Accounting Information Systems, 6th edition
James A. Hall
COPYRIGHT © 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western
are trademarks used herein under license
Objectives for Chapter 5
y Fundamental tasks performed during purchases and cash disbursement processes
y Functional areas involved in purchases and cash disbursements and the flow of these transactions through the organization
y Documents, journals, and accounts that provide audit trails, promote the maintenance of records, and support decision making and financial reporting
y Risks associated with purchase and cash disbursements activities and the controls that reduce these risks
y Operational features and the control implications of technology used in purchases and cash disbursement systems
Purchase Requisition
Purchasing
1
2
PROCUREMENT CYCLE
(SUBSYSTEM)
Receiving/
Inspection
3
Cash Disbursements
5
Accounts Payable
4
Goals of the Expenditure Cycle
y The goal of providing needed resources to organization can be broken down into several objectives:
y purchase from reliable vendors
y purchase high quality items
y obtain best possible price
y purchase only items that are properly authorized
y have resources available when they are needed
y receive only those items ordered
y ensure items are not lost, stolen, broken
y pay for the items in a timely manner or DFD of Purchases System
A Manual Purchases System
y Begins in Inventory Control when inventory levels drop to reorder levels
y A purchase requisition (PR) is prepared and copies to sent to Purchasing and Accounts Payable (A/P)
y Purchasing prepares a purchase order (PO) for each vendor and sends copies to Inventory Control, A/P, and Receiving
A Manual Purchases System
y Upon receipt, Receiving counts and inspects the goods. y A blind copy of the PO is used to force workers to count the goods. y A receiving report is prepared and copies sent to the raw materials storeroom, Purchasing, Inventory Control, and A/P.
A Manual Purchases System
y A/P eventually receives copies of the PR, PO, receiving report, and the supplier’s invoice.
y A/P reconciles these documents, posts to the purchases journal, and records the liability in the accounts payable subsidiary ledger. A Manual Purchases System
y 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
Accts Payable‐Control
DR
CR
y A/P also prepares a cash disbursements voucher and posts it in the voucher register. A Manual Purchases System
yG/L department: y posts from the accounts payable journal voucher to the general ledger
y reconciles the inventory amount with the account summary received from inventory control
Manual Purchases Flowchart
DFD of Cash Disbursements System
Manual Cash Disbursements System
y Periodically, A/P searches the open vouchers payable file for items with payments due: y A/P sends the voucher and supporting documents to Cash Disbursements
y A/P updates the accounts payable subsidiary ledger
Manual Cash Disbursements System
y Cash Disbursements:
y prepares the check
y records the information in a check register (cash disbursements journal)
y returns paid vouchers to accounts payable, mails the check to the supplier
y sends a journal voucher to G/L:
Accounts Payable
DR
Cash
CR
Manual Cash Disbursements System
y G/L department receives: the journal voucher from cash disbursements
y a summary of the accounts payable subsidiary ledger from A/P y
y The journal voucher is used to update the general ledger. y The accounts payable control account is reconciled with the subsidiary summary. Cash Disbursements System
Computer‐Based Accounting Systems
y CBAS technology can be viewed as a continuum with two extremes:
y automation ‐ use technology to improve efficiency and effectiveness y reengineering – use technology to restructure business processes and firm organization
Levels of Automating and Reengineering Ordering
y Computer generates PR
y Purchases manually generates PO
y Computer generates PO (no PR needed)
y PO not sent until manually reviewed
y Computer‐generated PO is automatically sent without manual review
y Electronic Data Interchange (EDI) y Computer‐to‐computer communication without PO Expenditure Cycle Database
y Master Files
y supplier (vendor) master file
y accounts payable master file
y merchandise inventory master file
y Transaction and Open Document Files
y purchase order file
open purchase order file
y supplier’s invoice file
y open vouchers file
y cash disbursements file
y
• Other Files
– supplier reference and
history file
– buyer file
– accounts payable detail file
Computer‐Based Purchases
y A Data Processing dept. performs routine accounting tasks.
y Purchasing ‐ a computer program identifies inventory requirements y The following methods are used for authorizing and ordering inventories:
the system prepares POs and sends them to Purchases for review, signing, and distributing
y the system distributes POs directly to the vendors and internal users, bypassing Purchases
y the system uses electronic data interchange (EDI) and electronically places the order without POs
y
Computer‐Based Purchases
y Other tasks performed automatically by the computer:
y updates the inventory subsidiary file from the receiving report
y calculates batch totals for general ledger update y closes the corresponding records in the open PO file to the closed PO file
y validates the voucher records against valid vendor files
Computer‐Based Cash Disbursements
yTasks performed automatically by the computer:
y the system scans for vouchers currently due y prints checks for these vouchers y records these checks in the check register
y batch totals are prepared for the general ledger update procedure
Automated Batch Purchases
Automated Batch Purchases
Advantages of Real‐Time Data Input & Processing Over Batch Processing
y Shortens the time‐lag in record‐keeping; hence, records are more current
y Eliminates much of the routine manual procedures, such as transcribing information onto paper documents
y Eliminates much of the storage and shuffling of paper documents
y Reduces data entry correction procedures
Reengineered Purchases/Cash Disbursements
Summary of Internal Controls
General Internal Controls
y Organization controls
y segregation of duties
y Documentation
y Asset Accountability Controls
y Management Practices
y Data Center Operations Controls
y Authorization Controls
y Access Controls
Manual Authorization Controls
y Purchases of inventory should be authorized by the Inventory Control department, not by purchasing agents
y Accounts Payable authorizes the payments of bills, not the cash disbursements clerk, who writes the checks
How do these controls change in a CBAS?
Computer‐Based Authorization Controls
y Authorizations are automated.
y programmed decision rules must be debugged
y Automating inventory in EDI and JIT y faulty inventory model can lead to over‐purchasing or under‐purchasing
y Cash disbursements may automate check printing and signing.
y programming logic must be flawless y automated signing only below a dollar threshold
Traditional Segregation of Duties
y Warehouse (stores)
y Inventory control
y Accounts payable
y General ledger
y Requisitioning
y Purchases
y Purchases returns and allowances
y Cash disbursements
Manual Segregation of Functions
y Custody of the asset, inventory, by the Warehouse must be separate from recordkeeping for the assets by the Inventory Control.
y Custody of the asset, cash, by Cash Disbursements must be kept separate from recordkeeping for the asset by A/P.
How do these controls change in a CBAS?
Computer‐Based Segregation of Functions
y Extensive consolidation by the computer of tasks traditionally segregated
y computer programs authorize and process purchase orders
y computer programs authorize and issue checks to vendors
Manual Supervision
y 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:
y failures to properly inspect the assets
y theft of the assets
How do these controls change in a CBAS?
Computer‐Based Supervision
y Automation often leads to a collapsing of the traditional segregation of duties.
y requires greater supervision
y Supervision takes on new aspects as technology advances.
y electronic monitoring y Supervision because more difficult as the workplace becomes more sophisticated.
y employees may have advanced IT training
Manual
Accounting Records
y Must maintain adequate records for: y accounts payable y vouchers payable
y checks
y general ledger
y subsidiary ledgers How do these controls change in a CBAS?
Computer‐Based
Accounting Records
y Accounting records rest on the reliability and security of stored digitalized data.
Accountants should be skeptical about the accuracy of hard‐copy printouts.
y Backups ‐ the system needs to ensure that backups of all files are continuously kept
y
y Most automated systems still have a lot of paper documents. This is good for audit trail purposes but is often inefficient.
y As the system becomes increasing paperless, maintaining an audit trail becomes more difficult.
y
Manual Access Controls
yAccess to: y inventories (direct)
y cash (direct)
y accounting records (indirect)
How do these controls change in a CBAS?
Computer‐Based Access Controls
y Magnetic records are vulnerable to both authorized and unauthorized exposure and should be protected
y must have limited file accessibility
y programs must be safeguarded and monitored
Manual
Independent Verification
y A/Payable dept. verifies much of the work done within the expenditure cycle. y
PR, PO, receiving reports, and suppliers’ invoices must be checked and verified by A/P.
y G/Ledger dept. verifies:
the total obligations recorded equal the total inventories received y the total reductions in accounts payable equal the total disbursements of cash
y
How do these controls change in a CBAS?
Computer‐Based
Independent Verification
y Automating the accounting function reduces the need for verification by reducing the chances of fraud and error in the expenditure cycle.
y However, the need for verification shifts to the computer program and the programmers where fraud and error may still be present.