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15 January, 2016 - 09:50

Case A: Midwest Insurance Co.

Background Information

Midwest Insurance Co. is a major property/casualty underwriter based in St. Louis. It uses more than 3,000 independent insurance agents to market its products and collect premiums. In the past, agents typically have remitted the premiums to Midwest at a predetermined time each month by mailing the checks to a lockbox site or to a regional office of the insurance company. This method of cash collections has been slow, and accounting for the agents’ payments has been fraught with problems. Therefore, Midwest sought the help of Nationwide Bank (NB) in developing a more automated collection process. NB responded by developing an ACH-based “Customer-Initiated Payment Service (CIPS)” that allows the independent agents to pay Midwest with ACH debits initiated via a toll-free phone call or over the Internet. The next section describes how the CIPS process works; for simplicity, the description is limited to telephone-initiated payments.

Operation of the CIPS Process

By 8:15 p.m. EST on the 14th of each month, an agent calls the toll-free number and gives the bank operator the following information:

  • The company number—Midwest’s four-digit designator
  • The unit number—the agent’s eight-digit unique identifier
  • The payment amount
  • The agent’s PIN
  • The effective date of the payment—a day (within the next 30 days) on which the payment is to be made

The bank operator keys the information to a payment database. Alternatively, the same information could be keyed in via the bank’s Web site. A preprocessing program checks to make sure all fields were filled in. Later in the evening, the bank uses the payment data to create a new file of transactions formatted to ACH standards. On each effective payment date, the ACH payment data is used to update the bank accounts of the agents and Midwest’s ACH concentration account at NB. Funds are then transferred from this ACH concentration account to Midwest’s primary concentration bank in New York City so they are available for investment on the transaction’s effective date.

The evening of the payment date, NB also transmits a data file of the settled payments to Midwest’s data center in Delaware. The data center uses the payments data to update its agents’ accounts receivable database and to post the payments to the general ledger. The following morning, the database is used to generate several reports, which can be viewed online or printed, depending on the option chosen by the users (i.e, by managers who access the database from Midwest’s St. Louis office).

Case B: Panhandle Department Stores (I)

Panhandle Department Stores operates at 30 locations in Texas and Oklahoma. The company’s headquarters are in Oklahoma City. The company accepts cash, national credit cards (VISA and MasterCard), and its own Panhandle charge card (PCC). Procedures for cash receipts are standard at each location. PCC billing and the treasury function are located at headquarters.

Customers present their purchases at a central checkout location at each store. Point-of-sale registers provide immediate updates to quantities on hand in the inventory master data, compile detailed data on sales, and accumulate “proof figures” used in cashing out the drawer at the end of each shift. Each store’s registers are tied to the central computer system in Oklahoma City.

Throughout the shift, clerks process the several forms of sales. At the end of the shift, the next clerk resets the proof totals. The front manager takes a hard copy of the proof totals for the shift completed and the drawer of the clerk whose shift was completed to the cashier, for “proving.” The cashier reconciles the drawer to the totals, prepares a two-part “cash out report” for each clerk on the shift, and updates the “over and short summary” maintained for each clerk. After the work for each shift is complete, these reports are sent to the front manager for review. Meanwhile, the clerk for the next shift has installed his own cash drawer and has begun processing sales.

Store deposits are made whenever the cash-on-hand balance reaches $25,000 and at the end of the day. For each deposit, the system prints out a deposit slip; a designated employee makes the trip to the local bank. The employee brings back a receipted deposit slip. Daily, the cashier prepares the national credit card (NCC) settlement sheets in duplicate for each credit company. One copy of the settlement sheet and the supporting charge sales slips are submitted to the appropriate charge company for payment. The PCC slips, a copy of the NCC settlement sheet, a copy of the cash out report, and the day’s deposit slips are sent to Oklahoma City at 5:00 p.m. by courier mail.

In the cash receipts department at Oklahoma City, a sales report is obtained from the process at the end of each day. That report is reconciled to the cash out report and the deposit slips. The PCC slips are reconciled to that line on the cash out report. The PCC slips are then sent to data processing, where data preparation clerks enter the charges into a batch file on the computer. At 9:00 p.m. the batch is used to update the accounts receivable master data.

Case C: Panhandle Department Stores (II)

Before starting this case, review the facts in Case B.

Reimbursements from the national credit cards are deposited directly in the company’s main Oklahoma City bank, and the bank notifies Panhandle of these receipts. The cash receipts department reconciles these receipts to the NCC settlement sheets that previously had been submitted to the card companies (the settlement sheets had been filed by date until this time). All receipts from the company’s proprietary cards (PCCs) are received in Oklahoma City. The company uses a turnaround document, so it receives a check and a portion of the monthly charge card statement (on which the customer has filled in the amount remitted). The cash receipts clerk examines the check against the amount written on the document and, in a space reserved, enters the amount received on the document so that it can be computer scanned.

Checks and turnaround documents are batched. The documents are sent to data processing. The checks are deposited, and the deposit slip is photocopied. Copies of the batch totals and the deposit slips are filed separately by date. A copy of the deposit slip is sent to the treasurer’s office.

The turnaround documents are then scanned. Each evening at 10:00 p.m., customers’ accounts are updated with scanned data, and a cash receipts listing is produced and sent to cash receipts each morning, where it is checked against and filed with the related batch totals. A copy of the cash receipts listing is sent to the treasurer’s office.


For the company assigned by your instructor,1 complete the following requirements:

a. Prepare a table of entities and activities.

b. Draw a context diagram.

c. Draw a physical data flow diagram (DFD).

d. Prepare an annotated table of entities and activities. Indicate on this table the groupings, bubble numbers, and bubble titles to be used in preparing a level 0 logical DFD.

e. Draw a level 0 logical DFD.


For the company assigned by your instructor,4 complete the following requirements:

a. Draw a systems flowchart.

b. Prepare a control matrix, including explanations of how each recommended existing control plan helps to accomplish—or would accomplish in the case of missing plans—each related control goal. Your choice of recommended control plans should come from section A of Table 12.2  or Table 12.3  plus any technology-related control plans from CONTROLLING INFORMATION SYSTEMS: PROCESS CONTROLS  that are germane to your company’s process.

c. Annotate the flowchart prepared in part a to indicate the points where the control plans are being applied (codes P-1 . . . P-n) or the points where they could be applied but are not (codes M-1 . . . M-n).


Study the narratives of the case indicated by your instructor. Also refer to the two operations process goals for the billing function in Figure 12.8, and Figure 12.9, and operations process goals A and B for the cash receipts function in Figure 12.11.

In one paragraph for each of the four goals, compare and contrast the assigned case processes in terms of their ability to achieve the goals. Cite specific features that give a particular process a comparative advantage in terms of meeting a particular goal. Also, be specific in identifying the query or reporting opportunities in the assigned cases.


Assume the data collected in this case are stored in a data warehouse. Describe the data and reports that could be used to help:

a. The treasurer decide how to invest the company’s money.

b. The controller determine if the company will have enough cash on hand.

c. The credit manager determine when to increase credit lines or cut off credit to existing customers.


The following capsule cases present short narratives of processes used by three actual organizations whose names have been changed for the purpose of this problem. You will use the cases to practice the mechanics of drawing data flow diagrams.

Capsule Case 1: Cumberland County Registry of Motor Vehicles

The Registry of Motor Vehicles (RMV) in Cumberland County, Kansas, has recently simplified its license renewal process by automating the test-taking and fee-collection steps in the process. RMV notifies drivers when their licenses are about to expire. Drivers who renew their licenses in person at the RMV work with a computer that looks and functions like an ATM machine. The process is described in the following paragraphs.

After keying in his or her current driver’s license number, the applicant is presented with a touch-screen display that pulls up test questions stored within the computer. Short video clips of typical traffic situations are shown, and questions are asked about each clip. The applicant responds to the questions by selecting from options presented on the screen.

The terminal scores the test, allows users to change address or other personal information appearing on the screen, and “collects” the renewal fee. The user “pays” the fee by inserting his or her VISA or MasterCard into a designated slot on the computer.

The computer then prints a scored answer sheet, which the applicant takes to a registry clerk. The clerk completes the process by administering a vision test, taking a picture of the applicant, and issuing a license.

Capsule Case 2: Down Under Airlines

Background Information

Down Under Airlines (DUA) processes over 400 million tickets a year. The process of issuing the tickets is highly automated; a record of each ticket sold is stored in DUA’s database. But when passengers turn in tickets, gate agents stuff the flight coupons into envelopes and ship them to DUA’s Denver headquarters. Because of discrepancies between the original records housed in the ticket database and actual ticket use as reflected by the flight coupons (see the following NOTE), DUA, like other airlines, has to match every coupon against every ticket in the database in order to accurately account for passenger revenues. With the volume of tickets involved, manual matching is a daunting task. Image processing to the rescue!

(Note: For example, passengers might use a ticket from one airline to fly with another, or they might use only the A-B leg of an A-B-C flight, and so forth.)

Description of the New Image Processing System

DUA’s new system, designed by one of the Big Four professional service firms, functions as follows:

When a ticket is sold to a passenger by a travel agent or by one of DUA’s own 30,000 ticket agents, the seller enters a record of the ticket into DUA’s database, just as in the past. However, when flight coupons are received in Denver, they are now read by an image scanner that captures the images and stores them in an optical storage and retrieval library called Big File.

The ticket number appearing on the flight coupon is also scanned by an optical character recognition (OCR) system. The ticket numbers—an index to the ticket images themselves—are stored in a relational database, which is used to track the location of each ticket image in Big File.

Operators use a network of workstations to access ticket images. Special audit software matches each ticket image in Big File with ticket records in the mainframe database. If the image and record do not match (for instance, a three-leg ticket sold but only two legs used), the ticket number is included in the audit data. If the image and record do match, the ticket record is written to the passenger revenue data.

Capsule Case 3: Rosebud Supermarkets

Background Information

Rosebud Supermarkets Inc. operates a chain of grocery stores in Vermont. Rosebud accepts credit cards and debit cards at the point of sale (POS). To offer this service to customers, Rosebud has placed a pinstripe terminal within the reach of the customer at each checkout counter. The terminal, which is attached to the transport belt area that moves the groceries past the cashier, interfaces with the POS cash register. For customers who want to pay for their orders using a means other than with cash, the system works as described below.

Partial Description of Rosebud’s Checkout Process

(Note: Exception routines are among the features not described.)

When a customer presents his or her order at the checkout station, the cashier uses a POS scanner at the end of the belt area to ring up the customer’s order in the cash register and to produce a register tape for the customer. After the groceries have been scanned, the cashier obtains the POS register total for the groceries purchased. Then, the customer hits the “enter” key in the pinstripe terminal. A screen display appears that shows the purchase total and asks the customer what type of payment option is desired. The customer selects from three options—credit card, direct debit (through local participating banks), or check authorization—by pressing a key opposite that option.

In the case of credit, the customer runs the credit card through the terminal’s magnetic stripe reader. The request for credit authorization is then transmitted to the appropriate credit card company. The credit card company sends back a credit authorization number for the purchased amount.

For the debit option, the customer runs a bank debit card through the card reader and then enters his PIN. As in the case of credit purchases, the data are transmitted to the appropriate bank. The bank responds by transmitting back an approval message.

For check authorization, Rosebud uses scannable courtesy cards. The courtesy card number and grocery total are transmitted to Rosebud’s internal check authorization system. The authorization system looks up the customer in its courtesy card data and notifies the cashier whether or not the check should be accepted.

For the capsule case assigned by your instructor, complete the following requirements:

a. Prepare a table of entities and activities.

b. Draw a context diagram.

c. Draw a physical data flow diagram (DFD).

d. Prepare an annotated table of entities and activities. Indicate on this table the groupings, bubble numbers, and bubble titles to be used in preparing a level 0 logical DFD.

e. Draw a level 0 logical DFD.


Airlines have issued paperless tickets for several years now. Recently, they have begun experimenting with allowing travelers to print their own tickets using special bar coding technology located at commercial customer locations. The bar-code ticket system can be used to communicate with business customers’ accounting systems and other internal databases to speed up the billing process. These tickets would be scanned at the airport in the same way as paper tickets or airport generated boarding cards, when the passenger boards the plane.

a. Describe the advantages to the airline of this process. Compare it to both travel-agent-issued paper tickets and to paperless tickets.

b. Describe the advantages to the customer of this process.

c. Review Capsule Case 2 on Down Under Airlines. How would this change affect the process you diagrammed for Down Under Airlines? Make a copy of your diagrams, and show the changes you envision.


The following is a list of 13 control plans from this chapter or from CONTROLLING INFORMATION SYSTEMS: PROCESS CONTROLS.

Control Plans

A. Independent billing authorization

B. Sales order tickler file in billing

C. One-for-one checking of sales order and invoice

D. Programmed edits of shipping notification

E. Interactive feedback check

F. Computer agreement of batch totals

G. Cumulative sequence check

H. Document design

I. Prenumbered documents

J. Procedures for rejected inputs

K. Turnaround documents

L. One-for-one checking of deposit slip and checks

M. Deposit slip file

Listed next are 10 statements describing either the achievement of a control goal (i.e., a system success) or a system deficiency (i.e., a system failure). List the numbers 1 through 10 on your solution sheet. Next to each item, insert one letter from the preceding list indicating the best control to achieve the desired goal or to address the system deficiency described. A letter should be used only once, with three letters left over.

Control Goals or System Deficiencies

  1. Helps to ensure the validity of shipping notifications.
  2. Provides a detective control to help ensure the accuracy of billing inputs.
  3. Provides a preventive control to help ensure the accuracy of billing inputs.
  4. Helps to ensure input validity by preventing duplicate document numbers from entering the system.
  5. Helps to identify duplicate, missing, and out-of-range numbers by comparing input numbers to a previously stored number range.
  6. Precludes a field salesperson from omitting the sales terms from the sales order, thus avoiding having the order rejected by the computer data entry personnel.
  7. Helps to ensure the Information System control goal of input completeness in a periodic/batch environment.
  8. Helps to ensure that all shipments are billed in a timely manner.
  9. Meets the operations system control goal of efficiency of resource use by reducing the number of data elements to be key entered from source documents.
  10. Provides an “audit trail” of deposits.


The following is a list of 15 control plans from this chapter or from CONTROLLING INFORMATION SYSTEMS: PROCESS CONTROLS  and THE “ORDER-TO-CASH” PROCESS: PART I, MARKETING AND SALES (M/S).

Control Plans

A. Sales order tickler file in billing

B. One-for-one checking of sales order and shipping notice by shipping department personnel

C. Confirming customer balances regularly

D. Entering shipping notice close to location where order is shipped

E. Checking for authorized prices, terms, freight, and discounts

F. Hash totals (e.g., of customer ID numbers)

G. Computer agreement of batch totals

H. Manual agreement of batch totals

I. Batch sequence check

J. Key verification

K. Written approvals

L. Immediately endorsing incoming checks

M. One-for-one checking of checks and remittance advices

N. Immediately separating checks and remittance advices

O. Reconciling bank account regularly

Listed below are 10 system failures that have control implications. List the numbers 1 through 10 on your solution sheet. Next to each number, insert one letter from the preceding list corresponding to the control plan that would best prevent the system failure from occurring. Also, give a brief (one- to two-sentence) explanation of your choice. A letter should be used only once, with five letters left over.

System Failures

  1. Once goods are delivered to the common carrier, the shipping system at Good-times Video Corp. prepares a three-part shipping notice. Copy 2 of the notice is sent to billing to initiate the billing process. Many shipping notices have either been lost in transit or have been delayed in reaching the billing section.
  2. A dishonest order entry clerk bypasses the credit-checking procedures every time a customer order is received from his brother-in-law’s firm. The clerk releases sales order copies to the warehouse and to the shipping department without submitting the orders to the credit department.
  3. Because the mailroom clerks at Laxx Company do not take batch totals of incoming customer checks, the cashier has misappropriated several thousand dollars over the years by depositing company checks to his personal bank account.
  4. Potpourri Merchandising Mart uses periodic processing for entering sales invoice inputs and updating customer accounts. Although it uses certain batch total procedures, Potpourri has experienced a number of instances of recording sales invoices to incorrect customer accounts.
  5. The billing department at Gerrymander Corp. employs batch processing and uses prenumbered invoice documents. Nevertheless, a number of duplicate invoice numbers has been processed, resulting in numerous customer complaints.
  6. Because Abraham Co. had been privately owned for years, it had never undergone an independent audit. When Abraham finally went public, the Securities and Exchange Commission required an audit of its financial statements. As part of its audit, the independent CPA firm found a large discrepancy between the accounts receivable general ledger balance and the underlying details of individual customer balances.
  7. At Jonquil, Inc., billing sends shipping notices to the data entry group in data processing, where they are keyed into the computer. During the last month, an inexperienced data entry clerk made several errors in keying the shipping notices. The errors were discovered by the internal auditors as part of their routine examination of the data processing department.
  8. Sales at Defrod Corporation have declined considerably over those of the preceding year. In an effort to improve the financial statements, the vice-president of finance obtained a supply of blank shipping notices on which she fabricated 100 fictitious shipments. She submitted the fictitious documents to the billing department.
  9. The mailroom at Whipoorwill Co. forwards checks and remittance advices to the accounts receivable department. A clerk checks the remittance advices against open invoices, as reflected in the accounts receivable master data. It is not uncommon for the clerk to note discrepancies, in which case the customer is contacted in an effort to reconcile the differences. Once all the discrepancies have been investigated and cleared, the accounts receivable clerk releases the checks to the cashier for deposit.
  10. Clerks in the billing department at Abacus Enterprises, Inc., prepare sales invoices from a copy of the packing slip received from the shipping department. Recently, the company has experienced a rash of customer complaints that the customers have been billed for freight charges, despite the fact that they were promised free shipping.


a. Redraw the appropriate part of Figure 12.4, assuming a lockbox system is used. Also, prepare a lower-level data flow diagram for the cash receipts function, using the same assumption.

b. Redraw the appropriate part of Figure 12.4 assuming that, in addition to cash collections from charge customers, the organization also has cash sales and receives cash from the sale of equity securities. Prepare a brief, one- to two- sentence defense for each of the changes made.

Do not draw an entirely new Figure 12.4 for either part (a) or part (b). You might want to photocopy the figure from the chapter and then draw your additions and changes on the photocopy.