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A&V Safety Inc.
Case Analysis
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Company Background
A&V Safety, Inc., is a growing company specializing in the sales of safety equipment to
commercial entities. It currently employs 200 full-time employees, all of whom work out of their
headquarters in San Diego, California. During the summer, the company expands to include
about 10 summer interns who are delegated smaller jobs and other errands. A&V currently
competes with Office Safety, Inc., and X-Safe, who lead the industry. Suppliers for A&V include
Halotron Extinguishers, Kadelite, and Exit Signs, Inc. A&V attempts to maintain inventory
levels sufficient to service two of sales. This level has shown to avoid stockouts, and the excess
inventory is held in a warehouse in a suburb of San Diego.
A&V has a legacy accounting system that employs a combination of manual procedures
supported by standalone PCs in the various departments. Recently it has experienced business
inefficiencies that have been linked to its antiquated accounting system. You have been retained
by A&V management to review its procedures for compliance with the Sarbanes-Oxley Act and
to provide recommendations for improvement.
Inventory Sub Ledger General Ledger
Supplier Low Inventory Level

Post to
PO2 General
Prepare
ledger
PO1 Purchase
Order
Supplier’s Invoice
Set Up
Accounts
Payable
PO3
Packing Slip Purchase Order AP Sub Ledger
Receive
Goods Open AP File
Receiving report
Warehouse Supplier
Update
Inventory
records
Inventory Sub Ledger
Current System’s DFD (Purchasing)
Expenditure Cycle:
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
AP Sub Ledger Check register
Amount Due,
Due date Prepare
Cash
CD Voucher Check
Disburse-
ments
Check Copy,
Update CD Voucher
Accounts
Payable Vendor
Check register
Summary
Closer Voucher File

AP Summary
Post to
General General Ledger
Ledger
Current System’s DFD (Cash Disbursement)
Cash Disbursement Procedures:
1. The AP clerk reviews the liabilities that are due by searching the AP subsidiary ledger. He
then prints out a hard-copy cash disbursement voucher for all items due and sends it to the
cash disbursements department for payment.
2. The AP clerk prints hard-copy AP summary from the department PC and sends it to the
general ledger department.
3. From his department PC, the cash disbursement clerk records the payment in the digital
check register and prints a three-part check.
4. Upon signing of the negotiable portion of the check, the clerk sends it to the vendor for
payment; another copy is filed in the department and the other is being sent to the
accounting AP department clerk together with the cash disbursement voucher.
5. At the end of the day, the clerk prints a hard-copy summary of the check register and sends
it to the general ledger department.
6. The AP clerk records the payment in the digital check register and close out the liability in
the AP digital subsidiary ledger.
7. From the department PC, the general ledger clerk posts the summaries received from the
accounting and cash disbursements departments to the appropriate ledger accounts. The
clerk files the hard copy summaries in the general ledger department.
Internal Control Weaknesses
Purchases Procedures
Lack of segregation of internal functions
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 result into fraudulent activities by the clerk which will consequently may cause damage
to the company. In order for a firm to have a sound 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.
Lenient reporting practice in receiving department
In the current system, 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 because had
the clerk immediately reported the discrepancy, the appropriate action would have been
performed earlier. The receiving department clerk should instead receive a ‘blind copy’ of the
purchase order to force the receiving clerk to count and inspect the items before preparing the
receiving report.
Improper verification in accounts payable department
In the current system, 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.
G/L 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 G/L 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.
Cash Disbursements Procedures
Flawed disbursement process
In the current system, the company may be paying for items not received. The cash disbursement
voucher is based on a flawed process to set up the accounts payable. The correct process should
be a proper 3-way match that is performed prior to establishing the liability. This is done by
sending a voucher packet to the cash disbursements department for payment approval. After
which this is returned to AP after proper approval and confirmation to update the AP records,
then the general ledger function should receive the journal voucher from cash disbursements and
the account summary from AP for reconciliation and for updating of the General Ledger.
No formal journal vouchers for G/L updating
In the current system, it is the custom of the company for the AP clerk in the accounting
department to review the liabilities that are due by searching the AP subsidiary ledger from the
department PC, printing out a hard-copy cash disbursement voucher for each item due for
payment, and sending cash disbursements voucher to the cash disbursements department for
payment, and at the end of the day, the clerk prints out a hard-copy AP summary then sends it to
the general ledger department.
If following the proper disbursement process, a journal voucher should have been received from
the cash disbursements department after proper review, approval, and processing of the voucher
packet received from the A/P department. Having a formal voucher will decrease the likelihood
of errors and fraudulent activities and ensure that transactions are properly recorded and
performed.
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A&V Safety Inc.

Supplier Low Inventory Level

Packing Slip Purchase Order AP Sub Ledger

Inventory Sub Ledger

Current System’s DFD (Purchasing)

Closer Voucher File

Current System’s DFD (Cash Disbursement)

Internal Control Weaknesses

Lack of segregation of internal functions

Lenient reporting practice in receiving department

Cash Disbursements Procedures

Flawed disbursement process

No formal journal vouchers for G/L updating

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