Ais12 SM CH13 Expenditure Cycle PDF

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Ch 13: Expenditure Cycle

CHAPTER 13 THE EXPENDITURE CYCLE: PURCHASING AND CASH DISBURSEMENTS SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 13. 1

In this chapter and in Chapter 12 the controller of AOE played a major role in evaluating and recommending ways to use IT to improve efficiency and effectiveness. Should the company’s chief information officer make these decisions instead? Should the controller be involved in making these types of decisions? Why or why not? There are several reasons why accountants should be involved in decisions about investing in IT and not leave such decisions solely to IS professionals. First, the economic merits of proposed IT investments need to be subjected to the same kind of detailed analysis as any other major capital investment (e.g., plant expansions). Accountants are skilled in making such analyses. Second, the operational feasibility of IT investments must also be evaluated. How will the investment affect daily operating procedures? Will the system be able to adapt as the company changes the nature of its operations? As one of the major users of the information system, accountants need to participate in these analyses. Third, what is the long-run viability of the proposed supplier? Here again accountants can make a valuable contribution by analyzing the long-run economic viability of proposed vendors.

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Ch. 13: The Expenditure Cycle: Purchasing and Cash Disbursements

13.2

Companies such as Wal-Mart have moved beyond JIT to VMI systems. Discuss the potential advantages and disadvantages of this arrangement. What special controls, if any, should be developed to monitor VMI systems? Vendor Managed Inventory (VMI) is essentially Electronic Data Interchange (EDI) where the retailer has given their vendor access rights to their point-of-sale (POS) system. Some of the potential advantages and disadvantages of moving to a VMI are: Advantages: 

Lower cost. Retailers are able to “outsource” their inventory management to their vendors.



Potentially reduced lost sales. – When vendors are able to meet product demand, the company can minimize lost sales due to stockouts.



More accurate forecasts. Since vendors have more data from the retailers, they are able to more accurately forecast and meet demand for their products.

Disadvantages: 

Cost. Retailers and vendors must incur the costs of acquiring the technology and changing the organization to a VMI arrangement.



Security. –. The retailer puts one of their most valuable assets, their sales data, in the hands of their vendors. Such significant access to retailer data opens the door to a myriad of data and system security issues such as data alteration and deletion, unauthorized access to nonsales related data, inadvertent loss of data, and corporate espionage.



Over supply. The vendor can ship more inventory than the retailer needs to meet the demand.

Controls: The following controls could be implemented to monitor VMI systems: 1. Monitor inventory levels. At least at first, and then periodically thereafter, the retailer should monitor inventory levels to determine whether the vendor is sending enough inventory to prevent stock outs but not too much inventory that is slow to sell. 2. Analyze inventory costs. If VMI is working, then overall inventory costs should decline. 3. Intrusion detection systems. To determine if the vendor has compromised the security of the retailer’s system. 4. Monitor unauthorized access attempts. All attempts by vendors to access non-VMI related areas of the retailer’s system should be investigated.

13.3

Procurement cards are designed to improve the efficiency of small noninventory 13-2 © 2012 Pearson Education, Inc. Publishing as Prentice Hall

Ch 13: Expenditure Cycle

purchases. What controls should be placed on their use? Why? Since the primary benefit of procurement cards is to give employee’s the ability to make small non-inventory purchases necessary for their area of responsibility -- be it office supplies, computer or office equipment, or meals and/or travel expenses -- a formal approval process for all purchases would negate the benefit of the procurement card. Therefore, the focus of procurement card controls should be on the initial issuance of the card and subsequent reviews and audits of purchases made by employees entrusted with procurement cards. Employees receiving cards must be properly trained in their proper use and in the procurement card controls implemented by the organization. If employees know that any purchase they make can be the subject of subsequent review and audit, they are more likely to make legitimate purchases. Subsequent reviews and audits must also require proper documentation related to each purchase made with the procurement card. During procurement card training, it should be emphasized that employees will be required to produce original receipts or other formal documentation for all items purchased. Budgets and detailed variance analyses are an important detective control to identify potential problems before they get too large. 13. 4

In what ways can you apply the control procedures discussed in this chapter to paying personal debts (e.g., credit card bills)? Many people do not keep their credit card receipts as evidenced by receipts left at “pay-at-thepump” gas stations. If consumers do not keep their receipts, how do they know whether their credit card bill is accurate? Thus, consumers should verify each charge on their bill to each receipt. In addition, credit card bill should be reviewed for accurate refunds for returned merchandise or cancelled services. Just as businesses should take advantage of discounts for prompt payment, consumers should attempt to always pay the balance due in full because the interest rate on outstanding balances can result in significantly greater total payments. Finally, consumers need to shred all statements prior to disposal, to reduce the risk of identity theft. If consumers engage in online banking, they should vigilantly monitor their account for signs of compromise. Ideally, they should only do online banking from one computer and use a different browser than is used for all other online activities.

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Ch. 13: The Expenditure Cycle: Purchasing and Cash Disbursements

13.5

Should every company switch from the traditional 3-way matching process (purchase orders, receiving reports, and supplier invoices) to the 2-way match (purchase orders and receiving reports) used in Evaluate Receipt Settlement (ERS)? Why (not)? Switching to ERS simplifies accounts payable and eliminates a major source of problems: inconsistency between supplier invoices and prices quoted when placing the order. However, ERS requires firm commitments to prices by suppliers – which may not be feasible for certain types of products like commodities. ERS also requires that receiving dock employees exercise great care in counting merchandise received. It also requires configuring the information system to automatically calculate and track payment due dates without the benefit of a reminder provided by receiving a supplier invoice.

13.6

Should companies allow purchasing agents to start their own businesses that produce goods the company frequently purchases? Why? Would you change your answer if the purchasing agent’s company was rated by an independent service, like Consumer Reports, as providing the best value for price? Why? The primary issue here is conflict of interest. If a purchasing manager owns a business that supplies goods to his employer, how does the employer know that they are receiving the best quality goods for the lowest prices? By allowing a purchasing manager to own an independent company that supplies his employer, the employer is in effect dis-aligning the interests of the purchasing manager with the interests of the employer. The higher the prices the supply company charges, the more money the purchasing manager makes. The employer may find some comfort if the purchasing manager’s supply business is reviewed or audited by some independent organization. However, independent rating organizations cannot audit every transaction. Since the purchasing manager has intimate knowledge of the employer’s operations and cost structure, he has the ability to structure transactions that could conceal purchases that were favorable to the purchasing manager’s business and unfavorable to the employer. Given the degree of oversight that any prudent employer would have to implement to make sure the purchasing manager provided the best quality for the best price, why would an employer want to allow such an arrangement?

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Ch 13: Expenditure Cycle

SUGGESTED ANSWERS TO THE PROBLEMS 13.1

a. A purchasing agent orders materials from a supplier that he partially owns.  

 

Require a purchase requisition from an operating department as authorization for preparation of all purchase orders. Require purchasing manager, before approving PO, to o Review the purchase requisition o Ensure that orders are placed only with approved vendors. Require purchasing agents to disclose any financial interest in supplier companies, though this may be difficult to enforce. Ensure that purchasing agents do not have investments in vendors on the approved vendor list.

b. Receiving-dock personnel steal inventory and then claim the inventory was sent

to the warehouse.  Count all deliveries and record counts on a receiving report.  Require warehouse personnel to count the goods received when they are transferred to the warehouse and acknowledge receipt of the specified quantity by signing the receiving report.  Have accounts payable personnel review the signed receiving report copy (signed by both the receiving department and the warehouse personnel) prior to approving payment. c. An unordered supply of laser printer paper delivered to the office is accepted

and paid for because the “price is right.” After jamming all of the laser printers, however, it becomes obvious that the “bargain” paper is of inferior quality. 



The problem here is that office employees are seldom trained about proper procedures for receiving, because it is assumed that all goods are delivered only to the warehouse. Office employees, like receiving employees, need to be trained not to accept deliveries unless they can verify the existence of an approved purchase order for those goods. In addition, companies should not approve and pay invoices unless they can match the invoice to an approved purchase order and receiving report.

d. The company fails to take advantage of a 1% discount for promptly paying a

vendor invoice.  

File invoices by discount date Maintain a cash budget 13- © 2012 Pearson Education, Inc. Publishing as Prentice Hall

Ch. 13: The Expenditure Cycle: Purchasing and Cash Disbursements

e. A company is late in paying a particular invoice. Consequently, a second invoice

is sent, which crosses the first invoice’s payment in the mail. The second invoice is submitted for processing and also paid.   

f.

Review related supporting voucher package or records (receiving report and purchase order) before approving an invoice for payment. Change the status of the invoice and its supporting records from "pending" to "paid" after payment is made. Deface the invoice and all supporting documents (such as marking them paid) so they cannot be used to support the payment of a duplicate invoice.

Inventory records show that an adequate supply of copy paper should be in stock, but none is available on the supply shelf.

 

Count physical inventory periodically. Correct system records using the count.

g. The inventory records are incorrectly updated when a receiving-dock employee

enters the wrong product number at the terminal.





Use closed loop verification – The item number is entered as input, the system displays the corresponding item description, and the user is asked to verify that it is the desired item. Use bar-codes or RFID tags to eliminate the need to enter the item number manually.

h. A clerical employee obtains a blank check and writes a large amount payable to

a fictitious company. The employee then cashes the check.

   

Store unused blank company checks in a secure location. Segregate duties by having the person reconciling the bank account be different from the person making payments Segregate duties by having the person signing checks be different from the person authorizing disbursements and preparing checks Ensure that the check signer reviews the documentation (purchase order and receiving report) supporting each disbursement prior to signing each check.

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Ch 13: Expenditure Cycle

i.

A fictitious invoice is received and a check is issued to pay for goods that were never ordered or delivered.         

j.

Program the system so that it only prints checks to approved suppliers listed in the database Restrict access to the supplier master data. Require appropriate background checks and management approvals before adding a new supplier to the supplier master data Review changes to the supplier master data periodically Require supporting documents (purchase order and receiving report) for each invoice that is paid Require the person who authorizes disbursements to review the purchase order and receiving report, as well as the invoice. Segregate duties by having the person signing checks be different from the person authorizing disbursements and preparing checks Ensure that the check signer reviews the invoice, purchase order, and receiving report supporting each disbursement prior to signing a check. Deface the invoice and all supporting documents (such as marking them paid) so they cannot be used to support the payment of a duplicate invoice.

The petty cash custodian confesses to having “borrowed” $12,000 over the last five years.  

Create a petty cash imprest fund and only replenish it based on receipts documenting how the funds were used Conduct periodic surprise counts of petty cash on hand to verify that the total of cash plus receipts equals the fund amount.

k. A purchasing agent adds a new record to the supplier master file. The company

does not exist. Subsequently, the purchasing agent submits invoices from the fake company for various cleaning services. The invoices are paid.

   

Restrict access to the supplier master file Require appropriate background checks and management approvals before adding a new supplier to the supplier master data Monitor on a regular basis all changes made to the supplier master data Implement budgetary controls and regular analyses of expenses related to services to detect this type of problem, as well as higher-than-expected expenses for a particular department.

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Ch. 13: The Expenditure Cycle: Purchasing and Cash Disbursements

l.

A clerk affixes a price tag intended for a low-end flat panel TV to a top-of-theline model. The clerk’s friend then purchases that item, which the clerk scans at the checkout counter.    

13.2

Restrict access to price tags so that cashiers do not have access to price tags Segregate duties by not letting stocking clerks work as cashiers. Monitor check-out clerks, either live or by closed-circuit cameras, to deter fraud. Hire honest and ethical employees by conducting effective interviews, checking references, and conducting background checks if cost effective.

Match the terms in the left column with their appropriate definition in the right column. Terms 1. _n__ economic order quantity 2. __f_ materials requirements planning (MRP) 3. _e__ Just-in-time (JIT) inventory system 4. __g_ purchase requisition 5. __b_imprest fund 6. __a_ purchase order 7. _s__ kickbacks 8. __r_ procurement card

9.

__p_ blanket purchase order

10. _h__ evaluated receipts settlement (ERS) 11. __m_ disbursement voucher 12. _q_ receiving report

Definitions a. A document that creates a legal obligation to buy and pay for goods or services. b. The method used to maintain the cash balance in the petty cash account. c. The time to reorder inventory based on the quantity on hand falling to predetermined level. d. A document used to authorize a reduction in accounts payable when merchandise is returned to a supplier. e. An inventory control system that triggers production based upon actual sales. f. An inventory control system that triggers production based on forecasted sales. g. A document only used internally to initiate the purchase of materials, supplies, or services. h. A process for approving supplier invoices based on a two-way match of the receiving report and purchase order. i. A process for approving supplier invoices based on a three-way match of the purchase order, receiving report, and supplier invoice. j. A method of maintaining accounts payable in which each supplier invoice is tracked and paid for separately. k. A method of maintaining accounts payable which generates one check to pay for a set of invoices from the same supplier. l. Combination of a purchase order, receiving report, and supplier invoice that all relate to the same transaction. 13-8

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Ch 13: Expenditure Cycle

13. __d_ debit memo 14. _o__ vendor managed inventory 15. __l_ voucher package

16. _j__ non-voucher system 17. _k__ voucher system

m. A document used to list each invoice being paid by a check. n. An inventory control system that seeks to minimize the sum of ordering, carrying, and stockout costs. o. A system whereby suppliers are granted access to point-of-sale (POS) and inventory data in order to automatically replenish inventory levels. p. An agreement to purchase set quantities at specified intervals from a specific supplier. q. A document used to record the quantities and condition of items delivered by a supplier. r. A special purpose credit card used to purchase supplies. s. A fraud in which a supplier pays a buyer or purchasing agent in order to sell its products or services.

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Ch. 13: The Expenditure Cycle: Purchasing and Cash Disbursements

13 . 3 EXCEL PROJECT. Using Benford’s Law to Detect Potential Disbursements Fraud. a. Read the article “Using Spreadsheets and Benford’s Law to Test Accounting Data,” by Mark G. Simkin in the ISACA Journal, Vol. 1, 2010, available at www.isaca.org. b. Follow the steps in the article to analyze the following set of supplier invoices: Invoice Number 2345 2346 2347 2348 2349 2350 2351 2352 2353 2354 2355 2356 2357 2358 2359 Invoice Number 2360 2361 2362 2363 2364 2365 2366 2367 2368 2369 2370 2371 2372 2373 2374

Amount $7,845 $2,977 $1,395 $3,455 $7,733 $1,455 $6,239 $2,573 $1,862 $1,933 $7,531 $4,400 $5,822 $7,925 $2,100 Amount $8,256 $1,863 $3,375 $6,221 $1,799 $1,450 $7,925 $2,839 $1,588 $2,267 $7,890 $7,945 $1,724 $9,311 $4,719 13-10 © 2012 Pearson Education, Inc. Publishing as Prentice Hall

Ch 13: Expenditure Cycle

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