SECOND EDITION Chapter 12-1 Prepared by CobybyHarmon Prepared Coby Harmon University of California, Santa Barbara University of California, Santa Barbara Westmont Westmont CollegeCollege Administrative Processes and Controls Chapter 12-2 Study Study Objectives Objectives An introduction to administrative processes Source of capital processes Investment processes Risks and controls in capital and investment processes General ledger processes Risks and controls and risks in general ledger processes Reporting as an output of the general ledger processes Ethical issues related to administrative processes and reporting Corporate governance in administrative processes and reporting Chapter 12-3 Alcoa, Inc., the world’s leading producer of Real World Real World aluminum, is well known for its accomplishments in the areas of sustainability and innovation in the transportation, aerospace, construction, and electronics industries In 2012, Alcoa was appointed to Fortune magazine’s list of Most Admired Companies for the twenty-ninth consecutive year A lesser known fact about Alcoa is that it is often the first of the Dow Jones Industrial companies to report its quarterly earnings Alcoa has worked hard to achieve a fast close, whereby it has fine-tuned its accounting processes and information systems to facilitate the completion of periodic transaction processing and closing of the general ledger within two days of the end of the period Then, it can report its consolidated financial results externally within one week In today’s fast-paced business environment, companies can gain competitive advantage by closing their books quickly and delivering timely information to internal and external stakeholders Chapter 12-4 Administrative Administrative Processes Processes Three administrative processes described in this chapter: Source of capital processes Investment processes General ledger processes Chapter 12-5 Introduction Introduction to to Administrative Administrative Processes Processes Administrative processes are transactions and activities that either are specifically authorized by top managers or are used by managers to perform administrative functions First set of processes: Examples include sale of stocks or bonds, the initiation of loans, bonds or notes payable, and the investment of funds in marketable securities Second set of processes: financial information being recorded in general ledger accounts Chapter 12-6 SO An introduction to administrative processes Exhibit 12-2 Overall View of Transactions, Processes, and Resulting Reports Introduction Introduction to to Administrative Administrative Processes Processes Chapter 12-7 SO An introduction to administrative processes Introduction Introduction to to Administrative Administrative Processes Processes Concept Check Which of the following is not part of an administrative process? a The sale of stock b The sale of bonds c The write-off of bad debts d The purchase of marketable securities Chapter 12-8 SO An introduction to administrative processes Sources Sources of of Capital Capital Processes Processes Capital is the funds used to acquire long-term, capital assets of an organization Source of capital processes are those processes to Chapter 12-9 authorize the raising of capital, the execution of raising capital, and the proper accounting of that capital SO Source of capital processes Sources Sources of of Capital Capital Processes Processes Chapter 12-10 Exhibit 12-3 Sources of Capital Process Map SO Source of capital processes Risks Risks and and Controls Controls in in General General Ledger Ledger Processes Processes Common procedures associated with the general ledger: Chapter 12-21 ► Authorization of transactions ► Segregation of duties ► Adequate records and documents ► Security of the general ledger and documents ► Independent checks and reconciliation ► Cost-benefit considerations SO Risks and controls and risks in general ledger processes Real Real World World Authorization of transactions Consider the checkout lanes at a department store such as WalMart Around the world, there are employees working checkout lanes who are scanning products by passing them over the bar code scanner and accepting payment In a large company such as Wal-Mart, it would be tremendously inefficient for the system to delay the general ledger posting until a specific employee logs in to conduct the posting Rather, when the checkout lane employee completes a sale by accepting payment and printing a sales receipt, he or she has authorized an event that will automatically update sales, inventory, and cash balances Chapter 12-22 SO Risks and controls and risks in general ledger processes Real Real World World Authorization of transactions Wal-Mart and Procter & Gamble (P&G) have interconnected IT systems P&G sells consumer products such as soap, shampoo, and diapers to Wal-Mart A sale by P&G to Wal-Mart is actually triggered by the Wal-Mart IT inventory system As Wal-Mart inventory levels of certain products fall below established reorder points, the systems interact and authorize a transfer of products from P&G to Wal-Mart This means that P&G’s sale and the subsequent update of its sales and receivable accounts are activated by its customer’s computer system Similarly, WalMart’s purchase and update of its inventory and payables accounts are triggered by this system Chapter 12-23 SO Risks and controls and risks in general ledger processes Risks Risks and and Controls Controls in in General General Ledger Ledger Processes Processes Concept Check Which of the following statements regarding the authorization of general ledger posting is not true? Chapter 12-24 a Posting to the general ledger always requires specific authorization b User IDs and passwords can serve as authorization to post transactions to the general ledger c A journal voucher serves as authorization for manual systems d As IT systems become more automated, the authorization of general ledger posting is moved to lower levels of employees SO Risks and controls and risks in general ledger processes Risks Risks and and Controls Controls in in General General Ledger Ledger Processes Processes Concept Check In a manual system with proper segregation of duties, an employee in the general ledger department should only a authorize posting to the general ledger b post transactions to the general ledger c reconcile the subsidiary ledger to the general ledger d post transactions to the subsidiary ledger Chapter 12-25 SO Risks and controls and risks in general ledger processes Reporting Reporting as as an an Output Output of of the the General General Ledger Ledger Processes Processes External Reporting Four general purpose financial statements ► balance sheet, ► income statement, ► statement of cash flows, and ► statement of retained earnings are created from general ledger account balances Chapter 12-26 SO Reporting as an output of the general ledger processes Reporting Reporting as as an an Output Output of of the the General General Ledger Ledger Processes Processes Internal Reporting Internal reports are usually not financial statements, but reports tailored to specific needs of each management level and function Many factors affect the type of report provided Chapter 12-27 ► Type of organization ► Function managed ► Time horizon SO Reporting as an output of the general ledger processes Reporting Reporting as as an an Output Output of of the the General General Ledger Ledger Concept Check Which of the following statements about reporting is true? a External users need detailed, rather than summarized, information b All reports, internal and external, are derived only from general ledger data c All organizations need similar internal reports d Internal reports are tailored to the specific needs of each management level and function Chapter 12-28 SO Reporting as an output of the general ledger processes Reporting Reporting as as an an Output Output of of the the General General Ledger Ledger For each report shown, indicate in the appropriate column whether the report is likely to be for internal or external users (some reports may be both), and whether data would come exclusively from the general ledger Chapter 12-29 External Yes Both No Internal No Internal No Internal No External No Internal No SO Reporting as an output of the general ledger processes Ethical Ethical Issues Issues Related Related to to Administrative Administrative Processes Processes and and Reporting Reporting Reasons that unethical and fraudulent behavior would tend to be management-initiated First, in a properly controlled system, employees not have access to related assets or source documents Second, administrative processes are tightly controlled and supervised by top management Finally, routine nature of processes such as sales, purchasing, payroll, and conversion generates a huge volume of transactions Chapter 12-30 SO Ethical issues related to administrative processes and reporting Ethical Ethical Issues Issues Related Related to to Administrative Administrative Processes Processes and and Reporting Reporting Unethical Management Behavior in Capital Sources and Investing Management should Chapter 12-31 be honest in the financial statements presented, footnote disclosures, and any related disclosures avoid misleading creditors about ► the financial status of the company or ► its ability to repay any borrowing SO Ethical issues related to administrative processes and reporting Ethical Ethical Issues Issues Related Related to to Administrative Administrative Processes Processes and and Reporting Reporting Internal Reporting ethical Issues Top management has an ethical obligation to use financial and other reports to encourage beneficial and ethical behavior Reports to lower level managers are usually used for two purposes Feedback to lower level managers Used by upper management to evaluate and reward the performance of lower level managers Chapter 12-32 SO Ethical issues related to administrative processes and reporting Ethical Ethical Issues Issues Related Related to to Administrative Administrative Processes Processes and and Reporting Reporting Concept Check Which of the following is not an area of measure in a balanced scorecard? a Vendor b Customer c Financial d Learning and growth Chapter 12-33 SO Ethical issues related to administrative processes and reporting Corporate Corporate Governance Governance in in Administrative Administrative Processes Processes and and Reporting Reporting Setting and monitoring financial goals, and establishing and maintaining reliable accounting journals and ledgers so that performance can be properly reported, are important to effective corporate governance In addition, internal controls and ethical practices within the administrative processes help ensure proper financial stewardship of a company’s administrative resources Chapter 12-34 SO Corporate governance in administrative processes and reporting 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 12-35 ... funds Chapter 12- 12 SO Investment processes Investment Investment Processes Processes Exhibit 12- 4 Investment Process Map Chapter 12- 13 SO Investment processes Investment Investment Processes Processes... purchase and update of its inventory and payables accounts are triggered by this system Chapter 12- 23 SO Risks and controls and risks in general ledger processes Risks Risks and and Controls Controls... fraud Chapter 12- 15 SO Risks and controls in capital and investment processes Risks Risks and and Controls Controls Concept Check Which of the following statements is not true regarding internal controls