Accounting information systems controls and process 2nd tunnwe weickgenannt chapter 09

Cash disbursement processes and the related risks and controls 5.. An overview of IT systems of expenditure and cash disbursement processes that enhance the efficiency of expenditures pr

Prepared by Coby Harmon University of California, Santa Barbara

Expenditures Processes and Controls-Purchases

1. An introduction to expenditures processes

2. Purchasing processes and the related risks and controls

3. Purchase return processes and the related risks and controls

4. Cash disbursement processes and the related risks and controls

5. An overview of IT systems of expenditure and cash disbursement processes that enhance the efficiency of expenditures processes

6. Computer-based matching of purchasing documents and the related risks and

controls

7. Evaluated receipt settlement systems and the related risks and controls

8. E-business and electronic data interchange (EDI) systems and the related risks and controls

Real World

Real World Organizations not only pay the purchase price of

inventory and supplies that they acquire, but they also pay a cost to conduct purchases and to write checks to pay for purchases This cost is the wages and salaries that organizations pay to employees involved

in purchasing and payment activities Many organizations continuously look for ways to reduce this cost by improving the efficiency of the purchasing and

payment processes General Electric Co (GE) implemented a Web-based

electronic invoice presentment (EIP) system in which its small and midsize

vendors send invoices electronically via the web This process allowed GE to

avoid the time and cost of receiving and entering paper invoices into its IT system

GE agreed to pay within 15 days in return for a 1.5 percent discount for invoices submitted under the EIP system On the other hand, any paper invoices would be paid in 60 days Within six months of implementing the new system, “more than 15,000 of GE’s vendors, who represented 45 percent of the company’s vendors, signed up for electronic presentment.”1 This change resulted in a 12 percent

When a purchase occurs, the information resulting from that

purchase must flow into

 the purchase recording systems,

 the accounts payable and cash disbursement systems, and

 the inventory tracking systems.

Introduction to Expenditures Processes

Introduction to Expenditures Processes

Transaction Processing Systems (TPS)

Exhibit 9-1

Expenditures Processes within the Overall System

Introduction to Expenditure

Processes

Introduction to Expenditure

Processes

Exhibit 9-2

Comparison of the Revenue and Expenditures Processes

Introduction to Expenditures Processes

Introduction to Expenditures Processes

Common expenditures processes include:

 Prepare a purchase requisition and/or purchase order.

 Notify vendor (supplier) of goods or services needed.

 Receive goods or services.

 Record the payable

 Pay the resulting invoice

 Update the records affected, such as accounts payable,

cash, inventory, and expenses.

Introduction to Expenditures Processes

Introduction to Expenditures Processes

Exhibit 9-2

Purchasing Process Map

Purchasing Processes

Purchasing Processes

Common procedures associated with the revenue

process:

 Authorization of transactions

 Segregation of duties

 Adequate records and documents

 Security of assets and documents

 Independent checks and reconciliation

Characteristics indicating risk with purchasing processes:

1.Goods received difficult to differentiate, count, or inspect

2.High volumes of goods are received, or goods are of high value.

3.Inventory pricing arrangements are complex or based on estimates 4.Frequent changes occur in purchase prices or vendors.

5.Company depends on one or few key vendors.

6.Receiving and/or record keeping are performed at multiple locations.

Controls and Risks in Purchasing

Processes

Controls and Risks in Purchasing

Processes

Within the purchasing processes, which of the following is the

first document prepared and thereby the one that triggers the

remaining purchasing processes?

Controls and Risks in Purchasing

Processes

Controls and Risks in Purchasing

Processes

Concept Check

Personnel who work in the receiving area should complete

all of the following processes except

a.counting the goods received.

b.inspecting goods received for damage.

c.preparing a receiving report.

Which of the given departments will immediately adjust the

vendor account for each purchase transaction so that the

company will know the correct amount owed to the vendor?

Reasons for Returns:

1 Goods received are unacceptable due to:

 Quantity or quality discrepancies

 Damage or defects

 Errors in the type of goods delivered or ordered

 Discrepancies in the terms of the purchase

 Timing issues

Purchase Returns Processes

Purchase Returns Processes

See next slide for larger image.

Exhibit 9-9

Purchase Returns Process Map

Purchase Returns Processes

Purchase Returns Processes

Purchase Returns Processes

Purchase Returns Processes

Exhibit 9-9

Purchase Returns Process Map

Exhibit 9-9

Purchase Returns Process Map

Purchase Returns Processes

Purchase Returns Processes

Specific controls over the purchase returns process:

 Authorization of transactions

 Segregation of duties

 Adequate records and documents

 Security of assets and documents

 Independent checks and reconciliation

The document prepared when purchased items are

Cash disbursements process must be designed to ensure that

the company appropriately processes payments to satisfy its

accounts payable when they are due.

Terminology:

 Cash management

 Remittance advice

 Cash disbursements journal

Cash Disbursement Processes

Cash Disbursement Processes

See next slide for larger image.

Cash Disbursement Processes

Cash Disbursement Processes

Exhibit 9-14

Cash Disbursement

Cash Disbursement Processes

Cash Disbursement Processes Exhibit 9-14Cash Disbursement

Process Map

Cash Disbursement Processes

Cash Disbursement Processes Exhibit 9-14Cash Disbursement

Process Map

Risks and Controls Cash Disbursement

 Adequate records and documents

 Security of assets and documents

 Independent checks and reconciliation

 Cost-benefit considerations

Which of the following controls is not normally performed in the

accounts payable department

a.The vendor’s invoice is matched with the related receiving

report

b.Vendor invoices are selected for payment

c.Asset and expense accounts to be recorded are assigned.

d.Unused purchase orders and receiving reports are accounted

In a system of proper internal controls, the same employee

should not be allowed to

a.sign checks and cancel the supporting voucher package.

b.receive goods and prepare the related receiving report

c.prepare voucher packages and sign checks.

d.initiate purchase requisitions and inspect goods received.

Risks and Controls Cash Disbursement

Process

Risks and Controls Cash Disbursement

Process

Concept Check

Within accounts payable, to ensure that each voucher is

submitted and paid only once, each invoice approved to be paid

should be

a.supported by a receiving report.

b.stamped “paid” by the check signer.

c.prenumbered and accounted for.

d.approved for authorized purchases.

Risks and Controls Cash Disbursement

Process

Risks and Controls Cash Disbursement

Process

Concept Check

Three-Way Match is the matching of a purchase order to

the related receiving report and invoice.

 Time consuming and expensive

 Business Process Reengineering (BPR) to improve

efficiency and effectiveness IT systems include:

► Computer-based matching and checking of

purchasing documents

► Evaluated receipt settlement (ERS)

IT Systems of Expenditure and Cash

Disbursement Processes

IT Systems of Expenditure and Cash

Disbursement Processes

Automated matching - software matches an invoice to its

related purchase order and receiving report

Real World

Real World Frymaster Corporation is a company in Shreveport,

Louisiana that manufactures foodservice equipment such as fryers and frying systems, food dispensing equipment, pasta cookers,

and toasters Frymaster uses an automated document-matching system for

invoice payment It is a medium-size company with four people in its accounts

payable department Compared with companies like it, Frymaster has a cost per

vendor payment processed that is extremely low: Frymaster’s average cost is

only about one-fourth of the overall average cost for a medium-size company

Frymaster has such lower cost because more than 75 percent of the invoices it receives usually match the other documents the first time These

matched invoices are paid automatically by the system so that no employee time

is needed

Therefore, fewer staff members are needed to process a larger volume

of payments, so the staff can focus on exceptions i.e., the other 25 percent of

invoices that do not initially match Documents that are properly matched are

processed automatically, and only those with differences require manual steps to

reconcile

Risks and Controls in Computer-Based

Matching

Risks and Controls in Computer-Based

Matching

 Security and Confidentiality Risks

 Processing Integrity Risks

 Availability Risks

In the mid-1990s, some companies, began implementing

invoice-less matching systems for purchasing and paying

vendors

Evaluated receipt settlement (ERS) - receipt of goods is

carefully evaluated and, if it matches the purchase order,

settlement of the obligation occurs through this system.

Elevated Receipt Settlement

Elevated Receipt Settlement

Risks and Controls in Elevated Receipt

Settlement

Risks and Controls in Elevated Receipt

Settlement

 Security and Confidentiality Risks

 Processing Integrity Risks

 Availability Risks

Which of the following IT systems is designed to avoid the

document matching process and is an “invoiceless” system?

a Computer-based matching system

b Electronic data interchange

c Evaluated receipt settlement

E-Business and Electronic Data Interchange

E-Business and Electronic Data Interchange

Exhibit 8-18

Value Added Networks

(VANs)

Exhibit 9-20

E-Business and EDI Risks and Controls

Risks and Controls in El-Business and EDI

Risks and Controls in El-Business and EDI

Input controls such as field check, validity check, limit check,

and reasonableness check are useful in IT systems of

purchasing processes to lessen which of the following risks?

a Unauthorized access

b Invalid data entered by vendors

c Repudiation of purchase transactions

d Virus and worm attacks

Risks and Controls in El-Business and EDI

Risks and Controls in El-Business and EDI

Concept Check

Electronic Invoice Presentment and Payment

(EIPP)

Takes advantage of the connectivity of the Internet to

electronically send invoices or payments.

 Accounts payable could receive invoices and make payments

via the Internet.

 Usually utilize web browsers as the interface for accounts

payable employees to receive and view invoices and make

payments.

E-Payables

E-Payables

Procurement cards

 Called p-cards.

 Credit cards that organization gives to certain employees

to make designated purchases

 Normally not used to purchase raw materials or products.

 Used for small-dollar-amount purchases.

Procurement Cards

Procurement Cards

Ethical Issues Related to Expenditures

Processes

Ethical Issues Related to Expenditures

Processes

It is important to establish internal control policies and IT

controls to help prevent or detect

 fraud,

 ethical lapses, or

 errors.

Real World

Real World There are many examples of frauds related to the

expenditures process committed by upper level managers In addition to the fraud committed at Phar-Mor as described in Chapter 3,

Michael Monus, as President and Chief Operating Officer of Phar-Mor, made

fraudulent payments on typewritten checks drawn on a special Phar-Mor checking

account The checks supported the World Basketball League (WBL) that Monus

founded The use of a special checking account allowed Monus to bypass the normal

purchase order controls, invoice matching system, and computer check writing policies

that accompanied Phar-Mor’s main operating account, so that he could use Phar-Mor

funds to keep the financially troubled WBL afloat His fraud diverted nearly $10 million

to the WBL in a period of three years Mr Monus specifically established a separate

checking account that avoided the internal control structure Since top management is

above the level of internal control, proper internal control systems may not prevent

expenditure fraud conducted by the top officials However, the board of directors and

upper level management should ensure that the corporate managers adhere to a code

of ethical conduct Ethics codes are not guarantees of fraud prevention either, but

Which of the following is most likely to be effective in

deterring fraud by upper level managers?

a Internal controls

b An enforced code of ethics

c Matching documents prior to payment

d Segregating custody of inventory from inventory record

Corporate governance policies should incorporate the four

areas of

 management oversight,

 internal controls and compliance,

 financial stewardship, and

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