Complete
Solutions for Accounting Information System 12e by Marshall B. Romney Paul J. Steinbart
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CHAPTER 13
THE EXPENDITURE CYCLE:
PURCHASING AND CASH
DISBURSEMENTS
13.1 In this chapter and in Chapter 12 the controller of AOE played a
major role in evaluating and recommending ways to use IT to improve efficiency
and effectiveness. Should the company’s chief information officer make these
decisions instead? Should the controller be involved in making these types of
decisions? Why or why not?
13.2 Companies such as Wal-Mart have moved beyond JIT to VMI systems.
Discuss the potential advantages and disadvantages of this arrangement. What
special controls, if any, should be developed to monitor VMI systems?
13.3 Procurement cards are designed to improve the efficiency of small
noninventory purchases. What controls should be placed on their use? Why?
13.4 In what ways can you apply the control procedures discussed in
this chapter to paying personal debts (e.g., credit card bills)?
13.5 Should every company switch from the traditional 3-way matching
process (purchase orders, receiving reports, and supplier invoices) to the
2-way match (purchase orders and receiving reports) used in Evaluate Receipt
Settlement (ERS)? Why (not)?
13.6 Should companies allow purchasing agents to start their own
businesses that produce goods the company frequently purchases? Why? Would you
change your answer if the purchasing agent’s company was rated by an
independent service, like Consumer Reports, as providing the best value for
price? Why?
13.1
a. A purchasing agent orders
materials from a supplier that he partially owns.
b. Receiving-dock
personnel steal inventory and then claim the inventory was sent to the
warehouse.
c. An unordered supply of laser printer paper delivered to the office
is accepted and paid for because the “price is right.” After jamming all of the
laser printers, however, it becomes obvious that the “bargain” paper is of
inferior quality.
d. The
company fails to take advantage of a 1% discount for promptly paying a vendor
invoice.
e. A company
is late in paying a particular invoice. Consequently, a second invoice is sent,
which crosses the first invoice’s payment in the mail. The second invoice is
submitted for processing and also paid.
f. Inventory records show that an adequate supply of copy paper
should be in stock, but none is available on the supply shelf.
g. The
inventory records are incorrectly updated when a receiving-dock employee enters
the wrong product number at the terminal.
h. A
clerical employee obtains a blank check and writes a large amount payable to a
fictitious company. The employee then cashes the check.
1. i. A
fictitious invoice is received and a check is issued to pay for goods that were
never ordered or delivered.
2. j. The
petty cash custodian confesses to having “borrowed” $12,000 over the last five
years.
3. k. A
purchasing agent adds a new record to the supplier master file. The company
does not exist. Subsequently, the purchasing agent submits invoices from the
fake company for various cleaning services. The invoices are paid.
4. l. A
clerk affixes a price tag intended for a low-end flat panel TV to a
top-of-the-line model. The clerk’s friend then purchases that item, which the
clerk scans at the checkout counter.
13.2 Match the terms in the left column with their appropriate
definition in the right column.
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Terms
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Definitions
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1. economic order quantity
2. A document that creates
a legal obligation to buy and pay for goods or services.
3. materials requirements
planning (MRP)
4. The method used to
maintain the cash balance in the petty cash account.
5. Just-in-time (JIT)
inventory system
6. The time to reorder
inventory based on the quantity on hand falling to predetermined level.
7. purchase requisition
8. A document used to
authorize a reduction in accounts payable when merchandise is returned to a
supplier.
9. imprest fund
10. An inventory control
system that triggers production based upon actual sales.
11. purchase order
12. An inventory control
system that triggers production based on forecasted sales.
13. kickbacks
14. A document only used
internally to initiate the purchase of materials, supplies, or services.
15. procurement card
16. A process for approving
supplier invoices based on a two-way match of the receiving report and
purchase order.
17. blanket purchase
order
18. A process for
approving supplier invoices based on a three-way match of the purchase order,
receiving report, and supplier invoice.
19. evaluated receipts
settlement (ERS)
20. A method of maintaining
accounts payable in which each supplier invoice is tracked and paid for
separately.
21. disbursement voucher
22. A method of maintaining
accounts payable which generates one check to pay for a set of invoices from
the same supplier.
23. receiving report
24. Combination of a
purchase order, receiving report, and supplier invoice that all relate to the
same transaction.
25. debit memo
26. A document used to list
each invoice being paid by a check.
27. vendor managed
inventory
28. An inventory control
system that seeks to minimize the sum of ordering, carrying, and stockout
costs.
29. voucher package
30. A system whereby
suppliers are granted access to point-of-sale (POS) and inventory data in
order to automatically replenish inventory levels.
31. non-voucher system
32. An agreement to
purchase set quantities at specified intervals from a specific supplier.
33. voucher system
34. A document used to
record the quantities and condition of items delivered by a supplier.
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1. A special purpose
credit card used to purchase supplies.
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1. A fraud in which a
supplier pays a buyer or purchasing agent in order to sell its products or
services.
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13.3 Excel Project. Using Benford’s
Law to Detect Potential Disbursements Fraud.
1. a. Read
the article “Using Spreadsheets and Benford’s Law to Test Accounting Data,” by
Mark G. Simkin in the ISACA Journal, Vol.
1, 2010, available at www.isaca.org.
2. b. Follow
the steps in the article to analyze the following set of supplier invoices:
13.4 Match threats in the first
column to appropriate control procedures in the second column. More than one
control may be applicable.
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Threat
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Control Procedure
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1. Failing to take
available purchase discounts for prompt payment.
2. Only accept deliveries
for which an approved purchase order exists.
A. Recording and posting
errors in accounts payable.
B. Document all transfers
of inventory.
i.
Paying for items not received.
C. Restrict physical
access to inventory.
i.
Kickbacks.
D. File invoices by due
date.
i.
Theft of inventory.
E. Maintain a cash budget.
i.
Paying the same invoice twice.
F. Automated comparison of
total change in cash to total changes in accounts payable.
i.
Stockouts.
G. Adopt a perpetual
inventory system.
i.
Purchasing items at inflated prices.
H. Require purchasing
agents to disclose financial or personal interests in suppliers.
i.
Misappropriation of cash.
I. Require purchases to be
made only from approved suppliers.
i.
Purchasing goods of inferior quality.
J. Restrict access to the
supplier master data.
i.
Wasted time and cost of returning unordered merchandise to
suppliers.
K. Restrict access to
blank checks.
i.
Accidental loss of purchasing data.
L. Only issue checks for a
complete voucher package (receiving report, supplier invoice, and purchase
order).
i.
Disclosure of sensitive supplier information (e.g., banking
data).
M. Cancel or mark “Paid”
all supporting documents in a voucher package when a check is issued.
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1. Regular backup of the
expenditure cycle database.
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1. Train employees how to
respond properly to gifts or incentives offered by suppliers.
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1. Hold purchasing
managers responsible for costs of scrap and rework.
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1. Reconciliation of bank
account by someone other than the cashier.
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13.5 Use Table 13-2 to create a
questionnaire checklist that can be used to evaluate controls for each of the
basic activities in the expenditure cycle (ordering goods, receiving, approving
supplier invoices, and cash disbursements).
1. a. For
each control issue, write a Yes/No question such that a “No” answer represents
a control weakness. For example, one question might be “Are supporting
documents, such as purchase orders and receiving reports, marked “paid” when a
check is issued to the vendor?”
b. For each Yes/No question, write a brief
explanation of why a “No” answer represents a control weakness.
13.6
EXCEL
Project
a. Expand the cash budget you created in Problem 12.4
to include a row for expected cash outflows equal to 77% of the current month’s
sales.
b. Also add a row to calculate the amount of cash that
needs to be borrowed, in order to maintain a minimum cash balance of $50,000 at
the end of each month.
c. Add another row to show the cash inflow from
borrowing.
d. Add another row to show the cumulative amount
borrowed.
e. Add another row to show the amount of the loan that
can be repaid, being sure to maintain a minimum ending balance of $50,000 each
month.
13.7 For
each of the following activities, identify the data that must be entered by the
employee performing that activity and list the appropriate data entry controls:
1. a. Purchasing
agent generating a purchase order
1. b. Receiving
clerk completing a receiving report
13.8 The following list identifies several
important control features. For each control, (1) describe its purpose and (2)
explain how it could be best implemented in an integrated ERP system.
a. Cancellation of the voucher package by the cashier
after signing the check.
b. Separation of duties of approving invoices for
payment and signing checks.
c. Prenumbering and periodically accounting for all
purchase orders.
d. Periodic physical count of inventory.
e. Requiring two signatures on checks for large
amounts.
f. Requiring that a copy of the receiving report
be routed through the inventory stores department prior to going to accounts
payable.
g. Requiring a regular reconciliation of the bank
account by someone other than the person responsible for writing checks.
h. Maintaining an approved supplier list and checking
that all purchase orders are issued only to suppliers on that list
.
13.9 For good internal control, which
of the following duties can be performed by the same individual?
1. Approve purchase orders
2. Negotiate terms with
suppliers
3. Reconcile the
organization’s bank account
4. Approve supplier invoices
for payment
5. Cancel supporting documents
in the voucher package
6. Sign checks
7. Mail checks
8. Request inventory to be
purchased
9. Inspect quantity and
quality of inventory received
13.10 Last year the Diamond Manufacturing Company purchased over $10
million worth of office equipment under its “special ordering” system, with
individual orders ranging from $5,000 to $30,000. Special orders are for
low-volume items that have been included in a department manager’s budget. The
budget, which limits the types and dollar amounts of office equipment a
department head can requisition, is approved at the beginning of the year by
the board of directors. The special ordering system functions as follows:
Purchasing A purchase requisition
form is prepared and sent to the purchasing department. Upon receiving a
purchase requisition, one of the five purchasing agents (buyers) verifies that
the requester is indeed a department head. The buyer next selects the
appropriate supplier by searching the various catalogs on file. The buyer then
phones the supplier, requests a price quote, and places a verbal order. A
prenumbered purchase order is processed, with the original sent to the supplier
and copies to the department head, receiving, and accounts payable. One copy is
also filed in the open-requisition file. When the receiving department verbally
informs the buyer that the item has been received, the purchase order is
transferred from the open to the filled file. Once a month, the buyer reviews
the unfilled file to follow up on open orders.
Receiving The
receiving department gets a copy of each purchase order. When equipment is
received, that copy of the purchase order is stamped with the date and, if
applicable, any differences between the quantity ordered and the quantity
received are noted in red ink. The receiving clerk then forwards the stamped
purchase order and equipment to the requisitioning department head and verbally
notifies the purchasing department that the goods were received.
Accounts Payable Upon receipt
of a purchase order, the accounts payable clerk files it in the open purchase
order file. When a vendor invoice is received, it is matched with the
applicable purchase order, and a payable is created by debiting the
requisitioning department’s equipment account. Unpaid invoices are filed by due
date. On the due date, a check is prepared and forwarded to the treasurer for
signature. The invoice and purchase order are then filed by purchase order
number in the paid invoice file.
Treasurer Checks received
daily from the accounts payable department are sorted into two groups: those
over and those under $10,000. Checks for less than $10,000 are machine signed.
The cashier maintains the check signature machine’s key and signature plate and
monitors its use. Both the cashier and the treasurer sign all checks over
$10,000.
a. Describe the weaknesses relating to purchases and
payments of “special orders” by the Diamond Manufacturing Company.
b. Recommend control procedures that must be added to
overcome weaknesses identified in part a.
c. Describe how the control procedures you recommended
in part b should be modified if Diamond reengineered its expenditure cycle
activities to make maximum use of current IT (e.g., EDI, EFT, bar-code
scanning, and electronic forms in place of paper documents). (CPA Examination, adapted)
13.11 The ABC Company performs its expenditure cycle activities using
its integrated ERP system as follows:
§ Employees in any department
can enter purchase requests for items they note as being either out of stock or
in small quantity.
§ The company maintains a
perpetual inventory system.
§ Each day, employees in the
purchasing department process all purchase requests from the prior day. To the
extent possible, requests for items available from the same supplier are
combined into one larger purchase order in order to obtain volume discounts.
Purchasing agents use the Internet to compare prices in order to select
suppliers. If an Internet search discovers a potential new supplier, the
purchasing agent enters the relevant information in the system, thereby adding
the supplier to the approved supplier list. Purchase orders above $10,000 must
be approved by the purchasing department manager. EDI is used to transmit
purchase orders to most suppliers, but paper purchase orders are printed and
mailed to suppliers who are not EDI capable.
§ Receiving department
employees have read-only access to outstanding purchase orders. Usually, they
check the system to verify existence of a purchase order prior to accepting
delivery, but sometimes during rush periods they unload trucks and place the
items in a corner of the warehouse where they sit until there is time to use
the system to retrieve the relevant purchase order. In such cases, if no
purchase order is found, the receiving employee contacts the supplier to
arrange for the goods to be returned.
§ Receiving department
employees compare the quantity delivered to the quantity indicated on the
purchase order. Whenever a discrepancy is greater than 5%, the receiving
employee sends an email to the purchasing department manager. The receiving
employee uses an online terminal to enter the quantity received before moving
the material to the inventory stores department.
§ Inventory is stored in a
locked room. During normal business hours an inventory employee allows any
employee wearing an identification badge to enter the storeroom and remove
needed items. The inventory storeroom employee counts the quantity removed and
enters that information in an online terminal located in the storeroom.
§ Occasionally, special items
are ordered that are not regularly kept as part of inventory, from a specialty
supplier who will not be used for any regular purchases. In these cases, an
accounts payable clerk creates a one-time supplier record.
§ All supplier invoices (both
regular and one-time) are routed to accounts payable for review and approval.
The system is configured to perform an automatic 3-way match of the supplier
invoice with the corresponding purchase order and receiving report.
§ Each Friday, approved
supplier invoices that are due within the next week are routed to the
treasurer’s department for payment. The cashier and treasurer are the only
employees authorized to disburse funds, either by EFT or by printing a check.
Checks are printed on dedicated printer located in the treasurer’s department,
using special stock paper that is stored in a locked cabinet accessible only to
the treasurer and cashier. The paper checks are sent to accounts payable to be
mailed to suppliers.
§ Monthly, the treasurer reconciles
the bank statements and investigates any discrepancies with recorded cash
balances.
Identify weaknesses in ABC’s expenditure cycle procedures, explain
the resulting problems, and suggest how to correct those problems.
13.12 Alden, Inc. has hired you to review its internal controls for the
purchase, receipt, storage, and issuance of raw materials. You observed the
following:
§ · Raw
materials, which consist mainly of high-cost electronic components, are kept in
a locked storeroom. Storeroom personnel include a supervisor and four clerks.
All are well trained, competent, and adequately bonded. Raw materials are
removed from the storeroom only upon written or oral authorization by a
production supervisor.
§ · No
perpetual inventory records are kept; hence, the storeroom clerks do not keep
records for goods received or issued. To compensate, the storeroom clerks
perform a physical inventory count each month.
§ · After
the physical count, the storeroom supervisor matches the quantities on hand against
a predetermined reorder level. If the count is below the reorder level, the
supervisor enters the part number on a materials requisition list that is sent
to the accounts payable clerk. The accounts payable clerk prepares a purchase
order for each item on the list and mails it to the supplier from whom the part
was last purchased.
§ · The
storeroom clerks receive the ordered materials upon their arrival. The clerks
count all items and verify that the counts agree with the quantities on the
bill of lading. The bill of lading is then initialed, dated, and filed in the
storeroom to serve as a receiving report.
a. Describe the weaknesses that exist in Alden’s
expenditure cycle.
b. Suggest control procedures to overcome the
weaknesses noted in part a.
c. Discuss how those control procedures
would be best implemented in an integrated ERP system using the latest
developments in IT.
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