Chapter 10-Auditing The Expenditure Cycle: True/False [PDF]

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Chapter 10—Auditing the Expenditure Cycle TRUE/FALSE 1. ANS: T

In non-manufacturing firms, purchasing decisions are authorized by inventory control. PTS: 1

2. The blind copy of the purchase order that goes to the receiving department contains no item descriptions. ANS: F 3. ANS: T

PTS: 1 Firms that wish to improve control over cash disbursements use a voucher system. PTS: 1

4. In a voucher system, the sum of all unpaid vouchers in the voucher register equals the firm’s total voucher payable balance. ANS: T

PTS: 1

5. The accounts payable department reconciles the accounts payable subsidiary ledger to the control account. ANS: F 6. ANS: F

PTS: 1 The use of inventory reorder points suggests the need to obtain specific authorization. PTS: 1

7. Proper segregation of duties requires that the responsibility approving a payment be separated from posting to the cash disbursements journal. ANS: T

PTS: 1

8. A major risk exposure in the expenditure cycle is that accounts payable may be overstated at the end of the accounting year. ANS: F

PTS: 1

9. When a trading partner agreement is in place, the traditional three way match may be eliminated. ANS: T

PTS: 1

10. Authorization of purchases in a merchandising firm occurs in the inventory control department. ANS: T 11.

PTS: 1 A three way match involves a purchase order, a purchase requisition, and an invoice.

ANS: F

PTS: 1

12. Authorization for a cash disbursement occurs in the cash disbursement department upon receipt of the supplier’s invoice. ANS: F

PTS: 1

13. An automated cash disbursements system can yield better cash management since payments are made on time. ANS: T

PTS: 1

14. Permitting warehouse staff to maintain the only inventory records violates separation of duties. ANS: T 15.

PTS: 1 A purchasing system that employs electronic data interchange does not use a purchase

order. ANS: F 16. ANS: F

PTS: 1 Inventory control should be located in the warehouse. PTS: 1

17. Inspection of shipments in the receiving department would be improved if the documentation showed the value of the inventory. ANS: F 18. ANS: T

PTS: 1 One reason for authorizing purchases is to enable efficient inventory management. PTS: 1

19. If accounts payable receives an invoice directly from the supplier it needs to be reconciled with the purchase order and receiving report. ANS: T 20. ANS: T

PTS: 1 Supervision in receiving is intended to reduce the theft of assets. PTS: 1

21. The inventory procurement process begins with the purchasing clerk preparing a purchase order. ANS: F 22.

PTS: 1

The warehouse is responsible for updating the inventory subsidiary ledger.

ANS: F

PTS: 1

23. The receiving report is prepared by the vendor to provide evidence that the purchase order was received. ANS: F

PTS: 1

24. The accounts payable clerk is responsible for updating the AP Control accounts to reflect each vendor liability. ANS: F

PTS: 1

25. When goods are received, the receiving clerk sends copies of the receiving report to the inventory control clerk and the AP clerk. ANS: T

PTS: 1

26.

Time cards are used by cost accounting to allocate direct labor charges to work in

process. ANS: F

PTS: 1

27. ANS: T

The personnel department authorizes changes in employee pay rates. PTS: 1

28. ANS: F 29. supervisor. ANS: F 30. ANS: T

Most payroll systems for mid-size firms use real-time data processing. PTS: 1 To improve internal control, paychecks should be distributed by the employee's PTS:

1

Employee paychecks should be drawn against a special checking account. PTS: 1

31. Because a time clock is used, no supervision is required when employees enter and leave the work place. ANS: F 32. ANS: F 33. ANS: T

PTS: 1 Work-in-process records are updated by payroll personnel. PTS: 1 Ideally, payroll checks are written on a special bank account used only for payroll. PTS: 1

34. The supervisor is the best person to determine the existence of a “phantom employee” and should distribute paychecks. ANS: F 35.

PTS: 1 Payroll processing can be automated easily because accounting for payroll is very

simple. ANS: F

PTS: 1

36. ANS: F

Timekeeping is part of the personnel function. PTS: 1

37. The payroll department is responsible for both updating the employee records and writing paychecks. ANS: T 38.

PTS: 1

The paymaster distributes paychecks to work center supervisors.

ANS: F

PTS: 1

MULTIPLE CHOICE a. b. c. d. ANS:

1. The purpose of the purchase requisition is to order goods from vendors record receipt of goods from vendors authorize the purchasing department to order goods bill for goods delivered C PTS: 1

a. b. c. d. ANS:

2. The purpose of the receiving report is to order goods from vendors record receipt of goods from vendors authorize the purchasing department to order goods bill for goods delivered B PTS: 1

3. All of the following departments have a copy of the purchase order except a. the purchasing department b. the receiving department c. accounts payable d. general ledger ANS: D PTS: 1 4. The purpose of the purchase order is to a. order goods from vendors b. record receipt of goods from vendors c. authorize the purchasing department to order goods d. approve payment for goods received ANS: A PTS: 1 5.

The open purchase order file in the purchasing department is used to determine

a.

the quality of items a vendor ships

b. c. d. ANS:

the best vendor for a specific item the orders that have not been received the quantity of items received C PTS: 1

a. b. c. d. ANS:

6. The purchase order is the source document to make an entry into the accounting records indicates item description, quantity, and price is prepared by the inventory control department is approved by the end-user department B PTS: 1

a. b. c. d. ANS:

7. The reason that a blind copy of the purchase order is sent to receiving is to inform receiving when a shipment is due force a count of the items delivered inform receiving of the type, quantity, and price of items to be delivered require that the goods delivered are inspected B PTS: 1

a. b. c. d. ANS:

8. The receiving report is used to accompany physical inventories to the storeroom or warehouse advise the purchasing department of the dollar value of the goods delivered advise general ledger of the accounting entry to be made advise the vendor that the goods arrived safely A PTS: 1

a. b. c. d. ANS:

9. When a copy of the receiving report arrives in the purchasing department, it is used to adjust perpetual inventory records record the physical transfer of inventory from receiving to the warehouse analyze the receiving department’s process recognize the purchase order as closed D PTS: 1

a. b. c. d. ANS:

10. The financial value of a purchase is determined by reviewing the packing slip purchase requisition receiving report supplier’s invoice D PTS: 1

a. b. c. d. ANS:

11. Which document is least important in determining the financial value of a purchase? purchase requisition purchase order receiving report supplier’s invoice A PTS: 1 12.

In a merchandising firm, authorization for the payment of inventory is the responsibil-

ity of

a. b. c. d. ANS:

inventory control purchasing accounts payable cash disbursements C PTS: 1 13.

ity of a. b. c. d. ANS:

In a merchandising firm, authorization for the purchase of inventory is the responsibil-

inventory control purchasing accounts payable cash disbursements A PTS: 14.

When purchasing inventory, which document usually triggers the recording of a

liability? a. purchase requisition b. purchase order c. receiving report d. supplier’s invoice ANS: D PTS:

a. b. c. d. ANS:

1

1

15. Because of time delays between receiving inventory and making the journal entry liabilities are usually understated liabilities are usually overstated liabilities are usually correctly stated none of the above A PTS: 1

16. Usually the open voucher payable file is organized by a. vendor b. payment due date c. purchase order number d. transaction date ANS: B PTS: 1 17.

Which of the following statements is not correct?

a. b. c.

the voucher system is used to improve control over cash disbursements the sum of the paid vouchers represents the voucher payable liability of the firm the voucher system permits the firm to consolidate payments of several invoices on one voucher d. many firms replace accounts payable with a voucher payable system ANS: B PTS: 1

a. b. c. d. ANS:

18. In the expenditure cycle, general ledger does not post the journal voucher from the accounts payable department post the account summary from inventory control post the journal voucher from the purchasing department reconcile the inventory control account with the inventory subsidiary summary C PTS: 1

a. b. c. d. ANS:

19. The documents in a voucher packet include all of the following except a check a purchase order a receiving report a supplier’s invoice A PTS: 1 20.

To maintain a good credit rating and to optimize cash management, cash disburse-

ments should arrive at the vendor’s place of business a. as soon as possible b. on the due date c. on the discount date d. by the end of the month ANS: C PTS: 1 21. The cash disbursement clerk performs all of the following tasks except a. reviews the supporting documents for completeness and accuracy b. prepares checks c. signs checks d. marks the supporting documents paid ANS: C PTS: 1

22. When a cash disbursement in payment of an accounts payable is recorded a. the liability account is increased b. the income statement is changed c. the cash account is unchanged d. the liability account is decreased ANS: D PTS: 1 23. Authorization for payment of an accounts payable liability is the responsibility of a. inventory control b. purchasing c. accounts payable d. cash disbursements ANS: C PTS: 1 24. Of the following duties, it is most important to separate a. warehouse from stores b. warehouse from inventory control c. accounts payable and accounts receivable d. purchasing and accounts receivable ANS: B PTS: 1

a. b. c. d. ANS:

25. In a firm with proper segregation of duties, adequate supervision is most critical in purchasing receiving accounts payable general ledger B PTS: 1

a. b. c. d. ANS:

26. The receiving department is not responsible to inspect shipments received count items received from vendors order goods from vendors safeguard goods until they are transferred to the warehouse C PTS: 1 27.

The major risk exposures associated with the receiving department include all of the

following except a. goods are accepted without a physical count b. there is no inspection for goods damaged in shipment c. inventories are not secured on the receiving dock d. the audit trail is destroyed ANS: D PTS: 1

28. When searching for unrecorded liabilities at the end of an accounting period, the accountant would search all of the files except a. the purchase requisition file b. the cash receipts file c. the purchase order file d. the receiving report file ANS: B PTS: 1 29. In regards to the accounts payable department, which statement is not true? a. the purchase requisition shows that the transaction was authorized b. the purchase order proves that the purchase was required c. the receiving report provides evidence of the physical receipt of the goods d. the supplier’s invoice indicates the financial value of the transaction ANS: B PTS: 1 30.

In a computerized system that uses an economic order quantity (EOQ) model and the

perpetual inventory method, who determines when to reorder inventory? a. the inventory control clerk b. the purchasing department c. the vendor d. the computer system ANS: D PTS: 1 31. Firms can expect that proper use of a valid vendor file will result in all of the following benefits except a. purchasing agents will be discouraged from improperly ordering inventory from related parties b. purchases from fictitious vendors will be detected c. the most competitive price will be obtained d. the risk of purchasing agents receiving kickbacks and bribes will be reduced ANS: C PTS: 1 32.

In a real-time processing system with a high number of transactions, the best and most

practical control over cash disbursements is to have a. all checks manually signed by the treasurer b. all checks signed by check-signing equipment c. checks over a certain dollar amount manually signed by the treasurer d. checks over a certain dollar amount manually signed by the cash disbursements clerk ANS: C PTS: 1 33. The document which will close the open purchase requisition file is the a. purchase order b. vendor invoice c. receiving report d. none of the above ANS: C PTS: 1 34. a. b.

Goods received are inspected and counted to

determine that the goods are in good condition determine the quantity of goods received

c. preclude payment for goods not received or received in poor condition d. all of the above ANS: D PTS: 1 35. If a company uses a standard cost system, inventory records can be updated from the a. vendor invoice b. purchase order c. receiving report d. purchase requisition ANS: C PTS: 1

36.

If a company uses an actual cost system, inventory records can first be updated from

the a. b. c. d. ANS:

vendor invoice purchase order receiving report purchase requisition A PTS: 1

a. b. c. d. ANS:

37. Copies of a purchase order are sent to all of the following except inventory control receiving general ledger accounts payable C PTS: 1

38. The receiving report a. is used to update the actual cost inventory ledger b. accompanies the goods to the storeroom c. is sent to general ledger d. is returned to the vendor to acknowledge receipt of the goods ANS: B PTS: 1 39. A supplier invoice a. is included with the goods b. shows what was ordered even if all was not shipped c. is sent by vendor to accounts payable d. none of the above ANS: C PTS: 1 40. The cash disbursement function is a. part of accounts payable b. an independent accounting function c. a treasury function d. part of the general ledger department PTS: 1 ANS: C

41. The document that captures the total amount of time that individual workers spend on each production job is called a a. time card b. job ticket c. personnel action form d. labor distribution form ANS: B PTS: 1 42. An important reconciliation in the payroll system is a. general ledger compares the labor distribution summary from cost accounting to the disbursement voucher from accounts payable b. personnel compares the number of employees authorized to receive a paycheck to the number of paychecks prepared c. production compares the number of hours reported on job tickets to the number of hours reported on time cards d. payroll compares the labor distribution summary to the hours reported on time cards ANS: A PTS: 1 43. Which internal control is not an important part of the payroll system? a. Supervisors verify the accuracy of employee time cards. b. Paychecks are distributed by an independent paymaster. c. Accounts payable verifies the accuracy of the payroll register before transferring payroll funds to the general checking accounting. d. General ledger reconciles the labor distribution summary and the payroll disbursement voucher. ANS: C

a. b. c. d. ANS:

PTS: 1

44. In the payroll subsystem, which function should distribute paychecks? personnel timekeeping paymaster payroll C PTS: 1 45.

Where does the responsibility lie for reconciling the labor distribution summary and

the payroll disbursement voucher? a. cash disbursements b. cost accounting c. personnel d. general ledger ANS: D PTS: 1 46. Which of the following statements is not true? a. Routine payroll processing begins with the submission of time cards. b. Payroll clerks must verify the hours reported on the time cards. c. Payroll reconciles personnel action forms with time cards and prepares paychecks. d. Cash disbursements signs paychecks and forwards them to the paymaster for distribution. ANS: B PTS: 1 47.

In a manufacturing firm, employees use time cards and job tickets. Which of the

following statements is not correct? a. Job tickets are prepared by employees for each job worked on, so an employee may have more that one job ticket on a given day. b. An individual employee will have only one time card. c. The time reported on job tickets should reconcile with the time reported on time cards. d. Paychecks should be prepared from the job tickets. ANS: D PTS: 1

a. b. c. d. ANS:

48. Which department is responsible for approving changes in pay rates for employees? payroll treasurer personnel cash disbursements C PTS: 1

49. Which of the following situations represents a serious control weakness? a. Timekeeping is independent of the payroll department. b. Paychecks are distributed by the employees immediate supervisor. c. Time cards are reconciled with job tickets. d. Personnel is responsible for updating employee records, including creation of records for new hires. ANS: B 50.

PTS: 1 Why would an organization require the paymaster to deliver all unclaimed paychecks

to the internal audit department? a. to detect a “phantom employee” for whom a check was produced b. to prevent an absent employee’s check from being lost c. to avoid paying absent employees for payday d. to prevent the paymaster from cashing unclaimed checks ANS: A PTS: 1

51. Payroll uses time card data to do all of the following except a. prepare the payroll register b. update employee payroll records c. prepare the labor distribution summary d. prepare paychecks ANS: C PTS: 1 52. Payroll checks are typically drawn on a. the regular checking account b. a payroll imprest account c. a wages payable account d. petty cash ANS: B PTS: 1 53. a. b. c.

The personnel action form provides authorization control by

preventing paychecks for terminated employees verifying pay rates for employees informing payroll of new hires

d. all of the above ANS: D PTS: 1 54. Accounting records that provide the audit trail for payroll include all of the following except a. time cards b. job tickets c. payroll register d. accounts payable register ANS: D PTS: 1

a. b. c. d. ANS:

55. Personnel actions forms are used to do all of the following except activate new employees terminate employees record hours worked change pay rates C PTS: 1

a. b. c. d. ANS:

56. The payroll department performs all of the following except prepares the payroll register distributes paychecks updates employee payroll records prepares paychecks B PTS: 1

a. b. c. d. ANS:

57. The document that records the total amount of time spent on a production job is the time card job ticket labor distribution summary personnel action form C PTS: 1

SHORT ANSWER 1. Which internally generated document should be compared to the supplier’s invoice to verify the price of an item? ANS: purchase order

PTS: 1 2. Which internally generated document should be compared to the supplier’s invoice to verify the quantity being billed for? ANS: receiving report

PTS: 1 3.

List specific jobs that should be segregated in the purchases processing system.

ANS: inventory control from warehouse, general ledger from accounts payable subsidiary ledger PTS: 1 4.

List specific jobs that should be segregated in the cash disbursements system.

ANS: general ledger from accounts payable subsidiary ledger, accounts payable subsidiary ledger from cash disbursements PTS: 1 5. Describe an internal control procedure that would detect that a vendor overcharged for goods delivered. ANS: Accounts payable should compare the price on the purchase order to the price on the supplier’s invoice. Accounts payable should recalculate the math (extensions and additions) and check all other charges such as freight, tax, etc. PTS: 1 6. Describe an internal control procedure that would prevent payment of a invoice for goods that were never delivered. ANS: Accounts payable should match every item on every invoice to a receiving report. PTS: 1 7. Describe an internal control procedure that would prevent issuing two checks in payment of the same invoice. ANS: The supporting documents should be marked “paid” after the check is signed. A computerized system will tag the invoice number as paid. PTS: 1 8.

Explain why supervision is so important in the receiving department.

ANS: Receiving department employees have custody of the asset and record keeping responsibilities. Without proper supervision, employees may fail to count and inspect incoming shipments. Without proper supervision, shipments may disappear from the receiving dock before being transferred to the warehouse. PTS: 1 9. What type of error or fraud might happen if the accounts payable ledger is not periodically reconciled to the control account in the general ledger?

ANS: errors in A/P processing would go undetected, overstated payments produce debit balances in A/P. PTS: 1 10. What type of error or fraud might happen if suppliers’ invoices are not compared to purchase orders or to receiving reports before payment? ANS: payment at higher than anticipated prices, payment for goods not received PTS: 1 11. What internal accounting control(s) would be the most effective in preventing a storekeeper from taking inventory home at night? When shortages become apparent, he claims the goods were never received. ANS: receiving records items received on a receiving report, storekeeper initials receipt of goods PTS: 1 12.

Why should the copy of a purchase order, which is sent to receiving, be a “blind”

copy? ANS: to force workers in receiving to count and inspect the goods received PTS: 1 13.

What is(are) the purpose(s) of maintaining a valid vendor file?

ANS: Inventories should only be acquired from valid vendors. This control procedure helps to deter the purchasing agent from buying inventories at excessive costs and receiving kickbacks or from buying from an entity in which the purchasing agent has a relationship, such a relative or a friend. PTS: 1 14.

Name two major benefits of automating the purchasing effort.

ANS: improved inventory control, better cash management, streamlining the purchasing effort PTS: 1 15. What function or department typically initiates a purchase in a merchandising business? ANS: Inventory control determines that the level of certain items warrants restocking and sends a purchase requisition to purchasing. PTS: 1

16.

Where is access control exercised in the purchasing/cash disbursement functions?

ANS: physical control of inventory and cash, access to documents that control physical assets–such as purchase requisitions, purchase orders, receiving reports, etc. PTS: 1 17. Explain why a three way match may not be required for transactions covered by a trading partner agreement. ANS: Under a trading partner agreement the parties contractually agree to terms of trade such as price, quantities to be shipped, discounts, and lead times. With these sources of potential discrepancy eliminated, financial information about purchases is known in advance and the vendor’s invoice provides no critical information that cannot be derived from the receiving report. Thus, a three way match is unnecessary. PTS: 1 18.

Name the key tasks associated with purchases procedures.

ANS: Purchases procedures include the tasks of identifying inventory needs, placing the order, receiving the inventory, and recognizing the liability. PTS: 1 19.

What is the purpose of the purchase requisition?

ANS: When inventories drop to a predetermined reorder point, a purchase requisition is prepared and sent to the purchasing function to initiate the purchase process. While procedures will vary from firm to firm, typically a separate purchase requisition will be prepared for each inventory item as the need is recognized. PTS: 1 20.

What is the purpose of the purchase order?

ANS: The purchasing function receives the purchase requisitions and sorts them by vendor. Next, a purchase order (PO), comprising one or many purchase requisitions, is prepared for each vendor. These documents are then sent to their respective vendors. PTS: 1 21.

What is a blind copy of a purchase order and what is its purpose?

ANS: A blind copy of the PO contains no quantity or price information about the products being received. The purpose of the blind copy is to force the receiving clerk to count and inspect inventories prior to completing the receiving report. PTS: 1

22.

What is the purpose of a receiving report?

ANS: Upon completion of the physical count and inspection of the items received, the receiving clerk prepares a receiving report stating the quantity and condition of the inventories. This receiving report is sent to various other functions for reconciliation and updating of records. One copy of the receiving report accompanies the physical inventories to either the raw materials storeroom or finished goods warehouse for safekeeping. Another copy is filed in the open/closed PO file to close out the PO. A third copy of the receiving report is sent to the AP department, where it is filed in the AP pending file. A fourth copy of the receiving report is sent to inventory control for updating the inventory records. Finally, a copy of the receiving report is placed in the receiving report file. PTS: 1 23.

What is the purpose of the suppliers invoice?

ANS: The suppliers invoice triggers the three-way match and the AP recognition process. During the course of the transaction, the AP department has received and temporarily filed copies of the PO and receiving report. The organization has received inventories from the vendor and has realized an obligation to pay for them. The firm has not, however, received the supplier’s invoice which contains financial information needed to record the transaction. The firm will thus defer recording (recognizing) the liability until the invoice arrives. PTS: 1 24.

What is the principle objective of the cash disbursement system?

ANS: The principal objective of this system is to ensure that timely and accurate payments are made to only valid creditors. If the system makes payments early, the firm forgoes interest income that it could have earned on the funds. If obligations are paid late, however, the firm will lose purchase discounts or may damage its credit standing.

PTS: 1 25.

What is a vouchers payable system and why is it used?

ANS: Many firms use a vouchers payable system rather than a traditional AP system. Under this approach, the AP department uses cash disbursement vouchers and maintains a voucher register. After the AP clerk performs the three-way match, he or she prepares a cash disbursement voucher to approve payment. Vouchers provide improved control over cash disbursements and allow firms to consolidate several payments to the same supplier on a single voucher, thus reducing the number of checks written. PTS: 1 26. Describe an internal control procedure that would prevent an employee from punching the time clock for another, absent employee. ANS: supervision of the time clock at the start of the shift PTS: 1

27.

Why should the employee’s supervisor not distribute paychecks?

ANS: A form of payroll fraud involves a supervisor submitting fraudulent time cards for nonexistent employees. The resulting paychecks, when returned to the supervisor are then cashed by the supervisor. PTS: 1 28. Describe an internal control procedure that would prevent a supervisor from stealing the unclaimed paychecks of employees who have been terminated. ANS: 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. Also, mail final paychecks to terminated employees. PTS: 1 29.

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

ANS: 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. PTS: 1 30.

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

ANS: 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. PTS: 1 31.

What is a personnel action form?

ANS: The personnel action form provides the payroll department with a list of currently active employees, so that any submission of time cards by supervisors for fictitious or ex-employees will not be processed. PTS: 1 32. In a manufacturing firm, employees typically fill out two different documents regarding their time worked. What are they? Why are there two? ANS: The two documents are the time card and the job ticket. Two are required because the time card records all the time worked by an employee during the period while the job ticket details the time by project. PTS: 1

33. Explain the purpose of each of the following documents used in the payroll system: the personnel action form, the job ticket, the time card. ANS: The personnel action form is a document which identifies employees who should receive a paycheck; reflects changes in pay rates, payroll deductions, and job classifications. The job ticket collects information on the time individual workers spend on each production job. The time card captures the total time that an employee is at work. PTS: 1 34.

Which department authorizes changes to employee pay rates?

ANS: The personnel department via the personnel action form PTS: 1

ESSAY 1.

Differentiate between a purchase requisition and a purchase order.

ANS: 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 items, 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). PTS: 1 2. What general ledger journal entries are triggered by the purchases system? From which departments do these journal entries arise? ANS: (Accounts Payable) Inventory Control

Debit Accounts Payable

Credit

(Cash Disbursements) Accounts Payable

Debit Cash

PTS: 1

Credit

3. The Soap Manufacturing Company has three employees who work in the warehouse. All of the warehouse workers are authorized to order inventory when it falls below the reorder level. The workers complete a purchase order and mail it to the supplier of their choice. The inventory is delivered directly to the warehouse. The workers send a memo to accounts payable reporting the receipt of inventory. Accounts payable compares the warehouse memo to the supplier’s invoice. Accounts payable prepares a check which the treasurer signs. Describe at least five needed internal control improvements. ANS: The warehouse workers should prepare a purchase requisition and send it to purchasing. Warehouse workers should make a note that the inventory has been requisitioned to avoid each of the workers requisitioning the same inventory items. Purchasing should prepare a purchase order. Purchasing should select a vendor based on price, quality of goods, delivery time, etc. Inventory should be delivered to the receiving department. The receiving department should prepare a receiving report. Accounts payable should receive a copy of the purchase requisition, purchase order, and receiving report and compare these documents to the supplier’s invoice. Cash disbursements should prepare the check. The supporting documents should be marked “paid” by cash disbursements. PTS: 1 4. How does a voucher payable system work? What documents are reconciled? Who prepares the voucher? How is the A/P balance determined? How does the voucher payable system improve control over cash? ANS: In place of a standard accounts payable system, many firms use a voucher payable system. The A/P department prepares cash disbursement vouchers which are recorded in a voucher register. A clerk would reconcile purchase requisition, purchase order, receiving report, and vendor invoice. If all agree, the clerk would prepare the voucher–which vouches the need to disburse cash. This would then be approved by a superior. The sum of all open (or unpaid) vouchers is the A/P balance. Control is improved over cash disbursements because of the itemization of items on the voucher and the authorization required. Without the data and authorization, no check is prepared. PTS: 1 5. Before authorizing payment for goods purchased, accounts payable reconciles three documents related to the purchase. Name them and explain what each indicates. What control area of SAS 78 is being addressed? ANS: The three documents are: the purchase order, which verifies the items were ordered; the receiving report, which verifies the goods were received; and the invoice, that is the vendor’s request for payment. This process is a form of independent verification of the purchase. PTS: 1

6.

What are the steps taken in the cash disbursement system?

ANS: Accounts payable reviews the documents related to a liability: purchase requisition, purchase order, receiving report, and vendor invoice. If proper, cash disbursements is authorized to make payment. Cash disbursements prepares the check, a separate person signs it, sends it to the vendor, and notifies accounts payable. At the end of the period, cash disbursements and accounts payable send summary information to general ledger. PTS: 1 7. 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? What about for the procedures used by the receiving department? ANS: A system which employs real-time data entry of sales will update the inventory levels 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 which is on hand. Thus, a customer wishing to know how soon they may have an item 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. The receiving department uses real-time data entry; they enter the purchase order number and a receiving screen prompts the clerk for the quantities of goods received. This system should cause less discrepancies due to poor handwriting, carelessness, and loss of the receiving report form. PTS: 1 8.

What are the key segregation of duties issues in purchasing and cash disbursements?

ANS: The key segregation of duties issue in purchasing is the separation of inventory control from the warehouse. If the only inventory records were held in the same place as the goods themselves, theft would be easy to hide with changes in the inventory records. Within the cash disbursements function it is important to separate cash disbursements from both general ledger and accounts payable to prevent alteration of records. The cash disbursements clerk is different from the check signer. Check signer does not perform back reconciliation. PTS: 1 9. Supervision is extremely important in the receiving department. Two main reasons were given. What were they? Why are these important? ANS: Supervision is important in the receiving department to assure that received goods are properly counted and inspected and to prevent theft. The key issue is ensuring that goods received are what was ordered (blind copy of PO identifies what was ordered, not how many) in good condition and in the proper quantity. If insufficient or improper goods are received and the error was not identified in receiving, payment would be made for goods not received. If inadequate supervision occurs, goods

could be stolen and the receiving report modified to cover the theft. PTS: 1 10. Why do companies devote resources to a purchasing department? Could not individual departments make their own purchases more efficiently? ANS: The purchasing function is extremely important to a business. The members of the department work closely with suppliers to assure that the goods ordered are appropriately selected, priced, and delivered. One of the tasks of purchasing is to monitor the performance of vendors and maintain an approved vendor list. After a requesting department submits a purchase requisition, purchasing prepares a purchase order. Hence the authorization occurs outside of purchasing separate from the processing of the purchase. Significant separation of duties is built into this system: the same party cannot authorize and initiate the transaction. Purchasing employees cannot initiate a purchase. This could be a problem if vendors try to influence the purchasing staff for favorable treatment. PTS: 1 11.

What are the key authorization issues in purchasing and cash disbursements?

ANS: Inventory control monitors inventory and authorizes restocking with a purchase requisition. Purchas-ing acts on the purchase requisition, it does not initiate the process. Accounts payable authorizes the cash disbursement. The cash disbursement function cannot produce checks on its own without authorization from accounts payable. PTS: 1 12.

Outline the key steps taken in the purchasing system?

ANS: Inventory control monitors inventory and authorizes restocking with a purchase requisition. A copy is retained and one is sent to accounts payable. Purchasing acts on the purchase requisition and prepares a purchase order. The original is sent to a vendor. Copies go to inventory control and accounts payable. A blind copy is sent to receiving and another is filed in purchasing. When the goods are received, the receiving staff count and inspect the goods. The blind purchase order tells what goods were ordered. The count is a significant control check. Receiving prepares a receiving report. One copy accompanies the goods to the storeroom. Other copies go to purchasing, inventory control, and accounts payable. Accounts payable reconciles the purchase requisition, purchase order and receiving report. When the vendor invoice arrives, it is examined thoroughly and reconciled and if all documents agree, the transaction is recorded in the purchases journal and the accounts payable subsidiary ledger. The information is filed until the time arises to make payment. The general ledger department receives a journal voucher from accounts payable and a summary from inventory control. The inventory and accounts payable control accounts are updated. PTS: 1

1. The Golf Club Company makes custom golf clubs. The manufacturing supervisor interviews people who have specialized manufacturing skills, and he informs payroll when an employee is hired. The employees use a time clock to record the hours they work. The employees are also required to keep a record of the time they spend working on each order. The supervisor approves all time cards. The accountant analyzes the job tickets and prepares a labor distribution summary. Payroll prepares the payroll register and paychecks. The supervisor distributes the paychecks to the employees. Payroll informs cash disbursement of the funds required to cover the entire payroll amount. The cash disbursements clerk ensures that there are adequate funds in the company's regular checking account to cover the payroll. Describe at least three internal control weaknesses; for each weakness suggest an improvement to internal control. ANS: WEAKNESS: The supervisor could be creating fictitious employees. The supervisor has too many incompatible duties; he hires workers, approves the time cards, and distributes the paychecks. IMPROVEMENT: Segregate duties. Personnel should hire employees and a paymaster should distribute paychecks. WEAKNESS: Employees could be paid for time they do not work; a co-worker could record an absent worker as present (punch the time clock). IMPROVEMENT: Supervise the time clock. Reconcile time cards and job time tickets. WEAKNESS: Payroll has authorization and transaction processing responsibilities. Payroll is authorizing the disbursement to fund the entire payroll. Accounts payable is not part of the system. IMPROVEMENT: Segregate duties; accounts payable should verify the accuracy of the payroll register and create a disbursement voucher. WEAKNESS: Payroll is funded through the general checking account. IMPROVEMENT: Paychecks should be written on a separate payroll account. PTS: 1 5.

Why does the payroll process lend itself to batch processing?

ANS: Payroll lends itself to batch computerization because it is processed at fixed time intervals which permits some time lag. Processing the payroll file usually involves most employees each time it is processed, which is an efficient use of computer resources and can be accomplished with a single pass through the file. PTS: 1 7. Outline the key steps taken in a payroll system that deals with hourly workers who are paid once each week? ANS: Work centers monitor employee time and provide employee time cards each week to the payroll department. The personnel department prepares a personnel action form to the payroll department. This document identifies valid employees and reflects changes in their payroll status.

The payroll department calculates the payroll, prepares paychecks for the employees, updates the employee records, and prepares a payroll register. The paychecks are sent to the paymaster who distributes the checks to the employee or they may be deposited directly into the employees’ accounts. The payroll register is sent to Accounts Payable. Accounts payable reviews the payroll register and authorizes cash disbursements to issue a single check for the entire payroll, which is deposited into the payroll impressed account at the banks.

The general ledger department receives a journal voucher from cash disbursements and a disbursement voucher from AP. PTS: 1