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➣ The mix of possible technology/human options creates a
continuum.

➣ At the other end of the continuum operate differently and present different internal control issues. The objection;

(1) illustrate accounting information systems (AIS) functionality and work flow patterns under different levels of technology,

(2) demonstrate how the internal control profile changes as the technology/human mix changes.

➣ At one end are minimal technology systems that rely heavily on
human involvement and manual procedures.

➣At the other end of the continuum are advanced technology
systems, which replace human activity with automated processes.

➣Systems at different points on the continuum operate differently
and present different internal control issues.

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1) Risk of Unauthorized Inventory Purchase 

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1) Risk of Unauthorized Inventory Purchase 

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Can result in excessive inventory levels for some items while others go out of stock.

Physical control:
➤ Transaction authorization

formal purchase requisition

IT control:
➤ Automated purchase approval

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2) Risk of Receiving Incorrect Items, Quantities or Damaged Goods

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2) Risk of Receiving Incorrect Items, Quantities or Damaged Goods

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Risk of accepting wrong items, incomplete orders and damaged goods.

Physical control:
➤ Independent verification

Receiving Department reconciles receipt with PO

➤ Supervision

Supervision in Receiving Department

IT control:
➤ Scanner technology

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➧ INVENTORY CONTROL
The inventory control clerk prints purchase requisitions from his PC by accessing the purchase requisition file.

➧ PURCHASING DEPARTMENT
The purchasing department receives the purchase requisition, sorts them by vendor, and adds a record to the digital open purchase order file.

➧ RECEIVING
The receiving department clerk receives the goods and the packing slip from the vendor and reconciles the goods with the blind copy of the PO.

➧ AP DEPARTMENT
When the supplier's invoices arrives, the AP clerk reconciles the invoice, purchase order, and receiving report (three-way match) and prepares an AP packets and reviews the documents for completeness and clerical accuracy.

➧ GENERAL LEDGER DEPARTMENT
The general ledger department receives a journal voucher from the AP department and an account summary from inventory control.

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A key element of successful EDI is the implementation of a trading partner agreement to eliminate discrepancies that require human involvement to resolve.

The key features of the system :

1. As the inventory needs are detected, the system automatically sends a digital EDI PO to the vendor.

2. When the goods arrive, receiving personnel perform only cursory inspection.

3. The vendor's invoice provides no critical information that cannot be derived from the receiving report.

4. Payment is made automatically by EFT directly to the vendor's bank account.

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In the absence of explicit authorization, only valid transactions are processed.

A trading partner or someone masquerading as trading partner, will access the firm's accounting records (unauthorized by the trading partner agreement).

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1. Computer Operations

Reads the purchases requisition file for items that need to be replenished.

Hard-copy purchase orders are prepares and sent to vendor.

A record is added to the open PO file.

A digital transaction listing of POs is created.

2. Receiving Department
When the goods arrive, a blind copy of the open PO file in real time is accessed.

A record is added to the receiving report file.

Quantities of items received are matched against the open PO record & the PO is closed.

The inventory subsidiary records are updated.

The general ledger inventory control account is updated.

3. Accounts Payable Department
When the supplier's invoice is received, a record is added to the vendor invoice file.

The system links the vendor invoice to the associated purchase order & receiving report records.

The system reconciles the supporting documents & creates a virtual AP packet.

The system displays the virtual AP packet for review.

Assuming no discrepancies that demand the AP clerk's intervention, the system automatically approves payment & sets a payment due date.

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⋄ Monitor Inventory Records
➥ Firm deplete their inventories by transferring raw materials into production process and by selling finished goods to customer.

⋄ Prepare Purchase Order
➥ A PO will be prepared by the prepare PO function upon receives the purchase requisitions.

⋄ Receive Goods
➥ The next event in expenditure cycle is the receipt of the inventory.

⋄ Update Inventory Records
➥ Updating the actual cost inventory ledger.

⋄ Set Up Accounts Payable
➥ The transaction will be recorded in the purchase journal and posted to the supplier's account in the AP subsidiary ledger.

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⋄ AP Department Uses Cash Disbursement Vouchers And Maintains A Voucher Register
➥After AP clerk performs the three-way match, he or she prepares a cash disbursement voucher to approve payment. Voucher provide improved control over cash disbursements and allow firm to consolidate several payments to the same supplier on a single voucher, thus reducing the number of checks written.

⋄ Post To General Ledger
➥The GL function receives a journal voucher from the AP department and an account summary from Inventory control.

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3) Risk of Inaccurately Recording Transaction in Journal and Ledgers

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3) Risk of Inaccurately Recording Transaction in Journal and Ledgers

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Expenditure cycle errors such as; purchases from vendors are incorrectly calculated.

Physical control:
➤ Transaction authorization

AP department authorizes cash disbursement to make payment

➤ Accounting record

Audit trail documents, journals, accounts and files.

➤ Independent verification

Inventory control, AP, cash disbursement and GL

IT control:
➤ Input data edits
➤ Error messages
➤ Automated posting to accounts
➤ File backup

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⋄ Identify Liabilities Due
➥Each dat the AP clerk reviews the open AP file for items due to payment.

⋄ Prepare Cash Disbursement
➥ The cash disbursement clerk receives the AP packet and reviews the document again. for each disbursement, the clerk prepares a check and records the check number, dollar amount and other pertinent data in the cash disbursement journal.

⋄ Update AP Record
➥ After receiving the paid AP packet, the clerk will removes the liability by debiting the vendor's AP subsidiary ledger account and filed in the closed AP file.

⋄ Post To General Ledger
➥ The GL function receives the journal voucher from cash disbursement and the AP account summary from AP.

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4) Risk of Misappropriation of Cash and Inventory

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4) Risk of Misappropriation of Cash and Inventory

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Risk of inventory theft occurs in the receiving department and the warehouse.

Physical control:
➤ Supervision

In Receiving Department

➤ Independent verification

Three-way match

➤ Segregation of duties

Cash disbursement, general ledger, AP function, warehouse, inventory records

IT control:
➤ Automated three-way match
➤ Multilevel security to provide segregation of duties

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5) Risk of Unauthorized Access to Accounting Records and Reports

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5) Risk of Unauthorized Access to Accounting Records and Reports

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Risk to unauthorized access from outsiders

Physical control:
➤ Access control

Source documents, journals, ledgers

➤ Segregation of duties

Sub-ledgers, GL, asset custody

IT control:
➤ Password control
➤ Multilevel security to prevent unauthorized access to data

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Organizations that use EFT to transmit payments employ different procedures.

Each day the due date fields of the vendor invoice are scanned for items to be paid.

The following procedures are performed on items that are due:

1. Checks are automatically printed, signed and distributed to the mailing room for mailing to vendors.

2. The payments are automatically recorded in the check register file.

3. Vendor invoices are closed.

4. The general ledger AP control and cash accounts are updated.

5. Reports detailing these transactions are transmitted via a terminal to the AP and cash disbursement departments.

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BASIC TECHNOLOGY CASH DISBURSEMENTS SYSTEMS 

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BASIC TECHNOLOGY CASH DISBURSEMENTS SYSTEMS 

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➧ 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.

The AP clerk removes the liability by debiting the vendor's digital AP subsidiary record.

➧ CASH DISBURSEMENTS DEPARTMENT
The cash disbursements clerk receives the AP packets and reviews the documents for completeness and clerical accuracy.

➧ GENERAL LEDGER DEPARTMENT
Based on the journal voucher from cash disbursements and the account summary from accounts payable, the general ledger uses the department PC to post to the GL control accounts and files the documents.