registration process (two separate flowcharts).
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Cal Poly Pomona registration process
Student
University
Consult advisor
Confirm appointment
Student database
Register for needed classes.
Fee bill
Pay fees.
f) Visit the web site of the International Accounting Standards Board. Summarize the process the Board uses to develop International Financial Reporting Standards (IFRS), then create a systems flowchart of the process. The IASB uses a process very similar to the FASB process. Through research, agenda items are identified for the board to consider. The board receives proposals about how to deal with an issue; they may choose to publish a discussion paper, but they are not required to do so. After public consultation, the board issues an exposure draft. They receive input from various groups, including audit technical partners, special interest groups, local standard setting bodies and regulators. After another period of public consultation, the board publishes a new standard, which may be adopted by local jurisdictions. Every standard is subject to a two-year post-implementation review process.
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Start Discussion paper
Conduct research
Optional
Board agenda
Consult public
Receive proposals
Exposure draft
Consult public
New IFRS
Reviewed after two years
End
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6) Narrative preparation from a flowchart (CMA adapted)
a) Consider the flowchart in Figure 5.4. Write a narrative description of the business process it depicts. This flowchart shows a straightforward sales process, from the initial order to the bank deposit. The salesperson prepares a four-part invoice, retaining one copy and sending three to the cashier. The cashier approves the sale and processes it, including assigning a consecutive number to the sales invoices. The cashier records the sale in a cash register; of the three invoice copies received by the cashier, one is sent to the customer, one is kept in the store, and the third is sent to the assistant manager. The cashier sends the register tape to the assistant manager, who reconciles the tapes against the invoices. The assistant manager also receives the checks / cash and prepares the bank deposit. The manager reviews the bank deposit and sends the reconciliation report back to the assistant manager; the assistant manager also handles the bank deposit. b) Consider the flowchart in Figure 5.5. Write a narrative description of the business process it depicts. This flowchart illustrates a sales order process, from the time of the customer order through packing and shipping. The customer places an order which is processed by the marketing department; a separate credit department checks customer credit after the order is processed. Based on the sales order, warehouse staff assembles the order and send it to shipping & receiving; shipping & receiving send the order to the client. In addition, the warehouse updates inventory records and prepares a material status report, presumably to transmit to purchasing.
7) Flowchart and system critiques
a) Consider the flowchart in Figure 5.4. Describe at least two strengths and at least two weaknesses of the flowchart itself. Then, identify and describe at least two strengths and at least two weaknesses of the process it depicts. For each process weakness, suggest a way to correct it. Regarding the flowchart itself, two strengths include plenty of white space and columnar organization. On the weakness side, some of the symbols could be better aligned; for example, its not immediately clear who prepares the bank deposit. Additionally, the flow is occasionally from bottom to top, rather than from top to bottom. In terms of the process depicted, sequential document numbering is (in and of itself) a strength; however, the numbering appears to be manual and occurs too late in the process to ensure strong internal control. That weakness would be eliminated by using information technology to assign numbers much earlier in the process. Having the bank deposit reviewed by a manager is a strength as well. The cashier, however, should not be approving sales; that function should take place much earlier in the process and be performed by a separate credit department.
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b) Consider the flowchart in Figure 5.5. Describe at least two strengths and at least two weaknesses of the flowchart itself. Then, identify and describe at least two strengths and at least two weaknesses of the process it depicts. For each process weakness, suggest a way to correct it. The flowchart in Figure 5.5 suffers from at least two major weaknesses: it lacks a title and it lacks directional arrows. The lack of directional arrows makes the process difficult to follow and the flowchart hard to interpret. The columnar organization is a strength, as is the inclusion of plenty of white space for easy reading. In terms of the process, strengths include a separate credit evaluation function and the presence of a stock availability report. However, customer orders are apparently assembled before checking inventory availability, which could lead to back orders and customer dissatisfaction. In addition, the warehouse has both physical custody of inventory and responsibility for maintaining inventory records; those functions should be separated for strong internal control. c) Compare the flowcharts you created for the registration process at your university and Cal Poly Pomona. What risk exposures do each flowchart indicate? What internal controls would you recommend to address each risk exposure? In the Cal Poly Pomona process, risk exposures and recommended controls for each include: Risk exposure Student misses registration appointment. Student registers for unneeded classes. Fee bill is incorrect. Student fails to pay fees timely. Recommended control Establish late registration period. Require advising. Confirm fees before sending bill. Offer multiple payment methods. Cancel classes for non-payment.
8) Crossword puzzle
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9) Terminology
Please match each item on the left with the best item on the right. 1. 2. 3. 4. 5. J C H G D 6. 7. 8. 9. 10. I B F A E
10)
1. 2. 3. 4. 5.
Multiple choice questions
C A D D C 6. 7. 8. 9. A B C A
10. C
11)
Risk / control matrices
The matrix below is based on 4D (Feng Shui University).
Controls Type P&A P&M Key Yes No Design Yes Yes COSO Information & communication Control activity Information & communication
Pre-addressed envelopes Daily receipt processing
Client names on folders
D&M
No
Yes
Bank reconciliation Daily deposits
D&M P&M
Yes Yes
Yes Yes
Control activity Control activty
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12)
Statement evaluation
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. A B Document flowcharts are focused on documents; other flowchart types have a different focus. B Off-page connectors may be needed if a flowchart is long or complex. C B In most cases, flowcharts will require revision when processes change. A A C B Although possible, this situation is highly unlikely. B Visio is sometimes the best tool, but not always.
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