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OVERVIEW OF PURCHASES AND CASH DISBURSEMENT ACTIVITIES
👉This section we will examine the expenditure cycle conceptually
👉Trace the sequence of activities through the purchases processing and cash disbursements procedures
👉Dicussion is intended to be technology-neutral
👉Our focus is on what need to be done not how it is accomplished

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👉Alternative to the AP procedures
👉AP department uses cash disbursement voucher and maintains a voucher register .
👉After perform three way match, he prepares a cash disbursement voucher to approve payment
👉Each voucher is recorded in the voucher register, which reflet the AP liability of the firm
👉The AP clerk files the cash disbursement voucher along with supporting source document in the voucher payable file

POST TO GENERAL LEDGER
👉GL function receives a journal voucher from the AP department and an account summary from inventory control
👉The GL post the data to the inventory and AP control account and reconciles the inventory control account with the inventory subsidiary summary
👉The journal voucher is then filed in the approved journal voucher file

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👉Process the payment of obligation created in the purchases system
👉Their objective is to ensure that only valid creditors receive payment and that amount paid are timely and correct
👉If the system makes payment early, the firm forgoes interest income that it could have earned on the funds
👉If obligation are paid late, the firm will lose purchase discount or may damage its credit standing

IDENTIFY LIABILITIES DUE
👉Cash disbursement begins in the AP department, where each day the AP clerk reviews the open AP file for the items due for payment
👉This file is organized by payment due date to ensure that debts are paid on the last possible date without missing due dates and losing discount.
👉The clerk sends payment approval in the form of the AP packet to the cash disbursement department

PREPARE CASH DISBURSEMENT
👉Cash disbursements clerk receive the AP packet and review the document for completeness and clerical accuracy
👉The clerk prepare a check and records the check number, amount and other data in check register which also called the cash disbursements journal
👉The negotiable portion of check is mailed to the supplier, a copy is attached to the AP packet as proof of payment and a check copy is filed  in the department
👉The clerk marks the documents in the packet paid and returns them to the AP clerk
👉Finally, the cash disbursements clerk summarizes the entries made to the check register and sends a journal voucher with the journal entry to GL function.

UPDATE AP RECORD
👉The AP clerk removes the liability by debiting the vendor AP subsidiary ledger account
👉The AP packet is then filed in the closed AP file and an account summary is prepared and sent to general ledger function

POST TO GENERAL LEDGER
👉GL receive the journal voucher from cash disbursements and the AP account summary from account payable
👉The voucher shows the total reduction in the firms obligations and cash account as a result of payment to suppliers.
👉These number is reconcile with the AP summary and the AP control and cash account in the GL are updated accordingly.
👉The approved journal voucher is then filed

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👉Purchase procedure include the task involve in identifying inventory need, placing the other, receiving the inventory and recognizing the liability
👉This procedures apply to both manufacturing and retailing firm
👉Manufacturing firms purchase raw material for production and their purchasing decision are authorize by the production planning and control function
👉Merchandising firms purchase finished goods for resale, the inventory control function provides the purchase authorization for this type of firm

MONITOR INVENTORY RECORDS
👉When inventories drop to a predetermined reorder point, a purchase requisition is prepare and sent to the prepare purchase order function to initiate the purchase process
👉Purchase requisition contains routine ordering information taken from the inventory subsidiary ledger and valid vendor file
👉The valid vendor file provides an important control by listing only approved vendors, the purpose is to ensure that the organization purchases inventories only from authorized vendors
👉Purchase requisition need to be combined into a single purchase order which is sent to vendor
👉Each purchase order is associated with one or more purchase requisition

PREPARE PURCHASE ORDER
👉Receive the purchase requisition which are then sorted by the vendor if necessary
👉Next, purchase order is prepared for each vendor
👉A copy or purchase order is sent to the vendor and set up account payable for filing temporarily in account payable pending file, and a blind copy is sent to the receive good function
👉The last copy is filed in the open/closed purchase order file

RECEIVE GOODS
👉Goods arriving from the vendor are reconcile with the blind copy of the purchase order.
👉The purpose of blind copy is to force the receiving clerk to count and inspect inventories prior to completing and receiving report
👉Upon the completion of the physical count and inspection, the receiving clerk prepares a receiving report, stating the quantity and condition of the inventories
👉One copy of receiving report accompanies the physical inventories to either the raw material store room or finished good warehourse for safekeeping.
👉Another copy is filed in the open/close purchase order file to close out the purchase order
👉The third copy is sent to the set up account payable function, where it is filed in the account payable pending file
👉The fourth copy is sent to inventory control for updating the inventory records
👉Lastly, a copy is placed in the receiving report file

UPDATE INVENTORY RECORDS
👉Organization that used a standard cost system carry their inventories at a predetermind standard value regardless of their price actually paid to vendor
👉Updating an actual cost inventory ledger requires additional financial information, such a copy of the supplier invoice when it arrives

SET UP ACCOUNT PAYABLE
👉Set up account payable function has receive and temporarily files copies of the purchase order and receiving report.
👉The organization has received inventories from the vendor and has incurres an obligation to pay for the goods
👉At this point, the firm has not received the suppliers invoice  containing the financial information needed to record the transaction
👉When the invoice arrives, the AP clerk reconcile the financial information with the receiving report and PO in the AP pending file
👉Once the reconcile is complete, the AP clerk prepare an AP packet
👉Once reconciled, the AP packet is the formal authority to record the liability and to subsequently make payment
👉Next, the transaction recorded in the purchases journal and posted to the supplier account in the AP subsidiary ledger
👉Finally, the AP clerk summarizes the entries in the purchases journal for the period and prepares a journal voucher for the general ledger function

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Basic Technology Purchases Processing System

INVENTORY CONTROL
1.the inventory control clerk prints purchase requisitions from his PC by accessing the purchase requisition file
2.then, a file was created
during the sales activity when the inventories dropped to their predetermined reorder point
3.One copy of the requisition is sent to the purchasing department
4.one copy is placed in the hard-
copy open purchase requisition file
5.to provide proper authorization control, the inventory control department is segregated from the purchasing department, which executes the purchase transaction

PURCHASING DEPARTMENT
receives the purchase requisitions,
sorts them by vendor, and adds a record to the digital open purchase order file
1.The clerk then
prints a multipart PO for each vendor
2.One copy of the PO is sent to the vendor
3.One copy is sent to inventory control, where the clerk files it with the open purchase requisition
4.One copy of the PO is sent to the AP for filing in the AP pending file
5.One copy (the blind copy) is sent to the
receiving department, where it is filed until the inventories arrive
6.The clerk files the last copy
along with the purchase requisition in the department.

RECEIVING
receives the goods and the packing slip from the vendor and reconciles the goods with a blind copy of the PO
2. the clerk adds a digital record to the receiving report file and prints a multipart hard-copy receiving report stating the quantity and condition of the inventories
3. One copy of the receiving report accompanies the physical inventories
4.another copy is sent to the purchasing department, where the purchasing clerk reconciles it with the open PO and closes the digital record in the open PO file. The purchasing clerk then files the hard-copy
and the PO
5.third copy of the receiving report is sent to inventory control (assuming a standard cost system). The clerk uses the department PC to update the digital inventory subsidiary ledger. The system automatically removes the “on-order” flag that was set when the purchase requisition was created
6. The inventory control clerk then files the hard-copy receiving report in the department. along with the PO and the purchase requisition
7.The fourth copy of the receiving report is sent to the AP department, where it is filed in the AP pending file
8.the receiving clerk files the blind copy PO and the packing slip in the receiving department

AP DEPARTMENT
1.When the supplier’s invoice arrives, the AP clerk reconciles the invoice, purchase order, and receiving the report (three-way match) and prepares an AP packet
2.The clerk next
records the transaction in the digital purchases journal
3.posts the liability to the supplier's
account in the AP subsidiary ledger
4. The clerk then files the AP packet in the open AP file

GENERAL LEDGER DEPARTMENT
1.receives a journal
voucher from the AP department and an account summary from inventory control
2.The general ledger clerk reconciles these and posts them to the inventory and AP control accounts

BASIC TECHNOLOGY CASH DISBURSEMENTS SYSTEM

AP DEPARTMENT
the AP clerk reviews the AP packets in the open AP file for items due, and sends the supporting documents to the cash disbursements department

CASH DISBURSEMENTS DEPARTMENT
1. receives the AP
packets and reviews the documents for completeness and clerical accuracy
2.For each disbursement,
the clerk prepares a three-part check and records the check number, dollar amount, and other pertinent data in the check register.
3. the negotiable portion of the check is mailed to the supplier
4.4.the clerk summarizes the entries made to the check register and sends a
journal voucher to the general ledger department

AP DEPARTMENT
1.Upon receipt of the AP packet, the AP clerk removes the liability by debit-
ing the vendor's digital AP subsidiary record.
2. the AP packet is filed in the closed AP file
3.the clerk sends an AP summary to the general ledger department

GENERAL LEDGER DEPARTMENT
1.general ledger clerk uses the department PC to post to the GL control accounts and files the documents

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👉objective advanced technology in AIS:
To integrate accounting and other business functions through common information system
👉Advantage integrate:
Is to improves operational performance and reduces cost by eliminating nonvalue-added task

INTERGRATED PURCHASES
PROCESSING SYSTEM
(comparing to basic technology system)
👉The level of of departmental activity is significantly lower than the basic technology system.
👉Advanced technology system use computer programs to perform clerical tasks than basic technology system who use labor intensive to perform task manually.
👉Basic technology system add greatly cost of system operation and result in human error. Whereas, Advanced technology system arise much cheaper cost and far less prone to error.
👉Advanced Technology system refocused on financial analysis and exception based  problem solving rather than day-to-day clerical task.
👉Advanced Technology system more smaller and more efficient than the basic technology counterpart.

💕   Computer Operations
Purchases computer application performs following tasks automatically:

👉 System reads the purchases requisition file for items that need to be replenished. The requisitions are then sorted by the vendor and matched againts the valid vendor file for vendor details.
👉Purchase Order (PO) are prepared and sent to vendor.
👉A Record is added to the open PO file.
👉PO is recorded in digital transaction listing which can be downloaded by the purchasing agent ,reviewed and filed in the department.

💕RECEIVING DEPARTMENT

The  following tasks are performed  automatically:

👉A record is added to receiving report file
👉 Quantities of items receiving are matched againts the open PO record, and the PO is closed by placing the receiving report number in the PO closed flag
👉The inventory subsidiary record in the PO closed flag
👉The general ledger inventory control account is updated

💕ACCOUNT PAYABLE DEPARTMENT

The  following tasks are performed  automatically:

👉Using PO numb. as a common attribute the system links the vendor invoice to the associated purchase order and receiving report records.
👉 The system reconciles the supporting documents and creates a virtual AP packet to authorize payment.
👉The system display the virtual AP packet on the AP clerk to browse the supporting documents and modify documents if necessary to reconcile quantity or price discrepancies that may exist.
👉assuming no discrepancies that demand the AP clerks intervention, the system automatically approves payment and set a due date.

In Business-To-business (B2B) transaction use the vendor file as a substitute for the traditional purchases journal and AP subsidiary ledger.

💕   INTEGRATED CASH DISBURSEMENTS  SYSTEM

👉 Checks are automatically printed signed  and distributed to the mail room for mailing to vendors .Checks above a preset materiality threshold will receive additional signatures prior to being mailed.
👉check register file recorded payment automatically
👉Vendor invoices are closed by the placing the check number the closed flag field
👉The general ledger AP control and cash accounts are updated
👉Reports detailing these transactions are transmitted via terminal to the AP and cash disbursements departments for  management review and filling

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EXPENDITURE CYCLE RISK AND INTERNAL CONTROLS

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EXPENDITURE CYCLE RISK AND INTERNAL CONTROLS

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Unauthorized Inventory Purchases
Places the decision of what to buy, when to buy, and from whom to buy solely at the discretion of the purchasing agent.

Physical Controls
TRANSACTION AUTHORIZATION
-To ensure that only valid transaction are processed.

IT Controls
AUTOMATED PURCHASE APPROVAL
-To prevent unauthorized purchases from unapproved vendors.

Receiving Incorrect Items, Quantities, or Damaged Goods
Responsible for inspecting and counting large quantities of valuable assets that arrive from vendors.

Physical Controls
INDEPENDENT VERIFICATION
-To perform this verification, the clerk obtains a “blind copy” of the original PO from purchasing that has all the relevant information about the goods being receipt except for the quantities and prices.
-The receiving personnel are forced to physically count and inspect the goods to obtain quantity information.

SUPERVISION
-To ensure that the clerks properly carry out these important duties.

IT Controls
SCANNER TECHNOLOGY
-Product code scanners will reduce the risk of human error in receiving and storing incorrect products.
-The system will verify that the items received match those on the purchase order.

Inaccurately Recording Transactions in Journals and Ledgers
-Purchases from vendors are incorrectly calculated.
-Accounts payable go unrecorded.
-Vendor bills customers for item they did not receive (back ordered).
-Vendor cash payments are inaccurately posted to accounts payable.
-Summaries of purchases, accounts payable, cash disbursements, and inventory levels are incorrectly posted to their respective GL accounts.

Physical Controls
TRANSACTION AUTHORIZATION
-To provide effective control over the flow of cash from the firm, the cash disbursement function should not write checks without this explicit authorization.

ACCOUNTING RECORDS
-To maintain an audit trail adequate for tracing a transaction from its source document to the financial statements.

INDEPENDENT VERIFICATION
-The general ledger function verifies that the total obligations recorded equal the total inventories received and that the total reductions in accounts payable equal the total disbursements of cash.

IT Controls
INPUT DATA EDITS
-Input controls are edits that focus on the integrity of transaction data being entered into the application such as;
1)Controls, including checks for missing data, numeric-alphabetic data, and invalid data values.
2)Check digit control will provide control over accessing the wrong accounts.

ERROR MESSAGES
-The computer program logic must correctly identify the inventory and vendor records being updated and any mismatch conditions should produce an error message to the computer operator.

AUTOMATED POSTINGS TO SUBSIDIARY AND GL ACCOUNTS
-Eliminating the human element from accounting activities, the potential for error and opportunities for fraud are significantly reduced.

FILE BACKUP
-This procedure needs to be in place as part of the daily processing of transaction data to avoid any physical loss, destruction or corruption of digital accounting record.

Misappropriation of Cash and Inventory
-May take the from of fraudulent payments to individuals posing as vendors.
-May also involve erroneous payments for items not ordered or not received.

Physical Controls
SUPERVISION
-Inadequate supervision can create an environment conducive to the theft of inventories in transit.

INDEPENDENT VERIFICATION
-Each document contains unique facts about the purchase transaction, which the AP clerk must reconcile before the firm recognizes an obligation.
1)The PO, which shows that the purchasing agent ordered only the needed inventories from a valid vendor.
2)The receiving report, which is evidence of the physical receipt of the goods. The reconciliation of this document with the PO signifies that the organization has a legitimate obligation to pay.
3)The supplier’s invoice, which provides the financial information needed. The AP clerk verifies that the prices on the invoice are reasonable compared with the expected prices on the PO.

SEGREGATION OF DUTIES – INVENTORY CONTROL FROM INVENTORY WAREHOUSE
-The task should be kept separate as the inventory control keeps the detailed records of the asset, while the warehouse (stores) has asset custody.

SEGREGATION OF DUTIES – ACCOUNTS PAYABLE FROM CASH DISBURSEMENTS
-An individual should not do combined responsibilities for establishing accounts payable and for writing checks to vendors in payment of accounts payable.

IT Controls
AUTOMATED THREE-WAY MATCH AND PAYMENT APPROVAL
-This act prompts the system to automatically create a virtual AP packet by linking the vendor invoice to the associated purchase order and receiving the supporting documents, using the PO number as a common attribute.

MULTILEVEL SECURITY
-Allows multiple individuals to simultaneously access a system, but provides segregation of duties to limit their access privileges and activities.

Unauthorized Access to Accounting Records and Reports
1)Attempts to perpetrate a vendor fraud
2)Theft of physical inventory
3)Malicious acts such as corrupting or deleting financial data

Physical Controls
ACCESS CONTROL
-A firm must limit access to documents that control its physical assets.

SEGREGATION OF DUTIES
-Certain record-keeping tasks should be separated

IT Controls
PASSWORD CONTROL
-The organization should implement a robust password control policy to prevent unauthorized access to computer files and programs.

MULTILEVEL SECURITY
-Two method: Access Control List (ACL) and Role-based Access Control (RBAC).
-Through these techniques, their access based on the privileges assigned to them.

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to expedite routine transaction processing between manufacturers. wholesalers, and retailers by connecting buyer and seller computers via a Private network or the Internet.

KEY ELEMENT
implementation of a trading partner agreement to eliminate the discrepancies that require human involvement to resolve

KEY FEATURES
1.As inventory needs are detected, the system automatically sends a digital
to the vendor.
2.when the goods arrive, receiving personnel perform only cursory inspection since quality and quantity are guaranteed by the trading partner agreement.
3. Because the financial information about purchases is known in advance from the partner agreement, the vendor's invoice provides no critical information from the receiving report. By eliminating this source of potential discrepancy,
to eliminate the three-way match for the majority of purchase transactions
4. Payment is made automatically by EFT directly to the vendor’s bank account

OBJECTIVE(by eliminating the receiving function entirely)
to send goods directly to the production di department and thus bypass the receiving area and avoid production delays and the associated handling cost