combined into a single purchase order ,

The Expenditure Cycle Part I: Purchases and Cash which is then sent to the vendor.
Disbursements Procedures - In this type of system, each purchase
order will be associated with one or more
The Conceptual System
purchase requisitions.
Purchases Processing Procedures
PREPARE PURCHASE ORDER.
- It includes the tasks involved in identifying
- The prepare purchase order function
inventory needs, placing the order,
receives the purchase requisitions, which
receiving the inventory, and recognizing
are sorted by vendor if necessary.
the liability.
- Next, a purchase order (PO) is prepared
- In general, these procedures apply to both
for each vendor.
manufacturing and retailing firms.
- A copy of the PO is sent to the vendor. In
- A major difference between the two
addition, a copy is sent to the set up
business types lies in the way purchases
accounts payable (AP) function for filing
are authorized.
temporarily in the AP pending file, and a
- Manufacturing firms purchase raw
blind copy is sent to the receive goods
materials for production, and their
function, where it is held until the
purchasing decisions are authorized by the
inventories arrive.
production planning and control function.
- The last copy is filed in the open/closed
- Merchandising firms purchase finished
purchase order file.
goods for resale.
- To make the purchasing process efficient,
- The inventory control function provides
the inventory control function will supply
the purchase authorization for this type of
much of the routine ordering information
firm.
that the purchasing department needs
MONITOR INVENTORY RECORDS. directly from the inventory and valid
vendor files.
- Firms deplete their inventories by - This information includes the name and
transferring raw materials into the address of the primary supplier, the
production process (the conversion cycle) economic order quantity of the item, and
and by selling finished goods to customers the standard or expected unit cost of the
(revenue cycle). item.
- When inventories drop to a - This allows the purchasing department to
predetermined reorder point, a purchase devote its efforts to meeting scarce,
requisition is prepared and sent to the expensive, or unusual inventory needs.
prepare purchase order function to - To obtain the best prices and terms on
initiate the purchase process. special items, the purchasing department
- Although procedures will vary from firm to may need to prepare detailed product
firm, typically a separate purchase specifications and request bids from
requisition will be prepared for each competing vendors.
inventory item as the need is recognized. - Dealing with routine purchases as
- This can result in multiple purchase efficiently as good control permits is
requisitions for a given vendor. These desirable in all organizations.
purchase requisitions need to be - The valid vendor file contributes to both
control and efficiency by listing only those
 vendors approved to do business with the - Another copy is filed in the open/closed
organization. PO file to close out the PO. A third copy of
- This reference helps to reduce certain the receiving report is sent to the AP
vendor fraud schemes. department, where it is filed in the AP
pending file.
RECEIVE GOODS. - A fourth copy of the receiving report is
sent to inventory control for updating the
- Most firms encounter a time lag between
inventory records.
placing the order and receiving the
- Finally, a copy of the receiving report is
inventory.
placed in the receiving report file.
- During this time, the copies of the PO
reside in temporary files in various UPDATE INVENTORY RECORDS.
departments.
- At this point, the firm has received no - Depending on the inventory valuation
inventories and incurred no financial method in place, the inventory control
obligation. procedures may vary somewhat among
- Hence, there is no basis for making a firms.
formal entry into any accounting record. - Organizations that use a standard cost
- However, firms often make memo entries system carry their inventories at a
of pending inventory receipts and predetermined standard value regardless
associated obligations. of the price actually paid to the vendor.
- The next event in the expenditure cycle is - Posting to a standard cost inventory ledger
the receipt of the inventory. requires only information about the
- Goods arriving from the vendor are quantities received. Because the receiving
reconciled with the blind copy of the PO. report contains quantity information, it
- The blind copy contains no quantity or serves this purpose.
price information about the products - Updating an actual cost inventory ledger
being received. requires additional financial information,
- The purpose of the blind copy is to force such as a copy of the supplier’s invoice
the receiving clerk to count and inspect when it arrives.
inventories prior to completing the
receiving report. SET UP ACCOUNTS PAYABLE.
- Shipments that are short or contain
- During the course of this transaction, the
damaged or incorrect items must be
set up AP function has received and
detected before the firm accepts and
temporarily filed copies of the PO and
places the goods in inventory.
receiving report.
- The blind copy is an important device in
- The organization has received inventories
reducing this exposure.
from the vendor and has incurred
- Upon completion of the physical count
(realized) an obligation to pay for the
and inspection, the receiving clerk
goods.
prepares a receiving report stating the
- At this point in the process, however, the
quantity and condition of the inventories.
firm has not received the supplier’s
- One copy of the receiving report
invoice containing the financial
accompanies the physical inventories to
information needed to record the
either the raw materials storeroom or
transaction.
finished goods warehouse for safekeeping.
 - The firm will thus defer recording Vouchers Payable System
(recognizing) the liability until the invoice
arrives. - Rather than using the AP procedures,
- This common situation creates a slight lag many firms use a vouchers payable
(a few days) in the recording process, system.
during which time the firm’s liabilities are - Under this system, the AP department
technically understated. uses cash disbursement vouchers and
- As a practical matter, this misstatement is maintains a voucher register.
a problem only at period-end when the - After the AP clerk performs the three-way
firm prepares financial statements. match, he or she prepares a cash
- To close the books, the accountant will disbursement voucher to approve
need to estimate the value of the payment.
obligation until the invoice arrives. - Vouchers provide improved control over
- If the estimate is materially incorrect, an cash disbursements and allow firms to
adjusting entry must be made to correct consolidate several payments to the same
the error. supplier on a single voucher, thus reducing
- Because the receipt of the invoice typically the number of checks written.
triggers AP procedures, accountants need - Each voucher is recorded in the voucher
to be aware that unrecorded liabilities register.
may exist at period-end closing. - The voucher register reflects the AP
- When the invoice arrives, the AP clerk liability of the firm.
reconciles the financial information with - The sum of the unpaid vouchers in the
the receiving report and PO in the pending register (those with no check numbers
file. and paid dates) is the firm’s total AP
- This is called a three-way match, which balance.
verifies that what was ordered was - The AP clerk files the cash disbursement
received and is fairly priced. voucher, along with supporting source
- Once the reconciliation is complete, the documents, in the vouchers payable file.
transaction is recorded in the purchases - This file is equivalent to the open AP file
journal and posted to the supplier’s discussed earlier and also is organized by
account in the AP subsidiary ledger. due date.
- After recording the liability, the AP clerk
POST TO GENERAL LEDGER.
transfers all source documents (PO,
receiving report, and invoice) to the open - The general ledger function receives a
AP file. journal voucher from the AP department
- Typically, this file is organized by payment and an account summary from inventory
due date and scanned daily to ensure that control.
debts are paid on the last possible date - The general ledger function posts from
without missing due dates and losing the journal voucher to the inventory and
discounts. AP control accounts and reconciles the
- Finally, the AP clerk summarizes the inventory control account and the
entries in the purchases journal for the inventory subsidiary summary.
period (or batch) and prepares a journal - The approved journal vouchers are then
voucher for the general ledger function). posted to the journal voucher file.

DR CR
 - With this step, the purchases phase of the disbursements department manager or
expenditure cycle is completed. treasurer.
- The negotiable portion of the check is
THE CASH DISBURSEMENTS SYSTEMS mailed to the supplier, and a copy of it is
attached to the voucher packet as proof of
- The cash disbursements system processes
payment.
the payment of obligations created in the
- The clerk marks the documents in the
purchases system.
voucher packets paid and returns them to
- The principal objective of this system is to
the AP clerk.
ensure that only valid creditors receive
- Finally, the cash disbursements clerk
payment and that amounts paid are
summarizes the entries made to the check
timely and correct.
register and sends a journal voucher with
- If the system makes payments early, the
the following journal entry to the general
firm forgoes interest income that it could
ledger department:
have earned on the funds.
- If obligations are paid late, however, the UPDATE AP RECORD.
firm will lose purchase discounts or may
damage its credit standing. - Upon receipt of the voucher packet, the
AP clerk removes the liability by debiting
IDENTIFY LIABILITIES DUE. the AP subsidiary account or by recording
the check number and payment date in
- The cash disbursements process begins in
the voucher register.
the AP department by identifying items
- The voucher packet is filed in the closed
that have come due.
voucher file, and an account summary is
- Each day, the AP function reviews the
prepared and sent to the general ledger
open AP file (or vouchers payable file) for
function.
such items and sends payment approval in
the form of a voucher packet (the voucher POST TO GENERAL LEDGER.
and/or supporting documents) to the cash
disbursements department. - The general ledger function receives the
journal voucher from cash disbursements
PREPARE CASH DISBURSEMENT. and the account summary from AP.
- The voucher shows the total reductions in
- The cash disbursements clerk receives the
the firm’s obligations and cash account as
voucher packet and reviews the
a result of payments to suppliers.
documents for completeness and clerical
- These numbers are reconciled with the AP
accuracy.
summary, and the AP control and cash
- For each disbursement, the clerk prepares
accounts in the general ledger are
a check and records the check number,
updated accordingly.
dollar amount, voucher number, and
- The approved journal voucher is then
other pertinent data in the check register,
filed.
which is also called the cash
disbursements journal. EXPENDITURE CYCLE CONTROLS
- Depending on the organization’s
materiality threshold, the check may - This section describes the primary internal
require additional approval by the cash controls in the expenditure cycle
according to the control procedures
 specified in Statement on Auditing - A cash disbursements journal (check
Standards No. 78. register) containing the voucher number
authorizing each check provides an audit
trail for verifying the authenticity of each
check written.

Segregation of Duties

SEGREGATION OF INVENTORY CONTROL FROM

THE WAREHOUSE.

- Within the purchases subsystem, the

primary physical asset is inventory.
- Inventory control keeps the detailed
Transaction Authorization records of the asset, while the warehouse
has custody.
PURCHASES SUBSYSTEM. - At any point, an auditor should be able to
reconcile inventory records to the physical
- The inventory control function continually
inventory.
monitors inventory levels.
- As inventory levels drop to their SEGREGATION OF THE GENERAL LEDGER AND
predetermined reorder points, inventory ACCOUNTS PAYABLE FROM CASH
control formally authorizes replenishment DISBURSEMENTS.
with a purchase requisition.
- Formalizing the authorization process - The asset subject to exposure in the cash
promotes efficient inventory disbursements subsystem is cash.
management and ensures the legitimacy - The records controlling this asset are the
of purchases transactions. AP subsidiary ledger and the cash account
- Without this step, purchasing agents could in the general ledger.
purchase inventories at their own - An individual with the combined
discretion, being in a position both to responsibilities of writing checks, posting
authorize and to process the purchase to the cash account, and maintaining AP
transactions. could perpetrate fraud against the firm.
- Unauthorized purchasing can result in
excessive inventory levels for some items, Supervision
while others go out of stock.
- In the expenditure cycle, the receiving
CASH DISBURSEMENTS SUBSYSTEM. department is the area that most benefits
from supervision.
- The AP function authorizes cash - Large quantities of valuable assets flow
disbursements via the cash disbursement through this area on their way to the
voucher. warehouse.
- To provide effective control over the flow - Close supervision here reduces the
of cash from the firm, the cash chances of two types of exposure:
disbursements function should not write - (1) failure to properly inspect the
checks without this explicit authorization. assets and
- (2) the theft of assets.
INSPECTION OF ASSETS. - The control objective of accounting
records is to maintain an audit trail
- When goods arrive from the supplier, adequate for tracing a transaction from its
receiving clerks must inspect items for source document to the financial
proper quantities and condition (damage, statements.
spoilage, and so on). - The expenditure cycle employs the
- For this reason, the receiving clerk following accounting records:
receives a blind copy of the original PO - AP subsidiary ledger, voucher
from purchasing. register, check register, and general
- A blind PO has all the relevant information ledger.
about the goods being received except for - The auditor’s concern in the expenditure
the quantities and prices. cycle is that obligations may be materially
- To obtain quantities information, which is understated on financial statements
needed for the receiving report, the because of unrecorded transactions.
receiving personnel are forced to - This is a normal occurrence at year-end
physically count and inspect the goods. closing simply because some supplier
- If receiving clerks were provided with invoices do not arrive in time to record the
quantity information via an open PO, they liabilities.
may be tempted to transfer this - This also happens as an attempt to
information to the receiving report intentionally misstate financial
without performing a physical count. information.
- Supervision is critical at this point to - Expenditure cycle systems must be
ensure that the clerks properly carry out designed to provide supporting
these important duties. information, such as the purchase
- A packing slip containing quantity requisition file, the PO file, and the
information that could be used to receiving report file.
circumvent the inspection process often - By reviewing these peripheral files,
accompanies incoming goods. auditors may obtain evidence of inventory
- A supervisor should take custody of the purchases that have not been recorded as
packing slip while receiving clerks count liabilities.
and inspect the goods.
Access Controls
THEFT OF ASSETS.
DIRECT ACCESS.
- Receiving departments are sometimes
hectic and cluttered during busy periods. - In the expenditure cycle, a firm must
- In this environment, incoming inventories control access to physical assets such as
are exposed to theft until they are cash and inventory.
securely placed in the warehouse. - These control concerns are essentially the
- Improper inspection procedures coupled same as in the revenue cycle.
with inadequate supervision can create a - Direct access controls include locks,
situation that is conducive to the theft of alarms, and restricted access to areas that
inventories in transit. contain inventories and cash.

Accounting Records INDIRECT ACCESS.

 - A firm must limit access to documents - Manual systems are covered here as a
that control its physical assets. visual training aid to promote a better
- For example, an individual with access to understanding of the concepts presented
purchase requisitions, purchase orders, in the previous section.
and receiving reports has the ingredients
to construct a fraudulent purchase A MANUAL SYSTEM
transaction.
Inventory Control
- With the proper supporting documents, a
fraudulent transaction can be made to - When inventories drop to a
look legitimate to the system and could be predetermined reorder point, the clerk
paid. prepares a purchase requisition.
- One copy of the requisition is sent to the
Independent Verification
purchasing department, and one copy is
INDEPENDENT VERIFICATION BY ACCOUNTS placed in the open purchase requisition
PAYABLE. file.
- Note that to provide proper authorization
- Copies of key source documents flow into control, the inventory control department
this department for review and is segregated from the purchasing
comparison. department, which executes the
- Each document contains unique facts transaction.
about the purchase transaction, which the
AP clerk must reconcile before the firm Purchasing Department
recognizes an obligation. These include:
- The purchasing department receives the
INDEPENDENT VERIFICATION BY THE GENERAL purchase requisitions, sorts them by
LEDGER DEPARTMENT. vendor, and prepares a mulipart PO for
each vendor.
- The general ledger function provides an - Two copies of the PO are sent to the
important independent verification in the vendor.
system. - One copy of the PO is sent to inventory
- It receives journal vouchers and summary control, where the clerk files it with the
reports from inventory control, AP, and open purchase requisition.
cash disbursements. - One copy of the PO is sent to AP for filing
- From these sources, the general ledger in the AP pending file.
function verifies that the total obligations - One copy (the blind copy) is sent to the
recorded equal the total inventories receiving department, where it is filed
received and that the total reductions in until the inventories arrive.
AP equal the total disbursements of cash. - The clerk files the last copy along with the
purchase requisition in the open PO file.
Physical Systems
Receiving
- This begins with a review of manual
procedures and then moves on to deal - Goods arriving from the vendor are
with several forms of computer-based reconciled with the blind copy of the PO.
systems. - Upon completion of the physical count
and inspection, the receiving clerk
 prepares a multipart receiving report - With this step, the purchases phase of the
stating the quantity and condition of the expenditure cycle is completed.
inventories.
- One copy of the receiving report THE CASH DISBURSEMENTS SYSTEMS
accompanies the physical inventories to
AP Department
the storeroom.
- Another copy is sent to the purchasing - Each day, the AP clerk reviews the open
department, where the purchasing clerk vouchers payable (AP) file for items due
reconciles it with the open PO. and sends the vouchers and supporting
- The clerk closes the open PO by filing the documents to the cash disbursements
purchase requisition, the PO, and the department.
receiving report in the closed PO file.
- A third copy of the receiving report is sent Cash Disbursements Department
to inventory control where (assuming a
- The cash disbursements clerk receives the
standard cost system) the inventory
voucher packets and reviews the
subsidiary ledger is updated.
documents for completeness and clerical
- A fourth copy of the receiving report is
accuracy.
sent to the AP department, where it is
- For each disbursement, the clerk prepares
filed in the AP pending file.
a three-part check and records the check
- The final copy of the receiving report is
number, dollar amount, voucher number,
filed in the receiving department.
and other pertinent data in the check
AP Department register.
- The check, along with the supporting
- When the invoice arrives, the AP clerk documents, goes to the cash
reconciles the financial information with disbursements department manager, or
the documents in the pending file, records treasurer, for his or her signature.
the transaction in the purchases journal, - The negotiable portion of the check is
and posts it to the supplier’s account in mailed to the supplier.
the AP subsidiary ledger (voucher - The clerk returns the voucher packet and
register). check copy to the AP department and files
- After recording the liability, the AP clerk one copy of the check.
transfers the source documents (PO, - Finally, the clerk summarizes the entries
receiving report, and invoice) to the open made to the check register and sends a
vouchers payable (APOK) file. journal voucher to the general ledger
department.
General Ledger Department
AP Department
- The general ledger department receives a
journal voucher from the AP department - Upon receipt of the voucher packet, the
and an account summary from inventory AP clerk removes the liability by recording
control. the check number in the voucher register
- The general ledger clerk reconciles these and filing the voucher packet in the closed
and posts to the inventory and AP control voucher file.
accounts. - Finally, the clerk sends an AP summary to
the general ledger department.
General Ledger Department Data Processing Department: Step 1

- Based on the journal voucher from cash - The purchasing process begins in the data
disbursements and the account summary processing department, where the
from AP, the general ledger clerk posts to inventory control function is performed.
the general ledger control accounts and - When inventories are reduced by sales to
files the documents. customers or usage in production, the
system determines if the affected items in
Concluding Remarks the inventory subsidiary file have fallen to
their reorder points.
We conclude our discussion of manual systems
- If so, a record is created in the open
with two points of observation. First, notice how
purchase requisition file.
manual expenditure cycle systems generate a
- Each record in the requisition file defines a
great deal of paper documentation. Buying,
separate inventory item to be replenished.
preparing, transporting, and filing physical
- The record contains the inventory item
documents add considerably to the cost of system
number, a description of the item, the
operation. As we shall see in the next section,
quantity to be ordered, the standard unit
their elimination or reduction is a primary
price, and the vendor number of the
objective of computer-based systems design.
primary supplier.
Second, for purposes of internal control, many - The information needed to create the
functions such as the inventory control, requisition record is selected from the
purchasing, AP, cash disbursements, and the inventory subsidiary record, which is then
general ledger are located in physically separate flagged ‘‘On Order’’ to prevent the item
departments. These labor-intensive activities also from being ordered again before the
add greatly to the cost of system operation. In current order arrives.
computer-based systems, computer programs - At the end of the day, the system sorts the
perform these clerical tasks, which is much open purchase requisition file by vendor
cheaper and far less prone to error. Although the number and con- solidates multiple items
classic department structure may still exist in from the same vendor onto a single
computer-based environments, personnel requisition.
responsibilities are refocused. Rather than being - Next, vendor mailing information is
involved in day-to-day transaction processing, retrieved from the valid vendor file to
these departments are now involved with produce hard copy purchase requisition
financial analysis and exception-based problem documents, which go to the purchasing
solving. As a result, these departments are department.
smaller and more efficient than their manual
Purchasing Department
system counterpart.
- Upon receipt of the purchase requisition,
Computer-Based Purchases and Cash
the purchasing department prepares a
Disbursements Applications multipart PO.
- Copies are sent to the vendor, AP,
AUTOMATING PURCHASES PROCEDURES USING receiving, data processing, and the
BATCH PROCESSING TECHNOLOGY purchasing department’s file.
- A com- puter program identifies inventory
- The principal difference is that accounting
requirements and prepares traditional
(bookkeeping) tasks are now automated.
 purchase requisitions, but the purchasing - In each of the three alternatives, the tasks
agent reviews the requisitions before of authorizing and ordering are integrated
placing the order. within the computer system.
- Some firms do this to reduce the risk of - Because physical purchase requisitions
placing unnecessary orders with vendors have no purpose in such a system, they
because of a computer error. are not produced.
- Such manual intervention, however, does - Digital requisition records, however,
create a bottleneck and delays the would still exist to provide an audit trail.
ordering process.
- If sufficient computer controls are in place Data Processing Department: Step 2
to prevent or detect purchasing errors,
- A copy of the PO is sent to data processing
then more efficient ordering procedures
and used to create a record in the open
can be implemented.
PO file.
- Before continuing, there are alternative
- The associated requisitions are then
approaches for authorizing and ordering
transferred from the open purchase
inventories.
requisition file to the closed purchase
- In alternative one, the system
requisition file.
automatically prepares the PO documents
and sends them to the purchasing Receiving Department
department for review and signing.
- The purchasing agent then mails the - When the goods arrive from vendors, the
approved POs to the vendors and receiving clerk prepares a receiving report
distributes copies to other internal users. and sends copies to the stores (with the
- Alternative two expedites the ordering goods), purchasing, AP, and data
process by distributing the POs directly to processing.
the vendors and internal users, thus
Data Processing Department: Step 3
bypassing the purchasing department
completely. - The data processing department creates
- Instead, the system produces a the receiving report file from data
transaction list of items ordered for the provided by the receiving report
purchasing agent’s review. documents.
- Alternative three represents a - Then a batch program updates the
reengineering technology called electronic inventory subsidiary file from the
data interchange. receiving report file.
- This method produces no physical POs. - The program removes the ‘‘On Order’’ flag
- Instead, the computer systems of both the from the updated inventory records and
buying and selling companies are calculates batch totals of inventory
connected via a dedicated receipts, which will later be used in the
telecommunications link. general ledger update procedure.
- The buyer and seller are parties to a - Finally, the associated records in the open
trading partner arrangement in which the PO file are transferred to the closed PO
entire ordering process is automated and file.
unimpeded by human intervention.
Accounts Payable
 - When the AP clerk receives the supplier’s Cash Disbursements Department
invoice, he or she reconciles it with the
supporting documents that were - The cash disbursements clerk reconciles
previously placed in the AP pending file. the checks with the transaction listing and
- The clerk then prepares a voucher, files it submits the negotiable portion of the
in the open voucher file, and sends a copy checks to management for signing.
of the voucher to data processing. - The checks are then mailed to the
suppliers.
Data Processing Department: Step 4 - One copy of each check is sent to AP, and
the other copy is filed in cash
- The voucher file is created from the disbursements, along with the transaction
voucher documents. listing.
- A batch program validates the voucher
records against the valid vendor file and Accounts Payable Department
adds them to the voucher register (open
AP subsidiary file). - Upon receipt of the check copies, the AP
- Finally, batch totals are prepared for clerk matches them with open vouchers
subsequent posting to the AP control and transfers these now closed items to
account in the general ledger. the closed voucher file.

CASH DISBURSEMENTS PROCEDURES REENGINEERING THE PURCHASES/CASH

DISBURSEMENTS SYSTEM
Data Processing Department
The automated system described in the previous
- Each day, the system scans the DUE DATE section simply replicates many of the procedures
field of the voucher register for items due. in a manual system. In particular, the AP task of
- Checks are printed for these items, and reconciling supporting documents with supplier
each check is recorded in the check invoices is labor-intensive and costly. The
register (cash disbursements journal). following example shows how reengineering this
- The check number is recorded in the activity can produce considerable savings.
voucher register to close the voucher and
transfer the items to the closed AP file. The Ford Motor Company employed more than
- The checks, along with a transaction 500 clerks in its North American AP department.
listing, are sent to the cash disbursements Analysis of the function showed that a large part
department. of the clerks’ time was devoted to reconciling
- Finally, batch totals of closed AP and cash discrepan- cies among supplier invoices, receiving
disbursements are prepared for the reports, and POs. The first step in solving the
general ledger update procedure. problem was to change the business
- At the end of the day, batch totals of open environment. Ford initiated trading partner
(unpaid) and closed (paid) AP, inventory agreements with suppliers in which they agreed
increases, and cash disbursements are in advance to terms of trade such as price,
posted to the AP control, inventory quantities to be shipped, discounts, and lead
control, and cash accounts in the general times. With these sources of discrepancy
ledger. eliminated, Ford reengineered the work flow to
- The totals of closed AP and cash take advantage of the new environment. The
disbursements should balance. flowchart in Figure 5-17 depicts the key features
of a reengineered system.
Data Processing - Each day, the DUE DATE fields of the AP
records are scanned for items due to be
The following tasks are performed automatically. paid.
- The following procedures are performed
1. The inventory file is searched for items
for the selected items.
that have fallen to their reorder points.
1. Checks are automatically printed, signed,
2. A record is entered in the purchase
and distributed to the mail room for
requisition file for each item to be
mailing to vendors. EDI vendors receive
replenished.
payment by electronic funds transfer
3. Requisitions are consolidated according to
(EFT).
vendor number.
2. The payments are recorded in the check
4. Vendor mailing information is retrieved
register file.
from the valid vendor file.
3. Items paid are transferred from the open
5. Purchase orders are prepared and added
AP file to the closed AP file.
to the open PO file.
4. The general ledger AP and cash accounts
6. A transaction listing of POs is sent to the
are updated.
purchasing department for review.
5. Reports detailing these transactions are
Receiving Department transmitted via terminal to the AP and
cash disbursements departments for
- When the goods arrive, the receiving clerk management review and filing.
accesses the open PO file in real time by - Because the financial information about
entering the PO number taken from the purchases is known in advance from the
packing slip. trading partner agreement, the vendor’s
- The receiving screen then prompts the invoice provides no critical information
clerk to enter the quantities received for that cannot be derived from the receiving
each item on the PO. report.
- By eliminating this source of potential
Data Processing
discrepancy, it was able to eliminate the
- The following tasks are performed task of reconciling vendor invoices with
automatically by the system. the supporting documents for the
1. Quantities of items received are matched majority of purchase transactions.
against the open PO record, and a Y value
CONTROL IMPLICATIONS
is placed in a logical field to indicate the
receipt of inventories. The Automated System
2. A record is added to the receiving report
file. IMPROVED INVENTORY CONTROL.
3. The inventory subsidiary records are
- The greatest advantage of the automated
updated to reflect the receipt of the
system over its manual counterpart is
inventory items.
improved ability to manage inventory
4. The general ledger inventory control
needs.
account is updated.
- Inventory requirements are detected as
5. The record is removed from open PO file
they arise and are processed
and added the open AP file, and a due
automatically.
date for payment is established.
 - As a result, the risks of accumulating - This, naturally, injects risk into the
excessive inventory or of running out of process.
stock are reduced. - To offset this exposure, firms set a
- With this advantage, however, comes a materiality threshold for check writing.
control concern. - Checks in amounts below the threshold
- Authorization rules governing purchase are signed automatically, while those
transactions are embedded within a above the threshold are signed by an
computer program. authorized manager or the treasurer.
- Program errors or flawed inventory
models can cause firms to find themselves TIME LAG.
suddenly inundated with inventories or
- A lag exists between the arrival of goods
desperately short of stock.
in the receiving department and recording
- Therefore, monitoring automated
inventory receipts in the inventory file.
decisions is extremely important.
- Depending on the type of sales order
- A well controlled system should provide
system in place, this lag may negatively
management with adequate summary
affect the sales process.
reports about inventory purchases,
- When sales clerks do not know the
inventory turnover, spoilage, and
current status of inventory, sales may be
slow-moving items.
lost.
BETTER CASH MANAGEMENT.
PURCHASING BOTTLENECK.
- The automated system promotes effective
- In this automated system, the purchasing
cash management by scanning the
department is directly involved in all
voucher file daily for items due, thus
purchase decisions.
avoiding early payments and missed due
- For many firms this creates additional
dates.
work, which extends the time lag in the
- By writing checks automatically, the firm
ordering process.
reduces labor cost, saves processing time,
- A vast number of routine purchases could
and promotes accuracy.
be automated, thus freeing purchasing
- To control against unauthorized payments,
agents from routine work such as
all additions to the voucher file should be
preparing POs and mailing them to the
validated by comparing the vendor
vendors.
number on the voucher against the valid
- Attention can then be focused on problem
vendor file.
areas (such as special items or those in
- If the vendor number is not on file, the
short supply), and the purchasing staff can
record should be diverted to an error file
be reduced.
for management review.
- In this system, a manager in the cash EXCESSIVE PAPER DOCUMENTS.
disbursements department physically
signs the checks, thus providing control - The automated system is laden with paper
over the disbursement of cash. documents.
- Many computer systems automate check - All operations departments create
signing, which is more efficient when documents, which are sent to data
check volume is high. processing, and which data processing
must then convert to magnetic media.
 - Paper documents add costs because they management to spot errors and any
must be purchased, stored, prepared, unusual events that warrant investigation.
handled by internal mail carriers, and
converted by data processing personnel. ACCOUNTING RECORDS AND ACCESS CONTROLS.
- Organizations with high volumes of
- Advanced systems maintain accounting
transactions benefit considerably from
records on digital storage media, with
reducing or eliminating paper documents
little or no hard-copy backup.
in their systems.
- Sarbanes-Oxley legislation requires
The Reengineered System organization management to implement
adequate control security measures to
- The reengineered system addresses many protect accounting records from
of the operational weaknesses associated unauthorized access and destruction.
with the automated system.
- Specifically, the improvements in this
system are that
- (1) it uses real-time procedures
and direct access files to shorten
the lag time in record keeping,
- (2) it eliminates routine clerical
procedures by dis- tributing
terminals to user areas, and
- (3) it achieves a significant
reduction in paper documents by
using digital communications
between departments and by
digitally storing records.
- These operational improvements,
however, have the following control
implications.

SEGREGATION OF DUTIES.

- This system removes the physical

separation between authorization and
transaction processing.
- Here, computer programs authorize and
process POs as well as authorize and issue
checks to vendors.
- To compensate for this exposure, the
system provides management with
detailed transaction listings and summary
reports.
- These documents describe the automated
actions taken by the system and allow