Pp 05-new

Hall, Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Accounting Information Systems, 7e
James A. Hall
1
Chapter 5
The Expenditure Cycle Part 1:
Purchases and Cash
Disbursements Procedures

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,in whole or in part.
Objectives for Chapter 5
 Fundamental tasks performed during purchases and
cash disbursement processes
 Functional areas involved in purchases and cash
disbursements and the flow of these transactions
through the organization
 Documents, journals, and accounts that provide audit
trails, promote the maintenance of records, and support
decision making and financial reporting
 Risks associated with purchase and cash disbursements
activities and the controls that reduce these risks
 Operational features and the control implications of
technology used in purchases and cash disbursement
systems
2

Organization of Chapter 5
 The conceptual expenditure cycle
 The physical expenditure cycle
 Basic technology system
 Advanced technology system
 Reengineering using EDI
• Address functionality, efficiency issues, work flow
characteristics and Internal control issues in each system at
different points on the technology/human continuum
3

Conceptual Expenditure Cycle
 Purchase processing
 Vouchers payable system
 Cash disbursement system
4

Purchase Processing
 Monitor inventory records
 Prepare purchase order
 Receive goods
 Update inventory records
 Set up accounts payable
5

DFD for Purchase System
6
Figure 5-1

Vouchers Payable System
 An alternate to AP procedures
 Uses cash disbursement vouchers
 Each voucher recorded in the voucher register
 Post to general ledger
 inventory and voucher control accounts
7

Cash Disbursements
 Identify liabilities due
 Prepare cash disbursement
 Update AP records
 Post to general ledger
8

DFD for Cash Disbursements System
9
Figure 5-10

Physical Expenditure Cycle
 Physical accounting information systems
combine technology and human activity.
 As a general rule, smaller businesses tend to rely
less on technology and more on manual
procedures, whereas larger companies tend to
employ advanced technologies.
 The nature of the technology/human mix
employed in a particular system has a direct
bearing on the nature of internal controls
needed to control the system.
10

Basic Technology Expenditure
Cycle
 Computers tend to be independent PCs.
 Information between departments is
communicated via hard-copy documents.
 Maintaining physical files of source documents
is critical to the audit trail.
 In the following flowcharts notice that in many
departments, after an individual completes his
or her assigned task, documents are filed as
evidence that the task was performed.
11

Basic Technology Purchases System
12
Figure 5-13

Basic Purchases System
 Begins when inventory clerk prints purchase requisitions
by accessing the purchase requisition file
 This file was created when inventories dropped to
predetermined reorder point.
 The purchasing department receives the requisition
 Adds a record to the open purchase order file
• PO copies are sent to
– Vendor
– Inventory control
– AP
– Blind copy to receiving
13

Basic Purchases System
 Receiving clerk receives the goods and reconciles with
packing slip and blind copy of PO
 Sends receiving report to
• Inventory storeroom
• Purchasing department
• Files hard copy
 AP department reconciles invoice, purchase order and
receiving report
 Records transaction in the purchases journal
 Gender ledger department receives journal voucher from
AP dept and account summary from inventory control.
14

Basic Technology Cash Disb. System
15
Figure 5-13

Basic Cash Disbursement System
 AP clerk reviews AP packets each day, identifies items
due, sends supporting documents to cash
disbursements department.
 Cash disbursements department reviews documents for
completeness and accuracy and prepares the payment
for signature.
 AP department removes the liability and sends AP
summary to GL department.
 GL department posts to the general ledger control
accounts and files the documents.
16

Basic Technology: Physical Controls
17

Authorization Controls
 Purchases of inventory should be authorized by
the Inventory Control department, not by
purchasing agents
 Accounts Payable authorizes the payments of
bills, not the cash disbursements clerk, who
writes the checks
18

Segregation of Duties
 Segregation of inventory control from the
warehouse
 Segregation of the general ledger and
accounts payable from cash disbursements
19

Supervision
 Within the expenditure cycle, supervision is of
highest importance in the Receiving department,
where the inventory arrives and is logged in by a
receiving clerk. Need to minimize:
 failures to properly inspect the assets
 theft of the assets
20

Accounting Records
 Accounting records rest on the reliability and
security of stored digitalized data.
 Accountants should be skeptical about the accuracy
of hard-copy printouts.
 Backups - the system needs to ensure that backups
of all files are continuously kept
 Most automated systems still have a lot of paper
documents.
 This is good for audit trail purposes but is often
inefficient.
 As the system becomes increasing paperless,
maintaining an audit trail becomes more difficult.
21

Access Controls
 Access to:
 inventories (direct)
 cash (direct)
 accounting records (indirect)
22

Independent Verification
 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
23

IT Application Controls
 Input Controls
 Edit controls to check for missing and invalid data
 Process
 Error messages
 Passwords
 File backup
 Output
 Primarily journal vouchers and account summaries
• Secure mail boxes/physical control
24

Advanced Technology
Expenditure Cycle
 Integration of accounting and other business
functions.
 Improved operational performance and
reduce costs by eliminating non-value-added
tasks.
 Advanced technologies significantly alter and
simply the expensiture cycle.
25

Integrated Purchases System
26

Integrated Purchase Processing
 Computer operations
 Many tasks performed automatically (e.g. identify
items to be ordered, send orders to vendors)
 Receiving department
 Clerk automatically prompted to enter quantities
received; system automatically creates receiving
report, updates inventory, sends info to G/L
 AP department
 System links vendor invoice, PO, receiving report;
creates virtual AP packet, automatically approves
payment 27

Integrated Cash Disb. System
28

Integrated Cash Disbursements
 Due items are automatically paid
 Payments recorded
 Payments sent
 Invoices closed
 AP control and cash accounts updated
 Reports sent to AP and cash disbursement departments
29

Advanced Technology Physical
Controls
30

Advanced Tech. Expenditure
Cycle Controls
 Automated purchase approval
 Computer logic, not a human, decides
 Automated three-way match and payment
approval
 Multilevel security
 Automated posting to subsidiary and GL
accounts
31

Advanced Technology IT Controls
32

Reengineering using EDI
 Expedites routine transaction processing
between business partners
 Requires trading partner agreement
 Reengineering receiving function and the AP
tasks produce considerable cost savings
 EDI poses unique control risks that must be
recognized and controlled – only valid
transactions must be processed
33

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