BP Chapter 5

Levels of Automating and Reengineering Ordering - Purchases

1) Computer generates PR ---computer programs decide that inventory is too low, flags it; human looks it over and orders more stuff ... kick it up a notch: computer orders stuff when inventory is low; human checks it over ... kick it up an EXTRA notch: computer orders stuff in real-time when inventory is low; no human interaction ---Purchases manually generates PO 2) Computer generates PO (no PR needed) ---PO not sent until manually reviewed 3) Computer-generated PO is automatically sent without manual review 4) Electronic Data Interchange (EDI) ---Computer-to-computer communication without PO ---

Articles:

-Falk's prediction is that the girl with the butt lift will go work for the City of Gainesville (RTS) http://www.gainesville.com/news/20171105/auditor-finds-lax-control-over-cash-in-gainesvilles-bus-system https://www.wuft.org/news/2017/11/06/gainesville-rts-audit-shows-variances-between-reported-and-estimated-revenues/

CBAS - independent verification

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 ---the nature of fraud due to automation has changed ---theft is not stealing physical cash, it is manipulating computer programs (adding vendors, changing payees)

CBAS Supervision

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 - analytics, reports ---management reports are printed out and used to do analytics to determine of something went wrong or does not make sense

Computer-Based Accounting Systems (CBAS)

CBAS technology can be viewed as a continuum with two extremes: 1) automation - use technology to improve efficiency and effectiveness ---taking the same task we have done for 30 years and having the computer help us out now 2) reengineering - use technology to restructure business processes and firm organization ---rethinking the WHOLE process

COSO Framwork

Control Environment Risk Assessment Control Activities Information & Communication Monitoring Activities

Vouchers Payable System

alternative to AP procedures AP dept. uses the CD vouchers and maintains a voucher register after the AP clerk performs the 3 way match, he or she prepares a CD voucher to approve payment vouchers provide improved control over CD vouchers allow firms to consolidate several payments to the same supplier on a single voucher (reduces the number of checks written) each voucher is recorded in the *voucher register* ----reflects the AP liability of the firm ---unpaid vouchers - those without check numbers and paid dates AP clerk files the CD voucher, along with supporting documents, in the *vouchers payable file* ---equivalent to the *open AP file*

Expenditure Cycle Theft

billing schemes ---shell company ---non-accomplice vendor ---personal purchase scheme check tampering expense reimbursement schemes ---------- Story from fraud book ---supervisor transgression: underwing had the complex scheme

4 Types of Check Tampering Scemes

1) Forged maker scheme - someone signing checks who doesn't have the authority to do so ---Probably being done by someone who has access to the checks ---Make a stencil; or put sample under a light and freehand over it 2) Forged Endorsement Scheme ---Check already written and signed ---Purposely "misdelivered" ---If you put for deposit only, you won't be asked for ID? ---Check has been prepared and recorded in accounting system, you are just routing it to you ---Random payments are good option here ---PAYEE ENDORSES CHECK - "For deposit only" and signature or account number ---A fake ID can be shown 3) Altered Payee Scheme ---Converting a stolen check ---Alter the payee ---Makes conversion of the check (having access to funds) much easier ---Might as well alter the dollar amount as well 4) Concealed check scheme ---Banking on the indifference of the manager ---A check tampering scheme whereby an employee prepares a fraudulent check and submits the concealed check usually along with legitimate checks to an authorized maker who signs it without a proper review

IT Controls

1) general controls (not specific to a particular cycle/subsystem; so do not apply directly to expenditure cycle) 2) application controls -input controls -processing controls -output controls

Update Inventory Records - Purchase System

1) standard cost system - carry inventories at a predetermined standard value regardless of the price actually paid to the vendor ---require only info about the quantity received (receiving report suffices) 2) actual cost inventory ledger - requires additional financial info (copy of the supplier's invoice)

Physical Controls

1) transaction authorization 2) segregation of duties 3) supervision 4) accounting records 5) access control 6) independent verification

Procurement Cycle Steps (subsystem)

1. Purchase Requisition - decide we need something; somebody manually looks at list OR real-time computer program 2. Purchasing - authorization; control before it becomes a purchase order (valid vendor file) 3. Receiving/Inspection - order shows up ---SUPERVISION IS KEY (cameras, wide/open area) 4. AP - GAAP recording; AP sub, purchases journal 5. CD

Expense Reimbursement Schemes

Almost impossible to prevent Employee incurs an expense, submits documentation, approval, payment Personal type expense, claim it is business - *mischaractering expense* ---Typically occurs by higher level people If you are the company you should require (1) THE ORIGINAL RECEIPT and (2) ITEMIZED RECEIPT - lists what everyone eats; say who had what If someone makes a purchase with a check, do not accept a copy of the check - how do you know they even paid? Do not just take a credit card statement - someone could have returned it have their credit card cycle ends Best control of all: POLICY MANUAL - outlines what is/is not reimbursable; what documentation is necessary Costanza defense - George Costanza from Seinfeld: Was that wrong? I didn't know; plead ignorance Timely submission - important control Compare receipts to working hours; where should they have been? Cab receipt for 4 AM Analytics - 40 sales people, look for outliers

CBAS Authorization

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 ----- CD may automate check printing and signing ---programming logic must be flawless ---automated signing only below a dollar threshold

Purchase System

Begins in *Inventory Control* when inventory levels drop to reorder levels A purchase requisition (PR) is prepared and copies to sent to 1) Purchasing and 2) Accounts Payable (AP) ---DONE ON A PER ITEM BASIS *Purchasing* prepares a purchase order (PO) for each vendor and sends copies to 1) Inventory Control, 2) AP, and 3) Receiving ---There can be multiple requisitions on ONE purchase order ---pick vendor from valid vendor file 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 1) raw materials storeroom, 2) Purchasing (***open order file***), 3) Inventory Control, and 4) AP *AP* eventually receives copies of the 1) PR, 2) PO, 3) receiving report, and the 4) supplier's invoice *AP* reconciles these documents, posts to the purchases journal, and records the liability in the accounts payable subsidiary ledger *AP* periodically summarizes the entries in the purchases journal as a journal voucher which is sent to the GL department (DEBIT- Inv Control or Purchases; CREDIT- AP Control) *AP* also prepares a cash disbursements voucher and posts it in the voucher register GL department: posts from the accounts payable journal voucher to the general ledger reconciles the inventory amount with the account summary received from inventory control

Billing Schemes - Non-Accomplice Vendor Schemes

Controls not often well- equipped to handle non-routine transactions People intentionally mishandle a payment ---intern, things are crazy; when you get the second check, please send it back to me ---anything that is non-routine is an exposure People overpay and ask for the money back You have a legitimate vendor that you have been paying for years, does anyone actually pay attention to mailing address ---make an invoice for them, change mailing address ---vendor doesn't know it exists ---this is an amazing one Invoice XYZ Supply instead of XYZ Supplies ---you would never get caught unless you got too greedy with the dollar amount If you controls suck and someone can just change the routing number and account for a payment ---they can change it back after ---an analytic people should run is a list of the CHANGES of direct deposit info, account number, addresses ALWAYS mark invoices as paid Anytime you have overrides, refunds, etc. - keep track of who is involved ---every overpayment happens by the same one, hmmmmm not just an accident

CBAS Segregation of Duties

Extensive consolidation by the computer of tasks traditionally segregated the computer consolidates some of these tasks, so we are most concerned with the integrity of the program ----- Purchases computer programs authorize and process purchase orders ----- CD computer programs authorize and issue checks to vendors

Fraudulent Disbursement

False documentation to cause company to issue a payment Actual disbursement of funds in same manner as would be for a legitimate disbursement Real defintion: using false documentation such as invoices, purchases order, etc, to cause the company to issue payment ***The actual disbursement of funds is done in the same way as legitimate ones Most common type of ?

Post to GL - Purchase System

GL receives 1) journal voucher from the AP department and 2) account summary from inventory control GL posts the data in voucher: DEBIT - inventory control CREDIT - AP reconciles inventory control with inventory sub summary journal voucher filed in the *journal voucher file* PURCHASE PHASE COMPLETE

Check Tampering

LARGEST MEDIAN LOSS Fraudulently preparing check for own benefit Intercepting a legit check and altering it ***Maker of the check*** - person who signs it If you are using a signature stamp; there MUST be physical control of the stamp Control over the check stock; do not just leave it on desk Box of checks should have security tape around them

Cash Disbursements System

Periodically, AP searches the *open vouchers payable file* OR *open AP file* for items with payments due: ---1) AP sends the voucher & supporting docs to CD (if OVPF) ---1) AP sends AP packet to CD ---2) AP updates the accounts payable subsidiary ledger Cash Disbursements: ---prepares the check ---records the information in a check register (cash disbursements journal) ---1) negotiable portion of check mailed to supplier ---2) copy of check attached to AP packet as proof of payment; send to AP ---3) copy of check filed in CD dept. ---sends a journal voucher to GL: DEBIT- AP; CREDIT- Cash AP department receives: ---AP packet with check copy ---DEBIT- vendor's AP sub ---AP packet is filed in the CLOSED AP FILE ---account summary is sent to GL GL department receives: ---the journal voucher from cash disbursements ---a summary of the accounts payable subsidiary ledger from AP ---the *journal voucher* is used to update the GL; shows the total reductions in AP and cash ---the accounts payable control account is reconciled with the subsidiary summary ---AP control and cash accounts are updated ---journal voucher gets filed CD PROCEDURES ARE OFFICIALLY OVER

Mischaractering Expense

Personal type expense, claim it is business Typically occurs by higher level people

Purchase Cycle Documents

Purchase requisition - usually go through some approval before becoming: ---contains routine ordering info taken from the *inventory sub-ledger* and *valid vendor file* ---providing this info to purchases allows purchases to deal with routine purchases as efficiently as good control permits and to devote his or her primary efforts to non-routine problems (sourcing scarce, expensive, or unusual inventory items) Purchase order - multiple copies distributed everywhere Valid vendor file Open order file - where purchase order goes in; when all of the pieces happen, it gets updated (receiving report, invoice, check written) Bill of lading, receiving report, packing slip ---Billing of lading - carrier prepares ---Receiving report - we prepare ---Packing slip - seller prepares Invoice Journals, special journals, sub-ledgers

Billing Schemes - Personal Purchases Schemes

Running through an expense that isn't legit Theft is in the purchasing, not the taking ppl running through a personal bill as if it were an expense for the company -sometimes its completely fake, but sometimes its tacking something on to a legitimate order (they are actually painting the break room and need 6 cans, but you order 8 because you need 2 cans to paint your house) -personal purchases on company card: -when you have a company card, you have implied authorization -what SHOULD happen afterwords, is a review of those purchases from the supervisor -company should also keep track of who has company cards (this review should be done by someone who does not have a card)

Expenditure Cycle Risks and Internal Controls - Misc. Notes

SOD reduces risk of collusion (does not totally eliminate)

AP Packet

consists of the supporting documents (PO, RR, invoice) filed in the OPEN AP FILE -NOWWWWWWWWW, formal authority has been granted to record the liability and then make the payment recorded in the purchases journal ---purchase journal entries get summarized into a journal voucher and sent to GL posted to the supplier's account in the AP sub-ledger NOTE: if actual cost method is used, the AP clerk will send a copy of the invoice to inventory control (if standard cost method is used, this step is not necessary)

Purchase Order

copies sent to: 1) vendor 2) inventory control - filed in the *open purchase req file* 3) AP - for temporary filing in the *AP pending file* 4) receiving - blind copy LAST COPY IS FILED: 5) open/closed purchase order file

Purchase Requisition

created during the sales activity when inventories drop to a predetermined reorder point, a _____ is prepared and sent to the prepare purchase order function to initiate the purchase process typically a separate _____ is prepared for each inventory item as the need is recognized often results in multiple _____ for a single vendor (combined into a single PO) document includes: 1) quantity * unit price = extended price 2) date prepared, date needed 3) suggested vendor 4) prepared by, approved by 5) vendor account no.

Billing Schemes - Shell Company

created to evade taxes, launder money, move stuff off balance sheet, actually steal for some bad or nefarious reason you create a company ***most successful when people who create it are responsible for billing *** Most people will create a real legal entity ---to do so you do have to provide some info for "registered agent" ---it would be unwise to use your own name ---the favorite: spouse's maiden name ---if you know the hole's in the system: set up your entity as online, people don't check if that's a real person ---you will want a bank account to make depositing the checks easier; to open a bank account as a business the one piece of info they need is a ***TAX ID NUMBER*** (federal employer identification number) - not difficult at all to get, IRS has an online system ---if you really want to look legit; get licenses "occupational license from Alachua" ---you will need an address - physical address, a good one is a ***UPS store*** ---IF LOOKING FOR FRAUD: check if the mailing address of a vendor matches the address of an employee NOW, set up invoice ---you will get busted by a crappy looking invoice ---at a bare minimum, includes: mailing address, website, phone number ---easy; templates online, pay 150 for quickbooks and prints them for you ---if they know it will work, they submit multiple of them (be careful with numbering; can't have duplicate invoices) ---IF LOOKING FOR FRAUD: input controls ---IF LOOKING FOR FRAUD: if this was a legit business; invoice one customer invoice 150 in July and 151 in October; the lag does not make much sense ---IF LOOKING FOR FRAUD: search for any override on invoices ---IF LOOKING FOR FRAUD: biggest hurdle: authorization; the one who authorizes the scheme ---***managerial indifference***; rubber stamp supervisor-someone who pretends to go through motions and agrees to anything; management have something that automatically signs ---forge the whole 3 way match (why it is so important to keep control of your documents) ---2 basic controls: valid vendor and authorization Subcategory - pass through scheme ---use a shell company established by an employee to purchase goods or services for the employer, which are then marked up and sold to the employer through the shell ---if some account looks really weird from budget to actual; one of the causes could be theft ---price checks ---let's say you made a fake invoice; you do not want it sitting around ---if the vast majority are paid within 25 days but you have one vendor paying in 2 days, you should check it out if you are doing a fake invoice, some good things to bill for: ---Billing someone for electricity is hard because a real vendor exists, and it's one the person clearly knows about ---Things that are easily identifiable are not a good choice ---Office supplies and services are a good choice ---Pick a service people are indifferent about (lawn services, pest services) ---analytics on $ amounts (if the threshold is 500, look right under that) ---benford analysis looks at distribution of dollar amounts to find weird things ---sketchy invoice you think you paid; first place you look = bank account number - ***see who cashed the check***

EDI

devised to expedite routine transaction processing between manufacturers, wholesalers, and retailers by connecting buyer and seller computers via a private network or the Internet buyer needs something, computer automatically orders from seller - little to no human involvement key element: trading partner agreement to eliminate discrepancies that require human involvement to resolve when goods arrive, receiving people only perform cursory inspections b/c quality/quantity are guaranteed by trading partner agreement ---likewise the invoice no longer provides critical info since the financial info is known in advance b/c agreement (eliminates 3 way match) ($ info on RR) payment made automatically by EFT (electronic funds transfer) control issues - absence of explicit authorization (only valid transactions); risk of trading partner or someone acting like them getting a hold of private info some companies are taking EDI a step further and eliminating the receiving function ---sending stuff directly to production ---calculate the number of parts received based on production (part usage) ---one supplier per part - which supplier to pay is self-evident ---problem: scrap parts, how to deal with payment of them since they do not end up in finished product

Set Up AP - Purchase System

during the course of this transaction, the set up AP function has received/temporarily filed copies of 1) the PO and 2) Receiving Report the organization has NOW received inventories from the vendor and incurred an obligation to pay ---HOWEVER, the firm has not received the *supplier's invoice* containing the financial info needed to record the transaction ---firm defers recording the liability until the invoice arrives

The Conceptual System - Misc. Notes

firms deplete their inventories by transferring raw materials into the production process (the conversion cycle) and by selling finished goods to customers (the revenue cycle)

Valid Vendor File

includes: 1) the name and address of the primary supplier 2) the economic order quantity of the item 3) the standard/expected unit cost of the item purpose is to ensure that the organization purchases inventories only from authorized vendors ---prevents certain vendor fraud schemes (agent buying from a supplier who is a friend/relative; buying at excessive prices in exchange for a kickback or bribe)

Advanced Technology Expenditure Cycle

integration improves operational performance and reduces costs by eliminating non-value-added tasks simplify and alter the expenditure cycle common info system

Integrated Purchases Processing System

level of departmental activity is significantly lower labor-intensive activities are costly and result in human error ---in advanced technology systems, computer programs perform many clerical tasks (aids both these issues) traditional department structure still exists ---smaller, more efficient HOWEVER, personnel responsibilities are refocused on 1) financial analysis and 2) exception-based problem solving ---rather than day-to-day clerical tasks Receiving Dept. -goods arrive, clerk accesses blind copy PO in realtime by entering the PO # taken from packing slip -receiving screen prompts clerk to enter the quantities received for each item on the PO -a record is added to RR file -quantities received are matched against open PO; PO is closed by placing the RR # in the PO closed flag -inventory sub records are updated -GL inventory control account is updated AP Dept. -AP clerk receives invoice, accesses system, adds invoice to the *vendor invoice file* (often used in B2B transactions instead of purchases journal & AP sub ledger) -clerk files hard-copy invoice in the AP dept. -using PO #, system links the vendor invoice to the PO and RR -system reconciles supporting documents; creates a virtual AP packet -system displays AP packet on screen for review (modify documents if necessary to reconcile quantity or price discrepancies) -if no discrepancies, system approves payment and sets a payment due date

Purchases Authorization - Manufacturing VS Merchandising

manufacturing - purchase raw materials for production; authorized by *production planning/control function* merchandising - purchase finished goods for resale; authorized by *inventory control*

VAN (value added network)

middleman in an EDI exchange charges a fee makes sure the vendor doesn't slip through and raise the prices real quick

Expenditure Cycle Risks and Internal Controls

objective is to mitigate the risk from errors and fraud 1) Risk of unauthorized inventory purchases (excess of inv, stockouts) Physical Controls: Transaction authorization ---valid vendor file - prevent kickbacks from unauthorized suppliers who charge more IT Controls: Automated purchase approval ---computer logic decides when to purchase, what to purchase, and from whom to purchase ---PURCHASE REQUISITION FILE & VALID VENDOR FILE ---control valid vendor file via password or encryption ---allow management override to add a vendor (all overrides should be documented fully) ---NOTE: excessive inv ties of the firm's cash reserves; stockouts cause lost sales/manufacturing delays 2) Risk of receiving incorrect items, quantities or damaged goods Physical Controls: Independent verification & supervision ---independent verification: when goods arrive, receiving clerks verify that the items are correct in type and quantity and inspect their condition (forced to physically count b/c blind copy PO) ---supervision is critical (packing slips include quantity info and should be immediately taken by a supervisor while clerks count/inspect goods) IT Controls: Scanner technology ---when scanned by clerk and warehouse, system will verify that items received match those on PO 3) Risk of inaccurately recording transactions EX: AP go unrecorded or are recorded in wrong period; incorrect calculation of purchases; vendors bills customers for missing items (backorder); cash payments posted to the wrong vendor AP; summaries of purchases, AP, CD, and inventory are incorrectly posted to GLs Physical controls: Transaction authorization, accounting records, & independent verification ---transaction authorization: AP clerk authorizes CD via AP packet ---accounting records: audit trail maintained for tracing transaction from source document to financial statement (AP sub ledger, check register, GL, PR file, PO file, RR file) ---independent verification: GL receives journal vouchers and summaries from inventory control, AP, and CD (total obligations recorded must match total inventories received) (total reductions in AP = total CD) IT controls: Input data edits, error messages, automated postings, and file backups ---input data edits: remember master file is clean, transaction data is dirty; edits that focus on the integrity of the transaction data being entered into the application (checks for missing data, numeric-alphabetic data, invalid data values) (check digit control will provide control over accessing the wrong accounts) ---error messages ---automated postings to sub and GL accounts: by removing the human element, the chance of errors and fraud are reduced a lot (critical to ensure tho that programs are doing what they need to do) ---file backups: need to be in place as part of the daily processing of data 4) Risk of misappropriation of cash and inventory Physical Controls: Supervision, independent verification, SOD ---supervision: inadequate supervision can create an environment conducive to theft ---independent verification: AP performs 3 way match (PO, RR, invoice) (NOTE: compare invoice amount to expected amount on PO) ---SOD: inventory control from inventory warehouse; accounts payable from cash disbursements IT Controls: Automated three-way match and payment approval, & multilevel security ---automated 3 way match: system may be programmed to approve payment of invoice amounts that do not exceed $100 and 1% of the estimated price on PO ---multilevel security: allows multiple people to access a system at the same time, but provides SOD to limit their access provileges 5) Risk of unauthorized access to accounting records and reports motives include: 1) attempts to perpetuate vendor fraud; 2) theft of physical inventory - access to inventory records allow perpetrator to conceal theft; 3) malicious acts such as corrupting/deleting data Physical Controls: Access controls and SOD ---access controls: firm must limit access to documents that control its physical assets ---SOD: sub ledges (AP and inventory), journals (purchases and CD), and GL should separated [person with total record keeping authority in collusion with person who has custody of asset = bad position] IT Controls: Password control and multilevel security ---password control: change periodically, strong password ---multilevel security: 1) access control list [ACL]; 2) role-based access control [RBAC]

Basic Technology Expenditure Cycle - Misc. Notes

open purchase requisition file - hard copy file; purchase req is placed here in the inventory control dept.; PO copy sent here open purchase order file - created digitally in the purchasing department; PO copy filed here; purchase req filed here purchases system departments - purchases, inventory control, receiving, AP CD departments - AP, CD, GL

LOOKOVER

p. 221 - basic technology purchases system flowchart p. 223 - basic technology CD system flowchart p. 224 - integrated purchases system flowchart p. 227 - integrated CD system flowchart

Objective of the Expenditure Cycle

to convert the organization's cash into the physical materials and human resources it needs to conduct business systems and procedures for acquiring raw materials and finished goods from suppliers fundamental tasks performed during the purchases and CD processes

Positive Pay System

pay bank a fee for this every time a huge batch of checks is processed, they send a spreadsheet to bank that says the check number and amount the bank knows the dollar amount, so if someone alters, and the bank cashes it... the bank is liable if you write big checks, this is worth it ---hospital write checks for 6 figures ***IF YOU WERE TRYING TO GET AWAY WITH THIS SCHEME: 1) ARE THE BOOKS STILL IN BALANCE? ---You should be caught in a thorough bank reconciliation 2) IS SOMEBODY WAITING FOR PAYMENT? ---If it doesn't't show up people might start asking questions things that won't add up: ---if the payee doesn't match the cash disbursements journal ---look at the endorsement - the CD says XYZ Enterprises and the check says XYZ Enterprises, but endorsement says an employee name ---if a check that's coded is voided, you probably have a problem ---if you actually record a fake check, you need to debit it somewhere

Expenditure Cycle - 2 Phases

physical phase - purchasing cycle financial phase - cash disbursements the time lag splits the expenditure transaction cycle into 2 phases - CREATES EXTRA CONTROL ISSUES NOTE: payroll cycle is typically kept separate from the other cash disbursements

Blind Copy PO

purchase order copy that goes to receiving quantity AND price left out - forces receiving people to not be lazy and actually count what is in the box and check the condition of the goods Concerns: --- 1) over time you could be getting shorted; paying more for inventory that you do not have if not counted correctly --- 2) if inventory is coming in too high; the receiver might pocket it

Expenditure Cycle - 2 Subsystems

purchases processing cash disbursements

Receiving Report

states the quantity and condition of inventories delivered from supplier copies sent to: 1) storeroom/warehouse - accompanies inventories 2) open/closed PO file - close out the PO 3) AP - set up AP function, filed in the AP pending file 4) inventory control - updating inventory records; removes "on-order" flag LAST COPY (AND PACKING SLIP) FILED: 5) receiving report file

COGS

the amount of physical goods that you actually bought and what you have to sell at the price you paid is your COGAS FIFO, LIFO, etc. live in a fantasy land - 8 different ways to chop up the same numbers

Goals of the Expenditure Cycle

the goal of providing needed resources to organization can be broken down into several objectives: -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

CBAS Cash Disbursements - other tasks performed automatically by the computer:

the system scans for vouchers currently due prints checks for these vouchers; automatically signed and sent to mail room for mailing to vendors (threshold tho) records these checks in the check register *vendor invoices are closed by placing the check # in the closed flag field* batch totals are prepared for the general ledger update procedure (AP control and cash accounts) reports detailing these transactions are transmitted via terminal to the AP and CD departments for management review/filing --- You can do formulas with dates on excel On excel you can scan the things you want to pay for by day

Cash Disbursements System - Misc. Notes

things to be careful of: ---timeliness of payments ---valid payment amounts ---payments are going to valid vendors NOTE: ---if payments are made early, firms forgo interest income that it could have earned on funds ---if payments are made late, firms lose purchase discounts/damage credit standing sometimes cash disbursements signs check or prints out a pre-signed check ---if controls before CD are ~perfect~, then it's okay for this to happen ---if CD has an opportunity to mess with the payee, then this is a problem ---could be the preparer (bad) , a supervisor, some other authorized person who may or may not validate the transaction, sometimes they are auto signed when prepared ---open AP file is in order of payment due date to ensure that debts are paid on the last possible date without missing due dates/losing discounts depending on the organization's materiality threshold, the check may require additional approval from CD manager or treasurer

Physical Systems

this mix of possible technology/human options creates a continuum one end: minimal technology systems that rely heavily on human involvement and manual procesures other end: advanced technology systems, which replace human activity with automated processes

Receive Goods - Purchase System

time lag between placing the order and _____ the inventory during this time, the copies of the PO reside in temporary files in various departments (NO ECONOMIC EVENT HAS OCCURRED - firm has received no inventories and incurred no financial obligation) ---hence there is no basis for making a formal entry into any accounting record ---firms often make entries of pending inventory receipts and associated obligations shipments that are missing items or contain damaged or incorrect items must be detected before the firm accepts and places the goods in inventory blind copy - important control in reducing this risk ^^^ upon completion of the physical count/inspection, receiving clerk prepares a *receiving report*

Supplier's Invoice

time lag between the time the receiving report gets to AP and invoice gets to AP - during this time the firm's liabilities are technically understated ---this misstatement is a problem only at period-end when the firm prepares financial statements ---to close the books, the accountant will need to estimate the value of the obligation until the invoice arrives (if the estimate is materially incorrect, and adjusting entry must be made to correct the error) ---b/c the receipt of invoice triggers AP procedures, accountants need to be aware that unrecorded liabilities mat exist at period-end closing when the invoice arrives, the AP clerk reconciles the financial info with the receiving report and the PO in the AP pending file - 3 WAY MATCH (invoice, PO, RR) ---verifies that the order was received is fairly priced once reconciliation is complete, the AP clerk prepares the *AP Packet* and files it in the *open AP file*

Control Points in the Expenditure Cycle - Purchases

transaction authorization ---purchases of inventory should be authorized by the *Inventory Control* department, not by purchasing agents ---purchasing agents should form relationships with customers; make sales - they could be motivated by kickbacks SOD - inventory control separate from purchasing and custody; AP sub separate from GL supervision - receiving; need to minimize: failures to properly inspect the assets & theft of the assets accounting records - AP sub, GL, purchase requisition file, PO file, receiving report file access - security of inventory (direct access) ; limit access to accounting records (indirect access) independent verification - AP reconciles AP packet before liability is recorded; GL reconciles overall process (total obligations = total assets receives; total reduction in AP = total CD)

Control Points in the Expenditure Cycle - CD

transaction authorization - AP authorizes the payments of bills, not the CD clerk, who writes the checks SOD - separate AP sub, CD (cash), & GL supervision - N/A accounting records - voucher payable file?, AP sub, CD journal, GL cash accounts access - security of cash (direct); limit access to accounting records (indirect) independent verification - final review by CD; overall reconciliation by GL; bank reconciliation by controller

CBAS Purchases - other tasks performed automatically by the computer:

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

Purchase System Misc. Notes

we do not want to order stuff we do not need - carrying costs of inventory; solution = authorization prevent stock-outs AP control - verifies the amount that should've been ordered (***purchase order***), agrees with what showed up via receiving (***receiving report***), agrees with ***invoice*** (3 way match) Invoice triggers recording (Debit -expense or asset, credit - AP) ---as an auditor this poses some issues; concerned with unrecorded liabilities - things should be recorded when received When there is a separate AP and CD department, you will usually see a journal voucher/voucher packet - AP tells CD to pay ---voucher packet: a couple of vouchers ---AP monitors and tells CD to write the check