HALL, ACCOUNTING INFORMATION SYSTEMS

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Accounting Information Systems, 6^th edition James A. Hall

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Objectives for Chapter 5

y Fundamental tasks performed during purchases and cash disbursement processes

y Functional areas involved in purchases and cash

disbursements and the flow of these transactions through the organization

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

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

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

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PROCUREMENT CYCLE (SUBSYSTEM)

Purchasing

Accounts Payable

Receiving/

Inspection Cash Disbursements

Purchase Requisition

1 2

3

4 5

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Goals of the Expenditure Cycle

y The goal of providing needed resources to organization can be broken down into several objectives:

y purchase from reliable vendors

y purchase high quality items

y obtain best possible price

y purchase only items that are properly authorized

y have resources available when they are needed

y receive only those items ordered

y ensure items are not lost, stolen, or broken

y pay for the items in a timely manner

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DFD of Purchases System

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A Manual Purchases System

y Begins in Inventory Control when inventory levels drop to reorder levels

y A purchase requisition (PR) is prepared and copies to sent to Purchasing and Accounts Payable (A/P)

y Purchasing prepares a purchase order (PO) for each vendor and sends copies to Inventory Control, A/P, and Receiving

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y Upon receipt, Receiving counts and inspects the goods.

y A blind copy of the PO is used to force workers to count the goods.

y A receiving report is prepared and copies sent to the raw materials storeroom, Purchasing, Inventory

Control, and A/P.

A Manual Purchases System

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y A/P eventually receives copies of the PR, PO, receiving report, and the supplier’s invoice.

y A/P reconciles these documents, posts to the

purchases journal, and records the liability in the accounts payable subsidiary ledger.

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y A/P periodically summarizes the entries in the

purchases journal as a journal voucher which is sent to the General Ledger (G/L) department.

Inv‐Control or Purchases DR

Accts Payable‐Control CR

y A/P also prepares a cash disbursements voucher and posts it in the voucher register.

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y G/L department:

y

posts from the accounts payable journal voucher to the general ledger

y

reconciles the inventory amount with the account summary received from

inventory control

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Manual Purchases Flowchart

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DFD of Cash Disbursements System

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Manual Cash Disbursements System

y Periodically, A/P searches the open vouchers payable file for items with payments due:

y

A/P sends the voucher and supporting documents to Cash Disbursements

y

A/P updates the accounts payable

subsidiary ledger

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y Cash Disbursements:

y prepares the check

y records the information in a check register (cash disbursements journal)

y returns paid vouchers to accounts payable, mails the check to the supplier

y sends a journal voucher to G/L:

Accounts Payable DR

Cash CR

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y G/L department receives:

y the journal voucher from cash disbursements

y a summary of the accounts payable subsidiary ledger from A/P

y The journal voucher is used to update the general ledger.

y The accounts payable control account is reconciled with the subsidiary summary.

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Cash Disbursements System

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Computer‐Based Accounting Systems

y CBAS technology can be viewed as a continuum with two extremes:

y

automation ‐ use technology to improve efficiency and effectiveness

y

reengineering – use technology to

restructure business processes and firm

organization

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Levels of Automating and Reengineering Ordering

y Computer generates PR

y Purchases manually generates PO

y Computer generates PO (no PR needed)

y PO not sent until manually reviewed

y Computer‐generated PO is automatically sent without manual review

y Electronic Data Interchange (EDI)

y Computer‐to‐computer communication without PO

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Expenditure Cycle Database

y Master Files

y supplier (vendor) master file

y accounts payable master file

y merchandise inventory master file

y Transaction and Open Document Files

y purchase order file

y open purchase order file

y supplier’s invoice file

y open vouchers file

y cash disbursements file

• Other Files

– supplier reference and history file

– buyer file

– accounts payable detail file

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y

A Data Processing dept. performs routine accounting tasks.

y

Purchasing ‐ a computer program identifies inventory requirements

y

The following methods are used for authorizing and ordering inventories:

y the system prepares POs and sends them to Purchases for review, signing, and distributing

y the system distributes POs directly to the vendors and internal users, bypassing Purchases

y the system uses electronic data interchange (EDI) and electronically places the order without POs

Computer‐Based Purchases

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Computer‐Based Purchases

y Other tasks performed automatically by the computer:

y

updates the inventory subsidiary file from the receiving report

y

calculates batch totals for general ledger update

y

closes the corresponding records in the open PO file to the closed PO file

y

validates the voucher records against valid

vendor files

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Computer‐Based Cash Disbursements

y Tasks performed automatically by the computer:

y

the system scans for vouchers currently due

y

prints checks for these vouchers

y

records these checks in the check register

y

batch totals are prepared for the general

ledger update procedure

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Automated Batch Purchases

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Automated Batch Purchases

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Advantages of Real‐Time Data Input &

Processing Over Batch Processing

y Shortens the time‐lag in record‐keeping;

hence, records are more current

y Eliminates much of the routine manual

procedures, such as transcribing information onto paper documents

y Eliminates much of the storage and shuffling of paper documents

y Reduces data entry correction procedures

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Reengineered Purchases/Cash

Disbursements

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Summary of Internal Controls

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General Internal Controls

y Organization controls

y segregation of duties y Documentation

y Asset Accountability Controls y Management Practices

y Data Center Operations Controls y Authorization Controls

y Access Controls

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Manual

Authorization Controls

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

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

How do these controls change in a CBAS?

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Computer‐Based Authorization Controls

y Authorizations are automated.

y programmed decision rules must be debugged y Automating inventory in EDI and JIT

y faulty inventory model can lead to over‐purchasing or under‐purchasing

y Cash disbursements may automate check printing and signing.

y programming logic must be flawless

y automated signing only below a dollar threshold

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Traditional Segregation of Duties

y

Warehouse (stores)

y

Inventory control

y

Accounts payable

y

General ledger

y

Requisitioning

y

Purchases

y

Purchases returns and allowances

y

Cash disbursements

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Manual

Segregation of Functions

y Custody of the asset, inventory, by the Warehouse

must be separate from recordkeeping for the assets by the Inventory Control.

y Custody of the asset, cash, by Cash Disbursements must be kept separate from recordkeeping for the asset by A/P.

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Computer‐Based Segregation of Functions

y Extensive consolidation by the computer of tasks traditionally segregated

y

computer programs authorize and process purchase orders

y

computer programs authorize and issue

checks to vendors

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Manual

Supervision

y 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:

y failures to properly inspect the assets

y theft of the assets

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Computer‐Based Supervision

y Automation often leads to a collapsing of the traditional segregation of duties.

y requires greater supervision

y Supervision takes on new aspects as technology advances.

y electronic monitoring

y Supervision because more difficult as the workplace becomes more sophisticated.

y employees may have advanced IT training

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Manual

Accounting Records

y Must maintain adequate records for:

y accounts payable

y vouchers payable

y checks

y general ledger

y subsidiary ledgers

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Computer‐Based

Accounting Records

y

Accounting records rest on the reliability and security of stored digitalized data.

y Accountants should be skeptical about the accuracy of hard‐copy printouts.

y Backups ‐ the system needs to ensure that backups of all files are continuously kept

y

Most automated systems still have a lot of paper documents.

y This is good for audit trail purposes but is often inefficient.

y As the system becomes increasing paperless,

maintaining an audit trail becomes more difficult.

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Manual

Access Controls

y Access to:

y

inventories (direct)

y

cash (direct)

y

accounting records (indirect)

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Computer‐Based Access Controls

y Magnetic records are vulnerable to both authorized and unauthorized exposure and should be protected

y must have limited file accessibility

y programs must be safeguarded and monitored

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Manual

Independent Verification

y

A/Payable dept. verifies much of the work done within the expenditure cycle.

y PR, PO, receiving reports, and suppliers’ invoices must be checked and verified by A/P.

y

G/Ledger dept. verifies:

y the total obligations recorded equal the total inventories received

y the total reductions in accounts payable equal the total disbursements of cash

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Computer‐Based

Independent Verification

y Automating the accounting function reduces the need for verification by reducing the chances of fraud and error in the expenditure cycle.

y However, the need for verification shifts to the

computer program and the programmers where fraud and error may still be present.