AccountingInformationSystems, 6th edition JamesA.

Hall

COPYRIGHT 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license

ObjectivesforChapter5
y Fundamentaltasksperformedduringpurchasesandcash disbursementprocesses y Functionalareasinvolvedinpurchasesandcash disbursementsandtheflowofthesetransactionsthrough theorganization y Documents,journals,andaccountsthatprovideaudit trails,promotethemaintenanceofrecords,andsupport decisionmakingandfinancialreporting y Risksassociatedwithpurchaseandcashdisbursements activitiesandthecontrolsthatreducetheserisks y Operationalfeaturesandthecontrolimplicationsof technologyusedinpurchasesandcashdisbursement systems

Purchase Requisition 1

Purchasing 2 PROCUREMENT CYCLE (SUBSYSTEM)

Cash Disbursements 5

Receiving/ Inspection 3

Accounts Payable 4

GoalsoftheExpenditureCycle
y Thegoalofprovidingneededresourcestoorganization canbebrokendownintoseveralobjectives:
y purchasefromreliablevendors y purchasehighqualityitems y obtainbestpossibleprice y purchaseonlyitemsthatareproperlyauthorized y haveresourcesavailablewhentheyareneeded y receiveonlythoseitemsordered y ensureitemsarenotlost,stolen,

or

broken y payfortheitemsinatimelymanner

DFDofPurchasesSystem

AManualPurchasesSystem
y BeginsinInventoryControlwheninventorylevels droptoreorderlevels y Apurchaserequisition(PR)ispreparedandcopiesto senttoPurchasingandAccountsPayable(A/P) y Purchasingpreparesapurchaseorder(PO)foreach vendorandsendscopiestoInventoryControl,A/P, andReceiving

AManualPurchasesSystem
y Uponreceipt,Receiving countsandinspectsthe goods. y AblindcopyofthePOisusedtoforceworkersto countthegoods. y Areceivingreportispreparedandcopiessenttothe rawmaterialsstoreroom,Purchasing,Inventory Control,andA/P.

AManualPurchasesSystem
y A/PeventuallyreceivescopiesofthePR,PO, receivingreport,andthesuppliersinvoice. y A/Preconcilesthesedocuments,poststothe purchasesjournal,andrecordstheliabilityinthe accountspayablesubsidiaryledger.

AManualPurchasesSystem
y A/Pperiodicallysummarizestheentriesinthe purchasesjournalasajournalvoucherwhichissentto theGeneralLedger(G/L)department.

InvControlorPurchases
AcctsPayableControl

DR
CR

y A/Palsopreparesacashdisbursementsvoucherand postsitinthevoucherregister.

AManualPurchasesSystem
yG/Ldepartment:
y postsfromtheaccountspayablejournal

vouchertothegeneral ledger y reconcilestheinventoryamountwiththe accountsummaryreceivedfrom inventorycontrol

ManualPurchasesFlowchart

DFDofCashDisbursementsSystem

ManualCashDisbursementsSystem
y Periodically,A/Psearchestheopenvoucherspayable fileforitemswithpaymentsdue:

y A/Psendsthevoucherandsupporting

documentstoCashDisbursements y A/Pupdatestheaccountspayable subsidiaryledger

ManualCashDisbursementsSystem
y CashDisbursements: y preparesthecheck y recordstheinformationinacheckregister(cash disbursementsjournal) y returnspaidvoucherstoaccountspayable,mailsthe checktothesupplier y sendsajournalvouchertoG/L: AccountsPayable DR Cash CR

ManualCashDisbursementsSystem
y G/Ldepartmentreceives:
thejournalvoucher fromcashdisbursements y asummaryoftheaccountspayablesubsidiaryledger fromA/P
y

y Thejournalvoucherisusedtoupdatethe generalledger. y Theaccountspayablecontrolaccountis reconciledwiththesubsidiarysummary.

CashDisbursementsSystem

ComputerBasedAccountingSystems
y CBAStechnologycanbeviewedasacontinuumwith twoextremes:

y automation usetechnologytoimprove

efficiencyandeffectiveness y reengineering usetechnologyto restructurebusinessprocessesandfirm organization

LevelsofAutomatingandReengineering Ordering
y ComputergeneratesPR y PurchasesmanuallygeneratesPO y ComputergeneratesPO(noPRneeded) y POnotsentuntilmanuallyreviewed y ComputergeneratedPOisautomaticallysentwithout manualreview y ElectronicDataInterchange(EDI) y ComputertocomputercommunicationwithoutPO

ExpenditureCycleDatabase
y MasterFiles
y supplier(vendor)masterfile y accountspayablemasterfile y merchandiseinventorymaster

Other Files
supplier reference and history file buyer file accounts payable detail file

file

y TransactionandOpen DocumentFiles
y purchaseorderfile

openpurchaseorderfile y suppliersinvoicefile y openvouchersfile y cashdisbursementsfile

ComputerBasedPurchases
y ADataProcessingdept.performsroutine accountingtasks. y Purchasing acomputerprogramidentifies inventoryrequirements y Thefollowingmethodsareusedforauthorizing andorderinginventories:
thesystempreparesPOsandsendsthemto Purchasesforreview,signing,anddistributing y thesystemdistributesPOsdirectlytothevendors andinternalusers,bypassingPurchases y thesystemuseselectronicdatainterchange(EDI) andelectronicallyplacestheorderwithoutPOs
y

ComputerBasedPurchases
y Othertasksperformedautomaticallybythe computer: y updatestheinventorysubsidiaryfilefrom thereceivingreport y calculatesbatchtotalsforgeneralledger update y closesthecorrespondingrecordsintheopen POfiletotheclosedPOfile y validatesthevoucherrecordsagainstvalid vendorfiles

ComputerBasedCashDisbursements
yTasksperformedautomaticallyby

thecomputer:
y thesystemscansforvoucherscurrently

due y printschecksforthesevouchers y recordsthesechecksinthecheckregister y batchtotalsarepreparedforthegeneral ledgerupdateprocedure

AutomatedBatchPurchases

AutomatedBatchPurchases

AdvantagesofRealTimeDataInput& ProcessingOverBatchProcessing
y Shortensthetimelaginrecordkeeping; hence,recordsaremorecurrent y Eliminatesmuchoftheroutinemanual procedures,suchastranscribinginformation ontopaperdocuments y Eliminatesmuchofthestorageandshuffling ofpaperdocuments y Reducesdataentrycorrectionprocedures

ReengineeredPurchases/Cash Disbursements

SummaryofInternalControls

GeneralInternalControls
y Organizationcontrols y segregationofduties y Documentation y AssetAccountabilityControls y ManagementPractices y DataCenterOperationsControls y AuthorizationControls y AccessControls

Manual AuthorizationControls
y Purchasesofinventoryshouldbeauthorizedbythe InventoryControldepartment,not bypurchasing agents y AccountsPayableauthorizesthepaymentsofbills, not thecashdisbursementsclerk,whowritesthe checks

How do these controls change in a CBAS?

ComputerBasedAuthorization Controls
y Authorizationsareautomated. y programmeddecisionrulesmustbedebugged y AutomatinginventoryinEDIandJIT y faultyinventorymodelcanleadtooverpurchasingor underpurchasing y Cashdisbursementsmayautomatecheckprintingand signing. y programminglogicmustbeflawless y automatedsigningonlybelowadollarthreshold

TraditionalSegregationofDuties
y Warehouse(stores) y Inventorycontrol y Accountspayable y Generalledger y Requisitioning y Purchases y Purchasesreturnsandallowances y Cashdisbursements

Manual SegregationofFunctions
y Custodyoftheasset,inventory,bytheWarehouse mustbeseparatefromrecordkeepingfortheassetsby theInventoryControl. y Custodyoftheasset,cash,byCashDisbursements mustbekeptseparatefromrecordkeepingforthe assetbyA/P.

How do these controls change in a CBAS?

ComputerBasedSegregation ofFunctions
y Extensiveconsolidationbythe

computeroftaskstraditionally segregated
y computerprogramsauthorizeand

processpurchaseorders y computerprogramsauthorizeandissue checkstovendors

Manual Supervision
y Withintheexpenditurecycle,supervision isof highestimportanceintheReceivingdepartment, wheretheinventoryarrivesandisloggedinbya receivingclerk.Needtominimize: y failurestoproperlyinspecttheassets y theftoftheassets

How do these controls change in a CBAS?

ComputerBasedSupervision
y Automationoftenleadstoacollapsingofthe traditionalsegregationofduties. y requiresgreatersupervision y Supervisiontakesonnewaspectsastechnology advances. y electronicmonitoring y Supervisionbecausemoredifficultastheworkplace becomesmoresophisticated. y employeesmayhaveadvancedITtraining

Manual AccountingRecords
y Mustmaintainadequaterecordsfor: y accountspayable y voucherspayable y checks y generalledger y subsidiaryledgers

How do these controls change in a CBAS?

ComputerBased AccountingRecords
y Accountingrecordsrestonthereliabilityand securityofstoreddigitalizeddata.
Accountantsshouldbeskepticalabouttheaccuracyof hardcopyprintouts. y Backups thesystemneedstoensurethatbackupsof allfilesarecontinuouslykept
y

y Mostautomatedsystemsstillhavealotofpaper documents.
Thisisgoodforaudittrailpurposesbutisoften inefficient. y Asthesystembecomesincreasingpaperless, maintaininganaudittrailbecomesmoredifficult.
y

Manual AccessControls
yAccessto:
y inventories(direct) y cash(direct) y accountingrecords(indirect)

How do these controls change in a CBAS?

ComputerBased AccessControls
y Magneticrecordsarevulnerabletobothauthorized andunauthorizedexposureandshouldbeprotected y musthavelimitedfileaccessibility y programsmustbesafeguardedandmonitored

Manual IndependentVerification
y A/Payabledept.verifiesmuchoftheworkdone withintheexpenditurecycle.
y

PR,PO,receivingreports,andsuppliers invoicesmustbe checkedandverifiedbyA/P.

y G/Ledgerdept.verifies:
thetotalobligationsrecordedequalthetotalinventories received y thetotalreductionsinaccountspayableequalthetotal disbursementsofcash
y

How do these controls change in a CBAS?

ComputerBased IndependentVerification
y Automatingtheaccountingfunctionreducestheneed forverificationbyreducingthechancesoffraudand errorintheexpenditurecycle. y However,theneedforverificationshiftstothe computerprogramandtheprogrammerswherefraud anderrormaystillbepresent.