Under this system the AP department uses cash disbursement vouchers and maintains a voucher register

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Chapter 5 The Expenditure Cycle Part I: Purchases and Cash Disbursements Procedures Objectives for Chapter 5 • Tasks that constitute the purchases and cash disbursement process • Departments involved in purchases and cash disbursement activities 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 • Exposures 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 Purchase Requisition Purchasing 1 2 PROCUREMENT CYCLE (SUBSYSTEM) Receiving/ Inspection 3 Cash Disbursements 5 Accounts Payable 4 Goals of the Expenditure Cycle • The goal of providing needed resources to organization can be broken down into several objectives: – – – – – – – purchase from reliable vendors purchase high quality items obtain best possible price purchase only items that are properly authorized have resources available when they are needed receive only those items ordered ensure items are not lost, stolen, or broken – pay for the items in a timely manner DFD of Purchases System A Manual Purchases System • The purchases cycle begins in the Inventory Control department when inventory levels drop to reorder levels. • A clerk prepares a purchase requisition and sends copies to Purchasing and Accounts Payable. • The Purchasing department prepares a purchase order for each vendor and sends copies to Inventory Control, Accounts Payable, Receiving (blind copy), and the vendor. A Manual Purchases System • Upon receipt of the goods, the Receiving department counts and inspects the goods. – One of the purposes of the blind copy of the purchase order is to force the workers to count the goods. • A worker then prepares the receiving report and sends copies to the raw materials storeroom, Purchasing, Inventory Control, and Accounts Payable. A Manual Purchases System • The Accounts Payable department has now received copies of the purchase requisition, purchase order, and receiving report. • Upon receipt of the supplier’s invoice, Accounts Payable reconciles all documents, posts to the purchases journal, and records the liability in the accounts payable subsidiary ledger. • Periodically, the entries in the purchases journal are summarized in a journal voucher which is sent to the General Ledger department. A Manual Purchases System • The journal voucher is prepared by Accounts Payable and sent to the General Ledger department: Inv-Control or Purchases DR Accts Payable-Control CR • Accounts Payable also prepares a cash disbursements voucher and posts it in the voucher register. A Manual Purchases System • The General Ledger department: – posts from the accounts payable journal voucher to the general ledger – reconciles the inventory amount with the account summary received from inventory control Manual Purchases System DFD of Cash Disbursements System Manual Cash Disbursements System • Periodically, usually daily, Accounts Payable searches the open vouchers payable file for items with payments due: – AP sends the voucher and supporting documents to Cash Disbursements – AP updates the accounts payable subsidiary ledger Manual Cash Disbursements System • The Cash Disbursements department – prepares the check – records the information in a check register (cash disbursements journal) – returns paid vouchers to accounts payable, mails the check to the supplier – sends a journal voucher to General Ledger: Accounts Payable DR Cash CR Manual Cash Disbursements System • The General Ledger department receives: – the journal voucher from cash disbursements – a summary of the accounts payable subsidiary ledger from Accounts Payable • The journal voucher is used to update the general ledger. • The accounts payable control account is reconciled with the subsidiary summary. Cash Disbursements System The Expenditure Cycle • The time lag splits the expenditure transaction cycle into two phases: – physical phase (purchasing cycle) – financial phase (cash disbursements) Expenditure Cycle Database • Master Files – supplier (vendor) master file – accounts payable master file – merchandise inventory master file • Transaction and Open Document Files – purchase order file • open purchase order file – supplier’s invoice file – open vouchers file – cash disbursements file • Other Files – supplier reference and history file – buyer file – accounts payable detail file The Purchase Requisition • A need for an item starts the expenditure cycle – based on reorder point or reorder quantity – manual: to initiate a credit purchase, someone in the organization recognizes a need for a good or service; an authorized person requests the good or service using a purchase requisition form – computerized: to initiate a credit purchase, someone in the organization recognizes a need for a good or service; an authorized person requests the good or service using a terminal and a purchase requisition screen Computer-Based Expenditure Applications--Purchases • Incorporates a data processing department which performs many of the routine accounting tasks – purchasing - a computer program identifies inventory requirements and can use one of the following methods for authorizing and ordering inventories • the system prepares the POs and sends them to the purchasing department for review, signing, and distributing • the system distributes the POs directly to the vendors and internal users, bypassing the purchasing department • the system uses EDI and electronically places the order Computer-Based Expenditure Applications--Purchases • Other tasks performed by the computer: – updates the inventory subsidiary file from the receiving report, calculates batch totals for the general ledger update procedure and then closes the corresponding records in the open PO file to the closed PO file – a program validates the voucher records against the valid vendor file, adds them to the voucher register, and prepares batch totals for posting to the general ledger Computer-Based Expenditure Applications--Cash Disbursements • Tasks performed by the computer: – the system scans for vouchers currently due – prints checks for these vouchers – records these checks in the check register – batch totals are prepared for the general ledger update procedure Levels of Automating and Re-Engineering Ordering • Computer generates purchase requisition – purchase department manually generates purchase order • Computer generates purchase order (no P.R. needed) – not sent until manually reviewed • Computer-generated P.O. is automatically sent • EDI--no P.O. CUSTOMER (PURCHASES CYCLE) Internal Data Flows EDI External Data Flows SELLER (REVENUE CYCLE) External Data Flows Internal Data Flows Purchase Order Customer Order Sales Order Shipping Documents Receiving Report Goods Vendor’s Invoice Check Sales Invoice Check or EFT or EFT Advantages of Real-Time Data Input & Processing Over Batch Processing • Shortens the time-lag in record-keeping; hence, records are more current • Eliminates much of the routine manual procedures, such as transcribing information onto paper documents • Eliminates much of the storage and shuffling of paper documents • Reduces data entry correction procedures Summary of Internal Controls General Internal Controls • Organization controls – segregation of duties • • • • • • Documentation Asset Accountability Controls Management Practices Data Center Operations Controls Authorization Controls Access Controls Manual 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 How do these controls change in a CB environment? Computer-Based Authorization Controls • Authorizations are automated. – programmed decision rules must be debugged • Automating inventory in EDI and JIT – faulty inventory model can lead to overpurchasing or under-purchasing • Cash disbursements may automate check printing and signing. – programming logic must be flawless – automated signing only below a dollar threshold Segregation of Duties • • • • • • • • Warehouse (stores) Inventory control Accounts payable General ledger Requisitioning Purchases Purchases returns and allowances Cash disbursements Manual Segregation of Functions • Custody of the asset, inventory, by the Warehouse must be separate from recordkeeping for the assets by the Inventory Control department • Custody of the asset, cash, by Cash Disbursements must be kept separate from recordkeeping for the asset by the Accounts Payable department How do these controls change in a CB environment? Computer-Based Segregation of Functions • Extensive consolidation by the computer of tasks traditionally segregated – computer programs authorize and process purchase orders – computer programs authorize and issue checks to vendors Manual 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 How do these controls change in a CB environment? Computer-Based Supervision • Automation often leads to a collapsing of the traditional segregation of duties. – requires greater supervision • Supervision takes on new aspects as technology advances. – electronic monitoring • Supervision because more difficult as the workplace becomes more sophisticated. – employees may have advanced IT training Manual Accounting Records • Must maintain adequate records for: – accounts payable – vouchers payable – checks – general ledger – subsidiary ledgers How do these controls change in a CB environment? Computer-Based Accounting Records • Maintaining an audit trail becomes more difficult. • Accounting records rests on reliability and security of magnetically stored data. – Be skeptical about accepting, on face value, the accuracy of computer produced hard-copy printouts of journals and ledgers. • The system needs to ensure that backup of all files is continuously kept. • Traditional automated systems still have a lot of paper documents. This is good for audit trail purposes but is often inefficient. – As IS becomes increasing paperless, notice the conflict with SAS 78 objectives. Manual Access Controls • Access to: – inventories (direct) – cash (direct) – accounting records (indirect) How do these controls change in a CB environment? Computer-Based Access Controls • Magnetic records are vulnerable to both authorized and unauthorized exposure and should be protected – must have limited file accessibility – programs must be safeguarded and monitored Manual Independent Verification • The Accounts Payable department verifies much of the work done within the expenditure cycle. – Purchase requisitions, purchase orders, receiving reports, and suppliers’ invoices must be checked and verified by Accounts Payable. • The General Ledger department verifies: – the total obligations recorded equal the total inventories received – the total reductions in accounts payable equal the total disbursements of cash How do these controls change in a CB environment? Computer-Based Independent Verification • Automating the accounting function reduces the need for verification by reducing the chances of fraud and error in the expenditure cycle. • However, the need for verification shifts to the computer program and the programmers where fraud and error may still be present.

Which department checks disbursement vouchers and maintains both the voucher register and general ledger?

Which department performs the reconciliation of the cash disbursement journal voucher and the account summary from accounts payable department?

What are the steps taken in the cash disbursement system?

What purpose does a purchasing department serve?