Chapter 5 Expenditure Cycle (book)

procurement cycle

(1) *Purchase requisition* - Decide we need something prepare requisition (2) *Purchasing * - controls/authorization before placed (3)*Receiving/Inspection* (4) *Accounts Payable* - Recordings (5) *Cash Disbursements*

Independent verification controls

*A/Payable dept. verifies much of the work done within the expenditure cycle.* -PR, PO, receiving reports, and suppliers' invoices must be checked and verified by A/P. *G/Ledger dept. verifies:* -the total obligations recorded equal the total inventories received -the total reductions in accounts payable equal the total disbursements of cash

How do these purchasing controls change in a CBAS?

*Authorizations are automated.* programmed decision rules must be debugged *Automating inventory in EDI and JIT* faulty inventory model can lead to over-purchasing or under-purchasing *Cash disbursements may automate check printing and signing.* programming logic must be flawless automated signing only below a dollar threshold -- We can essentially program in authorization -1 way = valid vendor file

How do supervision controls change in a CBAS?

*Automation often leads to a collapsing of the traditional segregation of duties.* -requires greater supervision *Supervision takes on new aspects as technology advances.* -electronic monitoring *Supervision becomes more difficult as the workplace becomes more sophisticated.* -employees may have advanced IT training Computer supervision takes the form of reports and analytics -print out integrated reports and determine if something has gone wrong or doesn't make sense

Processing the payment =

Making sure we are paying valid customers, real dollar amount, timeliness of payments

Some organizations do not use an AP subsidiary ledger or a purchase journal. How is this possible?

Many companies engaged in business-to-business (B2B) transactions use the vendor invoice file as a substitute for the traditional purchases journal and accounts payable subsidiary ledger. The invoices in the file provide a chronological record of total purchases for the period (equivalent to the purchases journal), and the unpaid invoices at any point in time constitute the organization's accounts payable.

Computer-generated PO

PO is automatically sent without manual review

Computer generates PO (no PR needed)

PO not sent until manually reviewed

AP packet

PO, receiving report, and supplier's invoice

Computer generates PR

Purchases manually generates PO

How do these segregation of function controls change in a CBAS?

*Extensive consolidation by the computer of tasks traditionally segregated* -computer programs authorize and process purchase orders -computer programs authorize and issue checks to vendors -- Computer consolidates these tasks -more concerned with integrity of program now (who can override???)

Accounting records

*Purchases System:* A sub-ledger, general ledger, purchases requisition file, purchase order file, receiving report file *CD System:* Voucher payable file, AP sub-ledger, cash disbursement journal, general ledger, cash accounts

Independent verification

*Purchases System:* AP reconciles source documents before liability is recorded. General ledger reconciles overall accuracy of process *CD System:* Final review by cash disbursements. Overall reconciliation by general ledger. Periodic bank reconciliation by controller

Transaction authorization

*Purchases System:* Inventory control *CD System:* Accounts payable authorizes payment

Segregation of duties

*Purchases System:* Inventory control separate from purchasing and inventory custody. AP sub-ledger separate from the general ledger *CD System:* Separate AP sub-ledger, cash disbursement, and general ledger functions

Supervision

*Purchases System:* Receiving department *CD System:* --

Access

*Purchases System:* Security of physical assets, limit access to the accounting records above *CD System:* Proper security over cash. limit access to the accounting records above

How do these independent verification controls change in a CBAS?

-Automating the accounting function reduces the need for verification by reducing the chances of fraud and error in the expenditure cycle. -However, the need for verification shifts to the computer program and the programmers where fraud and error may still be present. -- Password type stuff Predetermined roles and functions Programmers safeguarded programs 3 way match

A purchase system BOOK

-Begins in Inventory Control when inventory levels drop to reorder levels -A purchase requisition (PR) is prepared and copies to sent to Purchasing and Accounts Payable (A/P) -Purchasing prepares a purchase order (PO) for each vendor and sends copies to Inventory Control, A/P, and Receiving -Upon receipt, Receiving counts and inspects the goods. A blind copy of the PO is used to force workers to count the goods. -A receiving report is prepared and copies sent to the raw materials storeroom, Purchasing, Inventory Control, and A/P. -A/P eventually receives copies of the PR, PO, receiving report, and the supplier's invoice. -A/P reconciles these documents, posts to the purchases journal, and records the liability in the accounts payable subsidiary ledger. -A/P periodically summarizes the entries in the purchases journal as a journal voucher which is sent to the General Ledger (G/L) department. Inv-Control or Purchases DR Accts Payable-Control CR -A/P also prepares a cash disbursements voucher and posts it in the voucher register. -G/L department: posts from the accounts payable journal voucher to the general ledger reconciles the inventory amount with the account summary received from inventory control

Segregation of functions

-Custody of the asset, inventory, by the Warehouse must be separate from record keeping for the assets by the Inventory Control. -Custody of the asset, cash, by Cash Disbursements must be kept separate from record keeping for the asset by A/P.

Activities in the expenditure cycle

-Figure out we need something (i.e. looking at a list, real time POS system, etc.) -Prepare a purchase order (usually see a valid vendor file with this) -Receiving function -Recordings in the accounting system (purchase journal, AP sub) -Disbursement of the check

Cash Disbursements System BOOK

-Periodically, A/P searches the open vouchers payable file for items with payments due: A/P sends the voucher and supporting documents to Cash Disbursements A/P updates the accounts payable subsidiary ledger -Cash Disbursements: (1)prepares the check (2)records the information in a check register (cash disbursements journal) (3)returns paid vouchers to accounts payable, mails the check to the supplier (4)sends a journal voucher to G/L: Accounts Payable DR Cash CR -G/L department receives: the journal voucher from cash disbursements a summary of the accounts payable subsidiary ledger from A/P -The journal voucher is used to update the general ledger. -The accounts payable control account is reconciled with the subsidiary summary.

Documents used in the expenditure cycle

-Purchase requisition (authorization or approval process before it becomes purchase order) -Purchase order (multiple copies) -Valid vendor file -Open order file (when purchase order goes in, keeps track of transactions as things go in) -Receiving report (receiving) -Bill of lading (receiving) -Packing slip (receiving) ^all receiving but all have different functions -Invoice =Special journals, ledgers, subledgers

Ways we can automate expenditure cycle:

-computer programs decide/flag stuff that needs to be ordered, human approve this, then move it to purchase order -computer scans, decides what you need, makes purchase order from valid vendor list (someone looks at this before it goes out the door) -EDI system decides what needs to be reordered and in real time puts order in (no human role) w/ EDI there is always someone in the middle

Is cash disbursements allowed to sign the checks or print presigned checks?

-if controls before it gets there are really good then this is ok -if cash disbursements have some kind of opportunity to fool with the payee, then this is not ok

PG 221 basic purchases system flowchart

-inventory control comes before purchasing and is linked to the POS system

Goals of the Expenditure Cycle

-purchase from reliable vendors -purchase high quality items -obtain best possible price -purchase only items that are properly authorized -have resources available when they are needed -receive only those items ordered -ensure items are not lost, stolen, or broken -pay for the items in a timely manner

goals of the expenditure cycle

-purchase from reliable vendors -purchase high quality items -obtain best possible price -purchase only items that are properly authorized -have resources available when they are needed -receive only those items ordered -ensure items are not lost, stolen, or broken -pay for the items in a timely manner

Tasks performed automatically by the computer for cash disbursements

-the system scans for vouchers currently due -prints checks for these vouchers -records these checks in the check register -batch totals are prepared for the general ledger update procedure

Other tasks performed automatically by the computer in purchases system

-updates the inventory subsidiary file from the receiving report -calculates batch totals for general ledger update -closes the corresponding records in the open PO file to the closed PO file -validates the voucher records against valid vendor files

What two types of risk can close supervision of the receiving department reduce

1. failing to properly inspect the assets 2. Pilfering or stealing the inventory.

-VAN (Value added network)

3rd party intermediary who vets the transactions and runs some error checks for cybersecurity and to ensure the transaction has everything its supposed to

What is a three-way match

A comparison of transaction details between the Purchase Order (which established that the item was ordered), the Receiving Report (which showed that it was received), and the Invoice (which contains prices and other charges) is called a three-way match. Upon reconciliation of these documents, a company typically will record the liability.

Differentiate between a purchase requisition and a purchase order

A purchase requisition is completed by the inventory control department when a need for inventory items is detected. Purchase requisitions for office supplies and other materials may also be completed by staff departments such as marketing, finance, accounting, and personnel. The purchasing department receives the purchase requisitions, and if necessary, determines the appropriate vendor. If various departments have requisitioned the same item, the purchasing department may consolidate all requests into one order so that any quantity discounts and lower freight charges may be taken. In any case, the purchasing department prepares the purchase order, which is sent to the vendor, accounts payable department, and the receiving department (blind copy).

What purpose does a purchasing department serve?

A purchasing department is able to research the quality and pricing of various vendors. Their job is to monitor various supply sources and choose the highest quality good for a given price that can be reliably delivered on-time. The purchasing department may also take advantage of quantity discounts, especially when two or more manufacturing facilities are involved.

vouchers payable system

AP department uses *cash disbursement vouchers* and maintains a voucher register. -->After the AP clerk performs the 3 way match, he or she prepares a cash disbursements voucher to approve payment

physical access controls

Access to: inventories (direct) cash (direct) accounting records (indirect)

____________ authorizes the payments of bills

Accounts Payable (not the cash disbursements clerk, who writes the checks!)

Distinguish between an accounts payable file and a vouchers payable file

An open accounts payable file contains all source documents, including invoices, organized by payment date. As the due dates become close to the current date, the invoices are pulled from the file and paid. Under the voucher system, the accounts payable clerk prepares a cash disbursements voucher upon receipt of all source documents. Each cash disbursements voucher represents payment to one vendor. Multiple invoices may be covered by one voucher. The voucher system thus allows fewer checks to be written and provides better control over cash disbursements since cash vouchers are assigned and tracked.

2 extremes of Computer-Based Accounting Systems (CBAS)

Automation Reengineering

Levels of Automating and Reengineering Ordering

Computer generates PR Computer generates PO (no PR needed) Computer-generated PO Electronic Data Interchange (EDI)

Electronic Data Interchange (EDI)

Computer-to-computer communication without PO

What is the purpose of maintaining a valid vendor file?

Inventories should only be acquired from valid vendors. This control procedure helps to deter the purchasing agent from buying inventories at excessive costs and receiving kickbacks, or from buying from an entity in which the purchasing agent has a relationship, such as a relative or a friend. A valid vendor file also provides for a more efficient purchasing process when dealing with routine purchases.

What steps of independent verification does the general ledger department perform

The general ledger department receives journal vouchers from inventory control, accounts payable, and cash disbursements. With these summary figures, the general ledger clerk verifies that: 1. Total obligations recorded = total recorded increases in inventories, and 2. Total reductions in accounts payable = total recorded disbursements of cash.

What are the three logical steps of the cash disbursements system?

The three logical steps of the cash disbursements system are: a. authorization of cash disbursements for payment, b. preparation and distribution of checks, and c. preparation of summary information by cash disbursements and accounts payable, which are sent to the general ledger clerk.

Control Points in the expenditure cycle

Transaction authorization Segregation of duties Supervision Accounting records Access Independent verification

A purchase system FALK

Typical begin in inventory control (monitoring of inventory levels) -should be monitoring over this process bc we don't want to order things we don't need or have stock-outs and miss out on sales Purchase requisition = need to order -usually done on a PER ITEM BASIS (important). If we need 8 items, we have 8 purchase requisitions Purchase order (need to pick a vendor before) -by vendor -multicopy (ideally one copy that goes to receiving is referred to as a blind copy) Blind copy of a purchase order = the quantity is left out so it forces the receiving ppl to not be lazy and count what is in the box and fill in the quantity themselves Receiving = where physical supervision is needed (things are likely to go missing or if someone orders something they shouldn't they try and intercept it) Receiving report - 1 copy must go to ________ and 1 copy must go to A/R? (bare minimum) Receive invoice control verification (3 way match agrees to receiving, billing, ___) Invoice will trigger recording of the liability (debit expense or asset, credit AP) -tricky spot for auditor bc concerned about unrecorded liabilities Recording in AP When there is a separate AP and CD department, that is typically when you will see a voucher or voucher packet AP does recording and monitors due dates, then send voucher to CD and says its time to send the check Voucher packet = batch of bills to be paid that day

when will you typically see a voucher or voucher packet?

When there is a separate AP and CD department

purchase requisition vs. purchase order

a separate purchase requisition is prepared for each inventory item -->many purchase requisitions for a single vendor -->consolidated into one purchase order

voucher packet

batch of bills to be paid that day

check register

cash disbursements journal

blind copy of a purchase order

contains no quantity or price information about the products being received purpose = to force the receiving clerk to count and inspect inventories prior to completing the receiving report.

excel function for paying for purchases

formulas with dates --> can scan on a daily basis of when you want to pay --> run formula and it will pop out everything that has the due date you're looking for

Purchasing agent

function = to have relationships with the vendors We don't want the purchasing agents to be able to authorize the purchases

2 phases of the expenditure cycle

physical phase financial phase treated as independent transactions that are processed through separate subsystems

Physical supervision = all about

receiving point (when things are most likely to go missing)

voucher register

reflects the AP liability of the firm; the sum of the unpaid vouchers in the register (those with no check numbers and paid dates) is the firms total AP balance

Within the expenditure cycle, ______________ is of highest importance in the Receiving department, where the inventory arrives and is logged in by a receiving clerk. Need to minimize:

supervision -failures to properly inspect the assets -theft of the assets

Purchases of inventory should be authorized by:

the Inventory Control department (not by purchasing agents!)

physical phase

the acquisition of the resource

the $ amount of goods you actually bought vs. the $ amount you spent on those goods

the amount of goods you have actually bought and the dollar amount you have spent on those goods is always the same (reality) FIFO LIFO etc. are just methods of reporting it

financial phase

the disbursement of cash

how has the nature of fraud changed?

theft now is not physically stealing cash it is manipulating a computer system Access and figuring out how to work around/manipulate computer program

The ______________________ is the cause that splits the expenditure cycle into two phases

time lag most business entities operate on a credit basis that do not pay for the resources they need until after they acquire them. --> time lag

Automation

use technology to improve efficiency and effectiveness (taking the same task we've done for 30 years and having the computer make it more efficient)

Reengineering

use technology to restructure business processes and firm organization (rethinking the whole process)

Benefits of vouchers

vouchers provide improved control over cash disbursements and allow firms to consolidate several payments to the same supplier in a single voucher, thus reducing the number of checks written

purchase requisition

when inventories drop to a predetermined reorder point, a purchase requisition is prepared and sent to the prepare purchase order function to initiate the purchase process