Accounting Information System Exam #2

Supervision (P.O. processing)

Within the expenditure cycle, supervision is of highest importance in the receiving department, where the inventory arrives. When the goods arrive the receiving department supervisor takes the packing slip that comes with the goods. The receiving department clerk then completes the blind PO by counting the goods. The completed blind PO is then reconciled to the packing slip by the supervisor.

How do Point-of-Sale Systems differ from the sales order processing system discussed in class?

- Customers pick the inventory from the shelves and take them to a cashier - The inventory levels are updated and reorder needs can immediately be detected. - No accounts receivables

How is the revenue cycle typically automated?

-Authorizations and data access can be performed and controlled using computers. -The manual journals and ledgers are changed to transaction and master files. -Input and output are still typically hard copy documents that are entered into the system through a terminal and printed at the end of the procedures, the input is processed using one or more computerized processes and then eventually output. -The computerized processes perform similar procedures earlier performed manually - business process automation.

What are the two types of tests for control activities?

1. Design effectiveness of controls - tested to determine whether the company's controls satisfy the company's control objectives. 2. Operating effectiveness of controls - tested to determine whether the control is operating as designed and is effective.

Authorization (revenue processing)

1. A sale is made on credit (credit check process): "Credit is authorized before sales order is processed (goods picked and shipped)." 2. Inventory is picked from the warehouse (stock release/picking ticket from sales to warehouse): "Stock release (sales order/picking ticket) is used to authorize picking of goods."

Physical access controls (P.O. processing)

1. Access to inventory (direct) is physical restricted 2. Access to accounting records (indirect) is physically and logically restricted

Segregation of duties (P.O. processing)

1. Authorization of purchases should be separated from purchase processing -Authorization of inventory purchases is separate from purchase order processing 2. Custody of inventory (receiving) should be separated from recordkeeping (Inventory Control). 3. Access to the different accounting records should be separate (for purchase order processing: purchases journal, inventory subsidiary ledger and general ledger; purchases journal and accounts payable ledger are often updated by the same department)

What are the three columns in the Control Matrix?

1. Control objective 2. Risk 3. Control activity

Segregation of duties (revenue processing)

1. Credit authorization is separate from SO processing 2. Inventory record keeping is separate from inventory custody (e.g., warehouse and shipping) 3. Updating of the different accounting records is done by separate departments (sales journal, inventory subsidiary ledger, AR subsidiary ledger and general ledger)

What four procedures can be used in testing control activities?

1. Inquiry of appropriate personnel 2. Observation of the company's operations 3. Inspection of relevant documentation 4. Re-performance of the control

Physical access controls (revenue processing)

1. Only authorized individuals have access to assets, e.g., inventory is in a locked warehouse and only the warehouse function has access to the warehouse. 2. Only authorized individuals have logical and physical access to information (accounting records), i.e., logical and physical access security limits update access to journals, ledgers, transaction, archive, and master files.

Authorization (P.O. processing)

1. Purchases of inventory is based on actual inventory needs (before the purchase order is prepared a purchase requisition should be created when additional inventory is needed) 2. Purchase requisitions for non-inventory items are authorized by department managers 3. Approved vendor list is used when purchasing

Accounting records (P.O. processing)

1. Sequential numbering and using unique identifiers 2. The system uses appropriate journals (purchases journal) and accounting records (AP sub ledger, Inventory sub ledger, and General ledger).

Accounting records (revenue processing)

1. Source documents are sequentially numbered and have unique identifiers (e.g., sales orders, shipping notice, and invoices) 2. The system uses appropriate journals (Sales Journal) and ledgers (AR Subsidiary Ledger, Inventory Subsidiary Ledger, and General Ledger)

Two examples of business process reengineering in the revenue cycle

1. Systems that do not have master files (various balances, e.g., AR, are instead calculated on the fly if needed) do not need processes to update master files and functions that reconciles information to verify that master files were updated correctly, e.g., the G/L function does not need to reconcile the sales journal to the inventory summary. 2. Customer order and sales order preparation can be eliminated if customers' systems are integrated with the company's revenue cycle

Independent verification controls (P.O. processing) -Accounts Payable (3 way match)

AP compares purchase orders from purchasing, invoice from vendor (that received PO from purchasing), to receiving report from receiving (that received goods from vendor). This reconciliation is done to validate that we are invoiced for what we received and ordered before the accounts payable is recorded.

Independent verification control: (revenue processing) Sales -> Shipping -> Billing

Billing compares the shipping notice from shipping (that received sales information sales) to sales order information from sales - this provides a control over the shipping processes (and also warehouse processes) and ensures that we bill the customer for what they ordered and they receive

What are control activities?

Control activities are processes designed to achieve control objectives (mitigate control objective risks) by preventing or detecting negative affects of events and conditions on the control objectives.

What are control objectives?

Control objectives state desired end result and provide targets toward which the entity moves in conducting its activities. COSO categorizes control objectives into three groups: 1. financial statement reliability 2. effectiveness and efficiency of operations 3. compliance with laws and regulations

Independent verification control: (revenue processing) Inventory Control v Shipping ^ -> Billing v -> General Ledger Accounts Receivable^

General ledger compares sales journal voucher from billing (that received shipping notice from shipping), to AR summary from accounts receivable (that received invoice copy from billing), to inventory summary from inventory control (that received a shipping noticed from shipping) - this provides a control over billing, inventory control, and accounts receivable processes and ensures that correct amounts are entered into the general ledger

Independent verification controls (P.O. processing) -Inventory Control

Inventory control compares purchase requisition from inventory control, purchase order from purchasing (that received PR from inventory control) and receiving report from receiving (that receive goods from vendor that receives PO from purchasing). The reconciliation is done to validate that we ordered and received what was initially requested, and to validate that we received what was ordered before recording the increase in inventory (the reconciliation provides control over purchasing and receiving processes):

What is business process improvement?

More than automation but less radical changes than reengineering - falls somewhere between the two extremes

How is the control matrix extended when testing operating effectiveness?

Operating effectiveness evaluation documentation is typically accomplished by adding two columns (to the right) in the control matrix: 1. Test of Controls - containing descriptions of test procedures performed by the auditor 2. Effectiveness - states a conclusion about whether the control activity was determined to be effective and provides descriptions of the results of the tests

Independent verification control: (revenue processing) Sales -> Warehouse -> Shipping

Shipping compares the stock release and goods from the warehouse (that received the stock release from sales) to sales order information from sales - this provides a control over the warehouse processes and ensures that we ship what was ordered

Independent verification controls (P.O. processing) -General Ledger

The General Ledger department compares the purchases summary from AP (that received a receiving report from receiving) and the inventory summary from Inventory Control (that received a receiving report from receiving). The reconciliation is performed to validate that the total obligations recorded equal the total inventories received (and provides control over Inventory Control and AP).

What is business process automation?

Using technology to automate existing processes

What is business process reengineering?

Using technology to make radical changes to existing processes