Chapter 5 The Expenditure Cycle: Purchases, Cash Disbursements and Payroll Procedures

Accounting Information Systems, 5th edition James A. Hall

COPYRIGHT 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and SouthWestern are trademarks used herein under license

Goals of the Expenditure Cycle

The goal of providing needed resources to organization can be broken down into several objectives:

purchase from reliable vendors purchase high quality items obtain best possible price purchase only items that are properly authorized have resources available when they are needed receive only those items ordered ensure items are not lost, stolen, broken pay for the items in a timely manner

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The Expenditure Cycle

The time lag splits the expenditure transaction cycle into two phases:
physical phase (purchasing cycle) financial phase (cash disbursements)

DFD of Purchases System

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DFD of Cash Disbursements System

Computer-Based Accounting Systems

CBAS technology can be viewed as a continuum with two extremes: automation - use technology to improve efficiency and effectiveness reengineering use technology to restructure business processes and firm organization

 The following methods are used for authorizing and ordering inventories:
the system prepares POs and sends them to Purchases for review, signing, and distributing the system distributes POs directly to the vendors and internal users, bypassing Purchases the system uses electronic data interchange (EDI) and electronically places the order without POs

Automated Batch Purchases

Automated Batch Cash Disbursements

Advantages of Real-Time Data Input & Processing Over Batch Processing

Shortens the time-lag in record-keeping; hence, records are more current Eliminates much of the routine manual procedures, such as transcribing information onto paper documents Eliminates much of the storage and shuffling of paper documents Reduces data entry correction procedures

Summary of Internal Controls

Manual Authorization Controls

Purchases of inventory should be authorized by the Inventory Control department, not by purchasing agents Accounts Payable authorizes the payments of bills, not the cash disbursements clerk, who writes the checks
How do these controls change in a CBAS?

Computer-Based Authorization Controls

Authorizations are automated.
programmed decision rules must be debugged

Automating inventory in EDI and JIT

faulty inventory model can lead to over-purchasing or under-purchasing

Cash disbursements may automate check printing and signing.

programming logic must be flawless automated signing only below a dollar threshold

Manual Segregation of Functions

Custody of the asset, inventory, by the Warehouse must be separate from recordkeeping for the assets by the Inventory Control. Custody of the asset, cash, by Cash Disbursements must be kept separate from recordkeeping for the asset by A/P.
How do these controls change in a CBAS?

Computer-Based Segregation of Functions

Extensive consolidation by the computer of tasks traditionally segregated
computer programs authorize and process purchase orders computer programs authorize and issue checks to vendors

Manual Supervision
Within the expenditure cycle, supervision is of highest importance in the Receiving department, where the inventory arrives and is logged in by a receiving clerk. Need to minimize:
failures to properly inspect the assets theft of the assets
How do these controls change in a CBAS?

Computer-Based Supervision
Automation often leads to a collapsing of the traditional segregation of duties.
requires greater supervision

Supervision takes on new aspects as technology advances.

electronic monitoring

Supervision because more difficult as the workplace becomes more sophisticated.

employees may have advanced IT training

Manual Accounting Records

Must maintain adequate records for:
accounts payable vouchers payable checks general ledger subsidiary ledgers

How do these controls change in a CBAS?

Computer-Based Accounting Records

Accounting records rest on the reliability and security of stored digitalized data.
Accountants should be skeptical about the accuracy of hard-copy printouts. Backups - the system needs to ensure that backups of all files are continuously kept

Most automated systems still have a lot of paper documents.

This is good for audit trail purposes but is often inefficient. As the system becomes increasing paperless, maintaining an audit trail becomes more difficult.

Manual Access Controls

Access to:
inventories (direct) cash (direct) accounting records (indirect)

How do these controls change in a CBAS?

Computer-Based Access Controls

Magnetic records are vulnerable to both authorized and unauthorized exposure and should be protected
must have limited file accessibility programs must be safeguarded and monitored

Manual Independent Verification

Accounts Payable dept. verifies much of the work done within the expenditure cycle.
PR, PO, receiving reports, and suppliers invoices must be checked and verified by A/P.

General Ledger dept. verifies:

the total obligations recorded equal the total inventories received the total reductions in accounts payable equal the total disbursements of cash How do these controls change in a CBAS?

Computer-Based Independent Verification

Automating the accounting function reduces the need for verification by reducing the chances of fraud and error in the expenditure cycle. However, the need for verification shifts to the computer program and the programmers where fraud and error may still be present.

DFD of Payroll Procedures

Job -Time Information Production Dept. Update Cost Accounting Records Post Payroll Time Information Process Payroll Payroll Authorization Payroll Records Personnel Dept. Post Summary Information WIP Records

Paychecks

Payroll Summary

Prepare Accounts Payable

Summary Information

Update General Ledger

Post Authorize Funds Transfer Summary Information Post

Accounting Records

Control Accounts Prepare Cash Disbursements

Paychecks Employee

Funds Transfer Check Post Bank

Imprest Cash Account

Payroll Controls
Transaction authorization - the personnel action form is important in preventing:
terminated employees from receiving checks wage rates from being improperly changed for current employees

Payroll Controls
Segregation of Duties - timekeeping and personnel functions should be separated Supervision - need to monitor employees to ensure they are not clocking in for one another

Payroll Controls
Accounting Records - audit trail includes:
time cards job tickets disbursement vouchers labor distribution summary payroll register subsidiary ledger accounts general ledger accounts

Payroll Controls
Access Controls - need to prevent employees from having improper access to:
accounting records, such as time cards which can be altered unsigned checks

Payroll Controls
Independent Verification: verification of time cards distribution of paychecks to authorized employees verification of accuracy of payroll register by accounts payable general ledger reconciles the labor distribution summary and the payroll disbursement voucher

Computer-Based Payroll Systems

Payroll is well-suited to batch processing and sequential files, since a majority of the employees on the master file will receive a paycheck every pay period. The computer program performs the detailed record-keeping, check-writing, and general ledger functions.

Human Resource Management (HRM) Systems

A re-engineered IT that captures and processes a wide range of personnel-related data, including:
employee benefits labor resource planning employee skills pay rates and deductions evaluations payroll

Key Features of HRM Systems

Personnel - can make changes to the employee file in real time Cost Accounting - enters job cost data either daily or in real time Timekeeping - enters the attendance file daily Data Processing - still uses batch processing and prepares all reports, the checks, and updates the general ledger

HRM Systems
differ from automated batch, sequential file systems in the following ways: operations depts. transmit transactions to data processing via terminals direct access files are used for storage many processes are performed real time real-time access to personnel files required for direct inquiries

Reengineering Payroll
Payroll can be reengineered as a part of human resource management (HRM). In reengineered payroll systems
operations departments transmit transactions to data processing via terminals direct access files are used for data storage many processes are now performed in real time.

Reengineering Payroll--Before

Reengineering Payroll--After