Presentation on Expenditures Processes and Controls Purchases Submitted

Presentation on Expenditures Processes and Controls Purchases Submitted by WWW. ASSIGNMENTPOINT. COM Chapter 9 -1

Study Objectives 1. An introduction to expenditures processes 2. Purchasing processes and the related risks and controls 3. Purchase return processes and the related risks and controls 4. Cash disbursement processes and the related risks and controls 5. An overview of IT systems of expenditure and cash disbursement processes that enhance the efficiency of expenditures processes 6. Computer-based matching of purchasing documents and the related risks and controls 7. Evaluated receipt settlement systems and the related risks and controls 8. E-business and electronic data interchange (EDI) systems and the related risks and controls 9. E-payables systems 10. Procurement cards 11. Ethical issues related to expenditures processes 12. Corporate governance in expenditures processes Chapter 9 -2

Introduction to Expenditure Processes When a purchase occurs, the information resulting from that purchase must flow into Ø the purchase recording systems, Ø the accounts payable and cash disbursement systems, and Ø the inventory tracking systems. Transaction Processing Systems (TPS) Chapter 9 -3 SO 1 An introduction to expenditure processes

Introduction to Expenditure Processes Exhibit 9 -1 Expenditures Processes within the Overall System Chapter 9 -4 SO 1 An introduction to expenditure processes

Introduction to Expenditure Processes Exhibit 9 -2 Comparison of the Revenue and Expenditures Processes Chapter 9 -5 SO 1 An introduction to expenditure processes

Introduction to Expenditure Processes Common expenditures processes include: 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. Chapter 9 -6 SO 1 An introduction to expenditure processes

Purchasing Processes Terminology Chapter 9 -7 Ø Purchase Requisition Ø Packing Slip Ø Purchase Order Ø Receiving Report Ø Purchases Journal Ø Receiving Log Ø Blind Purchase Order Ø Cutoff Ø Bill of Lading Ø Accounts Payable Subsidiary Ledger SO 2 Purchasing processes and the related risks and controls

Purchasing Processes Exhibit 9 -2 Purchasing Process Map See next slide for larger image. Chapter 9 -8 SO 2 Purchasing processes and the related risks and controls

Purchasing Processes Exhibit 9 -2 Purchasing Process Map Chapter 9 -9 SO 2 Purchasing processes and the related risks and controls

Purchasing Processes Exhibit 9 -2 Purchasing Process Map Chapter 9 -10 SO 2 Purchasing processes and the related risks and controls

Controls and Risks in Purchasing Processes Common procedures associated with the revenue process: Ø Authorization of transactions Ø Segregation of duties Ø Adequate records and documents Ø Security of assets and documents Ø Independent checks and reconciliation Ø Cost-benefit considerations Chapter 9 -11 SO 2 Purchasing processes and the related risks and controls

Controls and Risks in Purchasing Processes Characteristics indicating risk with purchasing processes: 1. Goods received difficult to differentiate, count, or inspect. 2. High volumes of goods are received, or goods are of high value. 3. Inventory pricing arrangements are complex or based on estimates. 4. Frequent changes occur in purchase prices or vendors. 5. Company depends on one or few key vendors. 6. Receiving and/or record keeping are performed at multiple locations. Chapter 9 -12 SO 2 Purchasing processes and the related risks and controls

Controls and Risks in Purchasing Processes Quick Review Within the purchasing processes, which of the following is the first document prepared and thereby the one that triggers the remaining purchasing processes? a. The invoice b. The receiving report c. The purchase order d. The purchase requisition Chapter 9 -13 SO 2 Purchasing processes and the related risks and controls

Controls and Risks in Purchasing Processes Quick Review Personnel who work in the receiving area should complete all of the following processes except a. counting the goods received. b. inspecting goods received for damage. c. preparing a receiving report. d. preparing an invoice. Chapter 9 -14 SO 2 Purchasing processes and the related risks and controls

Controls and Risks in Purchasing Processes Quick Review Which of the given departments will immediately adjust the vendor account for each purchase transaction so that the company will know the correct amount owed to the vendor? a. Purchasing b. Receiving c. Accounts payable d. Shipping Chapter 9 -15 SO 2 Purchasing processes and the related risks and controls

Purchase Returns Processes Reasons for Returns: 1. Goods received are unacceptable: Ø Quantity or quality discrepancies Ø Damage or defects Ø Errors in the type of goods delivered or ordered Ø Discrepancies in the terms of the purchase Ø Timing issues 2. Changes in the company’s needs. Chapter 9 -16 SO 3 Purchase return processes and the related risks and controls

Purchase Returns Processes Exhibit 9 -9 Purchase Returns Process Map See next slide for larger image. Chapter 9 -17 SO 3 Purchase return processes and the related risks and controls

Purchase Returns Processes Exhibit 9 -9 Purchase Returns Process Map Chapter 9 -18 SO 3 Purchase return processes and the related risks and controls

Purchase Returns Processes Exhibit 9 -9 Purchase Returns Process Map Chapter 9 -19 SO 3 Purchase return processes and the related risks and controls

Risks and Controls in the Purchase Returns Process Specific controls over the purchase returns process: Ø Authorization of transactions Ø Segregation of duties Ø Adequate records and documents Ø Security of assets and documents Ø Independent checks and reconciliation Ø Cost-benefit considerations Chapter 9 -20 SO 3 Purchase return processes and the related risks and controls

Risks and Controls in the Purchase Returns Process Quick Review The document prepared when purchased items are returned is a(n) a. debit memo. b. invoice. c. receiving report. d. sales journal. Chapter 9 -21 SO 3 Purchase return processes and the related risks and controls

Cash Disbursement Processes Cash disbursements process must be designed to ensure that the company appropriately processes payments to satisfy its accounts payable when they are due. Terminology: Ø Cash management Ø Remittance advice Ø Cash disbursements journal Chapter 9 -22 SO 4 Cash disbursement processes and the related risks and controls

Cash Disbursement Processes Exhibit 9 -14 Cash Disbursement Process Map See next slide for larger image. Chapter 9 -23 SO 4 Cash disbursement processes and the related risks and controls

Cash Disbursement Processes Chapter 9 -24 Exhibit 9 -14 Cash Disbursement Process Map SO 4 Cash disbursement processes and the related risks and controls

Cash Disbursement Processes Chapter 9 -25 Exhibit 9 -14 Cash Disbursement Process Map SO 4 Cash disbursement processes and the related risks and controls

Risks and Controls Cash Disbursement Process Specific controls over the cash receipts process: Ø Authorization of transactions Ø Segregation of duties Ø Adequate records and documents Ø Security of assets and documents Ø Independent checks and reconciliation Ø Cost-benefit considerations Chapter 9 -26 SO 4 Cash disbursement processes and the related risks and controls

Risks and Controls Cash Disbursement Process Quick Review Which of the following controls is not normally performed in the accounts payable department? a. The vendor’s invoice is matched with the related receiving report. b. Vendor invoices are selected for payment. c. Asset and expense accounts to be recorded are assigned. d. Unused purchase orders and receiving reports are accounted for. Chapter 9 -27 SO 4 Cash disbursement processes and the related risks and controls

Risks and Controls Cash Disbursement Process Quick Review In a system of proper internal controls, the same employee should not be allowed to a. sign checks and cancel the supporting voucher package. b. receive goods and prepare the related receiving report. c. prepare voucher packages and sign checks. d. initiate purchase requisitions and inspect goods received. Chapter 9 -28 SO 4 Cash disbursement processes and the related risks and controls

Risks and Controls Cash Disbursement Process Quick Review Within accounts payable, to ensure that each voucher is submitted and paid only once, each invoice approved to be paid should be a. supported by a receiving report. b. stamped “paid” by the check signer. c. prenumbered and accounted for. d. approved for authorized purchases. Chapter 9 -29 SO 4 Cash disbursement processes and the related risks and controls

IT Systems of Expenditure and Cash Disbursement Processes Three-Way Match - matching of a purchase order to the related receiving report and invoice. Ø Time consuming and expensive. Ø Business Process Reengineering (BPR) to improve efficiency and effectiveness. IT systems include: ü Computer-based matching and checking of purchasing documents ü Evaluated receipt settlement (ERS) ü Electronic forms of purchase and payment Chapter 9 -30 SO 5 An overview of IT systems of expenditure and cash disbursement processes that enhance the efficiency of expenditures processes

IT Systems of Expenditure and Cash Disbursement Processes Exhibit 9 -19 Document Matching to Approve and Pay for Purchases Exhibit 8 -17 is a system flowchart of a generic version of revenue system with some paper documents. Chapter 9 -31 SO 5 An overview of IT systems of expenditure and cash disbursement processes that enhance the efficiency of expenditures processes

Computer-Based Matching Automated matching - software matches an invoice to its related purchase order and receiving report. Advantages Chapter 9 -32 Risks Ø reduce time, Ø system errors Ø costs, Ø unauthorized access, Ø errors, and Ø fraud, and Ø duplicate payments in invoice processing. Ø inadequate backup of files. SO 6 Computer-based matching of purchasing documents and the related risks and controls

Risks and Controls in Computer-Based Matching Ø Security and Confidentiality Risks Ø Processing Integrity Risks Ø Availability Risks Chapter 9 -33 SO 6 Computer-based matching of purchasing documents and the related risks and controls

Elevated Receipt Settlement Prior to 2000, 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 -34 SO 7 Evaluated receipt settlement systems and the related risks and controls

Risks and Controls in Elevated Receipt Settlement Ø Security and Confidentiality Risks Ø Processing Integrity Risks Ø Availability Risks Chapter 9 -35 SO 7 Evaluated receipt settlement systems and the related risks and controls

Risks and Controls in Elevated Receipt Settlement Quick Review 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 -36 SO 7 Evaluated receipt settlement systems and the related risks and controls

E-Business and Electronic Data Interchange Value Added Networks (VANs) Exhibit 8 -18 EDI Using a Third. Party Network Chapter 9 -37

Risks and Controls in El-Business and EDI Exhibit 9 -20 E-Business and EDI Risks and Controls Chapter 9 -38 SO 8 E-business and electronic data interchange (EDI) systems and the related risks and controls

Risks and Controls in El-Business and EDI Quick Review 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 -39 SO 8 E-business and electronic data interchange (EDI) systems and the related risks and controls

E-Payables Electronic Invoice Presentment and Payment (EIPP) Takes advantage of the connectivity of the Internet to electronically send invoices or payments. Chapter 9 -40 SO 9 E-payables system

Procurement Cards Procurement cards Ø Called p-cards Ø Credit cards that organization gives to certain employees to make designated purchases. Ø Normally not used to purchase raw materials or products Ø Used for small-dollar-amount purchases. Chapter 9 -41 SO 10 Procurement cards

Ethical Issues Related to Expenditures It is important to establish internal control policies and IT controls to help prevent or detect such fraud, ethical lapses, or errors. Chapter 9 -42 SO 11 Ethical issues related to expenditures processes

Ethical Issues Related to Expenditures It is important to establish internal control policies and IT controls to help prevent or detect Ø fraud, Ø ethical lapses, or Ø errors. Chapter 9 -43 SO 11 Ethical issues related to expenditures processes

Ethical Issues Related to Expenditures Quick Review 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 -44 SO 11 Ethical issues related to expenditures processes

Corporate Governance in Expenditure Processes Corporate governance policies should incorporate the four areas of Ø management oversight, Ø internal controls, Ø financial stewardship, and Ø ethical behavior. Chapter 9 -45 SO 12 Corporate governance in expenditure processes