Aguila, Paulo Timothy DR.

III – BSA

CIS: Chapter 10

Multiple-Choice Questions

1. B
2. A
3. C
4. B
5. D
6. C
7. D
8. D
9. C
10. C
11. B
12. A
13. C
14. C
15. C

Review Questions

1. Differentiate between a purchase requisition and a purchase order.

ANSWER:
Purchase Requisition:
- created by the sales team when the inventory is dropped to reorder level, which is predefined
in the system
- Sent to the purchase department where the purchase is approved
- A request to create a purchase order

Purchase order:
- When the purchasing department collects purchase requisitions, it creates one purchase order
per vendor
- Legal document and includes contractual terms and conditions
- official offer issued to the buyer

2. What purpose does a purchasing department serve?

ANSWER:
The Purchasing department receives the purchase requisition, sorts them by vendor and adds a
record to the digital open purchase order file.
4. What are the three logical steps of the cash disbursements system?
ANSWER:
1. Identify and approve the liability due
2. Prepare cash disbursement
3. Update the AP record and the general ledger

5. What general ledger journal entries does the purchases system trigger? From which departments do
these journal entries arise?

ANSWER:
1. AP account summary triggered form the AP department

2. Journal voucher triggers from the cash disbursement system

6. What two types of risks can close supervision of the receiving department reduce?

ANSWER:
1. Failure of inspection of assets
2. theft of assets

Discussion Questions

1. What is the importance of the job ticket? Illustrate the flow of this document and its information from
inception to impact on the financial statements?

ANSWER: The job ticket is used to allocate each labor hour of work to specific WIP accounts.
These job tickets are very important for cost accounting. The job tickets are completed by production
workers as they capture the total amount of time that they spend on each production job. Upon
completion, they route these to the cost accountants who use them to post the labor costs to specific
WIP accounts such as direct labor, indirect labor and overhead. The cost accountant prepares a labor
distribution summary which contains the information for the general ledger clerk to make the necessary
entries to the general ledger accounts.

2. What documents support the payment of an invoice? Discuss where these documents originate and
the resulting control implications.

ANSWER: The payment of an invoice may be supported by the purchase requisition, purchase
order, and receiving report (in addition to the invoice itself). The purchase requisition originates from
inventory control and represents the inventory requirements. The purchase order originates from the
purchasing department and represents an order placed. The receiving report originates from the
receiving department and represents the quantity and types of goods received. Thus, the accounts
payable must determine (a) that the goods ordered were requested by some department (i.e., inventory
control) other than purchasing, (b) that purchasing ordered the goods from a valid vendor, and (c) that
the goods were actually received. If all three of the conditions are met, then and only then should the
invoice be paid. Further, payments should be made for only those goods received in good shape.
3. Discuss the time lags between realizing and recognizing economic events in the purchase and payroll
systems. What is the accounting profession’s view on this matter as it pertains to these two systems?

ANSWER: For accounts payable, a time lag exists between the time the good that is purchased is
received and the recording of the liability to the vendor. The receipt of an invoice is the event that
usually causes the liability to the vendor to be recorded. The time lag may range from virtually nothing
for fully integrated EDI systems to a few days. Thus, during this slight lag in the recording process,
liabilities are understated.
For payroll costs, wages to workers accrue each minute, hour, or day that they work. However,
these costs are not recorded as a liability during the time between when the workers earn their wages
and when they are paid. These time lags typically average from half a week to a week.
Neither of these time lags are of concern unless the firm is closing its books or preparing interim
financial statements. At these points, however, estimates or accruals of the amounts owed should be
made and the books adjusted.
4. Discuss the importance of supervision controls in the receiving department and the reasons behind
blind fields on the receiving report, such as quantity and price.

ANSWER: The receiving clerks have access to many of the firm’s assets: its inventory.
Two exposures potentially exist: (a) the clerk failing to perform his or her duty and (b) the clerk pilfering
or stealing the inventory. Thus, the copy of the purchase order used for this inspection should have the
quantities and amounts covered so that they may not be read. If the quantity is printed on the receiving
clerk’s copy of the purchase order, he or she may be tempted to skip the physical inspection and the
company may pay for inventory it did not receive or that is damaged.
A supervisor must remove the packing slip that contains quantity information to make sure the receiving
clerk actually inspects the goods. If the value of the inventory is listed, the employee may be tempted to
steal some of the inventory. Close supervision should deter employees from stealing.

5. How does the procedure for determining inventory requirements differ between a basic batch
processing system and batch processing with real-time data input of sales and receipts of inventory?

ANSWER: A system that employs real-time data entry of sales will have the inventory levels
updated more frequently. Thus, when a sale depletes the inventory level to the reorder point, the
system will flag it for reorder more quickly than if it had to wait for a batch update of the inventory
records. The sooner the item is ordered; the sooner it will be received. With respect to the real-time
receipt of inventory, the inventory will be updated immediately to show the accurate amount that is on
hand. A customer wishing to know how soon an item will be shipped will receive more accurate
information regarding the status of the firm’s inventory levels. Thus, the customer benefits from better
stocking of inventory and better information regarding the inventory levels.

Problems

1. Payroll Fraud
John Smith worked in the stockyard of a large building supply company. One day he unexpectedly and
without notice left for California never to return. His foreman seized the opportunity to continue to
submit timecards for John to the payroll department. Each week, as part of his normal duties, the
foreman received the employee paychecks from payroll and distributed them to the workers on his shift.
Because John Smith was not present to collect his paycheck, the foreman forged John’s name and
cashed it.
Required:
Describe two control techniques to prevent or detect this fraud scheme.

ANSWER:
a. An employee action report from the personnel department should list all current
employees. Time cards for terminated or nonexistent employees should be identified when reconciled
with the personnel report.
b. An independent paymaster should distribute the paychecks to the employees. If an employee is not
present to receive the paycheck, it should be returned to the payroll department.

2. Payroll Controls
Refer to the Problem 2 flowchart in the text.
Required:
a. What risks are associated with the payroll procedures depicted in the flowchart?
b. Discuss two control techniques that will reduce or eliminate the risks.
ANSWER:
a. The payroll department has no independent information as to changes in an employee’s
status. For example, the foreman may continue to submit timecards for terminated employees.
Because the foreman also distributes paychecks, he could steal and forge the uncollected checks.
b. i. An employee action report from the personnel department should list all current
employees. Timecards for terminated or nonexistent employees should be identified when
reconciled with the personnel report.
ii. An independent paymaster should distribute the paychecks to the employees. If an
employee is not present to receive the paycheck; it will be returned to the payroll department.

3. Payroll Controls
Sherman Company employs 400 production, maintenance, and janitorial workers in eight separate
departments. In addition to supervising operations, the supervisors of the departments are responsible
for recruiting, hiring, and firing workers within their areas of responsibility. The organization attracts
casual labor and experiences a 20 to 30 percent turnover rate in employees per year. A portion of
Sherman Company’s payroll procedures are as follows:
Employees clock on and off the job each day to record their attendance timecards. Each department has
its own clock machine that is located in an unattended room away from the main production area. Each
week, the supervisors gather the timecards, review them for accuracy, and sign and submit them to the
payroll department for processing. In addition, the supervisors submit personnel action forms to reflect
newly hired and terminated employees. From these documents, the payroll clerk prepares payroll
checks and updates the employee records. The supervisor of the payroll department signs the paychecks
and sends them to the department supervisors for distribution to the employees. A payroll register is
sent to accounts payable for approval. Based on this approval, the cash disbursements clerk transfers
funds into a payroll clearing account.
Required:
Discuss the risks for payroll fraud in the Sherman Company payroll system. What controls would
you implement to reduce the risks? Use the SAS 78 framework of control activities to organize
your response.
ANSWER:
a. Risks

 Department supervisors have too much control over human resources. They are responsible
 for recruiting, hiring, and firing.
 The high degree of casual labor creates an environment that lends itself to abuse.
 High employee turnover rate makes identifying absent or nonexistent employees difficult.
 Clock machines are unsupervised and located in no prominent areas.
 Department supervisors submit personnel action forms.
 Department supervisors distribute the paychecks to the employees; checks written for
nonexistent employees could be kept and cashed by the supervisors.
 Controls
 Authorization: A separated personnel function should be established to account for employees
and to authorize their payment
 Segregation of Duties: The department supervisors should not distribute the paychecks to
employees. This should be the task of a paymaster.
 Supervision: The clocking in and out process should be supervised.