Auditing Expenditures - Test 1

Front 1

Goals/Objectives of Expenditure Cycle

Back 1

-Purchase from reliable vendors
-Purchase high quality items
-Obtain best possible price
-Purchase only items that are properly authorized
-Have resources available when they are needed
-Receive only those items ordered
-Ensure items are not lost, stolen, or broken
-Pay for the items in a timely manner

Front 2

Purchases - Batch Processing

Back 2

Step 1: Data processing department - inventory control
-Purchasing department
Step 2: Data processing department - purchase order
-Receiving department
Step 3: Data processing department - batch update of inventory
-Accounts Payable
Step 4: Data processing department validates vendors (make sure only purchase from authorized vendors)

Front 3

Cash Disbursement - Batch Processing

Back 3

Step 5: Data processing department scans for items due and prints check for items received
Step 6: Cash disbursements department reconciles checks and submits checks to management for signature
Step 7: Accounts payable department matches copies of checks with open vouchers and then closes them and files the documents

Front 4

If part of process is automated

Back 4

Data processing steps that can be performed automatically:
1. Inventory file is scanned for items and reorder points
2. Purchase requisition record for all items needing replenishment
3. Consolidate requisitions by vendor
4. Retrieve vendor mailing information
5. Purchase order is prepared and sent to the vendor
6. Open purchase order is added for each transaction
7. List of purchase order is sent to the purchasing department

Front 5

Not able to be automated

Back 5

-Goods arrive at receiving department
-Quantities received entered per item

Front 6

Resume automation

Back 6

1. Quantities keyed in match the open purchase order record
2. Receiving report file record added
3. Update inventory subsidiary records
4. G/L inventory updated
5. Record removed from open purchase order file and added to the open accounts payable file, and a due date is established

Front 7

Not able to be automated

Back 7

Each day, due date filed of A/P are scanned for items where payment is due

Front 8

Resume automation

Back 8

1. Checks printed, signed and distributed to mailroom
2. Payments are recorded in the check register file
3. Items paid are transferred from open accounts payable file to closed accounts payable file
4. G/L A/P and cash accounts are updated
5. Appropriate reports are transmitted to A/P and cash disbursements departments for review

Front 9

Reengineered System (automated) vs. Batch automated system

Back 9

-Improved inventory control
-Better cash management
-Less time lag
-Better purchasing time management
-Reduction of paper documents
-Segregation of duties
-Accounting records and access controls

Front 10

Expenditure Cycle Database - Master Files

Back 10

-Supplier (vendor) master file
-Accounts payable master file
-Merchandise inventory master file

Front 11

Expenditure Cycle Database - Transactions and Open Document Files

Back 11

-Purchase order file
-Suppliers invoice file
-Open vouchers file
-Cash disbursements file

Front 12

Expenditure Cycle Database - Other Files

Back 12

-Supplier reference and history file
-Buyer file
-Accounts payable detail file

Front 13

Payroll - drawbacks to using regular A/P and cash disbursements for payroll

Back 13

-General expenditure procedures that apply to all vendors will not apply to employees
-Writing checks to employees requires special controls
-General expenditure procedures are designed to accommodate relatively smooth flow of transactions

Front 14

Manual Payroll System - Personnel Department

Back 14

Personnel department uses personnel action forms to:
-Activate new employees
-Change the pay rate of employees
-Change marital status and/or number of dependents
-Terminate employees

Front 15

Manual Payroll System - Employees

Back 15

Production employees fill out 2 forms
-Job tickets: account for the time spent by the worker on each production job
-Time cards: used to capture the total time worked each pay period for payroll calculations (must be signed by a supervisor)

Front 16

Manual Payroll System - Cost Accounting Department

Back 16

Cost Accounting Department
-Uses the job tickets and time cards to allocate labor costs to WIP accounts
-They summarize the changes in labor distribution summary which is forwarded to the G/L department

Front 17

Manual Payroll System - Payroll Department

Back 17

Payroll department receives personnel action forms and time cards and uses them to:
-Prepare the payroll register
-Enter the information into the employee payroll records
-Prepare paychecks
-Send paychecks to cash disbursements department and a copy of the payroll register to accounts payable department

Front 18

Manual Payroll System - Accounts Payable Department

Back 18

Accounts Payable Department
-Prepares a cash disbursements voucher for the total amount of the payroll
-Sends copies to the cash disbursements and G/L departments

Front 19

Manual Payroll System - Cash Disbursements Department

Back 19

Cash disbursements department
-Reviews and signs the paychecks and forwards them to a paymaster for distribution to the employees
-Writes a check for the payroll and deposits it into the payroll imprest account

Front 20

Payroll Controls

Back 20

-Transaction authorization
-Segregation of duties
-Supervision
-Accounting records
-Access Controls
-Independent Verification

Front 21

Payroll Controls - Transaction authorization

Back 21

The personnel action form helps prevent:
-Terminated employees from receiving checks
-Wage rates from being improperly changed for current employees

Front 22

Payroll Controls - Segregation of duties

Back 22

Time keeping and personnel functions should be separated

Front 23

Payroll Controls - Supervision

Back 23

Need to monitor employees to ensure that they are not "clocking in" for one another

Front 24

Payroll Controls - Accounting Records

Back 24

The audit trail includes:
-Time cards
-Job tickets
-Disbursement vouchers
-Labor distribution summary
-Payroll register
-Subsidiary ledger accounts
-General ledger accounts

Front 25

Payroll Controls - Access Controls

Back 25

Need to prevent employees from having improper access to:
-Accounting records, such as time cards which can be altered
-Unsigned checks

Front 26

Payroll Controls - Independent Verification

Back 26

-Verification of time cards
-Distribution of paychecks to authorized employees
-Verification of accuracy of payroll register by A/P department
-G/L department reconciles the labor distribution summary and the payroll disbursement voucher

Front 27

Reengineered Payroll System

Back 27

-Often integrated with HR
-Differs from previous payroll system
-Personnel
-Cost accounting
-Timekeeping
-Data processing

Front 28

Reengineered vs. Previous Payroll System

Back 28

-Operations departments transmit transactions to the data processing department electronically
-Direct access to file are used for data storage
-Many processes are now performed in real time

Front 29

Reengineered Payroll - Data processing

Back 29

1. Labor costs are distributed to accounts
2. Online labor distribution summary
3. Online payroll register
4. Employee records are updated
5. Payroll checks are prepared and signed
6. Disbursement system generates checks to fund the payroll imprest account
7. G/L is updated

Front 30

Computer-Based Payroll Systems

Back 30

-Payroll is well-suited to batch processing and sequential files
+Most employees on the master file receive paychecks periodically
-The computer program performs the detailed record keeping, check writing, and general ledger functions

Front 31

Reengineered Human Resource Management Systems

Back 31

-Payroll can be reengineered as a part of HRM
-IT can process a wide range of personnel-related data, including:
+Employee benefits
+Labor resource planning
+Employee skills and training
+Pay rates, deductions, and paychecks
+Evaluations

Front 32

Key Features of Reengineered HRM

Back 32

-Personnel can make changes to the employee file in real time
-Cost accounting: enter job cost data either daily or in real time
-Timekeeping: enter the attendance file daily
-Data processing: still uses batch processing and prepares all reports, the checks, and updates the G/L

Front 33

Reengineered HRM different from automated manual and batch/sequential because

Back 33

-Operations departments transmit transactions to data processing via terminals
-Direct access files are performed in real time
-Many processes are performed in real time
-Real time access to personnel files required for direct inquiries

Front 34

Fixed Asset System (FAS)

Back 34

Fixed asset: property, plant, and equipment used in the operations of a business

Front 35

Life of a fixed asset

Back 35

1. Acquisition of asset
2. Depreciation
3. Subsequent expenditures
4. Disposal of asset

Front 36

Objectives of FAS

Back 36

-Acquire fixed assets in accordance with management approval and procedures
-Maintain adequate accounting records of asset acquisition, cost, description, and location
-Maintain depreciation records for depreciable assets in accordance with the acceptable method
-Provide management with information to help it plan future fixed asset investments

Front 37

Asset Acquisition

Back 37

-Begins when a department manager determines that an old fixed asset needs to be replaced or that a new fixed asset is warranted
-A purchase requisition form is filled out (may require authorizing signature)
-FAS department performs record-keeping functions

Front 38

Asset Maintenance

Back 38

-Involves adjusting FAS subsidiary account balances as assets depreciate
-Depreciation calculation are internal transactions that the FAS system bases upon a depreciation schedule
-Physical improvements must also be recorded to increase the subsidiary account balance and depreciation schedule

Front 39

Asset Disposal

Back 39

-At the end of an assets useful life (or earlier disposition), the asset must be removed from the records and depreciation schedule
-Disposals require disposal request forms and disposal reports as source documents

Front 40

Computer-Based FAS - Asset Acquisition

Back 40

-Receipt of assets are digitally recorded in the system, along with information such as its useful life, depreciation method, etc.
-Ledgers are automatically updated

Front 41

Computer Based FAS - Asset Maintenance

Back 41

-Calculates current period's depreciation
-Update accumulated depreciation and book value fields in the subsidiary records
-Post total depreciation to the affected general ledger accounts
-Record depreciation transactions by adding records to the journal voucher file

Front 42

Computer Based FAS automatically:

Back 42

-Posts adjusting entries to the fixed asset control account in the general ledger
-Records losses or gains associated with the disposal transaction
-Prepares journal voucher records

Front 43

FAS Controls

Back 43

-Authorization
-Supervision
-Independent Verification

Front 44

Authorization

Back 44

Authorization should be formal and explicit because of the high cost of fixed assets
-Acquisitions
-Changes in depreciation method

Front 45

Supervision

Back 45

Threat of misappropriation requires constant management oversight
-Theft: secure physical locations of assets
-Misuse: monitor on the job activities

Front 46

Independent Verification

Back 46

Internal auditors should periodically verify FAS records
-The reasonableness of factors used in decision making (useful life, disposal, budgeting model)
-Location, condition, and fair value of the fixed assets recorded in the subsidiary ledger
-The programming logic for automated calculations

Front 47

Expenditure Cycle - Input Controls

Back 47

-Data validation controls
-Testing validation controls
-Batch controls
-Testing batch controls
-Purchases authorization controls
-Employee authorization
-Testing employee authorization procedures

Front 48

Expenditure Cycle - Process Controls

Back 48

-File Update Controls
-Access Controls
-Physical Controls
-Output Controls

Front 49

File Update Controls

Back 49

-Sequence check control
-Liability validation control
-Valid vendor file
-Testing file update controls

Front 50

Access Controls

Back 50

-Warehouse security
-Moving assets promptly when received
-Paying employees by check vs cash

Front 51

Risks of access controls

Back 51

-Employees with access to the A/P subsidiary file
-Employees with access to attendance records
-Employees with acces to both cash and A/P records
-Employees with access to both inventory and inventory records

Front 52

Physical Controls

Back 52

-Purchase system controls
-Payroll system controls

Front 53

Physical Controls - Purchase System Controls

Back 53

-Segregation of inventory control from warehouse
-Segregation of G/L and A/P from cash disbursements
-Supervision of receiving department
+Inspection of assets
+Theft of assets
+Reconciliation of supporting documents

Front 54

Physical Controls - Payroll system controls

Back 54

-Verification of time cards
-Supervision
-Paymaster
-Payroll imprest account

Front 55

Output Controls

Back 55

-A/P change report
-Transaction listing
-Transaction logs
-Logs of automatic transactions
-Unique transaction identifiers
-Error listing

Front 56

Expenditure Cycle Substantive Tests

Back 56

-Risks and audit concerns
-Understanding data
-Testing accuracy and completion assertions
-Review disbursement vouchers for unusual trends and exceptions
-Testing completeness, existence, and rights and obligations assertions