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Accounting Information Systems, 7eJames A. Hall

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Chapter 5The Expenditure Cycle Part 1:

Purchases and Cash Disbursements Procedures


Objectives for Chapter 5 Fundamental tasks performed during purchases and

cash disbursement processes Functional areas involved in purchases and cash

disbursements and the flow of these transactions through the organization

Documents, journals, and accounts that provide audit trails, promote the maintenance of records, and support decision making and financial reporting

Risks associated with purchase and cash disbursements activities and the controls that reduce these risks

Operational features and the control implications of technology used in purchases and cash disbursement systems

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Organization of Chapter 5

The conceptual expenditure cycle The physical expenditure cycle

Basic technology system Advanced technology system Reengineering using EDI

• Address functionality, efficiency issues, work flow characteristics and Internal control issues in each system at different points on the technology/human continuum

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Conceptual Expenditure Cycle

Purchase processing Vouchers payable system Cash disbursement system

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Purchase Processing

Monitor inventory records Prepare purchase order Receive goods Update inventory records Set up accounts payable

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DFD for Purchase System

6Figure 5-1


Vouchers Payable System

An alternate to AP procedures Uses cash disbursement vouchers Each voucher recorded in the voucher register Post to general ledger

inventory and voucher control accounts

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Cash Disbursements

Identify liabilities due Prepare cash disbursement Update AP records Post to general ledger

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DFD for Cash Disbursements System

9Figure 5-10


Physical Expenditure Cycle

Physical accounting information systems combine technology and human activity. As a general rule, smaller businesses tend to rely

less on technology and more on manual procedures, whereas larger companies tend to employ advanced technologies.

The nature of the technology/human mix employed in a particular system has a direct bearing on the nature of internal controls needed to control the system.

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Basic Technology Expenditure Cycle Computers tend to be independent PCs. Information between departments is

communicated via hard-copy documents. Maintaining physical files of source documents

is critical to the audit trail. In the following flowcharts notice that in many

departments, after an individual completes his or her assigned task, documents are filed as evidence that the task was performed.

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Basic Technology Purchases System

12Figure 5-13


Basic Purchases System

Begins when inventory clerk prints purchase requisitions by accessing the purchase requisition file This file was created when inventories dropped to

predetermined reorder point. The purchasing department receives the requisition

Adds a record to the open purchase order file• PO copies are sent to

– Vendor– Inventory control– AP– Blind copy to receiving

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Basic Purchases System

Receiving clerk receives the goods and reconciles with packing slip and blind copy of PO Sends receiving report to

• Inventory storeroom• Purchasing department• Files hard copy

AP department reconciles invoice, purchase order and receiving report Records transaction in the purchases journal

Gender ledger department receives journal voucher from AP dept and account summary from inventory control.

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Basic Technology Cash Disb. System

15Figure 5-13


Basic Cash Disbursement System

AP clerk reviews AP packets each day, identifies items due, sends supporting documents to cash disbursements department.

Cash disbursements department reviews documents for completeness and accuracy and prepares the payment for signature.

AP department removes the liability and sends AP summary to GL department.

GL department posts to the general ledger control accounts and files the documents.

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Basic Technology: Physical Controls

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Authorization Controls

Purchases of inventory should be authorized by the Inventory Control department, not by purchasing agents

Accounts Payable authorizes the payments of bills, not the cash disbursements clerk, who writes the checks

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Segregation of Duties

Segregation of inventory control from the warehouse

Segregation of the general ledger and accounts payable from cash disbursements

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Supervision

Within the expenditure cycle, supervision is of highest importance in the Receiving department, where the inventory arrives and is logged in by a receiving clerk. Need to minimize: failures to properly inspect the assets theft of the assets

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Accounting Records

Accounting records rest on the reliability and security of stored digitalized data. Accountants should be skeptical about the accuracy

of hard-copy printouts. Backups - the system needs to ensure that backups

of all files are continuously kept Most automated systems still have a lot of paper

documents. This is good for audit trail purposes but is often

inefficient. As the system becomes increasing paperless,

maintaining an audit trail becomes more difficult.

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Access Controls

Access to: inventories (direct) cash (direct) accounting records (indirect)

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Independent Verification

A/Payable dept. verifies much of the work done within the expenditure cycle. PR, PO, receiving reports, and suppliers’ invoices must

be checked and verified by A/P.

G/Ledger dept. verifies: the total obligations recorded equal the total inventories

received the total reductions in accounts payable equal the total

disbursements of cash

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IT Application Controls

Input Controls Edit controls to check for missing and invalid data

Process Error messages Passwords File backup

Output Primarily journal vouchers and account summaries

• Secure mail boxes/physical control

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Advanced Technology Expenditure Cycle

Integration of accounting and other business functions.

Improved operational performance and reduce costs by eliminating non-value-added tasks.

Advanced technologies significantly alter and simply the expensiture cycle.

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Integrated Purchases System

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Integrated Purchase Processing

Computer operations Many tasks performed automatically (e.g. identify

items to be ordered, send orders to vendors)

Receiving department Clerk automatically prompted to enter quantities

received; system automatically creates receiving report, updates inventory, sends info to G/L

AP department System links vendor invoice, PO, receiving report;

creates virtual AP packet, automatically approves payment

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Integrated Cash Disb. System

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Integrated Cash Disbursements

Due items are automatically paid Payments recorded Payments sent Invoices closed AP control and cash accounts updated Reports sent to AP and cash disbursement departments

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Advanced Technology Physical Controls

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Advanced Tech. Expenditure Cycle Controls

Automated purchase approval Computer logic, not a human, decides

Automated three-way match and payment approval

Multilevel security Automated posting to subsidiary and GL

accounts

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Advanced Technology IT Controls

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Reengineering using EDI

Expedites routine transaction processing between business partners

Requires trading partner agreement Reengineering receiving function and the AP

tasks produce considerable cost savings

EDI poses unique control risks that must be recognized and controlled – only valid transactions must be processed

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