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ContentsSuggested answers to the problems
P; segregation of duties of accounts payable and cashier P
Request Purchase of Goods
Effect of Automation
Suggested answers to the cases
Accounting Information Systems
THE EXPENDITURE CYCLE:
PURCHASING AND CASH DISBURSEMENTS
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
11.1 There are several reasons why accountants should be involved in decisions about investing in IT and not leave such decisions solely to IS professionals. First, the economic merits of proposed IT investments need to be subjected to the same kind of detailed analysis as any other major capital investment (e.g., plant expansions). Accountants are skilled in making such analyses. Second, the operational feasibility of IT investments must also be evaluated. How will the investment affect daily operating procedures? Will the system be able to adapt as the company changes the nature of its operations? As one of the major users of the information system, accountants need to participate in these analyses. Third, at what stage of the life cycle is the proposed system? In other words, will the system soon become obsolete? Fourth, what are the risks that either employees or customers will be unhappy with the new system? Finally, what is the long-run viability of the proposed supplier? Here again accountants can make a valuable contribution by analyzing the long-run economic viability of proposed vendors.
11.2 The Vendor Managed Inventory (VMI) is essentially Electronic Data Interchange (EDI) where the retailer has given their vendor access rights to their point-of-sale (POS) system. Some of the potential advantages and disadvantages of moving to a VMI are:
Lower cost – retailers are able to essentially “outsource” their inventory management to their vendors.
Potentially reduced lost sales – provided that the vendors are able to meet product demand.
More accurate forecasts – since vendors have more data from the retailers, they are able to more accurately forecast and meet demand for their products.
Cost – the retailers and vendors must expend the resources necessary to acquire the technology and incur the costs of changing the organization to a VMI arrangement.
Security – The vendors have significant access to retailer data. The retailer puts one of their most valuable assets, their sales data, in the hands of their vendors. Such access opens the door to a myriad of data and system security issues such as data alteration and deletion, unauthorized access to non-sales related data, inadvertent loss of data or even corporate espionage.
Over supply – the vendor could ship more inventory than the retailer needs to meet demand.
The following are a list of potential controls that could be implemented to monitor VMI systems:
11.3 Since the primary benefit of procurement cards is to give employee’s the ability to make small non-inventory purchases necessary for their area of responsibility be it office supplies, computer or office equipment, meals and/or travel expenses, a formal approval process for all purchases would negate the benefit of the procurement card. Therefore, the controls for procurement cards should be focus on the initial issuance of the card and subsequent reviews and audits of purchases made by employees entrusted with procurement cards. Employees receiving cards must be properly trained in their proper use and in the procurement card controls implemented by the organization. If employees know that any purchase they make can be the subject of subsequent review and audit, they are more likely to make legitimate purchases. Subsequent reviews and audits must also require proper documentation related to each purchase made with the procurement card. During procurement card training, it should be emphasized that employees will be required to produce original receipts or other formal documentation for all items purchased.
11.4 This question should generate significant discussion and allow the instructor to counsel students on personal debt, credit cards, interest, and the personal problems that debt can cause. Many people do not keep their credit card receipts as evidence by receipts left at the “pay-at-the-pump” gas stations. If consumers do not keep their receipts, how do they know whether their credit card bill is accurate? Thus, consumers should verify each charge on their bill to each receipt. In addition, credit card bill should be reviewed for accurate refunds for returned merchandise or cancelled services. Instructors may also want to talk to students about running up a large balance on their credit cards and then only making the minimum payments. Students should be warned about identify theft and the dangers of paying for goods and services with credit cards through un-protected channels.
11.5 A firm’s use of technology to improve its expenditure cycle activities (inbound logistics) can help suppliers to improve their outbound logistics (shipping) in several ways. For example, if a company adopts the use of bar-coding or RFID (radio frequency identification) tags to expedite the handling of inventory, its vendors can streamline their shipments by adopting similar technology. In addition, EDI can be used by vendors to notify customers that shipments are on their way, so that the customer’s warehouse receiving function can be prepared. EDI and satellite technology also enable both the supplier and customer to track the status and location of all shipments in transit. By using shipping companies whose trucks are equipped with data terminals linked to satellites, it is possible to track the exact location and to redirect trucks in case of an urgent need in another location. Truck drivers also can be directed to certain loading docks that would be available for unloading thereby shortening truck turnaround time.
Customers have an incentive to share innovations with their suppliers because this may both further improve the efficiency of the customer’s inbound logistics activities and also enable suppliers to lower prices.
11.6 This question should generate good discussion on inventory management, anticipating demand, and vendor relations. The primary risk of minimizing or eliminating inventory is the risk of not being able to meet demand. If a business does not have enough inventory on-hand or not be able to acquire enough inventory to meet demand, then the business is likely to lose sales to competitors who do have enough inventory to meet demand. In addition, at a basic level, if a business carries insufficient inventory or no inventory, why would a customer buy from them? Could a customer simply bypass the business and go directly to the manufacturer and presumably eliminate the markup of the intermediary?
11.7 This question should generate significant discussion on business practices, vendor relations, non-compete agreements with employees, and business ethics. The primary issue here is conflict of interest. If a purchasing manager owns a business that supplies goods to his employer, how does the employer know that they are receiving the best quality goods for the lowest prices? By allowing a purchasing manager to own an independent company that supplies his employer, the employer is in effect dis-aligning the interests of the purchasing manager with the interests of the employer in that the higher the prices the supply company charges the more money the purchasing manager makes and the less money the higher the costs that employer pays for goods and services. The employer may find some comfort if the purchasing manager’s supply business is reviewed or audited by some independent organization, however, independent rating organizations cannot audit every transaction. Since the purchasing manager has intimate knowledge of the employer’s operations and cost structure, he has the ability to structure transactions that could conceal purchases that were favorable to the purchasing manager’s business and unfavorable to the employer. Given the degree of oversight that any prudent employer would have to implement to make sure the purchasing manager provided the best quality for the best price, why would an employer want to allow such an arrangement?
11.1 a. Require a purchase requisition from an operating department as authorization for preparation of all purchase orders. Before approving a purchase order, the purchasing manager should review the related purchase requisition. The purchasing manager also needs to ensure that orders are placed only with approved vendors. Also, company policy should require that purchasing agents disclose any financial interest or position which they hold in supplier companies, though this may be difficult to enforce. In addition, the purchasing manager should check to ensure that purchasing agents do not have investments in vendors on the approved vendor list.
b. Warehouse personnel should be required to count goods received and acknowledge receipt of the specified quantity by signing a copy of the receiving report. This copy of the receiving report would then be reviewed by accounts payable personnel prior to approval of payment. In on-line systems, the warehouse personnel would enter receipt of goods into the system. The system would then match that receiving report with the purchase order and vendor invoice prior to approving payment.
c. Receiving department personnel should be required to verify that a purchase order exists prior to accepting a shipment. Also, invoices should be compared to purchase order records prior to approval of the invoices for payment.
d. Proper invoice filing by payment date and proper cash budgeting.
e. When an invoice is approved for payment, the related supporting records (receiving report and purchase order) must be reviewed. At the conclusion of this process, the status of both the invoice and its supporting records should be changed, for example from "pending" to "paid." In this way the supporting records cannot be used twice to support payment of a duplicate invoice.
f. Periodic physical inventories should be taken, and the resulting counts used to correct system records.
g. Most effective here would be closed loop verification in which the item number is entered as input, and the system displays the corresponding item description and then asks the user to verify that this is the desired item.
h. Unused blank company checks should be stored in a secure location. In addition, the person signing checks should be different from the person authorizing disbursements and preparing checks, and the check signer should review the documentation (purchase order and receiving report) supporting each disbursement prior to signing each check.
i. Supporting documentation reviewed by the person who authorizes disbursements should include both a purchase order and a receiving report. In addition, the person signing checks should be different from the person authorizing disbursements and preparing checks, and the check signer should review the documentation (purchase order and receiving report) supporting each disbursement prior to signing each check.
11.2 Parts a. and b.:
c. A large number of controls are possible, including:
11.3 parts b & c
Vendor table referenced on the purchase order.
Product list referenced on the purchase order.
11.4 Types of controls used at various steps in the expenditure cycle.
Refer to Table 11.1 in the text for a list of threats and related controls. Students will likely create a variety of checklists, thus a template with a few example questions is listed below. Requirement b solutions will depend on the question(s) include on part a.
Expenditure Cycle Controls Checklist