Chapter 9-1. Chapter 9-2 Accounting Information Systems, 1 st Edition Expenditures Processes and...

Chapter 9-1

Chapter 9-2 Accounting Information Systems, 1st Edition

Expenditures Processes and Controls-Purchases

Chapter 9-3

1. An introduction to expenditures processes

2. Purchasing processes and the related risks and controls

3. Purchase return processes and the related risks and controls

4. Cash disbursement processes and the related risks and controls

5. An overview of IT systems of expenditure and cash disbursement processes that enhance the efficiency of expenditures processes

6. Computer-based matching of purchasing documents and the related risks and controls

7. Evaluated receipt settlement systems and the related risks and controls

8. E-business and electronic data interchange (EDI) systems and the related risks and controls

9. E-payables systems

10. Procurement cards

11. Ethical issues related to expenditures processes

12. Corporate governance in expenditures processes

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 9-4

When a purchase occurs, the information resulting from that purchase must flow into

the purchase recording systems,

the accounts payable and cash disbursement systems, and

the inventory tracking systems.

SO 1 An introduction to expenditure processesSO 1 An introduction to expenditure processes

Introduction to Expenditure Introduction to Expenditure ProcessesProcessesIntroduction to Expenditure Introduction to Expenditure ProcessesProcesses

Transaction Processing Systems (TPS)

Chapter 9-5

Exhibit 9-1 Expenditures Processes withinthe Overall System

Introduction to Introduction to Expenditure Expenditure ProcessesProcesses

SO 1 An introduction to expenditure SO 1 An introduction to expenditure processesprocesses

Chapter 9-6

Exhibit 9-2Comparison of the Revenue and Expenditures Processes

Chapter 9-7

Common expenditures processes include:

Prepare a purchase requisition and/or purchase order.

Notify vendor (supplier) of goods or services needed.

Receive goods or services.

Record the payable.

Pay the resulting invoice.

Update the records affected, such as accounts payable, cash, inventory, and expenses.

Chapter 9-8

Terminology

SO 2 Purchasing processes and the related risks and controlsSO 2 Purchasing processes and the related risks and controls

Purchasing ProcessesPurchasing ProcessesPurchasing ProcessesPurchasing Processes

Purchase Requisition

Purchase Order

Purchases Journal

Blind Purchase Order

Bill of Lading

Packing Slip

Receiving Report

Receiving Log

Cutoff

Accounts Payable Subsidiary Ledger

Chapter 9-9

Exhibit 9-2Purchasing Process Map

See next slide for larger image.

Chapter 9-10 SO 2 Purchasing processes and the related risks and controlsSO 2 Purchasing processes and the related risks and controls

Chapter 9-11 SO 2 Purchasing processes and the related risks and controlsSO 2 Purchasing processes and the related risks and controls

Chapter 9-12

Common procedures associated with the revenue process:

Controls and Risks in Purchasing Controls and Risks in Purchasing ProcessesProcessesControls and Risks in Purchasing Controls and Risks in Purchasing ProcessesProcesses

Authorization of transactions

Segregation of duties

Adequate records and documents

Security of assets and documents

Independent checks and reconciliation

Cost-benefit considerations

Chapter 9-13

Characteristics indicating risk with purchasing processes:1. Goods received difficult to differentiate, count, or

inspect.

2. High volumes of goods are received, or goods are of high value.

3. Inventory pricing arrangements are complex or based on estimates.

4. Frequent changes occur in purchase prices or vendors.

5. Company depends on one or few key vendors.

6. Receiving and/or record keeping are performed at multiple locations.

Chapter 9-14

Within the purchasing processes, which of the following is the first document prepared and thereby the one that triggers the remaining purchasing processes?

a. The invoice

b. The receiving report

c. The purchase order

d. The purchase requisition

Quick ReviewQuick Review

Chapter 9-15

Personnel who work in the receiving area should complete all of the following processes except

a. counting the goods received.

b. inspecting goods received for damage.

c. preparing a receiving report.

d. preparing an invoice.

Chapter 9-16

Which of the given departments will immediately adjust the vendor account for each purchase transaction so that the company will know the correct amount owed to the vendor?

a. Purchasing

b. Receiving

c. Accounts payable

d. Shipping

Chapter 9-17 SO 3 Purchase return processes and the related risks and SO 3 Purchase return processes and the related risks and

controls controls

Reasons for Returns:

1. Goods received are unacceptable: Quantity or quality discrepancies

Damage or defects

Errors in the type of goods delivered or ordered

Discrepancies in the terms of the purchase

Timing issues

2. Changes in the company’s needs.

Purchase Returns ProcessesPurchase Returns ProcessesPurchase Returns ProcessesPurchase Returns Processes

Chapter 9-18

Exhibit 9-9Purchase Returns Process Map

SO 3 Purchase return processes and the related risks and SO 3 Purchase return processes and the related risks and controls controls

Chapter 9-19 SO 3 Purchase return processes and the related risks and SO 3 Purchase return processes and the related risks and

controls controls

Chapter 9-20

Chapter 9-21

Risks and Controls in the Purchase Risks and Controls in the Purchase Returns ProcessReturns ProcessRisks and Controls in the Purchase Risks and Controls in the Purchase Returns ProcessReturns Process

Specific controls over the purchase returns process:

Chapter 9-22

The document prepared when purchased items are returned is a(n)

a. debit memo.

b. invoice.

c. receiving report.

d. sales journal.

Risks and Controls in the Purchase Risks and Controls in the Purchase Returns ProcessReturns ProcessRisks and Controls in the Purchase Risks and Controls in the Purchase Returns ProcessReturns Process

Chapter 9-23

Cash disbursements process must be designed to ensure that the company appropriately processes payments to satisfy its accounts payable when they are due.

Terminology:

Cash Disbursement ProcessesCash Disbursement ProcessesCash Disbursement ProcessesCash Disbursement Processes

Cash management

Remittance advice

Cash disbursements journal

SO 4 Cash disbursement processes and the related risks and SO 4 Cash disbursement processes and the related risks and controls controls

Chapter 9-24

Exhibit 9-14Cash Disbursement Process Map

Chapter 9-25

Chapter 9-26

Chapter 9-27

Risks and Controls Cash Disbursement Risks and Controls Cash Disbursement ProcessProcessRisks and Controls Cash Disbursement Risks and Controls Cash Disbursement ProcessProcess

Specific controls over the cash receipts process:

Chapter 9-28

Which of the following controls is not normally performed in the accounts payable department?

a. The vendor’s invoice is matched with the related receiving report.

b. Vendor invoices are selected for payment.

c. Asset and expense accounts to be recorded are assigned.

d. Unused purchase orders and receiving reports are accounted for.

Chapter 9-29

In a system of proper internal controls, the same employee should not be allowed to

a. sign checks and cancel the supporting voucher package.

b. receive goods and prepare the related receiving report.

c. prepare voucher packages and sign checks.

d. initiate purchase requisitions and inspect goods received.

Chapter 9-30

Within accounts payable, to ensure that each voucher is submitted and paid only once, each invoice approved to be paid should be

a. supported by a receiving report.

b. stamped “paid” by the check signer.

c. prenumbered and accounted for.

d. approved for authorized purchases.

Chapter 9-31

Three-Way Match - matching of a purchase order to the related receiving report and invoice.

Time consuming and expensive.

Business Process Reengineering (BPR) to improve efficiency and effectiveness. IT systems include:

Computer-based matching and checking of purchasing documents

Evaluated receipt settlement (ERS)

Electronic forms of purchase and paymentSO 5 An overview of IT systems of expenditure and cash SO 5 An overview of IT systems of expenditure and cash

disbursement processes that enhance the efficiency of disbursement processes that enhance the efficiency of expenditures processesexpenditures processes

IT Systems of Expenditure and Cash IT Systems of Expenditure and Cash Disbursement ProcessesDisbursement ProcessesIT Systems of Expenditure and Cash IT Systems of Expenditure and Cash Disbursement ProcessesDisbursement Processes

Chapter 9-32

Exhibit 8-17 is a system flowchart of a generic version of revenue system withsome paper documents.

SO 5 An overview of IT systems of expenditure and cash SO 5 An overview of IT systems of expenditure and cash disbursement processes that enhance the efficiency of disbursement processes that enhance the efficiency of expenditures processesexpenditures processes

IT Systems of Expenditure and Cash IT Systems of Expenditure and Cash Disbursement ProcessesDisbursement ProcessesIT Systems of Expenditure and Cash IT Systems of Expenditure and Cash Disbursement ProcessesDisbursement Processes

Exhibit 9-19Document Matching to Approve and Pay for Purchases

Chapter 9-33

Automated matching - software matches an invoice to its related purchase order and receiving report.

Computer-Based MatchingComputer-Based MatchingComputer-Based MatchingComputer-Based Matching

SO 6 Computer-based matching of purchasing SO 6 Computer-based matching of purchasing documents and the related risks and documents and the related risks and controlscontrols

Advantages reduce time, costs, errors, and duplicate

payments in invoice processing.

Risks system errors unauthorized access, fraud, and inadequate backup of

files.

Chapter 9-34

Risks and Controls in Computer-Based Risks and Controls in Computer-Based MatchingMatchingRisks and Controls in Computer-Based Risks and Controls in Computer-Based MatchingMatching

Security and Confidentiality Risks

Processing Integrity Risks

Availability Risks

SO 6 Computer-based matching of purchasing SO 6 Computer-based matching of purchasing documents and the related risks and documents and the related risks and controlscontrols

Chapter 9-35

Prior to 2000, some companies, began implementing invoice-less matching systems for purchasing and paying vendors.

Evaluated receipt settlement (ERS) - receipt of goods is carefully evaluated and, if it matches the purchase order, settlement of the obligation occurs through this system.

Elevated Receipt SettlementElevated Receipt SettlementElevated Receipt SettlementElevated Receipt Settlement

SO 7 Evaluated receipt settlement SO 7 Evaluated receipt settlement systems and the related risks and systems and the related risks and controlscontrols

Chapter 9-36

Risks and Controls in Elevated Receipt Risks and Controls in Elevated Receipt SettlementSettlementRisks and Controls in Elevated Receipt Risks and Controls in Elevated Receipt SettlementSettlement

Security and Confidentiality Risks

Processing Integrity Risks

Availability Risks

Chapter 9-37

Which of the following IT systems is designed to avoid the document matching process and is an “invoiceless” system?

a. Computer-based matching system

b. Electronic data interchange

c. Evaluated receipt settlement

d. Microsoft Dynamics GP®

Risks and Controls in Elevated Receipt Risks and Controls in Elevated Receipt SettlementSettlementRisks and Controls in Elevated Receipt Risks and Controls in Elevated Receipt SettlementSettlement

Chapter 9-38

E-Business and Electronic Data E-Business and Electronic Data InterchangeInterchangeE-Business and Electronic Data E-Business and Electronic Data InterchangeInterchange

Exhibit 8-18EDI Using a Third-Party Network

Value Added

Networks (VANs)

Chapter 9-39

Risks and Controls in El-Business Risks and Controls in El-Business and EDIand EDIRisks and Controls in El-Business Risks and Controls in El-Business and EDIand EDI

SO 8 E-business and electronic data interchange SO 8 E-business and electronic data interchange (EDI) systems and the related risks and (EDI) systems and the related risks and controlscontrols

Exhibit 9-20E-Business and EDI Risks and Controls

Chapter 9-40

Input controls such as field check, validity check, limit check, and reasonableness check are useful in IT systems of purchasing processes to lessen which of the following risks?

a. Unauthorized access

b. Invalid data entered by vendors

c. Repudiation of purchase transactions

d. Virus and worm attacks

Risks and Controls in El-Business Risks and Controls in El-Business and EDIand EDIRisks and Controls in El-Business Risks and Controls in El-Business and EDIand EDI

SO 8 E-business and electronic data interchange SO 8 E-business and electronic data interchange (EDI) systems and the related risks and (EDI) systems and the related risks and controlscontrols

Chapter 9-41

Electronic Invoice Presentment and Payment (EIPP)

Takes advantage of the connectivity of the Internet to electronically send invoices or payments.

E-PayablesE-PayablesE-PayablesE-Payables

SO 9 E-payables systemSO 9 E-payables system

Chapter 9-42

Procurement cards

Called p-cards

Credit cards that organization gives to certain employees to make designated purchases.

Normally not used to purchase raw materials or products

Used for small-dollar-amount purchases.

Procurement CardsProcurement CardsProcurement CardsProcurement Cards

SO 10 Procurement cardsSO 10 Procurement cards

Chapter 9-43

It is important to establish internal control policies and IT controls to help prevent or detect such fraud, ethical lapses, or errors.

Ethical Issues Related to Ethical Issues Related to ExpendituresExpendituresEthical Issues Related to Ethical Issues Related to ExpendituresExpenditures

SO 11 Ethical issues related to expenditures SO 11 Ethical issues related to expenditures processesprocesses

Chapter 9-44

It is important to establish internal control policies and IT controls to help prevent or detect

fraud,

ethical lapses, or

errors.

Chapter 9-45

Which of the following is most likely to be effective in deterring fraud by upper level managers?

a. Internal controls

b. An enforced code of ethics

c. Matching documents prior to payment

d. Segregating custody of inventory from inventory record keeping

Chapter 9-46

Corporate governance policies should incorporate the four areas of

management oversight,

internal controls,

financial stewardship, and

ethical behavior.

SO 12 Corporate governance in expenditure processesSO 12 Corporate governance in expenditure processes

Corporate Governance in Expenditure Corporate Governance in Expenditure ProcessesProcessesCorporate Governance in Expenditure Corporate Governance in Expenditure ProcessesProcesses

Chapter 9-47

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