Chapter 13 the expenditure cycle purchasing to cash disbursements

Accounting Information Systems
(TCO A) With the explosion of technological advances in the last 15 years, AIS skills are important for career success in accounting. Provide three reasons or benefits of AIS skills to any accounting-related career

(TCO C) Several years ago a ring of foreign-based hackers broke into South Pacific Bank’s system and stole $ 15 million from its customers’ accounts. Discuss how systems can become vulnerable to computer crimes and then evaluate controls that strengthen those weaknesses. (a) Provide at least three weaknesses of AIS that hackers can exploit for gain and then (b) suggest at least one control for each weakness.

(TCO D) Describe typical credit approval procedures.

(TCO E) The owner of a small family-owned business prepares his own payroll but rapid expansion is making demands for his time in other areas. He hires you to design payroll procedures with the proper internal controls that a small payroll department can handle. Design (using words) how payroll data should flow within the company, and in your design, make sure you address the control objectives.

(TCO F) Identify what tools are used to assess organizational performance and explain they are used.

(TCO G) Discuss redundancy as it applies to database design, and explain how redundancy can be reduced.

(TCO H) Provide an argument in support of a company’s decision to outsource its information system.

Fourteenth Edition

Chapter 13

The Expenditure Cycle: Purchasing to Cash Disbursements

Copyright © 2018 Pearson Education, Inc. All Rights Reserved

Copyright © 2018 Pearson Education, Inc.

Chapter 13: The Expenditure Cycle: Purchasing to Cash Disbursements

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Learning Objectives (1 of 2)

Discuss the basic business activities and related information processing operations in the expenditure cycle, explain the general threats to those activities, and describe the controls that can mitigate those threats.

Explain the process and key decisions involved in ordering goods and services, identify the threats to those activities, and describe the controls that can mitigate those threats.

Explain the process and key decisions involved in receiving goods and services, identify the threats to those activities, and describe the controls that can mitigate those threats.

Copyright © 2018 Pearson Education, Inc.

Chapter 13: The Expenditure Cycle: Purchasing to Cash Disbursements

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Learning Objectives (2 of 2)

Explain the process and key decisions involved in approving supplier invoices, identify the threats to those activities, and describe the controls that can mitigate those threats.

Explain the process and key decisions involved in cash disbursements to suppliers, identify the threats to those activities, and describe the controls that can mitigate those threats.

Copyright © 2018 Pearson Education, Inc.

Chapter 13: The Expenditure Cycle: Purchasing to Cash Disbursements

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Basic Expenditure Cycle Activities

Order materials, supplies, and services

Receive materials, supplies, and services

Approve supplier (vendor) invoice

Cash disbursement

Copyright © 2018 Pearson Education, Inc.

Chapter 13: The Expenditure Cycle: Purchasing to Cash Disbursements

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Key decisions

What is the optimal level of inventory?

Which suppliers provide the best quality at the best price?

How can IT be used to improve efficiency and accuracy of logistics?

How can we take advantage of vendor discounts?

How can we maximize cash flow?

Copyright © 2018 Pearson Education, Inc.

Chapter 13: The Expenditure Cycle: Purchasing to Cash Disbursements

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General Threats and Controls

Threats

Control

Inaccurate or invalid master data

Unauthorized disclosure of sensitive information

Loss or destruction of data

Poor performance

1 a. Data processing integrity controls

1 b. Restriction of access to master data

1 c. Review of all changes to master data

2 a. Access controls

b. Encryption

3 a. Backup and disaster recovery procedures

4 a. Managerial reports

Copyright © 2018 Pearson Education, Inc.

Chapter 13: The Expenditure Cycle: Purchasing to Cash Disbursements

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Order Goods (Materials/Supplies) or Services Processing Steps

Identify what, when, and how much to purchase

Source document: purchase requisition

Choose a supplier

Source document: purchase order

Copyright © 2018 Pearson Education, Inc.

Chapter 13: The Expenditure Cycle: Purchasing to Cash Disbursements

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Ordering Goods/Services (1 of 2)

Threats

Controls

Stockouts and excess inventory

Purchasing items not needed

Purchasing items at inflated prices

Purchasing goods of poor quality

1 a. Perpetual inventory system

b. Bar-coding, RFID

c. Periodic physical counts

2 a. Perpetual inventory systems

b. Review and approval of purchase requisitions

c. Centralized purchasing

3 a. Price lists

b. Competitive bids

c. Review purchase orders

4 a. Use approved suppliers

b. review and approve purchases from new suppliers

c. Monitor product quality by supplier

d. hold purchasing managers responsible for rework and scrap cost

Copyright © 2018 Pearson Education, Inc.

Chapter 13: The Expenditure Cycle: Purchasing to Cash Disbursements

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Ordering Goods/Services (2 of 2)

Threats

Controls

Unreliable suppliers

Purchasing from unauthorized suppliers

Kickbacks

5 a. Monitor supplier performance

b. Require quality certification

6 a. Purchase from approved suppliers

b. Review approval from purchases of new suppliers

c. EDI specific controls

7 a. Supplier audits

b. Prohibit gifts

c. Job rotation & mandatory vacations

d. Required disclosure of financial and personal interests in suppliers

Copyright © 2018 Pearson Education, Inc.

Chapter 13: The Expenditure Cycle: Purchasing to Cash Disbursements

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Receiving Process

Goods arrive

Verify goods ordered against the purchase order (what, how much, quality)

Source document: receiving report

Copyright © 2018 Pearson Education, Inc.

Chapter 13: The Expenditure Cycle: Purchasing to Cash Disbursements

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Receiving Goods or Services

Threats

Controls

Accepting unordered items

Mistakes in counting

Verifying receipt of services

Inventory theft

1 a. Authorized purchase orders needed before receiving goods

2 a. Bar codes or RFID

b. Receiving employees sign receiving report

c. Do not inform receiving of quantity ordered

3 a. Budget controls and audits

4 a. Restrict physical access to inventory

b. Document all inventory transfers

c. Segregate custody vs. receiving of inventory

Copyright © 2018 Pearson Education, Inc.

Chapter 13: The Expenditure Cycle: Purchasing to Cash Disbursements

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Approve Supplier Invoice and Cash Disbursements

Match the supplier invoice to:

Purchase order

Receiving report

supplier invoice + purchase order + receiving report = voucher

Approve supplier invoice for payment

Source document: disbursement voucher

Pay vendor

Copyright © 2018 Pearson Education, Inc.

Chapter 13: The Expenditure Cycle: Purchasing to Cash Disbursements

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Approve Supplier Invoice

Threats

Control

Errors in supplier invoice

Mistakes in posting to accounts payable

1 a. Verify invoice accuracy

b. Require detailed receipts for p-cards

c. Restrict access to supplier master data

2 a. Data entry edit controls

b. Reconcile detailed accounts payable records to the general ledger accounts payable account

Copyright © 2018 Pearson Education, Inc.

Chapter 13: The Expenditure Cycle: Purchasing to Cash Disbursements

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Cash Disbursements

Threats

Controls

Failure to take discounts

Pay for items not received

Duplicate payments

Theft of cash

Check alteration

Cash flow problems

1 a. File invoices by due date to take advantage of discounts

2 a. Match supplier invoice to supporting documents (purchase order, receiving report)

3 a. Pay only original invoices

b. Cancel supporting document when payment is made

4 a. Physical security of checks

b. Separation of duties

c. Reconcile bank accounts

5 a. Check Protection machines

b. special inks / papers

6 a. Cash flow budget

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Key Terms

Expenditure cycle

Economic order quantity (EOQ)

Reorder point

Materials requirement planning (MRP)

Just-in-time (JIT) inventory system

Purchase requisition

Purchase order

Blanket purchase order/blanket order

Vendor-managed inventory (VMI)

Kickbacks

Receiving report

Debit memo

Voucher package

Nonvoucher system

Voucher system

Disbursement voucher

Evaluated receipt settlement (ERS)

Procurement card

Imprest fund

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Copyright © 2018 Pearson Education, Inc.

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