chapter 9-1 prepared by coby harmon university of california, santa barbara westmont college

Chapter 9-1

Prepared byCoby Harmon

University of California, Santa BarbaraWestmont College

Chapter 9-2

Expenditures Processes and Controls-Purchases

Chapter 9-3

1. An introduction to expenditures processes

2. Purchasing processes and the related risks and controls

3. Purchase return processes and the related risks and controls

4. Cash disbursement processes and the related risks and controls

5. An overview of IT systems of expenditure and cash disbursement processes that enhance the efficiency of expenditures processes

6. Computer-based matching of purchasing documents and the related risks and controls

7. Evaluated receipt settlement systems and the related risks and controls

8. E-business and electronic data interchange (EDI) systems and the related risks and controls

9. E-payables systems

10. Procurement cards

11. Ethical issues related to expenditures processes

12. Corporate governance in expenditures processes

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 9-4

Real WorldReal WorldReal WorldReal World Organizations not only pay the purchase price of

inventory and supplies that they acquire, but they

also pay a cost to conduct purchases and to write checks to pay for purchases.

This cost is the wages and salaries that organizations pay to employees involved

in purchasing and payment activities. Many organizations continuously look for

ways to reduce this cost by improving the efficiency of the purchasing and

payment processes. General Electric Co. (GE) implemented a Web-based

electronic invoice presentment (EIP) system in which its small and midsize

vendors send invoices electronically via the web. This process allowed GE to

avoid the time and cost of receiving and entering paper invoices into its IT

system. GE agreed to pay within 15 days in return for a 1.5 percent discount for

invoices submitted under the EIP system. On the other hand, any paper invoices

would be paid in 60 days. Within six months of implementing the new system,

“more than 15,000 of GE’s vendors, who represented 45 percent of the

company’s vendors, signed up for electronic presentment.”1 This change resulted

in a 12 percent reduction in the cost of payables processing.

Chapter 9-5

When a purchase occurs, the information resulting from that

purchase must flow into

the purchase recording systems,

the accounts payable and cash disbursement systems, and

the inventory tracking systems.

SO 1 An introduction to expenditures processes

Introduction to Expenditures ProcessesIntroduction to Expenditures ProcessesIntroduction to Expenditures ProcessesIntroduction to Expenditures Processes

Transaction Processing Systems (TPS)

Chapter 9-6

Exhibit 9-1 Expenditures Processes withinthe Overall System

Introduction to Introduction to Expenditure Expenditure ProcessesProcesses

Introduction to Introduction to Expenditure Expenditure ProcessesProcesses


Chapter 9-7

Exhibit 9-2Comparison of the Revenue and Expenditures Processes



Chapter 9-8

Common expenditures processes include:

Prepare a purchase requisition and/or purchase order.

Notify vendor (supplier) of goods or services needed.

Receive goods or services.

Record the payable.

Pay the resulting invoice.

Update the records affected, such as accounts payable,

cash, inventory, and expenses.



Chapter 9-9

Terminology

SO 2 Purchasing processes and the related risks and controls

Purchasing ProcessesPurchasing ProcessesPurchasing ProcessesPurchasing Processes

Purchase Requisition

Purchase Order (PO)

Purchases Journal

Blind Purchase Order

Bill of Lading

Packing Slip

Receiving Report

Receiving Log

Cutoff

Accounts Payable

Subsidiary Ledger

Chapter 9-10

Exhibit 9-2Purchasing Process Map

See next slide for larger image.



Chapter 9-11 SO 2 Purchasing processes and the related risks and controls



Chapter 9-12 SO 2 Purchasing processes and the related risks and controls



Chapter 9-13

Common procedures associated with the revenue

process:

Authorization of transactions

Segregation of duties

Adequate records and documents

Security of assets and documents

Independent checks and reconciliation

Cost-benefit considerations


Controls and Risks in Purchasing Controls and Risks in Purchasing ProcessesProcessesControls and Risks in Purchasing Controls and Risks in Purchasing ProcessesProcesses

Chapter 9-14

Characteristics indicating risk with purchasing processes:

1.Goods received difficult to differentiate, count, or inspect.

2.High volumes of goods are received, or goods are of high value.

3.Inventory pricing arrangements are complex or based on estimates.

4.Frequent changes occur in purchase prices or vendors.

5.Company depends on one or few key vendors.

6.Receiving and/or record keeping are performed at multiple locations.



Chapter 9-15

Within the purchasing processes, which of the following is the

first document prepared and thereby the one that triggers the

remaining purchasing processes?

a. The invoice

b. The receiving report

c. The purchase order

d. The purchase requisition



Concept Check

Chapter 9-16

Personnel who work in the receiving area should complete

all of the following processes except

a.counting the goods received.

b.inspecting goods received for damage.

c.preparing a receiving report.

d.preparing an invoice.



Concept Check

Chapter 9-17

Which of the given departments will immediately adjust the

vendor account for each purchase transaction so that the

company will know the correct amount owed to the vendor?

a.Purchasing

b.Receiving

c.Accounts payable

d.Shipping



Concept Check

Chapter 9-18 SO 3 Purchase return processes and the related risks and controls

Reasons for Returns:

1. Goods received are unacceptable due to:

Quantity or quality discrepancies

Damage or defects

Errors in the type of goods delivered or ordered

Discrepancies in the terms of the purchase

Timing issues

2. Changes in the company’s needs.

Purchase Returns ProcessesPurchase Returns ProcessesPurchase Returns ProcessesPurchase Returns Processes

Chapter 9-19


Exhibit 9-9Purchase Returns Process Map

SO 3 Purchase return processes and the related risks and controls


Chapter 9-20 SO 3 Purchase return processes and the related risks and controls



Chapter 9-21




Chapter 9-22

Specific controls over the purchase returns process:








Risks and Controls in the Purchase Risks and Controls in the Purchase Returns ProcessReturns ProcessRisks and Controls in the Purchase Risks and Controls in the Purchase Returns ProcessReturns Process

Chapter 9-23

The document prepared when purchased items are

returned is a(n)

a.debit memo.

b.invoice.

c.receiving report.

d.sales journal.


Risks and Controls in the Purchase Risks and Controls in the Purchase Returns ProcessReturns ProcessRisks and Controls in the Purchase Risks and Controls in the Purchase Returns ProcessReturns Process

Concept Check

Chapter 9-24

Cash disbursements process must be designed to ensure that

the company appropriately processes payments to satisfy its

accounts payable when they are due.

Terminology:

Cash management

Remittance advice

Cash disbursements journal

Cash Disbursement ProcessesCash Disbursement ProcessesCash Disbursement ProcessesCash Disbursement Processes

SO 4 Cash disbursement processes and the related risks and controls

Chapter 9-25




Exhibit 9-14Cash Disbursement Process Map

Chapter 9-26




Chapter 9-27




Chapter 9-28

Risks and Controls Cash Disbursement Risks and Controls Cash Disbursement ProcessProcessRisks and Controls Cash Disbursement Risks and Controls Cash Disbursement ProcessProcess

Specific controls over the cash receipts process:








Chapter 9-29

Which of the following controls is not normally performed in the

accounts payable department

a.The vendor’s invoice is matched with the related receiving

report.

b.Vendor invoices are selected for payment.

c.Asset and expense accounts to be recorded are assigned.

d.Unused purchase orders and receiving reports are accounted

for.



Concept Check

Chapter 9-30

In a system of proper internal controls, the same employee

should not be allowed to

a.sign checks and cancel the supporting voucher package.

b.receive goods and prepare the related receiving report.

c.prepare voucher packages and sign checks.

d.initiate purchase requisitions and inspect goods received.



Concept Check

Chapter 9-31

Within accounts payable, to ensure that each voucher is

submitted and paid only once, each invoice approved to be paid

should be

a.supported by a receiving report.

b.stamped “paid” by the check signer.

c.prenumbered and accounted for.

d.approved for authorized purchases.



Concept Check

Chapter 9-32

Three-Way Match is the matching of a purchase order to the related receiving report and invoice.

Time consuming and expensive.

Business Process Reengineering (BPR) to improve efficiency and effectiveness. IT systems include:

► Computer-based matching and checking of purchasing documents

► Evaluated receipt settlement (ERS)

► Electronic forms of purchase and payment

SO 5 An overview of IT systems of expenditure and cash disbursement processes that enhance the efficiency of expenditures processes

IT Systems of Expenditure and Cash IT Systems of Expenditure and Cash Disbursement ProcessesDisbursement ProcessesIT Systems of Expenditure and Cash IT Systems of Expenditure and Cash Disbursement ProcessesDisbursement Processes

Chapter 9-33

Exhibit 8-17 is a system flowchart of a generic version of revenue system withsome paper documents.

SO 5 An overview of IT systems of expenditure and cash disbursement processes that enhance the efficiency of expenditures processes

Exhibit 9-19Document Matching to Approve and Pay for Purchases

IT Systems of Expenditure and Cash IT Systems of Expenditure and Cash Disbursement ProcessesDisbursement ProcessesIT Systems of Expenditure and Cash IT Systems of Expenditure and Cash Disbursement ProcessesDisbursement Processes

Chapter 9-34

Automated matching - software matches an invoice to its

related purchase order and receiving report.

Computer-Based MatchingComputer-Based MatchingComputer-Based MatchingComputer-Based Matching

SO 6 Computer-based matching of purchasing documents and the related risks and controls

Advantages

reduce time,

costs,

errors, and

duplicate payments in

invoice processing.

Risks

system errors in the

matching process,

unauthorized access,

fraud, and

inadequate backup of files.

Chapter 9-35

Real WorldReal WorldReal WorldReal World Frymaster Corporation is a company in Shreveport,

Louisiana that manufactures foodservice equipment

such as fryers and frying systems, food dispensing equipment, pasta cookers,

and toasters. Frymaster uses an automated document-matching system for

invoice payment. It is a medium-size company with four people in its accounts

payable department. Compared with companies like it, Frymaster has a cost per

vendor payment processed that is extremely low: Frymaster’s average cost is

only about one-fourth of the overall average cost for a medium-size company.

Frymaster has such lower cost because more than 75 percent of the

invoices it receives usually match the other documents the first time. These

matched invoices are paid automatically by the system so that no employee time

is needed.

Therefore, fewer staff members are needed to process a larger volume

of payments, so the staff can focus on exceptions i.e., the other 25 percent of

invoices that do not initially match. Documents that are properly matched are

processed automatically, and only those with differences require manual steps to

reconcile.


Chapter 9-36

Risks and Controls in Computer-Based Risks and Controls in Computer-Based MatchingMatchingRisks and Controls in Computer-Based Risks and Controls in Computer-Based MatchingMatching

Security and Confidentiality Risks

Processing Integrity Risks

Availability Risks


Chapter 9-37

In the mid-1990s, some companies, began implementing

invoice-less matching systems for purchasing and paying

vendors.

Evaluated receipt settlement (ERS) - receipt of goods is

carefully evaluated and, if it matches the purchase order,

settlement of the obligation occurs through this system.

Elevated Receipt SettlementElevated Receipt SettlementElevated Receipt SettlementElevated Receipt Settlement

SO 7 Evaluated receipt settlement systems and the related risks and controls

Chapter 9-38

Risks and Controls in Elevated Receipt Risks and Controls in Elevated Receipt SettlementSettlementRisks and Controls in Elevated Receipt Risks and Controls in Elevated Receipt SettlementSettlement

Security and Confidentiality Risks

Processing Integrity Risks

Availability Risks


Chapter 9-39

Which of the following IT systems is designed to avoid the

document matching process and is an “invoiceless” system?

a. Computer-based matching system

b. Electronic data interchange

c. Evaluated receipt settlement

d. Microsoft Dynamics GP®


Risks and Controls in Elevated Receipt Risks and Controls in Elevated Receipt SettlementSettlementRisks and Controls in Elevated Receipt Risks and Controls in Elevated Receipt SettlementSettlement

Concept Check

Chapter 9-40

E-Business and Electronic Data InterchangeE-Business and Electronic Data InterchangeE-Business and Electronic Data InterchangeE-Business and Electronic Data Interchange

Exhibit 8-18EDI Using a Third-Party Network

Value Added

Networks (VANs)

Chapter 9-41

SO 8 E-business and electronic data interchange (EDI) systems and the related risks and controls

Exhibit 9-20E-Business and EDI Risks and Controls

Risks and Controls in El-Business and EDIRisks and Controls in El-Business and EDIRisks and Controls in El-Business and EDIRisks and Controls in El-Business and EDI

Chapter 9-42

Input controls such as field check, validity check, limit check,

and reasonableness check are useful in IT systems of

purchasing processes to lessen which of the following risks?

a. Unauthorized access

b. Invalid data entered by vendors

c. Repudiation of purchase transactions

d. Virus and worm attacks

Risks and Controls in El-Business and EDIRisks and Controls in El-Business and EDIRisks and Controls in El-Business and EDIRisks and Controls in El-Business and EDI

SO 8 E-business and electronic data interchange (EDI) systems and the related risks and controls

Concept Check

Chapter 9-43

Electronic Invoice Presentment and Payment

(EIPP)

Takes advantage of the connectivity of the Internet to

electronically send invoices or payments.

Accounts payable could receive invoices and make payments

via the Internet.

Usually utilize web browsers as the interface for accounts

payable employees to receive and view invoices and make

payments.

E-PayablesE-PayablesE-PayablesE-Payables

SO 9 E-payables system

Chapter 9-44

Procurement cards

Called p-cards.

Credit cards that organization gives to certain employees

to make designated purchases.

Normally not used to purchase raw materials or products.

Used for small-dollar-amount purchases.

Procurement CardsProcurement CardsProcurement CardsProcurement Cards

SO 10 Procurement cards

Chapter 9-45

Ethical Issues Related to Expenditures Ethical Issues Related to Expenditures ProcessesProcessesEthical Issues Related to Expenditures Ethical Issues Related to Expenditures ProcessesProcesses

SO 11 Ethical issues related to expenditures processes

It is important to establish internal control policies and IT controls to help prevent or detect

fraud,

ethical lapses, or

errors.

Chapter 9-46

Real WorldReal WorldReal WorldReal World There are many examples of frauds related to the

expenditures process committed by upper level

managers. In addition to the fraud committed at Phar-Mor as described in Chapter 3,

Michael Monus, as President and Chief Operating Officer of Phar-Mor, made

fraudulent payments on typewritten checks drawn on a special Phar-Mor checking

account. The checks supported the World Basketball League (WBL) that Monus

founded. The use of a special checking account allowed Monus to bypass the normal

purchase order controls, invoice matching system, and computer check writing policies

that accompanied Phar-Mor’s main operating account, so that he could use Phar-Mor

funds to keep the financially troubled WBL afloat. His fraud diverted nearly $10 million

to the WBL in a period of three years. Mr. Monus specifically established a separate

checking account that avoided the internal control structure. Since top management is

above the level of internal control, proper internal control systems may not prevent

expenditure fraud conducted by the top officials. However, the board of directors and

upper level management should ensure that the corporate managers adhere to a code

of ethical conduct. Ethics codes are not guarantees of fraud prevention either, but

when ethical conduct is expected and rewarded, an environment is created in which

such management fraud is more difficult to conceal.


Chapter 9-47

Which of the following is most likely to be effective in

deterring fraud by upper level managers?

a. Internal controls

b. An enforced code of ethics

c. Matching documents prior to payment

d. Segregating custody of inventory from inventory record

keeping


Ethical Issues Related to Expenditures Ethical Issues Related to Expenditures ProcessesProcessesEthical Issues Related to Expenditures Ethical Issues Related to Expenditures ProcessesProcesses

Concept Check

Chapter 9-48

Corporate governance policies should incorporate the four areas of

management oversight,

internal controls and compliance,

financial stewardship, and

ethical conduct.

SO 12 Corporate governance in expenditure processes

Corporate Governance in Expenditure Corporate Governance in Expenditure ProcessesProcessesCorporate Governance in Expenditure Corporate Governance in Expenditure ProcessesProcesses

Chapter 9-49

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