Accounting information systems controls and process 2nd tunnwe weickgenannt chapter 12

Chapter 12-15 SO 4 Risks and controls in capital and investment processes Risks and Controls in Capital and Investment Processes Risks and Controls in Capital and Investment Processes

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Chapter

12-2

Administrative Processes and Controls

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Chapter

12-3

1. An introduction to administrative processes

2. Source of capital processes

3. Investment processes

4. Risks and controls in capital and investment processes

5. General ledger processes

6. Risks and controls and risks in general ledger processes

7. Reporting as an output of the general ledger processes

8. Ethical issues related to administrative processes and reporting

9. Corporate governance in administrative processes and reporting

Study Objectives

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Chapter

12-4

Real World

aluminum, is well known for its accomplishments in the areas of

sustainability and innovation in the transportation, aerospace,

construction, and electronics industries In 2012, Alcoa was appointed to Fortune magazine’s list of Most Admired Companies for the twenty-ninth consecutive year

A lesser known fact about Alcoa is that it is often the first of the Dow Jones Industrial companies to report its quarterly

earnings Alcoa has worked hard to achieve a fast close, whereby it has fine-tuned its accounting processes and information systems to facilitate the completion of periodic transaction processing and closing of the

general ledger within two days of the end of the period Then, it can

report its consolidated financial results externally within one week In

today’s fast-paced business environment, companies can gain

competitive advantage by closing their books quickly and delivering

timely information to internal and external stakeholders.

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Chapter

12-6

Administrative processes are transactions and activities that

either are specifically authorized by top managers or are used

by managers to perform administrative functions.

First set of processes: Examples include sale of stocks or

bonds, the initiation of loans, bonds or notes payable, and the

investment of funds in marketable securities.

Second set of processes: financial information being

recorded in general ledger accounts.

SO 1 An introduction to administrative processes

Introduction to Administrative Processes

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Chapter

12-7

Exhibit 12-2

Overall View of Transactions, Processes, and Resulting Reports

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Chapter

12-8

Which of the following is not part of an administrative

process?

a The sale of stock

b The sale of bonds

c The write-off of bad debts

d The purchase of marketable securities

Concept Check

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Chapter

12-9

Capital is the funds used to acquire long-term, capital

assets of an organization.

Source of capital processes are those processes to

 authorize the raising of capital,

 the execution of raising capital, and

 the proper accounting of that capital

SO 2 Source of capital processes

Sources of Capital Processes

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Chapter

12-11

Which of the following statements is not true regarding source of

capital transactions?

a These processes should not be initiated unless there is specific

authorization by management at a top level

b Source of capital processes will result in potential dividend or

interest payments

c Retirement of debt is a source of capital process

d The fact that these transactions and processes cannot occur

without oversight by top management means other controls are not necessary

SO 2 Source of capital processes

Sources of Capital Processes

Concept Check

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Chapter

12-12

Management should properly manage, or administer, the

investment of excess funds

Investment processes are those processes which

► authorize,

► properly account for

investments of excess funds

SO 3 Investment processes

Investment Processes

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Chapter

12-14

The officer within a corporation that usually has oversight

responsibility for investment processes is the

a controller.

b treasurer.

c chief executive officer (CEO).

d chief accounting officer (CAO).

SO 3 Investment processes

Concept Check

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Chapter

12-15 SO 4 Risks and controls in capital and investment processes

Risks and Controls in Capital and

For both source of capital processes and investment

processes, the important control is the specific authorization and oversight by top management.

Generally, the risks are not related to employee fraud, but are instead related to management fraud.

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Chapter

12-16

Which of the following statements is not true regarding internal

controls of capital and investment processes?

a Internal controls aimed at preventing and detecting employee

fraud in capital and investment processes are not as effective

b Top management fraud, rather than employee fraud, is more

likely to occur

c Any fraud is likely to involve manipulating capital and investment

processes

d Because of top management oversight, the auditor need not

review these processes

Risks and Controls

Concept Check

SO 4

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Chapter

12-17

Real World

Commission investigated Nathan A Chapman, Jr

and three of his companies One of the companies, echapman.com, was

scheduled to sell tock through an initial public offering (IPO) In an IPO, the

company offering stock must explain to potential investors the manner in

which funds from the IPO will be used

The SEC found that Chapman lied about the use

of IPO funds Chapman was actually using proceeds from the sale of new

stock to buy more of his own stock These purchases were only intended to

show a larger volume of sales of the stock, thereby making it look like a more attractive stock He was attempting to artificially pump up the price of the

stock through these purchases of his own stock To conceal this fraud, his

company falsified the financial statements

In this case, typical internal controls such as segregation of duties and reconciliations would not likely prevent or detect

these frauds The more important controls of specific authorization by top

management and close scrutiny by the internal and external auditors are

especially important in capital and investment processes.

SO 4

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Chapter

12-19

Which of the following statements is true?

a Routine transactions are recorded in the general

d Nonroutine transactions are recorded in a special

journal. SO 5 General ledger processes

General Ledger Process

Concept Check

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Chapter

12-20

Regarding subsidiary ledgers and general ledger control accounts, which of the following is not true?

a Total balances in a subsidiary ledger should always equal the

balance in the corresponding general ledger account

b The general ledger maintains details of subaccounts

c Control is enhanced by separating the subsidiary ledger from

the general ledger

d Reconciling a subsidiary ledger to the general ledger can

help to detect errors or fraud

SO 5 General ledger processes

General Ledger Process

Concept Check

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Chapter

12-21 SO 6 Risks and controls and risks in general ledger processes

Risks and Controls in General Ledger

► Security of the general ledger and documents

► Independent checks and reconciliation

► Cost-benefit considerations

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Chapter

12-22

Real World

Consider the checkout lanes at a department store such as

Wal-Mart Around the world, there are employees working checkout

lanes who are scanning products by passing them over the bar

code scanner and accepting payment In a large company such

as Wal-Mart, it would be tremendously inefficient for the system to delay the general ledger posting until a specific employee logs in

to conduct the posting Rather, when the checkout lane employee completes a sale by accepting payment and printing a sales

receipt, he or she has authorized an event that will automatically

update sales, inventory, and cash balances

Authorization of transactions

SO 6 Risks and controls and risks in general ledger processes

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Chapter

12-23

Real World

Wal-Mart and Procter & Gamble (P&G) have interconnected IT

systems P&G sells consumer products such as soap, shampoo,

and diapers to Wal-Mart A sale by P&G to Wal-Mart is actually

triggered by the Wal-Mart IT inventory system As Wal-Mart

inventory levels of certain products fall below established reorder

points, the systems interact and authorize a transfer of products

from P&G to Wal-Mart This means that P&G’s sale and the

subsequent update of its sales and receivable accounts are

activated by its customer’s computer system Similarly,

Wal-Mart’s purchase and update of its inventory and payables

accounts are triggered by this system

Authorization of transactions

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Chapter

12-24

Which of the following statements regarding the authorization of general

ledger posting is not true?

a Posting to the general ledger always requires specific authorization.

b User IDs and passwords can serve as authorization to post

transactions to the general ledger.

c A journal voucher serves as authorization for manual systems.

d As IT systems become more automated, the authorization of

general ledger posting is moved to lower levels of employees.

Processes

Concept Check

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Chapter

12-25

In a manual system with proper segregation of duties, an

employee in the general ledger department should only

a authorize posting to the general ledger.

b post transactions to the general ledger.

c reconcile the subsidiary ledger to the general ledger.

d post transactions to the subsidiary ledger.

Processes

Concept Check

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Chapter

12-26 SO 7 Reporting as an output of the general ledger processes

Reporting as an Output of the General

► statement of cash flows, and

► statement of retained earnings

are created from general ledger account balances

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Chapter

12-27 SO 7 Reporting as an output of the general ledger processes

Ledger Processes

Internal Reporting

Internal reports are usually not financial statements, but

reports tailored to specific needs of each management level and function Many factors affect the type of report provided

► Type of organization

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Chapter

12-28

Which of the following statements about reporting is true?

a External users need detailed, rather than summarized,

information

b All reports, internal and external, are derived only from general

ledger data

c All organizations need similar internal reports

d Internal reports are tailored to the specific needs of each

management level and function

SO 7 Reporting as an output of the general ledger processes

Ledger

Concept Check

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Chapter

12-29

For each report shown, indicate in the appropriate column whether the

report is likely to be for internal or external users (some reports may be

both), and whether data would come exclusively from the general ledger.

SO 7 Reporting as an output of the general ledger processes

Ledger

External Both Internal Internal Internal External Internal

Yes No No No No No No

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Chapter

12-30 SO 8 Ethical issues related to administrative processes and reporting

Ethical Issues Related to Administrative

Processes and Reporting

Reasons that unethical and fraudulent behavior would tend to

be management-initiated.

First, in a properly controlled system, employees do not have

access to related assets or source documents

Second, administrative processes are tightly controlled and

supervised by top management

Finally, routine nature of processes such as sales, purchasing,

payroll, and conversion generates a huge volume of transactions

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Chapter

Unethical Management Behavior in Capital Sources and Investing

Management should

 be honest in the financial statements presented, footnote

disclosures, and any related disclosures

 avoid misleading creditors about

► the financial status of the company or

► its ability to repay any borrowing

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Chapter

Internal Reporting ethical Issues

Top management has an ethical obligation to use financial

and other reports to encourage beneficial and ethical

behavior Reports to lower level managers are usually used for two purposes

1 Feedback to lower level managers

2 Used by upper management to evaluate and reward the

performance of lower level managers

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d Learning and growth

SO 8 Ethical issues related to administrative processes and reporting

Concept Check

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Chapter

12-34 SO 9 Corporate governance in administrative processes and reporting

Corporate Governance in Administrative

Setting and monitoring financial goals, and establishing and maintaining reliable accounting journals and ledgers so that performance can be properly reported, are important to

effective corporate governance

In addition, internal controls and ethical practices within the

administrative processes help ensure proper financial

stewardship of a company’s administrative resources.

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Chapter

12-35

Copyright

Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful

Request for further information should be addressed to the

Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these

programs or from the use of the information contained herein

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