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408 Part III  Accounting Information Systems Applications

Maintain Sup- Approve

plier Master Receive Supplier In- Pay Recon-
Order File (add, de- Inven- voices for Suppliers Sign Mail cile Bank
Inventory lete, edit) tory Payment Via EFT Checks Checks Account
Employee A 150  5
Employee B 100 100 100
Employee C 306  7  10
Employee D 70  10  10
Employee E 425
Employee F 150 125
Employee G 400  25
Employee H 1
Employee I 300

Required
Identify three examples of improper segregation of duties and explain the nature of
each problem you find.
  13.8. The following list identifies several important control features. For each control,
(1) describe its purpose, and (2) explain how it could be best implemented in an inte-
grated ERP system.
a. Cancellation of the voucher package by the cashier after signing the check
b. Separation of duties of approving invoices for payment and signing checks
c. Prenumbering and periodically accounting for all purchase orders
d. Periodic physical count of inventory
e. Requiring two signatures on checks for large amounts
f. Requiring that a copy of the receiving report be routed through the inventory stores
department prior to going to accounts payable
g. Requiring a regular reconciliation of the bank account by someone other than the
person responsible for writing checks
h. Maintaining an approved supplier list and checking that all purchase orders are
­issued only to suppliers on that list
13.9. For good internal control, which of the following duties can be performed by the same
individual?
1. Approve purchase orders
2. Negotiate terms with suppliers
3. Reconcile the organization’s bank account
4. Approve supplier invoices for payment
5. Cancel supporting documents in the voucher package
6. Sign checks
7. Mail checks
8. Request inventory to be purchased
9. Inspect quantity and quality of inventory received
13.10. Last year the Diamond Manufacturing Company purchased over $10 million worth of
office equipment under its “special ordering” system, with individual orders ranging from
$5,000 to $30,000. Special orders are for low-volume items that have been included in a
department manager’s budget. The budget, which limits the types and dollar amounts of
office equipment a department head can requisition, is approved at the beginning of the
year by the board of directors. The special ordering system functions as follows.
Purchasing  A purchase requisition form is prepared and sent to the purchasing de-
partment. Upon receiving a purchase requisition, one of the five purchasing agents
(buyers) verifies that the requester is indeed a department head. The buyer next se-
lects the appropriate supplier by searching the various catalogs on file. The buyer then
phones the supplier, requests a price quote, and places a verbal order. A prenumbered
purchase order is processed, with the original sent to the supplier and copies to the
department head, receiving, and accounts payable. One copy is also filed in the open
requisition file. When the receiving department verbally informs the buyer that the
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CHAPTER 13 The Expenditure Cycle: Purchasing to Cash Disbursements 409

item has been received, the purchase order is transferred from the open to the filled
file. Once a month, the buyer reviews the unfilled file to follow up on open orders.
Receiving  The receiving department gets a copy of each purchase order. When equip-
ment is received, that copy of the purchase order is stamped with the date, and, if ap-
plicable, any differences between the quantity ordered and the quantity received are
noted in red ink. The receiving clerk then forwards the stamped purchase order and
equipment to the requisitioning department head and verbally notifies the purchasing
department that the goods were received.
Accounts Payable  Upon receipt of a purchase order, the accounts payable clerk files
it in the open purchase order file. When a vendor invoice is received, it is matched
with the applicable purchase order, and a payable is created by debiting the requisi-
tioning department’s equipment account. Unpaid invoices are filed by due date. On the
due date, a check is prepared and forwarded to the treasurer for signature. The invoice
and purchase order are then filed by purchase order number in the paid-invoice file.
Treasurer  Checks received daily from the accounts payable department are sorted into
two groups: those over and those under $10,000. Checks for less than $10,000 are ma-
chine signed. The cashier maintains the check signature machine’s key and signature
plate and monitors its use. Both the cashier and the treasurer sign all checks over $10,000.
Required
a. Describe the weaknesses relating to purchases and payments of “special orders” by
the Diamond Manufacturing Company.
b. Recommend control procedures that must be added to overcome weaknesses iden-
tified in part a.
c. Describe how the control procedures you recommended in part b should be modi-
fied if Diamond reengineered its expenditure cycle activities to make maximum use
of current IT (e.g., EDI, EFT, bar-code scanning, and electronic forms in place of
paper documents). (CPA Examination, adapted)
d. Draw a BPMN diagram that depicts Diamond’s reengineered expenditure cycle.
13.11. The ABC Company performs its expenditure cycle activities using its integrated ERP
system as follows:
• Employees in any department can enter purchase requests for items they note as
either out of stock or in small quantity.
• The company maintains a perpetual inventory system.
• Each day, employees in the purchasing department process all purchase requests
from the prior day. To the extent possible, requests for items available from the same
supplier are combined into one larger purchase order to obtain volume discounts.
Purchasing agents use the Internet to compare prices in order to select suppliers. If
an Internet search discovers a potential new supplier, the purchasing agent enters
the relevant information in the system, thereby adding the supplier to the approved
supplier list. Purchase orders above $10,000 must be approved by the purchasing
department manager. EDI is used to transmit purchase orders to most suppliers, but
paper purchase orders are printed and mailed to suppliers who are not EDI capable.
• Receiving department employees have read-only access to outstanding purchase or-
ders. Usually, they check the system to verify existence of a purchase order prior to
accepting delivery, but sometimes during rush periods they unload trucks and place the
items in a corner of the warehouse where they sit until there is time to use the system
to retrieve the relevant purchase order. In such cases, if no purchase order is found, the
receiving employee contacts the supplier to arrange for the goods to be returned.
• Receiving department employees compare the quantity delivered to the quantity
indicated on the purchase order. Whenever a discrepancy is greater than 5%, the
receiving employee sends an e-mail to the purchasing department manager. The
receiving employee uses an online terminal to enter the quantity received before
moving the material to the inventory stores department.
• Inventory is stored in a locked room. During normal business hours, an inventory
employee allows any employee wearing an identification badge to enter the store-
room and remove needed items. The inventory storeroom employee counts the
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410 Part III  Accounting Information Systems Applications

quantity removed and enters that information in an online terminal located in the
storeroom.
• Occasionally, special items are ordered that are not regularly kept as part of inven-
tory, from a specialty supplier who will not be used for any regular purchases. In
these cases, an accounts payable clerk creates a one-time supplier record.
• All supplier invoices (both regular and one-time) are routed to accounts payable for re-
view and approval. The system is configured to perform an automatic three-way match
of the supplier invoice with the corresponding purchase order and receiving report.
• Each Friday, approved supplier invoices that are due within the next week are routed
to the treasurer’s department for payment. The cashier and treasurer are the only
­employees authorized to disburse funds, either by EFT or by printing a check.
Checks are printed on dedicated printer located in the treasurer’s department, using
special stock paper that is stored in a locked cabinet accessible only to the treasurer
and cashier. The paper checks are sent to accounts payable to be mailed to suppliers.
• Monthly, the treasurer reconciles the bank statements and investigates any discrep-
ancies with recorded cash balances.

Required
a. Identify weaknesses in ABC’s existing expenditure cycle procedures, explain
the problem, and suggest a solution. Present your answer in a three-column table
with these headings: Weakness, Problem, Solution.
b. Draw a BPMN diagram that depicts ABC’s expenditure cycle process rede-
signed to incorporate your answer to step a.
13.12. Figure 13-11 depicts the basic activities performed in Lexsteel’s expenditure cycle.
The following additional information supplements that figure:
• Because of cash flow problems, Lexsteel always pays suppliers on the last possible
day before incurring a penalty for late payment. Supplier invoices are processed

Employee Activity Performed (sequential, left-to-right across all rows)

Production
Control Issue Bill
of
Materials

Purchasing
Order
Inventory

Receiving Clerk
Receive
& Count
Inventory

Inventory
Control Store
Inventory

Accounts Use P.O and

Payable Receive
R.R. to approve
Invoice from
invoice and
Supplier
update A/P

Treasurer Monthly
Make
Receive &
EFT
Reconcile bank
payment to
statement
supplier

Figure 13-11
Lexsteel Expenditure Cycle Procedures
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CHAPTER 13 The Expenditure Cycle: Purchasing to Cash Disbursements 411

and paid weekly. Every Friday, the accounts payable clerk reviews and approves all
invoices with a due date the following week.
• The purchasing manager reviews and approves all purchases prior to e-mailing
them to suppliers.
• After counting and inspecting incoming deliveries, the receiving clerk enters the
following information into the system:
• Quantities received for each inventory item
• Date and time received
• Supplier number
• After entering that information, the receiving clerk takes the inventory to the inven-
tory control department for storage.
• Access to the inventory control department is restricted.
• Inventory is only released to production when properly authorized request is re-
ceived. When the inventory is released, the inventory control clerk updates the per-
petual inventory system.
• Physical counts of inventory are taken every three months. Discrepancies between
the counts and recorded quantities on hand are investigated. Upon resolution of the
investigation, the plant manager authorizes adjustments to the perpetual inventory
records to change them to the amount actually on hand.

Required
Identify at least three control weaknesses in Lexsteel’s expenditure cycle. For each weak-
ness, explain the threat and suggest how to change the procedures to mitigate that threat.
13.13. Excel Problem

Required
Download the spreadsheet for this problem from the course website and perform the
following tasks:
1. Explore Excel’s AutoFilter function.
a. At the bottom of the table, in cell C79 enter the words “Total (sum)” and in cell
D79 enter the SUM function to total all amounts in column D.
b. At the bottom of the table, in cell C80 enter the words “Total (subtotal)”and in
cell D80 enter “SUBTOTAL” function to sum all the amounts in column D.
c. Use AutoFilter to display all purchases from suppliers in Zipcode 85110. What
is displayed in cells D79 and D80? Why?
d. Repeat step 3 for Zipcodes 85111 and 85116. What is the value of using the
­AutoFilter function?
2. Use the AutoFilter and Sort functions to identify the following warning signs of
potentially fraudulent supplier invoices:
a. Suppliers that have only initials for the name
b. Different suppliers with the same PO Box for an address
c. Suppliers who submit sequentially numbered invoices
d. Invoices just below a threshold requiring approval; for example, invoices below
$1,000
e. Duplicate invoice numbers from the same supplier

Case 13-1  Research Project: Impact of Information Technology on Expenditure Cycle

Activities, Threats, and Controls

Search popular business and technology magazines a. Explains how IT can be used to change expenditure
(Business Week, Forbes, Fortune, CIO, etc.) to find an cycle activities.
article about an innovative use of IT that can be used to b. Discusses the control implications. Refer to Table 13-2,
improve one or more activities in the expenditure cycle. and explain how the new procedure changes the threats
Write a report that: and appropriate control procedures for mitigating those
threats.
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412 Part III  Accounting Information Systems Applications

AIS in Action Solutions

Quiz Key

1. Which of the following inventory control methods is most likely to be used for a product
for which sales can be reliably forecast?
a. JIT (Incorrect. JIT seeks to minimize inventory by making purchases only after sales.
It is used primarily for products for which it is hard to forecast demand.)
b. EOQ (Incorrect. EOQ represents the optimal amount of inventory to purchase to
­minimize the sum of ordering, carrying, and stockout costs.)
▶ c. MRP (Correct. MRP forecasts sales and uses that information to purchase inventory to
meet anticipated needs.)
d. ABC (Incorrect. ABC is a method for stratifying inventory according to importance
and scheduling more frequent inventory counts for the more important items.)
2. Which of the following matches is performed in evaluated receipt settlement (ERS)?
a. the vendor invoice with the receiving report (Incorrect. ERS eliminates the vendor
invoice.)
▶ b. the purchase order with the receiving report (Correct. ERS eliminates the vendor invoice
and schedules payments based on matching the purchase order and receiving report.)
c. the vendor invoice with the purchase order (Incorrect. ERS eliminates the vendor invoice.)
d. the vendor invoice, the receiving report, and the purchase order (Incorrect. ERS elimi-
nates the vendor invoice.)
3. Which of the following is true?
a. It is easier to verify the accuracy of invoices for purchases of services than invoices
for purchases of raw materials. (Incorrect. It is easier to verify invoices for purchases
of raw materials because you can compare to receiving reports. Receiving reports
­normally do not exist for purchase of services.)
▶ b. Setting up petty cash as an imprest fund violates segregation of duties. (Correct. Tech-
nically, setting up petty cash as an imprest fund violates segregation of duties because
the same person has custody of the asset—cash—authorizes its disbursement, and
maintains records.)
c. The EOQ formula is used to identify when to reorder inventory. (Incorrect. The EOQ
formula is used to determine how much to order. The reorder point identifies when to
reorder inventory.)
d. A voucher package usually includes a debit memo. (Incorrect. Voucher packages
consist of the purchase order, receiving report, and vendor invoice, if one is received;
debit memos are used to record adjustments of accounts payable.)
4. Which document is used to establish a contract for the purchase of goods or services from
a supplier?
a. vendor invoice (Incorrect. The vendor invoice is a bill.)
b. purchase requisition (Incorrect. A purchase requisition is an internal document.)
▶ c. purchase order (Correct. A purchase order is an offer to buy goods.)
d. disbursement voucher (Incorrect. A disbursement voucher is used to specify which
­accounts to debit when paying vendor invoices.)
5. Which method would provide the greatest efficiency improvements for the purchase of
noninventory items such as miscellaneous office supplies?
a. bar-coding (Incorrect. Bar-coding improves accuracy of counting inventory items. The
biggest efficiency-related problem with noninventory purchases is the time and effort
required to generate a purchase order, create a voucher package, and make payments
for a large number of small-dollar amount purchases.)
b. EDI (Incorrect. EDI is seldom used for miscellaneous purchases.)
▶ c. procurement cards (Correct. Procurement cards were designed specifically for pur-
chase of noninventory items.)
d. EFT (Incorrect. EFT improves the efficiency of payments, but does not improve the
efficiency of ordering and approving supplier invoices.)
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CHAPTER 13 The Expenditure Cycle: Purchasing to Cash Disbursements 413

6. Which of the following expenditure cycle activities can be eliminated through the use of
IT or reengineering?
a. ordering goods (Incorrect. Even with vendor-managed inventory, the vendor’s system
must initiate the ordering process.)
▶ b. approving vendor invoices (Correct. ERS systems eliminate vendor invoices.)
c. receiving goods (Incorrect. Ordered goods must always be received and moved to the
appropriate location.)
d. cash disbursements (Incorrect. IT can change the method used to make cash disburse-
ments, such as by EFT instead of by check, but the function must still be performed.)
7. What is the best control procedure to prevent paying the same invoice twice?
a. Segregate check-preparation and check-signing functions. (Incorrect. This is a good
control procedure, but its purpose is to ensure that payments are valid.)
b. Prepare checks only for invoices that have been matched to receiving reports and pur-
chase orders. (Incorrect. This is a good control procedure, but its purpose is to ensure
that organizations pay only for goods ordered and received.)
c. Require two signatures on all checks above a certain limit. (Incorrect. This is a good
control procedure, but its purpose is to better control large outflows of cash.)
▶ d. Cancel all supporting documents when the check is signed. (Correct. This ensures that
the supporting documents cannot be resubmitted to pay the same invoice again.)
8. For good internal control, who should sign checks?
▶ a. cashier (Correct. The cashier is responsible for managing cash and reports to the
treasurer.)
b. accounts payable (Incorrect. Accounts payable maintains vendor records.)
c. purchasing agent (Incorrect. The purchasing agent authorizes acquisition of goods.)
d. controller (Incorrect. The controller is in charge of accounting, the record-keeping
function.)
9. Which of the following procedures is designed to prevent the purchasing agent from
­receiving kickbacks?
a. maintaining a list of approved suppliers and requiring all purchases to be made from
suppliers on that list (Incorrect. The purpose of this control is to minimize the risk of
purchasing inferior goods at inflated prices or violating regulations.)
▶ b. requiring purchasing agents to disclose any financial investments in potential suppliers
(Correct. The purpose of such disclosure is to minimize the risk of conflicts of interest
that could result in kickbacks.)
c. requiring approval of all purchase orders (Incorrect. This control is designed to ensure
that only goods that are really needed are ordered and that they are ordered from
­approved vendors.)
d. prenumbering and periodically accounting for all purchase orders (Incorrect. This
control procedure is designed to ensure that all valid purchase orders are recorded.)
10. Which document is used to record adjustments to accounts payable based on the return of
unacceptable inventory to the supplier?
a. receiving report (Incorrect. This document records quantities of goods received.)
b. credit memo (Incorrect. This document is used in the revenue cycle to adjust a
­customer’s account.)
▶ c. debit memo (Correct. This document is used to adjust accounts payable.)
d. purchase order (Incorrect. This document establishes a legal obligation to purchase
goods.)