Auditing The Expenditure Cycle Review Questions [PDF]

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Chapter 10 Auditing the Expenditure Cycle Review Questions: 1. Differentiate between a purchase requisition and a purchase order. Response: A purchase requisition is completed by the inventory control department when a need for inventory items is detected. Purchase requisitions for office supplies and other materials may also be completed by staff departments, such as marketing, finance, accounting, and personnel. The purchasing department receives the purchase requisitions and, if necessary, determines the appropriate vendor. If various departments have requisitioned the same order, the purchasing department may consolidate all requests into one order so that any quantity discounts and lower freight charges may be taken. In any case, the purchasing department prepares the purchase order, which is sent to the vendor, accounts payable department, and the receiving department (blind copy). 2. What purpose does a purchasing department serve? Response: A purchasing department is able to research the quality and pricing of various vendors. Its job is to monitor various supply sources and choose the highest quality good for a given price, with reliable delivery. The purchasing department may also take advantage of quantity discounts, especially when two or more manufacturing facilities are involved. 3. Distinguish between an accounts payable file and a vouchers payable file. Response: An accounts payable file contains all source documents, including invoices, organized by payment date. As the due dates come close to the current date, the invoices are pulled from the file and paid. Under the voucher system, the accounts payable clerk prepares a cash disbursements voucher upon receipt of all source documents. Each cash disbursements voucher represents payment to one vendor. Multiple invoices may be paid with one voucher. The voucher system allows better control over cash disbursements because cash vouchers are assigned and tracked. 4. What are the logical steps of the cash disbursements system? Response: The three logical steps of the cash disbursements system are 1. Identify liabilities due 2.Prepare case disbursement 3. Update accounts payable record 4. Post to the general ledger 5. What general ledger journal entries are triggered by the purchases system? Response: Accounts Payable: Inventory Control Debit Accounts Payable Credit Cash Disbursements: Accounts Payable Cash



Debit Credit



6. What two types of exposure can close supervision of the receiving department reduce? Response: Large quantities of valuable assets flow through the receiving department on their way to the warehouse. Close supervision here reduces the chances of two types of exposure:



failure to properly inspect the assets and the theft of assets. 7. What steps of independent verification does the general ledger department perform? Response: The general ledger department receives journal vouchers from inventory control, accounts payable, and cash disbursements. With these summary figures, the general ledger clerk verifies that a. total obligations recorded equal total inventories received. b. total reductions in accounts payable equal total disbursements of cash. 8. What is (are) the purpose(s) of maintaining a valid vendor file? Response: As a control against unauthorized payments, comparing the vendor number on the voucher with a valid vendor file validates all entries in the voucher file. If the vendor number is not on file, the record is presumed to be invalid and is diverted to an error file for management review. 9. What is the purpose of the blind copy of the purchase order? Response: A blind purchase order has all the relevant information about the goods being received except for the quantities and prices. To obtain the information on quantities, which is needed for the receiving report, the receiving personnel are forced to physically count and inspect the goods. If receiving clerks were provided with quantity information through formal documentation (i.e., the purchase order), they may be tempted to transfer this information to the receiving report without performing a physical count. 10. Give one advantage of using a vouchers payable system? Response: Vouchers provide improved control over cash disbursement, and they allow firms to consolidate several payments to the same supplier on a single voucher, thus reducing the number of checks written. 11. How do computerized purchasing systems help to reduce the risk of purchasing bottlenecks? Response: Routine purchases can be automated, reducing the time lag between order, arrival and recording of inventory. By freeing purchasing agents from routine work, such as preparing purchase orders and mailing them to the vendors, attention can be focused on problem orders (such as special items or those in short supply). 12. Which document is used by cost accounting to allocate direct labor charges to work-inprocess? Response: Job tickets capture the time spent on each job during the day and are used to allocate the labor charges to the work-in-process accounts.



13. Which department authorizes changes in employee pay rates? Response: The personnel department, through the personnel action form authorizes changes to employee pay rates. 14. Why should the employee’s supervisor not distribute paychecks? Response: A form of payroll fraud involves a supervisor submitting fraudulent time cards for nonexistent employees. The resulting paychecks, when given to the supervisor are then cashed by the supervisor. This type of fraud can be reduced or eliminated by using a paymaster to distribute paychecks to employees in person. Any uncollected paychecks are then returned to payroll. 15. Why should employee paychecks be drawn against a special checking account? Response: A separate imprest account is established for the exact amount of the payroll based on the payroll summary. When the paychecks are cashed, this account should clear leaving a zero balance. Any errors in checks (additional checks or abnormal amounts) would result in a non-zero balance in the imprest account and/or some paycheck would not clear. This will alert management to the problem so corrective action can be taken. 16. Why should employees clocking on and off the job be supervised? Response: A form of payroll fraud involves employees clocking the time cards of absent employees. By supervising the clocking in and out process, this fraud can be reduced or eliminated. 17. What is a personnel action form? Response: The advantages of a batch system with direct access files are increased efficiency since master files (such as the general ledger) need not be recreated with each update thus permitting more frequent reconciliation. The disadvantage is the need to take extra measures to ensure the back-up and data integrity within the system. 18.



What tasks does a payroll clerk perform upon receipt of hours-worked data from the production department?



The payroll then performs the following tasks. 1. Prepares the payroll register showing gross pay, deductions, overtime pay, and net pay. 2. Enters the above information into the employee payroll records. 3. Prepares employee paychecks . 4. Sends the paychecks to the paymaster or other distribute-paycheck function. 5. Files the time cards, personnel action form, and copy of the payroll register (not shown). 19. What documents constitute the audit trail for payroll? Response: Timecards, personnel action forms, job tickets, labor distribution summary. Discussion Questions 1. What is the importance of the job ticket? Illustrate the flow of this document and its information from inception to impact on the financial statements. Response: The job ticket is used to allocate each labor hour of work to specific WIP



accounts. These job tickets are very important for cost accounting. The job tickets are completed by production workers as they capture the total amount of time that they spend on each production job. Upon completion, these are routed to the cost accountants who use them to post the labor costs to specific WIP accounts such as direct labor, indirect labor, and overhead. The cost accountant prepares a labor distribution summary that contains the information for the general ledger clerk to make the necessary entries to the general ledger accounts. 2. What documents support the payment of an invoice? Discuss where these documents originate and the resulting control implications. Response: The payment of an invoice may be supported by the purchase requisition, purchase order, and receiving report (in addition to the invoice itself). The purchase requisition originates from inventory control and represents the inventory requirements. The purchase order originates from the purchasing department and represents an order placed. The receiving report originates from the receiving department and represents the quantity and types of goods received. Thus, the accounts payable must determine (a) that the goods ordered were requested by some department (i.e., inventory control) other than purchasing, (b) that purchasing ordered the goods from a valid vendor, and (c) that the goods were actually received. If all three of the conditions are met, then and only then should the invoice be paid. Further, payments should be made for only those goods received in good shape. 3. Discuss the time lags between realizing and recognizing economic events in the purchase and payroll systems. What is the accounting profession’s view on this matter as it pertains to these two systems? Response: For accounts payable, a time lag exists between the time the good that is purchased is received and the recording of the liability to the vendor. The receipt of an invoice is the event that usually causes the liability to the vendor to be recorded. The time lag may range from virtually nothing for fully integrated EDI systems to a few days. Thus, during this slight lag in the recording process, liabilities are understated. For payroll costs, wages to workers accrue each minute, hour, or day that they work. However, these costs are not recorded as a liability during the time between when the workers earn their wages and when they are paid. These time lags typically average from half a week to a week. Neither of these time lags are of concern unless the firm is closing its books or preparing interim financial statements. At these points, however, estimates or accruals of the amounts owed should be made and the books adjusted. 4. Discuss the importance of supervision controls in the receiving department and the reasons behind blind fields on the receiving report, such as quantity and price. Response: The receiving clerks have access to many of the firm’s assets: its inventory. Two exposures potentially exist: (a) the clerk failing to perform his or her duty and (b) the clerk pilfering or stealing the inventory. Thus, the copy of the purchase order used for this inspection should have the quantities and amounts covered so that they may not be read. If the quantity is printed on the receiving clerk’s copy of the purchase order, he or she may be tempted to skip the physical inspection and the company may pay for inventory it did not receive or that is damaged. A supervisor must remove the packing slip that contains quantity information to make sure the receiving clerk actually inspects the goods. If the value of the inventory is listed, the employee may be tempted to steal some of the inventory. Close supervision should deter employees from stealing. 5. How does the procedure for determining inventory requirements differ between a basic batch



processing system and batch processing with real-time data input of sales and receipts of inventory? Response: A system that employs real-time data entry of sales will have the inventory levels updated more frequently. Thus, when a sale depletes the inventory level to the reorder point, the system will flag it for reorder more quickly than if it had to wait for a batch update of the inventory records. The sooner the item is ordered, the sooner it will be received. With respect to the real-time receipt of inventory, the inventory will be updated immediately to show the accurate amount that is on hand. A customer wishing to know how soon an item will be shipped will receive more accurate information regarding the status of the firm’s inventory levels. Thus, the customer benefits from better stocking of inventory and better information regarding the inventory levels. 6. What advantages are achieved in choosing: a. a basic batch computer system over a manual system? b. a batch system with real-time data input over a basic batch system? Response: a. The basic batch system provides the following benefits over a manual system: improved inventory control, better cash management, reduction in time lag of inventory entries, increases in the efficiency of the purchasing department, and a reduction in paper documentation. b. The real-time data input system provides the following benefits over a batch system: reduction in the time lag in record keeping, elimination of routine manual procedures, and an even greater reduction in paper documentation. 7. Discuss the major control implications of batch systems with real-time data input. What compensating procedures are available? Response: The first control implication is that a fundamental separation between authorization and transaction processing no longer exists. The computer programs both authorize and process the orders and issue checks to the vendors. The compensating control is to provide transaction listings and summary reports that describe the automated activities taken by the system to management. In order for these controls to work, the managers must take the time to carefully review these reports. The second control implication is that the accounting records as well as the computer programs reside on magnetic disks. These disks should not be accessed by any individuals not authorized to access them in any fashion. The compensating control is to employ hardware, software, and procedural controls over the data stores. 8. Discuss some specific examples of how information systems can reduce time lags that positively affect an organization. Response: One example is by reducing the time it takes to record the receipt of inventory into the inventory records that are used to inform customers whether or not their requested item is available. Also, the inventory levels are also reduced more quickly for those inventories that are being shipped. With a reduced time lag, the risk of promising to ship an item to another customer when it is not available is greatly reduced. Further, the automated system will be less likely to pay an invoice too early, while at the same time not missing the discount period. Thus, cash management is improved. 9. Discuss some service industries that may require their workers to use job tickets. Response: Law firms require their employees to log the amount of time spent on each client for billing purposes. Accounting firms also require their employees to keep job tickets for the time they spend on each client. Car repair shops are another example. The mechanic must



keep track of how much time she or he spends working on each automobile. 10. Payroll is often used as a good example of batch processing using sequential files. Explain why. Response: Sequential files are appropriate because most if not all payroll records on the master payroll file are updated during the payroll processing run. Multiple Choice 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.



B B C B D C B D C C B A C C C



Problems 1. Payroll Fraud John Smith worked in the stockyard of a large building supply company. One day he unexpectedly and without notice left for California never to return. His foreman seized the opportunity to continue to submit timecards for John to the payroll department. Each week, as part of his normal duties, the foreman received the employee paychecks from payroll and distributed them to the workers on his shift. Because John Smith was not present to collect his paycheck, the foreman forged John’s name and cashed it. Required: Describe two control techniques to prevent or detect this fraud scheme. Response: a. An employee action report from the personnel department should list all current employees. Time cards for terminated or nonexistent employees should be identified when reconciled with the personnel report. b. An independent paymaster should distribute the paychecks to the employees. If an employee is not present to receive the paycheck, it should be returned to the payroll department. 2. Payroll Controls Refer to the Problem 2 flowchart in the text.



Required: a. What risks are associated with the payroll procedures depicted in the flowchart? b. Discuss two control techniques that will reduce or eliminate the risks. Response: a. The payroll department has no independent information as to changes in an employee’s status. For example, the foreman may continue to submit timecards for terminated employees. Because the foreman also distributes paychecks, he could steal and forge the uncollected checks. b. i. An employee action report from the personnel department should list all current employees. Timecards for terminated or nonexistent employees should be identified when reconciled with the personnel report. ii. An independent paymaster should distribute the paychecks to the employees. If an employee is not present to receive the paycheck, it will be returned to the payroll department. 3. Payroll Controls Sherman Company employs 400 production, maintenance, and janitorial workers in eight separate departments. In addition to supervising operations, the supervisors of the departments are responsible for recruiting, hiring, and firing workers within their areas of responsibility. The organization attracts casual labor and experiences a 20 to 30 percent turnover rate in employees per year. A portion of Sherman Company’s payroll procedures are as follows: Employees clock on and off the job each day to record their attendance timecards. Each department has its own clock machine that is located in an unattended room away from the main production area. Each week, the supervisors gather the timecards, review them for accuracy, and sign and submit them to the payroll department for processing. In addition, the supervisors submit personnel action forms to reflect newly hired and terminated employees. From these documents, the payroll clerk prepares payroll checks and updates the employee records. The supervisor of the payroll department signs the paychecks and sends them to the department supervisors for distribution to the employees. A payroll register is sent to accounts payable for approval. Based on this approval, the cash disbursements clerk transfers funds into a payroll clearing account. Required: Discuss the risks for payroll fraud in the Sherman Company payroll system. What controls would you implement to reduce the risks? Use the SAS 78 framework of control activities to organize your response. Response: a. Risks  Department supervisors have too much control over human resources. They are responsible for recruiting, hiring, and firing.  The high degree of casual labor creates an environment that lends itself to abuse.  High employee turnover rate makes identifying absent or nonexistent employees difficult.  Clock machines are unsupervised and located in nonprominent areas.  Department supervisors submit personnel action forms.  Department supervisors distribute the paychecks to the employees; checks written for nonexistent employees could be kept and cashed by the supervisors. b. Controls  Authorization: A separated personnel function should be established to account for employees and to authorize their payment  Segregation of Duties: The department supervisors should not distribute the paychecks to



employees. This should be the task of a paymaster.  Supervision: The clocking in and out process should be supervised. 4. Flowchart Analysis Examine the Problem 4 diagram presented in the text and indicate any incorrect initiation and/or transfer of documentation. What problems could this cause? Response: The purchase requisition should originate from the inventory control department after someone has reviewed the records to determine if and how much of an inventory item needs to be ordered. If purchasing agents are allowed to authorize purchase requisitions, they might be tempted to buy items not needed in order to reap benefits and/or kickbacks from the vendor. The purchase order that is sent to receiving is not said to be a blind copy, and this might cause employees to either shirk their responsibilities and not count the inventory or to steal some units because they know their value. Further, receiving should retain a copy of the receiving report in its files along with the purchase order and packing slip. The inventory control department should not prepare a journal voucher to send to the general ledger department; rather it should prepare summary information that the general ledger department can use to reconcile the inventory control account with inventory subsidiary summary. The accounts payable department needs to post the liability to the accounts payable subsidiary ledger. The subsidiary accounts payable ledger will not balance with the control account in the general ledger if these postings are not made. 5. Accounting Records and Files Indicate which department—accounts payable, cash disbursements, data processing, purchasing, inventory, or receiving—has ownership over the following files and registers: a. Open Purchase Order file b. Purchase Requisition file c. Open Purchase Requisition file d. Closed Purchase Requisition file e. Inventory file f. Closed Purchase Order file g. Valid Vendor file h. Voucher register i. Open Vouchers payable file j. Receiving Report file k. Closed Voucher file l. Check register (cash disbursements journal) Response: a. purchasing b. inventory control c. inventory control d. inventory control e. inventory control f. purchasing g. accounts payable h. accounts payable i. accounts payable j. receiving k. accounts payable



l. cash disbursements 6. Source Documents Identification Refer to the Problem 6 figure presented in the text, which shows typical expenditure cycle files and attributes. Explain, in detail, the process by which these data are obtained and used in the requisition, purchase, and payment to inventory. Response: First, the Inventory Master file is searched to determine if the Quantity on Hand is less than or equal to the Reorder Point, which is a predetermined point at which the firm orders more inventory. If it is less than or equal to the reorder point and the Quantity on Order is not flagged as true, then the EOQ (a predetermined optimal order amount) is used to order the Inventory Number item, which is an assigned number and described by the Description field. The item is ordered from a specified Vendor in the Vendor file, and this information is stored in the Inventory Master file. A purchase requisition is filled out and a Purchase Requisition Number is assigned to the requisition. The Inventory Number, Quantity on Order, Vendor Number, and Unit Standard Cost are recorded. The vendor Address, Terms of Trade, and Lead Time are obtained from the Vendor file. If the Lead Time is too long, a different vendor may need to be chosen or the price paid may be higher than the predetermined Standard Cost for the item. At this point, the Date of Last Order field in the vendor file is updated. The purchasing department then completes a purchase order and places it into the Open Purchase Order file until the order is completed. First, the purchasing clerk assigns a Purchase Order Number and fills in the corresponding Purchase Order Number. The following information is also copied to the purchase order file from the above-mentioned records: Purchase Requisition Number, Inventory Number, Quantity on Order, Vendor Number, Vendor Address, and Standard Cost. The Expected Invoice Amount is determined by multiplying the expected price times the quantity ordered. When the inventory is received, the Inventory Master File is updated: the Quantity on Hand is increased by the number of units received, and the Total Inventory Cost is updated. In the Open Purchase Order file, the field Rec Flag is checked to indicate that the goods have been received. When the vendor’s invoice is received, the Invoice Flag field in the Open Purchase Order file is checked to indicate that the invoice has been received. Further, the accounts payable department adds a new record to the Voucher Register. This voucher register record is assigned a Voucher Number, and the following information is recorded in it: Purchase Order Number, Purchase Requisition Number, Inventory Number, Quantity on Order, Vendor Number, Address, Standard Cost, and Expected Invoice Amount. The invoice Due Date is also noted so that the disbursement may be made as close to the due date as possible without missing any discounts offered. 7. Internal Control Using the flowchart of a purchases system presented in Problem 7 of the text, identify six major control weaknesses in the system. Discuss and classify each weakness in accordance with SAS 78. Response:  Authorization: The purchases function is not authorized from inventory control.  Accounting Records: Inventory records are updated based on the purchase order rather than the receiving report or invoice.  Accounting Records: The accounts payable subsidiary ledger is updated based only on the invoice. There is no reconciliation with supporting documents.



 Accounting Records: There is no cash disbursements journal or check register in use.  Accounting Records/Segregation of Functions: The receiving department prepares the receiving report directly from the packing slip. A blind copy of the purchase order should go to the receiving clerk to control this activity. A supervisor should take possession of the packing slip that contains relevant data and oversee the inspection process.  Accounting Records/Independent Verification: The general ledger department should receive journal vouchers or batch totals from inventory control, cash disbursements, and accounts payable. These are used to keep the general ledger control accounts current and to verify the overall accounting accuracy of the process. 8. Purchase Discounts Lost Estimate the money that could be saved by the accounts payable and cash disbursements departments if a basic batch processing system were implemented. Assume that the clerical workers cost the firm $12 per hour, and that 13,000 vouchers are prepared, and that 5,000 checks are written per year. Assume that total cash disbursements to vendors amount to $5 million per year. Due to sloppy bookkeeping, the current system takes advantage of only about 25 percent of the discounts offered by vendors for timely payments. The average discount is 2 percent if payment is made within 10 days. Payments are currently made on about the 15th day after the invoice is received. Make your own assumptions (and state them) regarding how long specific tasks will take. Also discuss any intangible benefits of the system. (Don’t worry about excessive paper documentation costs.) Response: This firm processes approximately 52 vouchers per day and 20 checks per day. At a minimum, the firm would benefit from the purchase discounts that would not be lost due to sloppy bookkeeping: $5,000,000 × 75% = $3,750,000 × 2% discount = $75,000 savings per year Even after deducting for any interest lost at 5 percent on the funds that remain in the bank the extra 5 days: ($3,750,000 × 5%)(5/365) = $2,569. Thus, the net savings would be $72,431. An added benefit may be that one less worker is needed. If this is true, the savings would be approximately $25,000 before considering employee payroll taxes and costs of benefits. Other benefits would include fewer errors, and thus fewer vendor complaints and better control and reports over cash disbursements. 9. Data Processing Output Using the information provided in Problem 8 present in the text, discuss all transaction listings and summary reports that would be necessary for a batch system with real-time input of data. Response: This answer assumes that the inventory and purchase order records are not on the computer system. Upon receipt of an invoice, the clerk would reconcile the amount with the purchase requisition, purchase order, and receiving report. A cash disbursements voucher would be filled out and input immediately into the system; any input errors would require immediate correction. Thus, all records in the voucher file would be clean records ready for processing. The voucher records would be accumulated and processed together at the end of the day. A voucher register would be generated and printed. The system will automatically update the accounts payable subsidiary ledger and ensure that the debits and credits to the subsidiary ledger equal the batch totals. A summary journal voucher will be prepared automatically for the general ledger clerk. As the system determines that an invoice needs to be paid, it will flag it for check writing procedures. The checks will be prepared as well as a check register. The subsidiary ledger will be updated, and a summary journal voucher will be prepared automatically for the general ledger clerk.



10. Internal Control Discuss any control weaknesses found in the Problem 10 flowchart presented in the text. Recommend any necessary changes. Response: The checks should be processed through accounts payable and the cash disbursement departments. The payroll personnel should not have access to a bank account with funds. The checks should be prepared, and the money should be transferred into the payroll account by the cash disbursements department. The paychecks should not be handled by the payroll personnel before being received by the paymaster because payroll personnel could withhold a dummy check that was processed against a terminated employee. Actually, the personnel action forms (new employees and terminated employees) should be processed by the personnel department rather than the payroll department. The payroll department should use this master list to verify the employees to whom checks are issued. 11. Internal Control (CMA 1288 5-3) Lexsteel is a leading manufacturer of steel furniture. Although the company has manufacturing plants and distribution facilities throughout the United States, the purchasing, accounting, and treasury functions are centralized at corporate headquarters. While discussing the management letter with the external auditors, Ray Lansdown, controller of Lexsteel, became aware of potential problems with the accounts payable system. The auditors had to perform additional audit procedures to attest to the validity of accounts payable and cutoff procedures. The auditors have recommended that a detailed systems study be made of the current procedures. Such a study would not only assess the exposure of the company to potential embezzlement and fraud, but would also identify ways to improve management controls. Lansdown has assigned the study task to Dolores Smith, a relatively new accountant in the department. Because Smith could not find adequate documentation of the accounts payable procedures, she interviewed those employees involved and constructed a flowchart of the current system. The Problem 11 flowchart is presented in the text, and a description of the current procedures is presented below. Computer Resources Available The host computer mainframe is located at corporate headquarters with interactive, remote jobentry terminals at each branch location. In general, data entry occurs at the source and is transmitted to an integrated database maintained on the host computer. Data transmission is made between the branch offices and the host computer over leased telephone lines. The software allows flexibility for managing user access and editing data input. Procedures for Purchasing Raw Materials Production orders and appropriate bills of materials are generated by the host computer at corporate headquarters. Based on these bills of materials, purchase orders for raw materials are generated by the centralized purchasing function and mailed directly to the vendors.Each purchase order instructs the vendor to ship the materials directly to the appropriate manufacturing plant. Assuming that the necessary purchase orders have been issued, the manufacturing plants proceed with the production orders received from corporate headquarters. When goods are received, the manufacturing plant examines and verifies the count with the packing slip and transmits the receiving data to accounts payable at corporate headquarters. In the event that raw material deliveries fall behind production, each branch manager is given the authority to order materials and issue emergency purchase orders directly to the vendors. Data about the emergency orders and verification of materials receipt are transmitted via computer to



accounts payable at corporate headquarters. Because the company employs a computerized perpetual inventory system, physical counts of raw materials are deemed not to be cost effective and are not performed. Accounts Payable Procedures Vendor invoices are mailed directly to corporate headquarters and entered by accounts payable personnel when received; this often occurs before the receiving data are transmitted from the branch offices. The final day of the invoice term for payment is entered as the payment due date. This due date must often be calculated by the data entry person using information listed on the invoice. Once a week, invoices due the following week are printed in chronological entry order on a payment listing, and the corresponding checks are drawn. The checks and the payment listing are sent to the treasurer’s office for signature and mailing to the payee. The check number is printed by the computer and displayed on the check, and the payment listing is validated as the checks are signed. After the checks are mailed, the payment listing is returned to accounts payable for filing. When there is insufficient cash to pay all the invoices, certain checks and the payment listing are retained by the treasurer until all checks can be paid. When the remaining checks are mailed, the listing is then returned to accounts payable. Often, weekly check mailings include a few checks from the previous week, but rarely are there more than two weekly listings involved. When accounts payable receives the payment listing back from the treasurer’s office, the expenses are distributed, coded, and posted to the appropriate plant or cost center accounts. Weekly summary performance reports are processed by accounts payable for each cost center and branch location reflecting all data entry to that point. Required: a. Identify and discuss three areas where Lexsteel Corporation may be exposed to fraud or embezzlement due to weaknesses in the procedures described, and recommend improvements to correct these weaknesses. b. Describe three areas where management information could be distorted due to weaknesses in the procedures, and recommend improvements to correct these thatweaknesses. c. Identify three strengths in the procedures described and explain why they are strengths. Response: a. Three areas where Lexsteel Corporation may be exposed to fraud or embezzlement due to weaknesses in its procedures, and the recommended improvements include the following. Weakness i. Branch managers are permitted to issue purchase orders in emergencies by dealing directly with the vendor, avoiding purchasing controls. The branch manager can decide when an “emergency” exists and is permitted to subjectively choose a vendor. ii. Invoices are sent to and directly entered accounts payable, without authorization or verification documentation from the purchasing or receiving departments. Payments for undesired or unreceived goods could be processed.



Recommendation A procedure for expediting orders should be developed for the purchasing department.



Lexsteel should require proper authorization and verification documentation (i.e. purchase order and receiving report) prior to payment.



iii. Checks are prepared on invoices. There is no supporting documentation attached to the checks when they are forwarded to the treasurer for payment. The invoices cannot be cancelled after payment, allowing the possibility of a second payment of the same invoice.



Checks should be paid based on the original invoice only after it has been verified to the original purchase order and receiving report. The invoices should be cancelled after the checks are signed.



b. Three areas where management information could be distorted due to weaknesses in the procedures, and the recommended improvements include the following. Weakness Recommendation i. Cash balances will be distorted Checks should be drawn only when because all checks are drawn when cash is available and mailed due but may be held for future immediately. Procedures should be mailing when sufficient cash is established for taking advantage of available. Cash management will vendor discounts when appropriate. also be affected by inaccurate due dates, lack of procedures for taking vendor discounts, and inaccurate information for EOQ calculations. ii. Accounts payable information will Invoices should not be entered into the be distorted by drawing checks and system until matched with supporting then holding for future payment, by documents, and receiving documents entering invoices without supportshould be matched against original ing documentation, and by inaccurate purchase orders. Due dates should be receiving documentation. In addition, calculated from the date goods are inaccurate due dates could damage received. vendor relations. iii. Inventory balances are likely to Procedures for cycle counting with be misstated because of lack of physical periodic reconciliation of book to counts, poor receiving documentation, physical amount should be and weak accounts payable procedures. implemented. The lack of control over emergency orders could distort inventory balances and cause duplicate purchases. c. Strengths in the procedures described include the following: i. The company has a centralized EDP system and database in place. This eliminates duplication of effort and data redundancy while improving data integrity, efficiency, productivity, and timely management information. ii. Most purchase orders are issued by the centralized purchasing department from computerized production orders or bills of material. This limits overstocking of materials inventory and employs specialized expertise in the purchasing function. iii. The functions of purchasing, production control, accounts payable, and cash disbursements are centralized at the corporate headquarters. This improves management control and avoids a duplication of efforts. The separated departments help maintain internal control by the segregation of duties for authorization, payment, and coding. 12. Human Resource Data Management In a payroll system with real-time processing of human resource management data, control issues



become very important. List some items in this system that could be very sensitive or controversial. Also describe what types of data must be carefully guarded to ensure that they are not altered. Discuss some control procedures that might be put into place to guard against unwanted changes to employee’s records. Response: The data contained in a human resource management database are extremely sensitive. Payroll employees should be able to verify that an employee has the status of an active employee, but should not be able to change this status. The personnel employees, on the other hand, should be able to activate new employees and change the status of an employee from active to terminated. The personnel employees should not be able to submit timecards for employees. This separation of tasks prevents either the payroll employees or the personnel employees from processing paychecks for nonexistent or terminated employees. The payroll employees should only be able to retrieve information that is necessary for payroll. The human resource database will probably contain other information that the payroll employees have no business viewing, such as performance evaluation data, health records, pension plan balances, and injury claims. Thus, the central location of data needs good controls to make sure that these sensitive data cannot be viewed or tampered with. Performance evaluation data is very sensitive, and passwords should be necessary to access such information. Payroll rate data are also very sensitive and should not be able to be tampered with. 13. Unrecorded Liabilities You are auditing the financial statements of a New York City company that buys a product from a manufacturer in Los Angeles. The buyer closes its books on June 30. Assume the following details: Terms of trade: FOB shipping point June 10, buyer sends purchase order to seller June 15, seller ships goods July 5, buyer receives goods July 10, buyer receives seller’s invoice Required: a. Could this transaction have resulted in an unrecorded liability in the buyer’s financial statements? b. If yes, what documents provide audit trail evidence of the liability? c. On what date did the buyer realize the liability? d. On what date did the buyer recognize the liability? New assumption: Terms of trade: free on board destination e. Could this transaction have resulted in an unrecorded liability in the buyer’s financial statements? f. If yes, what documents provide audit trail evidence of the liability? g. On what date did the buyer realize the liability? h. On what date did the buyer recognize the liability? Response: Term FOB shipping point: a. Yes b. The best evidence is provided by the Purchase Order and Bill of Lading Purchase Order—is evidence that the item was ordered, but does not indicate when it was shipped. Bill of Lading—reviewed post-period; will indicate when the goods were shipped



Receiving Report—prepared post-period; establishes possession but may not indicate when goods were shipped c. June 15 d. July 10 Term FOB destination: e. No f. N/A g. July 5 h. July 15 14. Inventory Ordering Alternatives Refer to Figure 10-2 in the text, which illustrates three alternative methods of ordering inventory. Required: a. Distinguish between a purchase requisition and a purchase order. b. Discuss the primary advantage of alternative two over alternative one. Be specific. c. Under what circumstances can you envision management using alternative one rather than alternative two? Response: a. A purchase requisition is created when an item of inventory is needed (e.g., fallen below the reorder point) and authorizes its purchase. A purchase order is created from requisitions to the same vendor. Thus, one purchase order may contain many purchase requisitions. b. The system shown in alternative two expedites the ordering process by distributing the purchase orders directly to the vendors and internal users, thus bypassing the purchasing department completely. This shortens the time between recognizing the need for inventory and mailing the PO to the vendor. Consequently, inventory safety stock levels can be reduced, thus reducing inventory carrying costs. c. Alternative one provides additional control over the ordering process. For example, the purchasing agent could manually detect unusual order quantities or frequency caused by a computer error. Managers whose systems lack reliable computer controls, and who wish to compensate with human independent verification, may prefer this alternative. The price of this added control is excessive inventory carrying costs. 15. Payroll Flowchart Analysis Discuss the risks depicted by the payroll system flowchart for Problem 6 in the text. Describe the internal control improvements to the system that are needed to reduce these risks. Response: Risks:  Supervisor submits the personnel action form. This allows him/her to create nonexistent employees.  Supervisor distributes the paychecks to the employees. Checks written for nonexistent employees can be kept and cashed by the supervisor.  The appearance of control provided by accounts payable is deceiving. The review and reconciliation of the payroll register is based on the presumption that the personnel action form and time cards are legitimate and accurate. Since they are both prepared by the supervisor, their integrity is brought into question. Controls:



 



Authorization: A separated personnel function should be established to prepare personnel action forms and manage the human resource. Segregation of Duties. The supervisor should not distribute the paychecks to employees. This should task should be performed by an independent paymaster.



Internal Control Cases: 1. Solution to Smith’s Market (Small Business Cash Sales Accounting System a), b) See diagrams on the following pages. c) Internal Control Weaknesses 1) Warehouse clerk has transaction authorization and purchasing responsibility. 2)



Warehouse clerk has asset custody and recordkeeping responsibility. Blind PO is not used to verify received inventory.



3)



Accounting clerk approves invoice for payment without the benefit of a receiving report or a purchase order. No three way match control.



4)



Accounting clerk has account payable and cash disbursement responsibility.



Vend or



Pa cki ng Sli p



Insp ect and Upd ate Stoc Pa k cki ngFile Reco Sli rds p



Invoi ce Revi ew stoc k Prep are PO Stoc k Reco rds



Smith’s Market Exp Cycle DFD



Revi ew and File



File



Invoi ce



Invoi ce Pay Ven dor



Chec k Invoi ce File



Chec k Regi ster



File



Jour nal Vouc her



Sum Jour mary Updnal ateVouc her Acco unts Gene ral Ledg er



Sum mary



Ware Ob house ser ve Sto inv ck ent Rec ory ord On s HaRevie nd w Stock Prepar e PO



1



PO



Pac kin g Vend Slip Inspec or t and 2 Update Stock Pur Record Pac s cha kin ses g Su Slip mm ary Smith’s A Market Exp Cycle FC



Accounti ng Clerk Vend or



3



Inv Re oice vi e w an d Inv Fil oice e



Pay Vend or and Recor d in Inv Acco oice unts Che ck



4



Vend or



Treasury Clerk Pur A cha seJou rnal Su Vou mm che ary Gener r al Upda Ledge te r Acco Acc unts oun Jou trnal Su Vou mm che aryr Jou rnal Vou A che r Check Regis ter



2.



Solution to Spice is Right Imports (Standalone PC-based Accounting System) a), b) see the following pages c) Internal Control Weaknesses



1) Purchasing approves and executes purchases. The company needs an inventory control function. 2) Purchasing updates inventory records for transactions that it previously approved and executed.



3) Receiving clerk prepares receiving report from the packing slip. Should have a Blind Copy of the PO. 4) Accounts Payable approves vendor payments based only on a PO and Invoice. They have no evidence of inventory receipts and inspection. They need a receiving report as well. 5) AP approves liability and writes the check. 6) AP clerk has access to the AP control account in the general ledger and the AP subsidiary (Cash Disbursement voucher file).



Purchase Order Review Inventor y Prepare PO



Invent ory



Purch ase Order



Vendor



Update Inventor y Close PO



PO File



Packin g Slip



Rec Rept



Rec Rept



Inspect Goods



Invoi ce



File



Vendor



Review Chec Open k Items and Post Check Copy Check File



Regist er



Wareho use



Reconcile and set up Liability



Purch ases Journa Cash l Disb Vouch er Gen Ledge r



Inve Purchasi ngntor y Revi Departm ew entSub Ledg Inve 1 er ntor y and Pu Prep PO Pu rc are File rc ha Pu PO ha se rc A seha Or Orse de rdeOr rdeVe rnd or



Re ce ivi ng Upd Re ate po Inve rt ntor y and 2 Clos e PO Re ce ivi ng Re po rt



Spice is Right Expenditure Cycle Flowchart (Page 1)



Accounts VeIReceivin Pu Payable nd Pa A ng rc or ck s ha in p se ge Ve Or 3 Sli c nd de pt In r T or a voReco Re n ic ncile ce Re d e , Set 4 ivi ce V Up ngivi e Liabi Reng Pur r lity, po Re Cas cha if post Wa rt po h yreh tose rt dis GLJou ou b rnal se Gen Vou Led che ger r



Accounts Payable (Continued) Ven dor Review 5 open items and Post to Accoun ts



Che ck Che ck Cop y Cash disb Vouch Check er Regist Gener er al Ledge 6 r



Spice is Right Expenditure Cycle Flowchart (Page 2)



d) Flowchart of revised system Student responses will vary for this part of the assignment. The following issues, however, need to be addressed.  Upgrade stand-alone computers to a networked environment  The internal control problems already covered need to be corrected in the new system.  A system configuration similar to figure 10-3 would be appropriate.



3.



Solution to ABE Plumbing, Inc. (Centralized Small Business Accounting System) ABE Plumbing Internal Control Problems



1)



Purchasing agent authorizes and executes the purchase transaction. 2)



Receiving clerk prepares receiving report from the packing slip. He should



receive a “blind” copy of the PO. 3)



Warehouse clerk should not be updating the inventory subsidiary ledger. The



clerk has asset custody and record keeping responsibility. 4)



Accounts Payable clerk should not be writing checks. The clerk has asset



custody and record keeping responsibility.



ABE Plumbing, Inc. DFD Expenditure Cycle Purchase Order



Inventory Requirements



Vendor



Inventory



Review Inventory Records Packing Slip



PO



Order Data



PO File Receive Inventory



Receiving Data



RR



Quantity and Condition



Hard Copy RR



Update AP



Payment Data



CD Voucher Due Date



Receiving Report



Post Update AP



Post Update Inventory



Quantity



Check Number



General ledger Post



Inventory Check



Check Amount



Check Register



Vendor



Purchasing Department



Data Processing



1



2



PO



B



Monitor / Prepare PO



PO



Purchases / AP System



Packing Slip



Receiving Department



Warehouse



A



Packing Slip Rec Report Prepare Rec Report



Accounts Pay



A



Invoice



PO File



Reconcile and Post



Review and Write Checks



Check



Rec Report



Inventory Sub Ledger



Invoice



4



Rec Report



3 Update Inventory



B



Rec Report File GL Open/Closed Cash Disb Check Reg



ABE Plumbing Purchases / Cash Disbursements System



This flowchart shows the receiving report being filed by the warehouse clerk, although the problem description does not include this step. d) Flowchart of revised system   Student responses will vary for this part of the assignment. The solution should address the control issues identified in part C of the case.    



4. Solution to Walker Books, Inc. (Manual system with Minimal PC Support) a), b), See diagrams on the following pages. c) Internal Control Weaknesses Walker Books Expenditure Internal Control Weaknesses 1) A separate inventory control department should authorize purchases. 2) Receiving should use ‘blind copy’ of the purchase order to force the clerk to count and inspect the goods upon arrival. 3) Accounts payable should perform a three-way match between the PO, Receiving Report, and the Supplier’s Invoice. 4) The Accounts Payable Department should not write checks. 5) The invoice should not be destroyed. This is an audit trail issue. 6) Signing and distribution of the check is done without the benefit of supporting documents or a valid vendor file.



Walker Books Data Flow Diagram for Purchasing System



Vendor Vendor Inventory Inventory levels



1 Review records



Invoice



Inventory requirements



P.O.



Vendor Vendor



Goods and packing slip



2 Prepare PO



7 Reconcile & Record AP



P.O.



P.O.



4 Receive & Packing slip Unload Goods



Posting info



AP Subsidiary



Journal voucher 5 Reconcile PO & Pack. Slip



8 Examine & Post



P.O. & Packing slip 6 Create Receiving Reports



Posting info



General Ledger



Walker Books Data Flow Diagram for Cash Disbursements System AP Subsidiary



Check Register Posting info



1 Review open AP



Invoice due



2 Prepare Check & Update Check



3 Examine Check & Sign



Signed check



4 Signed check & Photocopy Photocopy Check



5 Send Signed check Check & Mark Copy



Vendor Vendor



Marked check photocopy 6 Create Journal Voucher Journal voucher 7 Examine & Post



Posting info



General Ledger



Walker Books Document Flowchart for Purchasing System (Original) Purchasing Department



Monitor Goods & Generate POs



Terminal



Receiving Department Purchase Order



Packing Slip



Inventory



1



Reconcile Goods & Documents



Purchase Order



Vendor



Warehouse



Accounts Payable Department



Receiving Report



A



Purchase Order



File



Vendor



2



Temp. File



Purchase Order



A



Invoice



Receiving Report Vendor



Record & Create Voucher File



File



Receiving Report



3



Journal Voucher Purchase Order 2A



AP Subsidiary



Invoice



Open AP



Walker Books Document Flowchart for Cash Disbursements System (Original) Accounts Payable Department Open AP



Review & Create Check



Cash Disbursements Department



General Ledger



Check



4



Examine & Sign Check



Check



1A



6



Journal Voucher



Journal Voucher



Invoice



AP Subsidiary



Signed Check Update Records



Terminal



Check Register



Photocopy Check



Check Invoice



Vendor



5



General Ledger



Signed Check Check Copy



Trash Bin



Marked Check Copy



Mark “Paid” & Create Voucher



Journal Voucher



File



Revised System Walker Books System Student responses will vary for this part of the assignment. Notwithstanding the internal control issues already covered that need to be addressed, Walker Book’s new system design could reflect features similar to those in figure 10-3.



5. Solution to AV Safety, Inc. (Manual and Standalone Computer Processing) a), b), See diagrams on the following pages. c) Internal Control Weaknesses Purchases Procedures 1) The inventory clerk in the warehouse department has asset custody, transaction authorization and record keeping responsibility. 2) The receiving clerk prepares the receiving report from the packing slip information. The receiving department clerk should receive a ‘blind copy’ of the purchase order to force the receiving clerk to count and inspect the items before preparing the receiving report. 3) Accounts Payable does not verify that the good have been received via a receiving report. Payment approval is based on a PO and invoice only. 4) A copy of the PO is sent to the General Ledger, presumably for updating purposes. Its use, however, is unclear from the case. Only journal vouchers should be used to update the GL accounts. Cash Disbursements Procedures 5) The company may be paying for items not received. The cash disbursement voucher is based on a flawed process to set up the AP. A proper 3-way match needs to be performed prior to establishing the liability. 6) No valid vendor file is used to approve payment. 7) No formal Journal vouchers are used to update the General Ledger.



A&V Safety, Inc Expenditure Cycle DFD- Purchasing



Supplier Supplier



Prepare Purchase Order



Purchase Order



Low Inventory Items list



Invoice



Inventory Records



Reconcile Recd.



Receiving Report



Prepare Accounts Payable



Voucher



AP Summary Information



Raw Materials Report



Raw Materials Raw Materials Storeroom Storeroom



Receiving Report



Update General Ledger



Update Inventory Records



GL Control A/c



Summary Report



A&V Safety, Inc Expenditure Cycle DFD- Cash Disbursement



Supplier Supplier Checks Filed



Check



Prepare Checks



Summary Report



Receiving Report



Prepare Accounts Payable



Voucher



AP Review



Summary Information



Update General Ledger



Post



GL Control A/c



A&V Safety, Inc. Expenditure Cycle Flowchart (Original) Page 1f 2o Warehouse



General Ledger



Accounting



Receiving Dept.



1



A



Purchase Order Prepare Purchase Order



Vendor



Purchases Purchase Order



Journal



?? 4



Purchase Order



Confirm and Prepare RR



Signed PO



AP Subsidiary



Purchase Order



Purchase Order



Ledger



A



3



Vendor



B



Review and Update



Receiving Report



Vendor Update Program



Inventory Ledger



Packing Slip



Invoice



Receiving Report



B



File



2



A&V Safety, Inc. Expenditure Cycle Flowchart (Original) Page 2f o2 Accounts Payable



Review Inven And Prepare CD Vouch



Cash Disbursements



General Ledger



7



AP Subsidiary Ledger



A



Prepare Checks Summary



5



6 .



Update Program Check Register



Cash Disbursement Voucher



General Ledger Checks



AP Summary



Update Summary



Voucher Register



A



Approve Checks Confirm, update AP File and post Voucher



AP Subsidiary Ledger



Cash Disb’ment Voucher Copy of



Cash Disb’ment Voucher



File Copy of Check



Copy of Check File



Check



File



Check



Vendor



Revised AV Safety, Inc. System



Student responses will vary for this part of the assignment. Notwithstanding the internal control issues already covered that need to be addressed, AV Safety’s new system design could reflect features similar to those in figure 10-3 6. Solution to Premier Sports Memorabilia Purchasing System (Networks Computer System with Manual Procedures) a), b) see the following pages c) Internal Control Weaknesses 1) The receiving clerk should be provided with a blind copy of the purchase order. 2) The high degree redundant activities in the system are inefficient and may possibly lead to errors in accounting records. Specifically:  Inventory requisitions are downloaded from the system to produce hard copy purchase orders manually  Inventory is manually updated from a terminal  General ledger entries are posted from manually produced hard copy journal vouchers and summaries. Pre mier Sports Me morabilia Purchasing System Data Flow Diagram



Inventory Inventory Levels



Vendor Vendor



Chec k Inventory Levels



Inventory Requirements



Valid Vendor



Vendor Info Purchase Order



Goods Shipped



Purchase Inventory



Purchase Order



Invoice



Vendor Vendor



Purchase Order & Packing Slip



Receive Goods



Receiving Report



Update Inventory



Prepare Receiving Report



Receiving Report



Prepare A/P



A/P Voucher



Summary



Update General Ledger



Post



Inventory



Post



Control Accounts



Accounts Payable



Premier Sports Memorabilia Purchasing System Document FlowchartPage 1/2 (Original) Inventory Control



Purchasing Dept



Receiving



Data Processing Dept



B A



Prepare PO



Valid Vendor File



Purchase Order



Prepare Purchase Requisition



1 Inventory Purchase Order



View and Update



A B



Open/Closed Requisition



Vendor



C Packing Slip



2



Purchase Order



Purchase Order Purchase Order



2 1



Purchase Order



View and Update



Open/Closed Purchases



Receiving Report



D



Close and Update Inventory



Inventory



E



Update AP



F



Update GL



Receiving Report Receiving Report



2



AP Sub Ledger



Vendor



D



End of day Procedure



Create Open Purchase



Prepare Receiving Report



Purchase Order



Receiving Report



C



Inventory Summary



3



General Ledger



Premier Sports Memorabilia Purchasing System Document Flowchart



Page 2/2 (Original)



Accounts Payable



1



General Ledger & A/R



2



Purchase Order



3



Receiving Report



2 Inventory Summary



A/P Voucher



Invoice



Reconcile and Post



Reconcile



Vendor



E



Set Up AP



End of Day Procedure



F



A/P Voucher



d) Revised System Premier Sports System Student responses will vary for this part of the assignment. An operationally improved system design should reflect features similar to those in figures 10-3



7. Solution to Bait ‘n Reel (Combination of Networked Computers and Manual System) a), b), d) See diagrams on the following pages. c) Internal Control Weaknesses 1) The inventory control department should submit a purchase requisition to the purchasing department authorization of purchases. 2) The receiving department clerk should receive a ‘blind copy’ of the purchase order to force the receiving clerk to count and inspect the items before preparing the receiving report. 3) Accounts payable department records the liability before the vendor’s invoice arrives. No three-way match is performed. 4) The AP Clerk should not update both the AP subsidiary ledger and the general ledger AP Control account. 5) Cash Disbursement clerk prepares check and updates the AP subsidiary and GL accounts. The clerk could set up a fraudulent AP and pay it (vendor fraud). 6) Inventory control/Storage has asset custody and record keeping responsibility.



Inventory Records



Vendor Records



Bait ‘n Reel DFD



1 Review Records



Inventory Requirements



Electronic PO



Accounts Payable



6 Record Liability & Prepare Voucher



Post



2 Prepare Purchase Order



Purchase Order



Electronic PO



Receiving Report



Receiving Report



Vendor Vendor



Invoice & PO Copy



Post A/P Control



Invoice, PO Copy, RR



Signed Check



5 Update Inventory Records Post



Inventory Subsidiary



9 Prepare Check



Cash Account



Invoice, PO Copy, RR, Check 12 Update Records & Sign Check



4 Reconcile Goods & Order



Check Register Post



Goods



Goods & Receiving Report Inventory Control



7 Reconcile & Update Accounts



Vendor Vendor



General Ledger



Inventory Control Storage



Purchasing



A



Receiving Report 2



Terminal



Inv. Subsidiary Ledger



Inv. Subsidiary Vendor List Ledger



6



Accounts Payable Receiving Electronic Report 1 PO



Electronic PO



Terminal



1 Receiving Report 2



File



Receiving



Review Vendors & Prepare PO



Purchase File Order 2 Purchase Order 1



Terminal



Reconcile & Prepare RR



2



Receiving Report 1 A



Receiving Report 2 Receiving Report 1



Purchase Order



Vendor



Update



Terminal



Terminal



Save Order & Notify



Terminal



Update



Inventory Control



Bait n Reel ‘ Purchases System (Original)



AP Control



AP subsidiary



3



File



Vendor



Reconcile & Record



Invoice



Invoice Receiving Report 1 PO Copy



2A



PO Copy



Cash Disbursements



1A



Invoice Receiving Report PO Copy



Review & Prepare Check



4



Invoice



Invoice



Receiving Report



Receiving Report



PO Copy



PO Copy



Check



Terminal



Review & Sign



General Ledger



Check Register



AP Subsidiary



Check



Check



Vendor



Update



Invoice



5



Receiving Report Check Copy PO Copy File



Bait ‘n Reel Cash Disbursements System (Original)



Data Processing (Inventory Control)



Purchasing



Inventory Sub. File



Review & File



Transact. List Vendor



Prepare Purchase Orders



Accounts Payable



Blind Copy



Transact. List



Open Purchase Order File



Receiving



Vendor Records



Blind Copy Transact. List Purchase Order 2 Purchase Order 1



Purchase Order 2



Reconcile Goods & Order



Open AP File



Terminal/ Printer



Receiving Report



Vendor



Vendor Invoice File



Reconcile Info



File



A



Account Summary



Printer



Account Summary



Receiving Report File



File



General Ledger



Terminal File



Open Purchase Order File



Update & Close Open PO



A/P File Inventory Sub. File



Closed Purchase Order File



Open AP File



Update



General Ledger Control Accounts



Account Summary



A



Bait ‘n Reel Purchases System (Revised)



Data Processing



Accounts Payable



Cash Disbursements



General Ledger



Open AP File



Review For A/P Due



Printer



Printer



Printer



Transact. Listing



Transact. Listing



Account Summary



Check File



Due AP Information



File File



Write Checks & Record



Sign Check



Vendor



Check Register



Closed AP File



General Ledger Control Accounts



Bait ‘n Reel Cash Disbursement System (Revised)



8. Solution to Green Mountain Coffee Roasters, Inc. (Manual Procedures and Standalone PCs) a), b) see the following pages c) The Following are the control weaknesses found in this Cash Disbursements System: 1) Warehouse authorizes and executes purchases of inventory. There should be an independent inventory control function. 2) No formal receiving function and no receiving reports are prepared. A blind copy of the Purchase Order should be used to count and inspect not a packing slip. 3) Warehouse has asset custody and maintains inventory records. 4) Accounts Payable approves liability with no evidence that goods were received. A three-way match should include Purchase Order, Invoice, and Receiving Report 5) Account Payable has check writing responsibility and approves the liability and maintains the accounting records.



DFD Green Mountain Purchases System



DFD Green Mountain Cash Disbursements System



Flowchart Green Mountain Purchases System Page 1 Warehouse



Inventory Ledger



1 C Open PR



A



2 D



A Packing Slip



3



B



A



Packing Slip



E



Flowchart Green Mountain Purchases System Page 2



E C



4



D



A



B



AP Sub Ledger



Flowchart Green Mountain Cash Disbursements System General Ledger



Journal Voucher Check Register



5



Update GL



Check



General Ledger



Check Copy Journal Voucher



Journal Voucher



Vendor



d) Revised Green Mountain System Student responses will vary for this part of the assignment. Notwithstanding the internal control issues already covered that need to be addressed, Green Mountain’s new system design could reflect features similar to those in figure 10-3



9. Solution to Holly Company –Payroll Systems (Small Company Uses Manual Procedures with PC Support)



Employee Information Record Hours Worked



Time Cards



Review Time Cards



Reviewed Time Cards



Employee Records



Prepare Payroll



Time Cards , Payroll Register Copy



File



Hours Worked Payroll Register Print checks and Update Accounts



Employees



Signed Paychecks



Payroll Register



Paychecks Signed Paychecks Distribute Checks



Holly Company Payroll System DFD



Sign Checks



File



Foremen



Payroll



Accounting



1



C. Employees Control Weaknesses 1) Supervision – Timekeeping 2)



Time card



Payroll Register



Time processcard is unsupervised



7 Segregation of Duties – Accounting Department Prepares Paychecks



3) Segregation of Duties – Accounting



Prepare department Payroll



maintains both sub and GL



Print Checks Update Accounts accounts



Review



4)



Accounting Records – Payroll drawn on general cash account Employee Records



Subsidiary Ledgers



2



5) Segregation of Duties – Accounting clerk prepares and signs paychecks Employees 6) 7)



3



Time Paychecks Card Segregation of Duties – Foremen authorize Payroll time cards and distribute paychecks Register Payroll Transaction verification Payroll clerk prepares paychecks without authorization Register Distribute



6



personnel action form.



Sign



Paychecks



1. Provide supervision over timekeeping Holly Company Payroll Process System Flowchart 2. Paychecks should be prepared by Payroll Department 3. Create separate GL function or provide access control to GL 4. Establish separate cash disbursement department 5. Establish an Impress account for payroll 6. Employ a paymaster to distribute paychecks to employees 7. Verify the status of employees before preparing paychecks.



from a Payroll Register



5



D. Recommend Improvements



General Ledgers



Paychecks



4



10. Solution to A&V Safety, Inc. –Payroll Processing System (Manual Process) Personnel File Record Hours Worked



Time Cards



Reviewed Time Cards



Approve Time Sheets



Verified recipient Form



Hours Worked



Payroll Register



File



Time Cards



Paycheck



Payroll Register Copy



Employees



Sign Paychecks



Signed Paycheck



Employee Information



Prepare Payroll



Payroll Summary



Payroll Check Update AP Ledger



Verified recipient Form



AP Ledger



Reconcile and Post Summaries



GL



AV Safety Payroll System DFD



Supervisor



Payroll



Employees



Personnel File



6 Prepare Pay Checks



Review and Add Pay rates



3 Update AP Ledger



Payroll register



Time Cards



2



Pay Checks



2



Payroll Register Copy



Time Cards



Time Cards



1



Accounts Payable



Pay Checks



Payroll Summary



2



2



Payroll register Copy



Verified Recipients



AP Ledger



2



2 Distribute Pay Checks



Employees



Pay Checks Copy



Reconcile



Pay Checks Copy



Payroll register



AV Safety Payroll System Flowchart Page 1



Cash Disbursements



General Ledger



1



1



5 Verified Recipients



Pay Checks



Verified Recipients Pay Checks



Reconcile and Post



Verified Recipients



Sign Pay Checks



Payroll Summary



4



AP Ledger



Pay Checks Copy 1



1



1



AV Safety Payroll System Flowchart



Page 2



C. Control Weaknesses



1) Segregation of duties – Supervisors assign pay rates for some employees 2)



Segregation of Duties – Supervisors distribute check to employees



3) Transaction Authorization – Accounts Payable department should authorize cash disbursements to issue a payroll check to cover the individual paychecks. An imprest account should be employed. 4) Accounting Records – The verified recipient list does not verify who received the checks. It verifies only that a check was written for an individual. 5) Independent Verification –The general ledger should receive an account summary from the AP department. 6) Transaction verification - Payroll clerk prepares paychecks without authorization from a personnel action form.



D. Flowcharts for this part of the case will vary. Solutions should address the issues presented in part C of the case.