Chapter 9-1 Prepared by Coby Harmon University of California, Santa Barbara Westmont College.
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Transcript of Chapter 9-1 Prepared by Coby Harmon University of California, Santa Barbara Westmont College.
Chapter 9-1
Prepared byCoby Harmon
University of California, Santa BarbaraWestmont College
Chapter 9-2
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
Real WorldReal WorldReal WorldReal World Organizations not only pay the purchase price of
inventory and supplies that they acquire, but they
also pay a cost to conduct purchases and to write checks to pay for purchases.
This cost is the wages and salaries that organizations pay to employees involved
in purchasing and payment activities. Many organizations continuously look for
ways to reduce this cost by improving the efficiency of the purchasing and
payment processes. General Electric Co. (GE) implemented a Web-based
electronic invoice presentment (EIP) system in which its small and midsize
vendors send invoices electronically via the web. This process allowed GE to
avoid the time and cost of receiving and entering paper invoices into its IT
system. GE agreed to pay within 15 days in return for a 1.5 percent discount for
invoices submitted under the EIP system. On the other hand, any paper invoices
would be paid in 60 days. Within six months of implementing the new system,
“more than 15,000 of GE’s vendors, who represented 45 percent of the
company’s vendors, signed up for electronic presentment.”1 This change resulted
in a 12 percent reduction in the cost of payables processing.
Chapter 9-5
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 expenditures processes
Introduction to Expenditures ProcessesIntroduction to Expenditures ProcessesIntroduction to Expenditures ProcessesIntroduction to Expenditures Processes
Transaction Processing Systems (TPS)
Chapter 9-6
Exhibit 9-1 Expenditures Processes withinthe Overall System
Introduction to Introduction to Expenditure Expenditure ProcessesProcesses
Introduction to Introduction to Expenditure Expenditure ProcessesProcesses
SO 1 An introduction to expenditures processes
Chapter 9-7
Exhibit 9-2Comparison of the Revenue and Expenditures Processes
SO 1 An introduction to expenditures processes
Introduction to Expenditures ProcessesIntroduction to Expenditures ProcessesIntroduction to Expenditures ProcessesIntroduction to Expenditures Processes
Chapter 9-8
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.
SO 1 An introduction to expenditures processes
Introduction to Expenditures ProcessesIntroduction to Expenditures ProcessesIntroduction to Expenditures ProcessesIntroduction to Expenditures Processes
Chapter 9-9
Terminology
SO 2 Purchasing processes and the related risks and controls
Purchasing ProcessesPurchasing ProcessesPurchasing ProcessesPurchasing Processes
Purchase Requisition
Purchase Order (PO)
Purchases Journal
Blind Purchase Order
Bill of Lading
Packing Slip
Receiving Report
Receiving Log
Cutoff
Accounts Payable
Subsidiary Ledger
Chapter 9-10
Exhibit 9-2Purchasing Process Map
See next slide for larger image.
SO 2 Purchasing processes and the related risks and controls
Purchasing ProcessesPurchasing ProcessesPurchasing ProcessesPurchasing Processes
Chapter 9-11 SO 2 Purchasing processes and the related risks and controls
Purchasing ProcessesPurchasing ProcessesPurchasing ProcessesPurchasing Processes
Exhibit 9-2Purchasing Process Map
Chapter 9-12 SO 2 Purchasing processes and the related risks and controls
Purchasing ProcessesPurchasing ProcessesPurchasing ProcessesPurchasing Processes
Exhibit 9-2Purchasing Process Map
Chapter 9-13
Common procedures associated with the revenue
process:
Authorization of transactions
Segregation of duties
Adequate records and documents
Security of assets and documents
Independent checks and reconciliation
Cost-benefit considerations
SO 2 Purchasing processes and the related risks and controls
Controls and Risks in Purchasing Controls and Risks in Purchasing ProcessesProcessesControls and Risks in Purchasing Controls and Risks in Purchasing ProcessesProcesses
Chapter 9-14
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.
SO 2 Purchasing processes and the related risks and controls
Controls and Risks in Purchasing Controls and Risks in Purchasing ProcessesProcessesControls and Risks in Purchasing Controls and Risks in Purchasing ProcessesProcesses
Chapter 9-15
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
SO 2 Purchasing processes and the related risks and controls
Controls and Risks in Purchasing Controls and Risks in Purchasing ProcessesProcessesControls and Risks in Purchasing Controls and Risks in Purchasing ProcessesProcesses
Concept Check
Chapter 9-16
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.
SO 2 Purchasing processes and the related risks and controls
Controls and Risks in Purchasing Controls and Risks in Purchasing ProcessesProcessesControls and Risks in Purchasing Controls and Risks in Purchasing ProcessesProcesses
Concept Check
Chapter 9-17
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
SO 2 Purchasing processes and the related risks and controls
Controls and Risks in Purchasing Controls and Risks in Purchasing ProcessesProcessesControls and Risks in Purchasing Controls and Risks in Purchasing ProcessesProcesses
Concept Check
Chapter 9-18 SO 3 Purchase return processes and the related risks and controls
Reasons for Returns:
1. Goods received are unacceptable due to:
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 9-19
See next slide for larger image.
Exhibit 9-9Purchase Returns Process Map
SO 3 Purchase return processes and the related risks and controls
Purchase Returns ProcessesPurchase Returns ProcessesPurchase Returns ProcessesPurchase Returns Processes
Chapter 9-20 SO 3 Purchase return processes and the related risks and controls
Purchase Returns ProcessesPurchase Returns ProcessesPurchase Returns ProcessesPurchase Returns Processes
Exhibit 9-9Purchase Returns Process Map
Chapter 9-21
Exhibit 9-9Purchase Returns Process Map
SO 3 Purchase return processes and the related risks and controls
Purchase Returns ProcessesPurchase Returns ProcessesPurchase Returns ProcessesPurchase Returns Processes
Chapter 9-22
Specific controls over the purchase returns process:
Authorization of transactions
Segregation of duties
Adequate records and documents
Security of assets and documents
Independent checks and reconciliation
Cost-benefit considerations
SO 3 Purchase return processes and the related risks and controls
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
The document prepared when purchased items are
returned is a(n)
a.debit memo.
b.invoice.
c.receiving report.
d.sales journal.
SO 3 Purchase return processes and the related risks and controls
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
Concept Check
Chapter 9-24
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 management
Remittance advice
Cash disbursements journal
Cash Disbursement ProcessesCash Disbursement ProcessesCash Disbursement ProcessesCash Disbursement Processes
SO 4 Cash disbursement processes and the related risks and controls
Chapter 9-25
See next slide for larger image.
Cash Disbursement ProcessesCash Disbursement ProcessesCash Disbursement ProcessesCash Disbursement Processes
SO 4 Cash disbursement processes and the related risks and controls
Exhibit 9-14Cash Disbursement Process Map
Chapter 9-26
Cash Disbursement ProcessesCash Disbursement ProcessesCash Disbursement ProcessesCash Disbursement Processes
SO 4 Cash disbursement processes and the related risks and controls
Exhibit 9-14Cash Disbursement Process Map
Chapter 9-27
Cash Disbursement ProcessesCash Disbursement ProcessesCash Disbursement ProcessesCash Disbursement Processes
SO 4 Cash disbursement processes and the related risks and controls
Exhibit 9-14Cash Disbursement Process Map
Chapter 9-28
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:
Authorization of transactions
Segregation of duties
Adequate records and documents
Security of assets and documents
Independent checks and reconciliation
Cost-benefit considerations
SO 4 Cash disbursement processes and the related risks and controls
Chapter 9-29
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.
SO 4 Cash disbursement processes and the related risks and controls
Risks and Controls Cash Disbursement Risks and Controls Cash Disbursement ProcessProcessRisks and Controls Cash Disbursement Risks and Controls Cash Disbursement ProcessProcess
Concept Check
Chapter 9-30
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.
SO 4 Cash disbursement processes and the related risks and controls
Risks and Controls Cash Disbursement Risks and Controls Cash Disbursement ProcessProcessRisks and Controls Cash Disbursement Risks and Controls Cash Disbursement ProcessProcess
Concept Check
Chapter 9-31
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.
SO 4 Cash disbursement processes and the related risks and controls
Risks and Controls Cash Disbursement Risks and Controls Cash Disbursement ProcessProcessRisks and Controls Cash Disbursement Risks and Controls Cash Disbursement ProcessProcess
Concept Check
Chapter 9-32
Three-Way Match is the 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 payment
SO 5 An overview of IT systems of expenditure and cash disbursement processes that enhance the efficiency of expenditures 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 9-33
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 disbursement processes that enhance the efficiency of expenditures processes
Exhibit 9-19Document Matching to Approve and Pay for Purchases
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 9-34
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 documents and the related risks and controls
Advantages
reduce time,
costs,
errors, and
duplicate payments in
invoice processing.
Risks
system errors in the
matching process,
unauthorized access,
fraud, and
inadequate backup of files.
Chapter 9-35
Real WorldReal WorldReal WorldReal World Frymaster Corporation is a company in Shreveport,
Louisiana that manufactures foodservice equipment
such as fryers and frying systems, food dispensing equipment, pasta cookers,
and toasters. Frymaster uses an automated document-matching system for
invoice payment. It is a medium-size company with four people in its accounts
payable department. Compared with companies like it, Frymaster has a cost per
vendor payment processed that is extremely low: Frymaster’s average cost is
only about one-fourth of the overall average cost for a medium-size company.
Frymaster has such lower cost because more than 75 percent of the
invoices it receives usually match the other documents the first time. These
matched invoices are paid automatically by the system so that no employee time
is needed.
Therefore, fewer staff members are needed to process a larger volume
of payments, so the staff can focus on exceptions i.e., the other 25 percent of
invoices that do not initially match. Documents that are properly matched are
processed automatically, and only those with differences require manual steps to
reconcile.
SO 6 Computer-based matching of purchasing documents and the related risks and controls
Chapter 9-36
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 documents and the related risks and controls
Chapter 9-37
In the mid-1990s, 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 systems and the related risks and controls
Chapter 9-38
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
SO 7 Evaluated receipt settlement systems and the related risks and controls
Chapter 9-39
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®
SO 7 Evaluated receipt settlement systems and the related risks and controls
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
Concept Check
Chapter 9-40
E-Business and Electronic Data InterchangeE-Business and Electronic Data InterchangeE-Business and Electronic Data InterchangeE-Business and Electronic Data Interchange
Exhibit 8-18EDI Using a Third-Party Network
Value Added
Networks (VANs)
Chapter 9-41
SO 8 E-business and electronic data interchange (EDI) systems and the related risks and controls
Exhibit 9-20E-Business and EDI Risks and Controls
Risks and Controls in El-Business and EDIRisks and Controls in El-Business and EDIRisks and Controls in El-Business and EDIRisks and Controls in El-Business and EDI
Chapter 9-42
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 and EDIRisks and Controls in El-Business and EDIRisks and Controls in El-Business and EDIRisks and Controls in El-Business and EDI
SO 8 E-business and electronic data interchange (EDI) systems and the related risks and controls
Concept Check
Chapter 9-43
Electronic Invoice Presentment and Payment
(EIPP)
Takes advantage of the connectivity of the Internet to
electronically send invoices or payments.
Accounts payable could receive invoices and make payments
via the Internet.
Usually utilize web browsers as the interface for accounts
payable employees to receive and view invoices and make
payments.
E-PayablesE-PayablesE-PayablesE-Payables
SO 9 E-payables system
Chapter 9-44
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 cards
Chapter 9-45
Ethical Issues Related to Expenditures Ethical Issues Related to Expenditures ProcessesProcessesEthical Issues Related to Expenditures Ethical Issues Related to Expenditures ProcessesProcesses
SO 11 Ethical issues related to expenditures processes
It is important to establish internal control policies and IT controls to help prevent or detect
fraud,
ethical lapses, or
errors.
Chapter 9-46
Real WorldReal WorldReal WorldReal World There are many examples of frauds related to the
expenditures process committed by upper level
managers. In addition to the fraud committed at Phar-Mor as described in Chapter 3,
Michael Monus, as President and Chief Operating Officer of Phar-Mor, made
fraudulent payments on typewritten checks drawn on a special Phar-Mor checking
account. The checks supported the World Basketball League (WBL) that Monus
founded. The use of a special checking account allowed Monus to bypass the normal
purchase order controls, invoice matching system, and computer check writing policies
that accompanied Phar-Mor’s main operating account, so that he could use Phar-Mor
funds to keep the financially troubled WBL afloat. His fraud diverted nearly $10 million
to the WBL in a period of three years. Mr. Monus specifically established a separate
checking account that avoided the internal control structure. Since top management is
above the level of internal control, proper internal control systems may not prevent
expenditure fraud conducted by the top officials. However, the board of directors and
upper level management should ensure that the corporate managers adhere to a code
of ethical conduct. Ethics codes are not guarantees of fraud prevention either, but
when ethical conduct is expected and rewarded, an environment is created in which
such management fraud is more difficult to conceal.
SO 11 Ethical issues related to expenditures processes
Chapter 9-47
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
SO 11 Ethical issues related to expenditures processes
Ethical Issues Related to Expenditures Ethical Issues Related to Expenditures ProcessesProcessesEthical Issues Related to Expenditures Ethical Issues Related to Expenditures ProcessesProcesses
Concept Check
Chapter 9-48
Corporate governance policies should incorporate the four areas of
management oversight,
internal controls and compliance,
financial stewardship, and
ethical conduct.
SO 12 Corporate governance in expenditure processes
Corporate Governance in Expenditure Corporate Governance in Expenditure ProcessesProcessesCorporate Governance in Expenditure Corporate Governance in Expenditure ProcessesProcesses
Chapter 9-49
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