Accounting information systems controls and process 2nd tunnwe weickgenannt chapter 09

Prepared by Coby Harmon University of California, Santa Barbara Westmont College Chapter 9-1 Expenditures Processes and Controls-Purchases Chapter 9-2 Study Study Objectives Objectives An introduction to expenditures processes Purchasing processes and the related risks and controls Purchase return processes and the related risks and controls Cash disbursement processes and the related risks and controls An overview of IT systems of expenditure and cash disbursement processes that enhance the efficiency of expenditures processes Computer-based matching of purchasing documents and the related risks and controls Evaluated receipt settlement systems and the related risks and controls E-business and electronic data interchange (EDI) systems and the related risks and controls E-payables systems 10 Procurement cards 11 Ethical issues related to expenditures processes 12 Corporate governance in expenditures processes Chapter 9-3 Real Real World 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 9-4 Introduction Introduction to to Expenditures Expenditures Processes Processes 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 Transaction Processing Systems (TPS) Chapter 9-5 SO An introduction to expenditures processes Exhibit 9-1 Expenditures Processes within the Overall System Introduction Introduction to to Expenditure Expenditure Processes Processes Chapter 9-6 SO An introduction to expenditures processes Introduction Introduction to to Expenditures Expenditures Processes Processes Exhibit 9-2 Comparison of the Revenue and Expenditures Processes Chapter 9-7 SO An introduction to expenditures processes Introduction Introduction to to Expenditures Expenditures Processes Processes Common expenditures processes include: Chapter 9-8  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 SO An introduction to expenditures processes Purchasing Purchasing Processes Processes Terminology  Purchase Requisition  Packing Slip  Purchase Order (PO)  Receiving Report  Purchases Journal  Receiving Log  Blind Purchase Order  Cutoff  Bill of Lading  Accounts Payable Subsidiary Ledger Chapter 9-9 SO Purchasing processes and the related risks and controls Purchasing Purchasing Processes Processes Exhibit 9-2 Purchasing Process Map See next slide for larger image Chapter 9-10 SO Purchasing processes and the related risks and controls Real Real World 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 not initially match Documents that are properly matched are processed automatically, and only those with differences require manual steps to reconcile Chapter 9-35 SO Computer-based matching of purchasing documents and the related risks and controls Risks Risks and and Controls Controls in in Computer-Based Computer-Based Matching Matching  Security and Confidentiality Risks  Processing Integrity Risks  Availability Risks Chapter 9-36 SO Computer-based matching of purchasing documents and the related risks and controls Elevated Elevated Receipt Receipt Settlement Settlement 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 Chapter 9-37 SO Evaluated receipt settlement systems and the related risks and controls Risks Risks and and Controls Controls in in Elevated Elevated Receipt Receipt Settlement Settlement  Security and Confidentiality Risks  Processing Integrity Risks  Availability Risks Chapter 9-38 SO Evaluated receipt settlement systems and the related risks and controls Risks Risks and and Controls Controls in in Elevated Elevated Receipt Receipt Settlement Settlement Concept Check 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® Chapter 9-39 SO Evaluated receipt settlement systems and the related risks and controls E-Business E-Business and and Electronic Electronic Data Data Interchange Interchange Value Added Networks (VANs) Exhibit 8-18 EDI Using a ThirdParty Network Chapter 9-40 Risks Risks and and Controls Controls in in El-Business El-Business and and EDI EDI Exhibit 9-20 E-Business and EDI Risks and Controls Chapter 9-41 SO E-business and electronic data interchange (EDI) systems and the related risks and controls Risks Risks and and Controls Controls in in El-Business El-Business and and EDI EDI Concept Check 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 Chapter 9-42 SO E-business and electronic data interchange (EDI) systems and the related risks and controls E-Payables E-Payables 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 Chapter 9-43 SO E-payables system Procurement Procurement Cards Cards Procurement cards Chapter 9-44  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 SO 10 Procurement cards Ethical Ethical Issues Issues Related Related to to Expenditures Expenditures Processes Processes It is important to establish internal control policies and IT controls to help prevent or detect Chapter 9-45  fraud,  ethical lapses, or  errors SO 11 Ethical issues related to expenditures processes Real Real World 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 9-46 SO 11 Ethical issues related to expenditures processes Ethical Ethical Issues Issues Related Related to to Expenditures Expenditures Processes Processes Concept Check 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 Chapter 9-47 SO 11 Ethical issues related to expenditures processes Corporate Corporate Governance Governance in in Expenditure Expenditure Processes Processes Corporate governance policies should incorporate the four areas of Chapter 9-48  management oversight,  internal controls and compliance,  financial stewardship, and  ethical conduct SO 12 Corporate governance in expenditure processes Copyright Copyright Copyright © 2013 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Chapter 9-49 ... Purchasing processes and the related risks and controls Purchasing Purchasing Processes Processes Exhibit 9-2 Purchasing Process Map Chapter 9-11 SO Purchasing processes and the related risks and controls. .. Purchasing Purchasing Processes Processes Exhibit 9-2 Purchasing Process Map Chapter 9-12 SO Purchasing processes and the related risks and controls Controls Controls and and Risks Risks in in... Purchase return processes and the related risks and controls Cash disbursement processes and the related risks and controls An overview of IT systems of expenditure and cash disbursement processes