Chapter 13. The Expenditure Cycle. Because this cycle involves the outflow of cash, it is the counterpoint to the revenue cycle

Transcription

1 Chapter 13 The Expenditure Cycle Introduction Because this cycle involves the outflow of cash, it is the counterpoint to the revenue cycle Two subsystems include: The purchases processing system The cash disbursements processing system 1

2 Purchase Requisition Purchasing 1 2 Cash Disbursements 5 PROCUREMENT CYCLE (SUBSYSTEM) Receiving/ Inspection 3 Accounts Payable 4 Objectives of the Cycle To ensure that all goods and services are ordered as needed To receive all ordered goods and verify that they are in good condition To safeguard goods until needed To ensure that invoices pertaining to goods and services are valid and correct 2

3 Objectives of the Cycle (cont..) To record and classify the expenditures and cash disbursements promptly and accurately To post obligations and cash disbursements to proper suppliers accounts in the accounts payable ledger To ensure that all cash disbursements are related to authorized expenditures Relationships of Organizational Units to Expenditure Cycle Functions VP Logistics VP Finance Purchasing Receiving Inventory Production Budgeting & Cash Planning Inventory Control Accounts Payable Cash Disbursements General Ledger Recognize need for goods & services Place Order Receive and Store goods Determine validity of payment obligation Make Cash Disbursements Figure 13-1 Maintain Accounts Payable Post Transactions & Prepare Financial Reports 3

4 Supplier Requirement sediaan 1 Review Catatan Level sediaan Catatan Sediaan Supplier Purchase order 2 Inventory Pembelian Purchase order Catatan Supplier 5 Requirement sediaan invoice 6 Info penerimaan Siapkan Account Payable Ringkasan info posting Update GL Terima Barang 3 Penerimaan Barang Account Payable Ringkasan info posting Barang 4 Rekening Pengendali SImpan Info penerimaan Update Catatan posting Catatan Sediaan A Manual Purchases System Begins in Inventory Control when inventory levels drop to reorder levels A purchase requisition (PR) is prepared and copies to sent to Purchasing and Accounts Payable (A/P) Purchasing prepares a purchase order (PO) for each vendor and sends copies to Inventory Control, A/P, and Receiving 4

5 A Manual Purchases System Upon receipt, Receiving counts and inspects the goods. A blind copy of the PO is used to force workers to count the goods. A receiving report is prepared and copies sent to the raw materials storeroom, Purchasing, Inventory Control, and A/P. A Manual Purchases System A/P eventually receives copies of the PR, PO, receiving report, and the supplier s invoice. A/P reconciles these documents, posts to the purchases journal, and records the liability in the accounts payable subsidiary ledger. 5

6 A Manual Purchases System 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 A/P also prepares a cash disbursements voucher and posts it in the voucher register. A Manual Purchases System G/L department: posts from the accounts payable journal voucher to the general ledger reconciles the inventory amount with the account summary received from inventory control 6

7 Manual Purchases Flowchart Computer-Based Accounting Systems CBAS technology can be viewed as a continuum with two extremes: automation - use technology to improve efficiency and effectiveness reengineering use technology to restructure business processes and firm organization 7

8 Levels of Automating and Reengineering Ordering Computer generates PR Purchases manually generates PO Computer generates PO (no PR needed) PO not sent until manually reviewed Computer-generated PO is automatically sent without manual review Electronic Data Interchange (EDI) Computer-to-computer communication without PO Expenditure Cycle Database Master Files Other Files supplier (vendor) master file supplier reference and accounts payable master file history file merchandise inventory master file buyer file Transaction and Open Document Files accounts payable detail file purchase order file open purchase order file supplier s invoice file open vouchers file cash disbursements file 8

9 Computer-Based Purchases A Data Processing dept. performs routine accounting tasks. Purchasing - a computer program identifies inventory requirements The following methods are used for authorizing and ordering inventories: the system prepares POs and sends them to Purchases for review, signing, and distributing the system distributes POs directly to the vendors and internal users, bypassing Purchases the system uses electronic data interchange (EDI) and electronically places the order without POs Computer-Based Purchases Other tasks performed automatically by the computer: updates the inventory subsidiary file from the receiving report calculates batch totals for general ledger update closes the corresponding records in the open PO file to the closed PO file validates the voucher records against valid vendor files 9

10 Computer-Based Cash Disbursements Tasks performed automatically by the computer: the system scans for vouchers currently due prints checks for these vouchers records these checks in the check register batch totals are prepared for the general ledger update procedure Automated Batch Purchases 10

11 Automated Batch Purchases Documents Pertaining to the Expenditure Cycle Purchase Requisition Purchase Order Receiving Report Supplier s (Vendor s) Invoice Disbursement Voucher Disbursement Check Debit Memorandum New Supplier Form Request for Proposal 11

12 Manual Cash Disbursements System Periodically, A/P searches the open vouchers payable file for items with payments due: A/P sends the voucher and supporting documents to Cash Disbursements A/P updates the accounts payable subsidiary ledger Manual Cash Disbursements System Cash Disbursements: prepares the check records the information in a check register (cash disbursements journal) returns paid vouchers to accounts payable, mails the check to the supplier sends a journal voucher to G/L: Accounts Payable DR Cash CR 12

13 Manual Cash Disbursements System G/L department receives: the journal voucher from cash disbursements a summary of the accounts payable subsidiary ledger from A/P The journal voucher is used to update the general ledger. The accounts payable control account is reconciled with the subsidiary summary. Cash Disbursements System 13

14 Managerial Decisions Pertaining to the Expenditure Cycle - I Inventory Decisions What levels of merchandise inventory should be stocked? When should particular inventory be reordered? What quantities of particular inventory items should be reordered? When should long term purchase contracts be obtained for particular inventory items? Which suppliers should be established as long-term sources of merchandise and supplies? Managerial Decisions Pertaining to the Expenditure Cycle - 2 Inventory Decisions (Continued) From which suppliers should particular inventory items be ordered? What procedures should be followed in receiving and storing merchandise inventory? What organizational units are to be included in the inventory management and logistics function? What logistics plans and budgets are to be established for the coming year? 14

15 Managerial Decisions Pertaining to the Expenditure Cycle - 3 Financial Decisions What policies concerning purchase terms and discounts should be established? What accounts payable records are to be maintained concerning amounts owed to suppliers? What financial plans and budgets are to be established for the coming year? What sources of funds are to be employed? Operational Listings & Reports Voucher Register Check Register Open Purchase Order Report Open Invoices Report Inventory Status Report Overdue Deliveries Report 15

16 Scheduled Managerial Reports A Payables Aging Report Purchase Analyses Vendor Performance Report Cash-flow Statement Critical Factors Report Control Objectives - 1 All purchases are authorized on a timely basis when needed and are based on EOQ calculations All received goods are verified to determine that the quantities agree with those ordered and that they are in good condition All services are authorized before being performed and are monitored to determine that they are properly performed 16

17 Control Objectives - 2 All suppliers invoices are verified on a timely basis and conform with goods received or services performed All available purchase discounts are identified, so that they may be taken if economical to do so All purchase returns and allowances are authorized and accurately recorded and based on actual return of goods Control Objectives - 3 All cash disbursements are recorded completely and accurately All credit purchases and cash disbursements transactions are posted to proper suppliers accounts in the accounts payable ledger All accounting records and merchandise inventory are safeguarded 17

18 Risk Exposures Within the Expenditure Cycle - I Risk 1) Orders placed for unneeded goods or more goods than needed Receipt of uncoded goods 3) No receipt of ordered goods 4) Fraudulent placement of orders by buyers with suppliers to whom they have personal or financial attachments Exposure(s) 1) Excessive inventory and storage costs 2) Excessive inventory and storage costs 3) Losses due to stockouts 4) Possibility of inferior or overpriced goods or services Risk Exposures Within the Expenditure Cycle - II Risk 5) Creation of fictitious invoices and other purchasing documents 6) Lack of vigilance in writing down inventory that is aged or damaged 7) Omission of liabilities, such as material contingencies 8) Overcharges (with respect either to unit prices or to quantities) by suppliers for goods delivered Exposure(s) 5) Overstatement of inventory; losses of cash disbursed 6) Overstatement of inventory 7) Understatement of liabilities 8) Excessive purchasing costs 18

19 Risk Exposures Within the Expenditure Cycle - III Risk 9) Dam age to goods enroute to the acquiring firm 10) Errors by suppliers in com puting am ounts o r in v o ic e s 11) Erroneous or om itted postings of purchases or purchase returns to supplier s accounts payable records 12) Errors in charging transaction am ounts to purchases and expense accounts Exposure(s) 9) Possibility of inferior goods for use or sale 10) Possibility of overpaym ent for goods received 11) Incorrect balances in accounts payable and g e n e ra l le d g e r a cc o u n t records 12) Incorrect levels (either high or low) for purchases and expense accounts Risk Exposures Within the Expenditure Cycle - IV Risk 13) Lost purchase discounts due to late payments 14) Duplicate payments of invoices from suppliers 15) Incorrect disbursements of cash, either to improper or fictitious parties or for greater amounts than approved Exposure(s) 13) Excessive purchasing costs 14) Excessive purchasing costs 15) Loss of cash and excessive costs for goods and services 19

20 Risk Exposures Within the Expenditure Cycle - V Risk 16) Im proper disbursem ent of cash for goods or services not received 17) Theft of scrap proceeds 18) Disbursem ent of checks payable to em ployees for unauthorized expenses or fraudulent claim s 19) Frau du lent alteration and cashing of checks by em ployees 20) K itin g of ch ecks by em ployees Exposure(s) 16) Excessive costs for goods or services 17) Loss of cash 18) Loss of cash 19) Loss of cash 20) Overstatem ent of b a c k b a la n c e s; p o ssib le losses of deposited cash Risk Exposures Within the Expenditure Cycle - VI Risk 21) Accessing of supplier records by unauthorized persons 22) Involvement of cash, merchandise inventory, and accounts payable record in natural or human-made disasters 23) Interception of data transm itted via the W eb 24) Unauthorized purchase requisitions and purchase orders initiated via the W eb Exposure(s) 21) Loss of security over such records, with possible detrim ental use m ade of data accessed 22) Loss of or damage to assets, including possible loss of data needed to m onitor paym ents of am ounts due to suppliers within discount periods 23) Loss of data or unreliable data resulting in inaccurate purchase orders 24) Excessive inventory and storage costs 20

21 Risk Exposures Within the Expenditure Cycle - VII Risk 25) Unauthorized viewing and alteration of a company s purchase records via the Web 26) Breakdown of the Web server due to unexpected events Exposure(s) 25) Loss of security over data which can be used to the detriment of the company 26) Loss of data and delay in processing purchase orders General Controls - I Organizational Controls Documentation Controls Asset Accountability Controls Management Practices Controls Training & Bonding of employees Systems development & changes subject to prior approvals, testing, and sign-off Audits on purchases and cash disbursements Periodic review and analyses of account activity and computer-approved transactions 21

22 General Controls - II Data Center Operations Controls Authorization Controls Access Controls Assigned passwords required in order to access accounts payable and other supplier-related files Terminals restricted in their functions with respect to purchases and cash disbursement transactions Logging of all purchases and cash disbursement transactions upon their entry into the system Frequent dumping of accounts payable and merchandise inventory master files onto magnetic tape backup Physically protected warehouses Logs that monitor all accesses of data stored in files Application Controls Pertaining to the Expenditure Cycle: Input Controls 1) Prepare pre-numbered and well-designed documents relating to purchases, receiving, payables, and cash disbursements 2) Validate data on purchase orders and receiving reports and invoices as the data are prepared and entered for processing 22

23 Application Controls Pertaining to the Expenditure Cycle: Input Controls (cont..) 3) Correct errors that are detected during data entry and before the data are posted to the supplier and inventory records 4) Pre-compute batch control totals relating to key data on suppliers invoices and vouchers due for payment Application Controls Pertaining to the Expenditure Cycle: Processing Controls 1) Issue purchase requisitions, purchase orders, disbursement vouchers, checks, and debit memoranda on the basis of valid authorizations 2) verify all data elements and computations on purchase requisitions and on purchase orders 23

24 Application Controls Pertaining to the Expenditure Cycle: Processing Controls (cont..) 3) Vouch all data elements and computations on suppliers invoices 4) Monitor all open transactions, such as partial deliveries and rejected goods 5) issue debit memoranda only on the basis of prior approval of the purchasing or other appropriate manager Application Controls Pertaining to the Expenditure Cycle: Processing Controls 6) Reconcile amounts in the accounts payable subsidiary ledger and expense ledgers with control accounts in the general ledger 7) Verify that total postings to the accounts payable file accounts agree with the total postings to the general ledger accounts 8) Monitor discount terms relating to payment 24

25 Application Controls Pertaining to the Expenditure Cycle: Processing Controls (cont..) 9) review evidence supporting the validity of expenditures and the correctness of amounts prior to the signing of checks 10) use check protectors to protect the amounts on checks against alteration before the checks are presented to be signed Application Controls Pertaining to the Expenditure Cycle: Processing Controls 11) Require that checks over a specified amount be countersigned by a second manager 12) Verify all inventories on hand by physical counts once yearly, and reconcile the counted quantities with the quantities shown in the inventory records 13) Use imprest systems for disbursing currency from petty-cash funds, with the funds being subject to surprise counts by internal auditors or a designated manager 25

26 Application Controls Pertaining to the Expenditure Cycle: Processing Controls 14) Establish purchasing policies that require competitive bidding for large and/or non-routine purchases and that prohibit conflicts of interest 15) Correct errors that are made during processing steps, usually by reversing erroneous postings to accounts and entering correct data Application Controls Pertaining to the Expenditure Cycle: Output Controls 1) establish clear-cut receiving and payables cut-off policies, so that inventories and accounts payable are fairly valued at the end of each accounting period 2) Establish budgetary control over purchases, with periodic reviews of actual purchase costs and such key factors as inventory turnover rates 3) Compare monthly statements from suppliers with the balances appearing in the suppliers accounts in accounts payable 26

27 Application Controls Pertaining to the Expenditure Cycle: Output Controls 4) File copies of all documents pertaining to purchases and cash disbursements by number; including voided documents such as checks 5) Print transaction listings in order to provide an adequate audit trail Programmed Edit Checks Useful in validating Transaction Data in the Expenditure Cycle Validity check Self-checking digit Field check Limit check Range check Relationship check Sign check Completeness check* Echo checks* * = applicable only to online systems 27

28 Thank You! 28