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Accounting Information Systems Ch 13: The Expenditure Cycle
13-2
Hint: You may need to use the VALUE function to transform the results of using the LEFT function to parse the lead digit in
each invoice amount.
13-3
However, the various character-parsing functions (LEFT, RIGHT, MID) all return their results as
text. Therefore, we need to transform that result back into a number by using the VALUE
13.4 Match threats in the first column to appropriate control procedures in the second
column. More than one control may be applicable.
Threat
Control Procedure
1. _d,e__ Failing to take available purchase
discounts for prompt payment.
a. Only accept deliveries for which an
approved purchase order exists.
2. _f__ Recording and posting errors in
accounts payable.
b. Document all transfers of inventory.
3. _l__ Paying for items not received.
c. Restrict physical access to inventory.
4. __h,o_ Kickbacks.
d. File invoices by due date.
5. _b,c,g_ Theft of inventory.
e. Maintain a cash budget.
6. _m,l_ Paying the same invoice twice.
f. Automated comparison of total change in
cash to total changes in accounts payable.
7. _g,b,c_ Stockouts.
g. Adopt a perpetual inventory system.
8. __h,i,j,o_ Purchasing items at inflated
prices.
h. Require purchasing agents to disclose
financial or personal interests in suppliers.
9. __k,q_ Misappropriation of cash.
i. Require purchases to be made only from
approved suppliers.
10. _h,i,o,p__ Purchasing goods of inferior
quality.
j. Restrict access to the supplier master data.
11. __a_ Wasted time and cost of returning
unordered merchandise to suppliers.
k. Restrict access to blank checks.
12. __n_ Accidental loss of purchasing data.
l. Only issue checks for a complete voucher
package (receiving report, supplier
invoice, and purchase order).
13. __j_ Disclosure of sensitive supplier
information (e.g., banking data).
m. Cancel or mark “Paid” all supporting
documents in a voucher package when a
check is issued.
n. Regular backup of the expenditure cycle
database.
o. Train employees how to respond properly
to gifts or incentives offered by suppliers.
p. Hold purchasing managers responsible for
costs of scrap and rework.
q. Reconciliation of bank account by
someone other than the cashier.
13.5 Use Table 13-2 to create a questionnaire checklist that can be used to evaluate
controls for each of the basic activities in the expenditure cycle (ordering goods,
receiving, approving supplier invoices, and cash disbursements).
a. For each control issue, write a Yes/No question such that a “No” answer
represents a control weakness. For example, one question might be “Are
supporting documents, such as purchase orders and receiving reports, marked
“paid” when a check is issued to the vendor?”
A wide variety of questions is possible. Below is a sample list:
Question
Yes
No
1. Is access to supplier master data restricted?
2. Are additions to supplier master data regularly reviewed and all
changes investigated?
3. Is sensitive data encrypted while stored in the database?
4. Does a backup and disaster recovery plan exist?
5. Have backup procedures been tested within the past year?
6. Are appropriate data entry edit controls used?
7. Is a perpetual inventory maintained?
8. Are physical counts of inventory taken regularly and used to adjust
the perpetual inventory records?
9. Are competitive bids used when ordering expensive items?
10. Are purchasing agents required to disclose financial interests in
suppliers?
11. Are budgets set for service expenses and are variances investigated?
12. Is the system configured to generate purchase orders only to suppliers
listed in the database?
13. Are receiving dock employees trained to accept deliveries only when
an approved purchase order exists?
14. Are receiving dock employees trained about the importance of
accurately counting all items delivered?
15. Do receiving dock employees inspect all deliveries for quality?
16. Do both receiving dock employees and inventory control employees
sign off on the transfer of items?
17. Is physical access to inventory restricted?
18. Are invoices only approved for payment when accompanied by both a
purchase order and receiving report?
19. Is supporting documentation cancelled or marked “Paid” when a
check is generated?
20. Are invoices filed by due date (adjusted for any discounts for early
payment)?
21. Is access to blank checks restricted?
22. Is access to the EFT system restricted?
23. Is the bank account regularly reconciled by someone not involved in
issuing checks?
Accounting Information Systems Ch 13: The Expenditure Cycle
13-
6
b. For each Yes/No question, write a brief explanation of why a “No” answer represents a
control weakness.
Question
Reason a “No” answer represents a weakness
1
Unrestricted access to supplier master data could facilitate fraud by allowing the creation of
fake suppliers to whom checks can be issued.
2
Failure to investigate all changes to supplier master data may allow fraud to occur because
unauthorized suppliers may not be detected.
3
Failure to encrypt sensitive data can result in the unauthorized disclosure of banking-related
information about suppliers.
4
If a backup and disaster recovery plan does not exist, the organization may lose important
data.
5
If the backup plan is not tested regularly, it may not work.
6
Without proper data entry edit controls, errors in purchasing, receiving, and paying suppliers
can occur.
7
Without a perpetual inventory system, shortages and excess inventory is more likely.
8
Without periodic physical counts, the perpetual inventory records are likely to be incorrect.
9
Without competitive bids, purchases may be at higher than necessary prices.
10
Non-disclosure of personal interests in suppliers creates a conflict of interest and may lead to
kickbacks and other forms of fraud.
11
Without budgets and analyses of services expenses, these expenses can be fraudulently
inflated to cover up fraud.
12
If generating purchase orders is not restricted to suppliers in the database, purchases may be
made from unauthorized suppliers which may result in paying too much, receiving inferior
quality goods, or violating laws.
13
If receiving dock employees accept deliveries without an approved purchase order, this may
result in higher costs and wasted time processing deliveries and then returning those
unordered items.
14
Failure to count deliveries accurately will create errors in inventory records and may result in
paying for goods not received.
15
Failure to inspect the quality of goods at the receiving dock increases the risk of production
delays when the problem is discovered later.
16
Failure to acknowledge the transfer of goods increases the risk of loss and precludes
assigning responsibility for any shortages.
17
Inadequate physical security increases the risk of theft of inventory.
18
Failure to require a voucher package can result in paying for items not ordered or not
received.
19
Failure to cancel supporting documents can result in paying the same invoice twice.
20
Failure to file invoices by due date increases the risk of not taking advantage of discounts for
prompt payment.
21
Unrestricted access to blank checks increases the risk of misappropriation of funds.
22
Unrestricted access to the EFT system increases the risk of misappropriation of funds.
23
Lack of an independent bank account reconciliation increases the risk of fraud going
undetected. It also precludes the timely identification of unauthorized disbursements,
possibly resulting in the bank refusing to correct the problem.
13-7
13.6 EXCEL PROJECT
a. Expand the cash budget you created in Problem 12.4 to include a row for expected cash outflows equal to 77% of the
current month’s sales.
b. Also add a row to calculate the amount of cash that needs to be borrowed, in order to maintain a minimum cash
balance of $50,000 at the end of each month.
c. Add another row to show the cash inflow from borrowing.
d. Add another row to show the cumulative amount borrowed.
e. Add another row to show the amount of the loan that can be repaid, being sure to maintain a minimum ending
balance of $50,000 each month.
Accounting Information Systems Ch 13: The Expenditure Cycle
Explanation of solution:
Accounting Information Systems Ch 13: The Expenditure Cycle
13-
9
13-
11
Accounting Information Systems Ch 13: The Expenditure Cycle
13.7 The following table presents the results of using a CAAT tool to interrogate the XYZ Company’s ERP system for expenditure
cycle activities. It shows the number of times each employee performed a specific task.
Order
Inventory
Maintain
Supplier
Master File
(add, delete,
edit)
Receive
Inventory
Approve
Supplier
Invoices
for
Payment
Pay
Suppliers
Via EFT
Sign
Checks
Mail
Checks
Reconcile
Bank
Account
Employee A
150
5
Employee B
100
100
100
Employee C
306
7
10
Employee D
70
10
10
Employee E
425
Employee F
150
125
Employee G
400
25
Employee H
1
Employee I
300
Required
Identify three examples of improper segregation of duties and explain the nature of each problem you find.
1. Employee A orders inventory and maintains supplier master – can alter supplier master to order from unapproved suppliers.
2. Employee C places orders and approves invoices – could order for personal use.
3. Employee C maintains supplier master file and approves invoices, so could submit and approve payments to fictitious vendors.
4. Employee D maintains supplier master and approves invoices – can submit and approve invoices from fictitious suppliers.
5. Employee D approves invoices and makes EFT payments – could approve disbursal of funds to self.
6. Employee G approves invoices and mails checks – by getting custody of signed checks, has opportunity to alter.
13.8 The following list identifies several important control features. For each control, (1)
describe its purpose and (2) explain how it could be best implemented in an integrated ERP
system.
a. Cancellation of the voucher package by the cashier after signing the check
b. Separation of duties of approving invoices for payment and signing checks
c. Prenumbering and periodically accounting for all purchase orders.
d. Periodic physical count of inventory.
e. Requiring two signatures on checks for large amounts
f. Requiring that a copy of the receiving report be routed through the inventory
stores department prior to going to accounts payable.
g. Requiring a regular reconciliation of the bank account by someone other than
the person responsible for writing checks
h. Maintaining an approved supplier list and checking that all purchase orders are
issued only to suppliers on that list
Item
Part I - Purpose
Part II – ERP System Control
a.
Prevent resubmission of invoices
for double payment
Control field in supplier invoice record to indicate
the document has been used
Control field in purchase order and receiving report
records to indicate the document has been used to
support payment.
b.
Prevent payment of fictitious
invoices
System matches all invoices to corresponding
receiving reports and purchase orders
Checks signed by cashier.
c.
Prevent unauthorized purchases.
Sequence check of all purchase orders.
d.
Verify the accuracy of recorded
amounts and detect losses.
Still need to count physical inventory periodically.
e.
Prevent large disbursements for
questionable reasons.
Still need two signatures.
f.
Verifies that items received were
placed in inventory and were not
stolen.
Receiving clerks enter that goods were transferred to
inventory.
Inventory clerks acknowledge receipt of goods via
terminals. System configured so that voucher
package requires that the receiving report include the
acknowledgement of receipt by inventory control.
g.
Detect unauthorized disbursements.
Still required.
h.
Ensure the purchase of quality
goods and prevent violations of
laws or company policies.
Validity check of supplier number on all purchase
orders.
Restrict access to the supplier master file
Verify all changes to the supplier master file
Restrictions on who can make changes to the supplier
master file.
13-
14
13.9 For good internal control, which of the following duties can be performed by the
same individual?
1. Approve purchase orders
2. Negotiate terms with suppliers
3. Reconcile the organization’s bank account
4. Approve supplier invoices for payment
5. Cancel supporting documents in the voucher package
6. Sign checks
7. Mail checks
8. Request inventory to be purchased
9. Inspect quantity and quality of inventory received
The cells in the following table marked with an X indicate duties that can be performed by the
same individual without creating an internal control weakness:
Duty
1
2
3
4
5
6
7
8
9
1
2
X
3
4
5
6
X
7
X
X
8
9
Accounting Information Systems Ch 13: The Expenditure Cycle
13-
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13.10 Last year the Diamond Manufacturing Company purchased over $10 million worth
of office equipment under its “special ordering” system, with individual orders
ranging from $5,000 to $30,000. Special orders are for low-volume items that have
been included in a department manager’s budget. The budget, which limits the
types and dollar amounts of office equipment a department head can requisition, is
approved at the beginning of the year by the board of directors. The special
ordering system functions as follows:
Purchasing A purchase requisition form is prepared and sent to the purchasing
department. Upon receiving a purchase requisition, one of the five purchasing
agents (buyers) verifies that the requester is indeed a department head. The buyer
next selects the appropriate supplier by searching the various catalogs on file. The
buyer then phones the supplier, requests a price quote, and places a verbal order. A
prenumbered purchase order is processed, with the original sent to the supplier and
copies to the department head, receiving, and accounts payable. One copy is also
filed in the open-requisition file. When the receiving department verbally informs
the buyer that the item has been received, the purchase order is transferred from
the open to the filled file. Once a month, the buyer reviews the unfilled file to follow
up on open orders.
Receiving The receiving department gets a copy of each purchase order. When
equipment is received, that copy of the purchase order is stamped with the date and,
if applicable, any differences between the quantity ordered and the quantity
received are noted in red ink. The receiving clerk then forwards the stamped
purchase order and equipment to the requisitioning department head and verbally
notifies the purchasing department that the goods were received.
Accounts Payable Upon receipt of a purchase order, the accounts payable clerk
files it in the open purchase order file. When a vendor invoice is received, it is
matched with the applicable purchase order, and a payable is created by debiting
the requisitioning department’s equipment account. Unpaid invoices are filed by
due date. On the due date, a check is prepared and forwarded to the treasurer for
signature. The invoice and purchase order are then filed by purchase order number
in the paid invoice file.
Treasurer Checks received daily from the accounts payable department are
sorted into two groups: those over and those under $10,000. Checks for less than
$10,000 are machine signed. The cashier maintains the check signature machine’s
key and signature plate and monitors its use. Both the cashier and the treasurer sign
all checks over $10,000.
a. Describe the weaknesses relating to purchases and payments of “special orders”
by the Diamond Manufacturing Company.
b. Recommend control procedures that must be added to overcome weaknesses
identified in part a.
c. Describe how the control procedures you recommended in part b should be
modified if Diamond reengineered its expenditure cycle activities to make
maximum use of current IT (e.g., EDI, EFT, bar-code scanning, and electronic
forms in place of paper documents).
Weakness
Control
Effect of new IT
1. Buyer does not verify that
the department head’s request
is within budget.
Compare requested amounts
to total budget and YTD
expenditures.
System can automatically compare the
requested amount to the remaining
budget.
2. No procedures established
to ensure the best price is
obtained.
Solicit quotes/bids for large
orders.
EDI and Internet can be used to solicit
bids.
3. Buyer does not check
vendor’s past performance.
Prepare a vendor performance
report and use it when
selecting vendors.
Vendor performance ratings can be
updated automatically and made
available to buyer.
4. Blind counts not made by
receiving.
Black out quantities ordered
on copy of Purchase Order
sent to receiving
Provide incentives if
discrepancies between
packing slip and actual
delivery are detected.
Do not permit receiving clerks to access
quantities on purchase orders.
Request bar coding or RFID tagging of
all items and use readers to check in all
deliveries.
Still provide incentives to detect
discrepancies.
5. Written notice of
equipment receipt not sent to
purchasing.
Send written notice of
equipment receipt to
purchasing.
Receiving data and comments entered
via on-line terminals and routed to
purchasing.
6. Written notice of
equipment receipt not sent to
accounts payable
Send written notice of
equipment receipt to accounts
payable
Configure system to notify accounts
payable automatically of equipment
receipt.
7. Mathematical accuracy of
vendor invoice is not verified.
Verify mathematical accuracy
of vendor invoice.
Automatic verification of mathematical
accuracy of vendor invoice.
8. Invoice quantity not
compared to receiving report
quantity.
Compare/verify invoiced
quantity with quantity
received.
System verifies invoice quantity with
quantity received.
9. Notification of
acceptability of equipment
from requesting department
not obtained prior to
recording payable.
Obtain confirmation from
requisitioner of the
acceptability of equipment
ordered prior to recording
payable.
Configure system to require confirmation
of equipment acceptability prior to
approving invoice for payment.
10. Voucher package not sent
to Treasurer.
Send voucher package
(purchase order and receiving
report) to Treasurer along
with approved invoice.
Configure system to match invoices
automatically with supporting
documents.
11. Voucher package not
cancelled when invoice paid.
Treasurer should mark
voucher package as PAID
when check is signed.
Configure system to mark supporting
documents as used when invoice is paid.
12. No mention of bank
reconciliation.
Bank account should be
reconciled by someone other
than Accounts Payable or the
treasurer.
Bank account should be reconciled by
someone other than Accounts Payable or
the treasurer.
Accounting Information Systems Ch 13: The Expenditure Cycle
13-
17
d. Draw a BPMN diagram that depicts Diamond’s reengineered expenditure cycle.
(CPA Examination, adapted)
Solution will vary depending upon which weaknesses were corrected. This BPMN
addresses all the weaknesses listed above.
Employee
Activity Performed (sequential, left-to-right across all rows)
Department
Heads
Purchasing
(Buyer)
Receiving
Clerk
Accounts
Payable
Treasurer
Purchase
Requisition
Order
Inventory
Receive
& Inspect
Use P.O and
R.R. to approve
invoice and
update A/P
Receive
Invoice from
Supplier
Pay Supplier
& Cancel
Voucher
Package
Verify request within
budget;
use RFP for large
purchases;
check supplier history
Update open
P.O.s
RR copy
Receiving Report
Inspect &
Approve
Equipment
Notification of acceptability
File Cancelled
Voucher
Package
