When inventories drop to a predetermined reorder point a prepared and sent to the Prepare PO function to initiate the purchase process?

REVIEW QUESTIONS

1. Differentiate between a purchase requisition and a purchase order.

When inventories drop to a predetermined reorder point, a purchase requisition is prepared by inventory control and sent to the prepare purchase order function to initiate the purchase process. The prepare purchase order function receives the purchase requisitions, which are then sorted by vendor if necessary. 2. What purpose does a purchasing department serve?

 The purchasing department receives the purchase requisitions sorts them by vendor, and adds a record to the digital open purchase order file. One copy of the PO is sent to the vendor another is sent to inventory control. 3. Distinguish between an accounts payable file and a vouchers payable file.  An AP file consists of the AP packet which has the PO, receiving report, and invoice. Once this packet is reconciled into the file the organization is able to record the liability. In a vouchers payable system the AP department uses cash dispersement systems and maintains a voucher register. After the AP clerk performs the three-way match (when the invoice arrives reconciling the financial information with the receiving report and PO in the AP pending file), he/she makes a cash disbursement voucher to approve payment. The AP clerk files the cash disbursement voucher along with supporting source documents in the vouchers payable file - equivalent to the open AP file. 4. What are the three logical steps of the cash disbursements system? Identify liabilities due, prepare cash disbursement, update AP record 5. What general ledger journal entries are triggered by the purchases system? Vendor invoice file triggers the purchase journal and AP sub ledger, updating the inventory sub ledger and general ledger for the invoice file

6. What two types of exposure can close supervision of the receiving department reduce? Failure to properly inspect the assets and the theft of assets 7. What steps of independent verification does the general ledger department perform?  receives journal vouchers and summary reports from inventory control, AP, and cash disbursements. then verifies that the total obligations recorded equal the total inventories received and that the total reductions in AP equal the total disbursements of cash 8. What is (are) the purpose(s) of maintaining a valid vendor file? Prepares unauthorized purchases from unapproved vendors 9. What is the purpose of the blind copy of a purchase order? To force the receiving clerk to count and inspect inventories prior to completing the receiving report 10. Give one advantage of using a vouchers payable system.

11. How do computerized purchasing systems help to reduce the risk of purchasing bottlenecks?

12. Which document is used by cost accounting to allocate direct labor charges to work-in-process? Job ticket is used by cost accounting to allocate direct labor charges to work-in-process 13. Which department authorizes changes in employee pay rates? Personnel 14. Why should the employee’s supervisor not distribute paychecks?

15. Why should employee paychecks be drawn against a special checking account?

16. Why should employees clocking on and off the job be supervised?

17. What is a personnel action form?

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

19. What documents constitute the audit trail for payroll?

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.

2. What documents support the payment of an invoice? Discuss where these documents originate and the resulting control implications.

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?

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.

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?

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?

7. Discuss the major control implications of batch systems with real-time data input. What compensating procedures are available?

8. Discuss some specific examples of how information systems can reduce time lags that positively affect an organization.

9. Discuss some service industries that may require their workers to use job tickets.

10. Payroll is often used as a good example of batch processing using sequential files. Explain why.

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 Debit Cash

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.

When inventories drop to a predetermined reorder point a purchase requisition is prepared by the purchase order function to initiate the purchase process?

Why should the copy of a purchase order which is sent to receiving be a blind copy?

What are the three logical steps in a disbursement system?

What is the difference between purchase requisition and purchase order?