PAULINE C.

DE VILLA
BSA 4203

I. Transaction Cycle Identification

Categorize each of the following activities into the expenditure, conversion, or revenue
cycles and identify the applicable subsystem.
a. preparing the weekly payroll for manufacturing personnel- Expenditure cycle
because it involves paying employees for their work which is an outflow of funds.
The applicable subsystem is Human Resources or Accounting.
b. releasing raw materials for use in the manufacturing cycle- Conversion cycle
because it directly contributes to the production process, converting raw
materials into finished goods. The applicable subsystem is Manufacturing or
Production.
c. recording the receipt of payment for goods sold- Revenue cycle activity because
it represents the inflow of funds from the sale of products. The applicable
subsystem is Accounting or Sales.
d. recording the order placed by a customer- Revenue cycle, as it marks the
beginning of a transaction that will eventually lead to a sale. The applicable
subsystem is Sales or Customer Relationship Management (CRM).
e. ordering raw materials- Expenditure cycle, as it involves spending money on
materials needed for production. The applicable subsystem is Purchasing or
Supply Chain Management.
f. determining the number of raw materials to order- I think it can be considered
part of both the Conversion and Expenditure cycles. It contributes to the
Conversion cycle by ensuring the right number of materials is available for
production, and it is part of the Expenditure cycle because it involves spending
money on raw materials. The applicable subsystems are Manufacturing or
Production and Purchasing or Supply Chain Management.

II. Types of Files

For each of the following records, indicate the appropriate related file structure: master
file, transaction file, reference file, or archive file.
a. customer ledgers- Master File
b. purchase orders- Transaction File
c. list of authorized vendors- Reference File
d. records related to prior pay periods- Archive File
e. vendor ledgers- Master File
f. hours each employee has worked during the current pay period- Transaction File
g. tax tables- Reference File
h. sales orders that have been processed and recorded- Transaction File

III. Internal Control

Leslie Epstein, an employee of Bormack Manufacturing Company, prepares journal

vouchers for general ledger entries. Because of the large number of voided journal
vouchers caused by errors, the journal vouchers are not prenumbered by the printer;
rather, Leslie numbers them as she prepares each journal voucher. She does, however,
keep a log of all journal vouchers written so that she does not assign the same number
 to two journal vouchers. Bi weekly, Leslie posts the journal vouchers to the general led
ger and any necessary subsidiary accounts. Bimonthly, she reconciles the subsidiary
accounts to their control accounts in the general ledger and makes sure the general
ledger accounts balance.

Required: Discuss any potential control weaknesses and problems in this scenario.

Internal control is crucial for maintaining accuracy and reliability in financial reporting. It
ensures the prevention or timely detection of errors, fraud, or irregularities. In this case,
there are a few areas of concern regarding the internal control system at Bormack
Manufacturing Company.

1. The absence of prenumbered journal vouchers creates an opportunity for errors,

fraud, or misuse. Prenumbered vouchers provide a way to track and identify missing or
altered documents, which can help detect discrepancies and maintain the integrity of the
financial records.

2. Having an employee number the journal vouchers introduce a risk of potential errors
or manipulation. Ideally, this task should be assigned to a different individual to ensure
independence and minimize the chances of intentional or unintentional mistakes.

3. Since the journal voucher numbers are not preprinted, there is no physical control
mechanism in place to ensure that the same number is not assigned to multiple
vouchers. This increases the likelihood of duplicate entries or misappropriation of funds.

4. Posting journal vouchers to the general ledger only bi-weekly may result in a delay in
capturing transactions, which could lead to inaccurate financial reporting. Ideally,
transactions should be posted to the general ledger as soon as they are recorded to
maintain up-to-date financial records.

5. Reconciling subsidiary accounts with the general ledger only bimonthly may result in
undetected errors or discrepancies. To maintain effective internal control, it is essential
to perform reconciliations more frequently, such as monthly, to ensure timely
identification and resolution of any issues.

6. While it is good practice for Leslie to ensure that general ledger accounts balance, it
would be more effective if this task is performed by a different individual to maintain
independence and minimize potential conflicts of interest.

IV. System Documentation - Payroll

The following describes the payroll procedures for a hypothetical company. Every
Thursday, the timekeeping clerk sends employee time cards to the payroll department
for processing. Based on the hours worked reflected on the time cards, the employee
pay rate and withholding information in the employee file, and the tax rate reference file,
the payroll clerk calculates gross pay, withholdings, and net pay for each employee. The
clerk then manually prepares paychecks for each employee, files hard copies of the pay
checks in the payroll department, and posts the earnings to the hard-copy employee
records.
Finally, the clerk manually prepares a payroll summary and sends it and the paychecks
to the cash disbursements department. The cash disbursements clerk reconciles the
payroll summary with the paychecks and manually records the transaction in the hard-
copy cash disbursements journal. The clerk then files the payroll summary and sends
the paychecks to the treasurer for signing. The signed checks are then sent to the pay
master, who distributes them to the employees on Friday morning.

Required: Prepare a data flow diagram and a system flowchart of the payroll procedures
previously described.

Data Flow Diagram (DFD):

A DFD is a graphical representation that shows the flow of data within a system. It
consists of rectangles (processes) and ovals (data stores). The arrows represent the
flow of data between processes and data stores.

PAYROLL PROCEDURES

Processes Data Stores

Timekeeping Clerk - Employee Time Cards

Sends time cards
Employee Files
Payroll Clerk - Calculates
payroll Tax Rate Reference Files

Paychecks
Cash Disbursements
Clerk - Reconciles and Payroll Summary
records transaction
Cash Disbursement Journal

Hard-copy Employee Records

 System Flowchart:
A system flowchart is a visual representation of the sequence of steps in a process. It
consists of shapes (symbols) connected by arrows, which indicate the flow of the
process.

Processes

Employee Time Cards Paychecks

Employee Pay Rate Payroll Summary
and Withholding Updated Hard-copy
Information Employee
Tax Rate Reference

Inputs Outputs

 Timekeeping Clerk sends time

cards to Payroll Department
(Thursday)
 Payroll Clerk calculates gross pay,
withholdings, and net pay
 Payroll Clerk prepares and files
paychecks
 Payroll Clerk prepares payroll
summary and sends it to Cash
Disbursements Department
 Cash Disbursements Clerk
reconciles payroll summary and
V. Multiple Choice records transaction in cash
disbursements journal
 Cash Disbursements Clerk sends
1. Which statement is not true?
payroll
a. Business activities beginsummary
with theand paychecksoftomaterials, property, and labor
acquisition
Treasurer for signing
in exchange for cash.
 Treasurer signs checks and sends
them to Paymaster
 Paymaster distributes signed
checks to employees on Friday
morning
 b. The conversion cycle includes the task of determining raw materials
requirements.
c. Manufacturing firms have a conversion cycle but retail firms do not.
d. A payroll check is an example of a product document of the payroll system.
e. A journal voucher is actually a special source document.

2. A documentation tool that depicts the physical flow of information relating to a

particular transaction through an organization is a
a. system flowchart.
b. program flowchart.
c. decision table.
d. work distribution analysis.
e. systems survey.

3. Sequential file processing will not permit

a. data to be edited on a separate computer run.
b. the use of a database structure.
c. data to be edited in an offline mode.
d. batch processing to be initiated from a terminal.
e. data to be edited on a real-time basis.

4. The production subsystem of the conversion cycle includes all of the following
EXCEPT
a. determining raw materials requirements.
b. make or buy decisions on component parts.
c. release of raw materials into production.
d. scheduling the goods to be produced.

5. Which of the following files is a temporary file?

a. transaction file
b. master file
c. reference file
d. none of the above