AIS Ch 15 Expenditure Cycle

Steps in the expenditure cycle

1. Order goods/services

2. Receive the goods/services

3. Approve supplier invoices

4. Cash disbursements

Key management decisions in expenditure cycle

How can cash payments to vendors be managed to optimize cash flow?

What is the optimal level of inventory and supplies to carry on hand?

NOT

What are the optimal selling prices for each product or service?

General threats & controls throughout entire expenditure cycle

1. Inaccurate or invalid master data

--1.1 Data processing integrity controls

--1.2 Restriction of access to master data

--1.3 Review of all changes to master data

2. Unauthorized disclosure of sensitive information

--2.1 Access controls

--2.2 Encryption

3. Loss or destruction of data

--3.1 Backup and disaster recovery procedures

4. Poor performance

--4.1 Managerial reports

Threats & controls for ordering

5. Stockouts and excess inventory

--5.1 Perpetual inventory system

--5.2 Bar coding or RFID tags

--5.3 Periodic physical counts of inventory

6. Purchasing items not needed

--6.1 Perpetual inventory system

--6.2 Review and approval of purchase requisitions

--6.3 Centralized purchasing function

7. Purchasing at inflated prices

--7.1 Price lists

--7.2 Competitive bidding

--7.3 Review of purchase orders

--7.4 Budgets

8. Purchasing goods of inferior quality

--8.1 Purchasing only from approved suppliers

--8.2 Review and approval of purchases from new suppliers

--8.3 Tracking and monitoring product quality by supplier

--8.4 Holding purchasing managers responsible for rework and scrap costs

9. Unreliable suppliers

--9.1 Requiring suppliers to possess quality certification (e.g., ISO 9000, international quality standards)

--9.2 Collecting and monitoring supplier delivery performance data

10. Purchasing from unauthorized suppliers

--10.1 Maintaining a list of approved suppliers and configuring the system to permit purchase orders only to approved suppliers

--10.2 Review and approval of purchases from new suppliers

--10.3 EDI-specific controls (access, review of orders, encryption, policy)

11. Kickbacks (bribery)

--11.1 Prohibit acceptance of gifts from suppliers

--11.2 Job rotation and mandatory vacations

--11.3 Requiring purchasing agents to disclose financial and personal interests in suppliers

--11.4 Supplier audits

Threats & controls for receiving

12. Accepting unordered items

--12.1 Requiring existence of approved purchase order prior to accepting any delivery

13. Mistakes in counting

--13.1 Do not inform receiving employees about quantity ordered

--13.2 Require receiving employees to sign receiving report

--13.3 Incentives

--13.4 Use of bar codes and RFID tags

--13.5 Configuration of the ERP system to flag discrepancies between received and ordered quantities that exceed tolerance threshold for investigation

14. Not verifying receipt of services

--14.1 Budgetary controls

--14.2 Audits

15. Theft of inventory

--15.1 Restriction of physical access to inventory

--15.2 Documentation of all transfers of inventory between receiving and inventory employees

--15.3 Periodic physical counts of inventory and reconciliation to recorded quantities

--15.4 Segregation of duties: custody of inventory versus receiving

Threats & controls for approving supplier invoices

16. Errors in supplier invoices

--16.1 Verification of invoice accuracy

--16.2 Requiring detailed receipts for procurement card purchases

--16.3 ERS (evaluated receipt settlement, automated invoice & pmt)

--16.4 Verification of freight bill and use of approved delivery channels

17. Mistakes in posting to accounts payable

--17.1 Data entry edit controls

--17.2 Reconciliation of detailed accounts payable records with the general ledger control account

Threats & controls for cash disbursements

18. Failure to take advantage of discounts for prompt payment

--18.1 Filing of invoices by due date for discounts

--18.2 Cash flow budgets

19. Paying for items not received

--19.1 Requiring that all supplier invoices be matched to supporting documents acknowledged by both receiving and inventory control

--19.2 Budgets (for services)

--19.3 Verification of all receipts for travel expenses

--19.4 Use of corporate credit cards for travel expenses

20. Duplicate payments

--20.1 Requiring a complete voucher package for all payments

--20.2 Policy to pay only from original copies of supplier invoices

--20.3 Cancelling all supporting documents when payment is made

21. Theft of cash

--21.1 Physical security of blank checks and check-signing machine

--21.2 Periodic accounting of all sequentially numbered checks by cashier

--21.3 Access controls to EFT (electronic funds transfer) terminals

--21.4 Use of dedicated computer and browser for online banking

--21.5 ACH blocks on accounts not used for payments

--21.6 Separation of check-writing function from accounts payable

--21.7 Requiring dual signatures on checks greater than a specific amount

--21.8 Regular reconciliation of bank account with recorded amounts by someone independent of cash disbursements procedures

--21.9 Restriction of access to supplier master file

--21.10 Limiting the number of employees with ability to create one-time suppliers and to process invoices from one-time suppliers

--21.11 Running petty cash as an imprest fund

--21.12 Surprise audits of petty cash fund

22. Check alteration

--22.1 Check-protection machines

--22.2 Use of special inks and papers

--22.3 "Positive Pay" arrangements with banks

23. Cash flow problems

--23.1 Cash flow budget

Purchase order

used to establish a contract for the purchase of goods or services from a vendor

Positive pay system

allows you to upload a list of your company checks on a daily basis and automatically compare it to the checks presented at the bank for payment that day.

Economic Order Quantity (EOQ)

How much to order

the optimal order size to minimize the sum of ordering, carrying (holding inv), and stockout (result from inv. shortages e.g. loss of sales) costs

Reorder Point (ROP)

When to order

the inventory level (point) at which action is taken to replenish the stocked item

the level that inventory needs to fall below for an order to be necessary

Materials Requirement Planning (MRP)

seeks to reduce required inventory levels by improving the accuracy of forecasting techniques to better schedule purchases to satisfy production plans.

A computer-based operations management system that uses forecasted sales to make sure that needed parts and materials are available at the right time and place.

infrequent bulk deliveries to a central receiving and storage facility

just-in-time inventory system

a system that minimizes or virtually eliminates finished goods inventories by purchasing and producing goods only in response to actual, rather than forecasted, sales

frequent deliveries of small amounts of materials, parts, and supplies directly to the specific locations that require them when they are needed

multiple receiving docks

useful for products that have relatively short life cycles and for which demand cannot be accurately predicted, such as toys associated with specific movies.

Purchase Requisition

basically says "hey, we need more inventory"

supervisor approves it

document that identifies the requisitioner; specifies the delivery location and date needed; identifies the item numbers, descriptions, quantity, and price of each item requested; and may suggest a supplier

Purchasing agents

aka buyers

Factors to consider when choosing a supplier (3)

price

quality of items

will supplier be able to deliver

blanket purchase order/ blanket order

a commitment to purchase specified items at designated prices from a particular supplier for a set time period, often one year

Ways to reduce purchasing-related costs of raw materials and FG inventory (4)

1. EDI

2. vendor-managed inventory

3. reverse auctions

4. pre-award audits

EDI (Electronic Data Interchange Capabilities)

--helps eliminate clerical work (paper docs)

--reduced time b/w recognizing need to reorder & receiving it

--reduced risk of running out of stock= increased profitability

vendor-managed inventory (VMI)

an approach for improving supply chain efficiency in which the manufacturer is responsible for maintaining the retailer's inventory levels in each of its stores

supplier has access to customer's POS (point of sale) system and automatically sends them supplies when they're in need

pre-award audit

for large purchases

internal auditor visits the suppliers who've made the final cut

verify accuracy of their bid by identifying errors in their pricing formulas to provide considerable savings

reverse auctions

suppliers compete with one another to meet demand at the lowest price, usually for commodity items

Receiving process

Receiving clerk:

--compares purch order # to supplier's packing list

--counts & inspects goods

--documents receiving report

Debit memo created if damaged/ poor-quality goods

Receiving report

a document that records details about each delivery, including the date received, shipper, supplier, quantity received

(date, shipper, supplier, purchase order number, item number, description, unit of measure, quantity, person who received & inspected goods, comments)

debit memo

a document used to record a reduction to the balance due to a supplier

used to record adjustments to accounts payable based on the return of unacceptable inventory to the supplier

One copy to the supplier, who creates and returns a credit memo in acknowledgment

One copy goes with the goods to the shipping dpt to authorize return

How to improve receiving process efficiency

RFID tags (track inventory items)

EDI (electronic data interchange)

--notifies companies when inv's shipped

--links to satellites help to track location

Approving Supplier Invoices process

Invoice received

AP matches invoice w/ puch order & receiving report.

Voucher pkg= supplier invoice, puch order, receiving report

approve supplier invoice when it's verified that ordered goods were received

voucher package

The set of documents used to authorize payment to a supplier. It consists of a purchase order, receiving report, and supplier invoice.

nonvoucher system

a method for processing accounts payable in which each approved invoice is posted to individual supplier records in the accounts payable file and is then stored in an open invoice file

voucher system

A method for processing accounts payable in which a disbursement voucher is prepared instead of posting invoices directly to supplier records in the accounts payable subsidiary ledger.

The disbursement voucher identifies the supplier, lists the outstanding invoices, and indicates the net amount to be paid after deducting any applicable discounts and allowances. Contrast with nonvoucher system.

3 advantages to a voucher system

Reduce # checks written bc many invoices on one disbursement voucher

Disb. voucher is prenumbered to track all payables

Separates time of invoice approval from time of invoice pmt, easier to schedule both activities to maximize efficiency

Disbursement voucher

a document that identifies the supplier, lists the outstanding invoices, and indicates the net amount to be paid after deducting any applicable discounts and allowances

Which process in Approving Supplier Invoices could be automated?

AP process (matching PO & RR) can be automated easily

How to improve efficiency in approving supplier invoice process (3)

Suppliers submit invoices via EDI, automatically match invoice to PO & RR

Or eliminate supplier invoices (Evaluated receipt settlement ERS="invoiceless approach")

Procurement cards-- for non inventory purchases (corporate credit cards for employees)

Evaluated Receipt Settlement (ERS)

An invoiceless approach to accounts payable that replaces the three-way matching process (supplier invoice, receiving report, and purchase order) with a two-way match of the purchase order and receiving report.

eliminates the vendor invoice

(why did they take the supplier invoice out?

Which expenditure cycle activities can be eliminated through the use of IT or reengineering?

Approving vendor invoices

ERS systems eliminate vendor invoices.

procurement card

A corporate credit card that employees can use only at designated suppliers to purchase specific kinds of items.

specifically for purchase of noninventory items like misc. office supplies

Cash disbursement process

--Payments are made when accounts payable sends the cashier a voucher package.

--Cashier reports to treasurer, cashier responsible for paying suppliers → segregates custody (cashier) from authorization & recording (purchasing & AP dots)

--A lot of pmts still made by check even though EFT and FEDI is increasing

imprest fund

A cash account with two characteristics: (1) It is set at a fixed amount, such as $100

(2) vouchers/ receipts are required for every disbursement. At all times, cash+vouchers/ receipts = preset fund balance.

Technically, setting up petty cash as an imprest fund violates segregation of duties because the same person has custody of the asset—cash—authorizes its disbursement, and maintains records.

ex: use imprest fund for minor purchases like coffee or donuts

could do periodic unannounced counts of fund balance and receipts to control

What is the best control procedure to prevent paying the same invoice twice?

Cancel all supporting documents when the check is signed

This ensures that the supporting documents cannot be resubmitted to pay the same invoice again.

EDI, bar-coding, RFID, and EFT help reduce time & cost of expenditure cycle

True

For good internal control, who should sign checks?

cashier

NOT AP, controller , or purchasing agent (authorizes

Which procedure is designed to prevent the purchasing agent from receiving kickbacks?

requiring purchasing agents to disclose any financial investments in potential suppliers

minimizes the risk of conflicts of interest that could result in kickbacks.

Figure 15-4

Prob. 15.9 For good internal control, who performs the following duties?

1. Request purchases of inventory

2. Approve purchase orders

3. Count quantity received

4. Approve supplier invoices for payment

5. Cancel supporting documents in the voucher package

6. Sign checks

7. Mail checks

8. Reconcile the bank account

1. Request purchases of inventory-- anyone/ inventory control

2. Approve purchase orders -- purchasing agent, supervisor, general authorization

3. Count quantity received-- receiving clerk

4. Approve supplier invoices for payment-- AP

5. Cancel supporting documents in the voucher package-- treasurer or Cashier

6. Sign checks-- Cashier

7. Mail checks--Cashier

8. Reconcile the bank account--AP

Figure 15-4 Please select the duty an purchasing agent should perform

1. Request purchases of inventory

2. Approve purchase orders

3. Count quantity received

4. Approve supplier invoices for payment

5. Cancel supporting documents in the voucher package

6. Sign checks

7. Mail checks

8. Reconcile the bank account

2. Approve purchase orders

Figure 15-4 Please select all of the duties a cashier could perform

1. Request purchases of inventory

2. Approve purchase orders

3. Count quantity received

4. Approve supplier invoices for payment

5. Cancel supporting documents in the voucher package

6. Sign checks

7. Mail checks

8. Reconcile the bank account

A cashier can:

5. cancel supporting documents in the voucher package

6. sign checks

7. mail checks

Figure 15-4 Please select the duty an accounts payable clerk should perform

1. Request purchases of inventory

2. Approve purchase orders

3. Count quantity received

4. Approve supplier invoices for payment

5. Cancel supporting documents in the voucher package

6. Sign checks

7. Mail checks

8. Reconcile the bank account

4. approve supplier invoices for payment

8. Reconcile bank statement

Figure 15-4 Please select the duty that should be performed by the receiving workers.

1. Request purchases of inventory

2. Approve purchase orders

3. Count quantity received

4. Approve supplier invoices for payment

5. Cancel supporting documents in the voucher package

6. Sign checks

7. Mail checks

8. Reconcile the bank account

3. Count quantity received (they shouldn't know how much was ordered)

Which of the following documents will best prevent the receipt of unordered goods?

Approved purchase order

Approved vendor invoice

Signed receiving report

Approved purchase order

If there isn't an approved PO, it's obvious we didn't order the goods

receiving clerk should compare approved PO to the goods received

Which of the following control procedures would best prevent failure to take available purchase discounts?

Filing by due date

Use bar code technology

Double-check invoice accuracy

Filing by due date

Which of the following is generally not shown on a completed receiving report?

price of the items

quantity of the items

purchase order number

counted and inspected by

price of the items

don't want the receiving clerks to know the value of the goods they're receiving in case they want to take some

Which control would be best to prevent payments made to fictitious vendors?

Segregate the accounts payable and accounts receivable functions

Have an independent bank reconciliation

Make sure all documents are in order before approving payments

Do not make payments to vendors that are not on the approved vendor list

Do not make payments to vendors that are not on the approved vendor list