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

Hall, Accounting Information Systems, 8e ©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

Hall, Accounting Information Systems, 8e ©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. 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

Hall, Accounting Information Systems, 8e ©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. Conceptual Expenditure Cycle  Purchase processing  Vouchers payable system  Cash disbursement system 4

Hall, Accounting Information Systems, 8e ©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. Purchase Processing  Monitor inventory records  Prepare purchase order  Receive goods  Update inventory records  Set up accounts payable 5

Hall, Accounting Information Systems, 8e ©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. DFD for Purchase System 6 Figure 5-1

Hall, Accounting Information Systems, 8e ©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. 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

Hall, Accounting Information Systems, 8e ©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. Cash Disbursements  Identify liabilities due  Prepare cash disbursement  Update AP records  Post to general ledger 8

Hall, Accounting Information Systems, 8e ©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. DFD for Cash Disbursements System 9 Figure 5-10

Hall, Accounting Information Systems, 8e ©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. 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

Hall, Accounting Information Systems, 8e ©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. 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

Hall, Accounting Information Systems, 8e ©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. Basic Technology Purchases System 12 Figure 5-13

Hall, Accounting Information Systems, 8e ©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. 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

Hall, Accounting Information Systems, 8e ©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. 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

Hall, Accounting Information Systems, 8e ©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. Basic Technology Cash Disb. System 15 Figure 5-13

Hall, Accounting Information Systems, 8e ©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. 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

Hall, Accounting Information Systems, 8e ©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. Basic Technology: Physical Controls 17

Hall, Accounting Information Systems, 8e ©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. 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

Hall, Accounting Information Systems, 8e ©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. Segregation of Duties  Segregation of inventory control from the warehouse  Segregation of the general ledger and accounts payable from cash disbursements 19

Hall, Accounting Information Systems, 8e ©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. 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

Hall, Accounting Information Systems, 8e ©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. 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

Hall, Accounting Information Systems, 8e ©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. Access Controls  Access to:  inventories (direct)  cash (direct)  accounting records (indirect) 22

Hall, Accounting Information Systems, 8e ©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. 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

Hall, Accounting Information Systems, 8e ©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. 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

Hall, Accounting Information Systems, 8e ©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. 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

Hall, Accounting Information Systems, 8e ©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. Integrated Purchases System 26

Hall, Accounting Information Systems, 8e ©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. 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

Hall, Accounting Information Systems, 8e ©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. Integrated Cash Disb. System 28

Hall, Accounting Information Systems, 8e ©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. 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

Hall, Accounting Information Systems, 8e ©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. Advanced Technology Physical Controls 30

Hall, Accounting Information Systems, 8e ©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. 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

Hall, Accounting Information Systems, 8e ©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. Advanced Technology IT Controls 32

Hall, Accounting Information Systems, 8e ©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. 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