Summary of Purchases and Cash Disbursements Procedures

Summary

The chapter examined procurement procedures involving the acquisition of raw materials and finished goods. Because most organizations conduct these activities on a credit basis, the in- formation system needs to be designed to properly recognize and record obligations as they arise and to discharge them when they come due. Two expenditure cycle subsystems ac- complish these tasks: the purchases system and the cash dis- bursements system. This chapter focused on the following areas:

1. The processes of each subsystem and the flow of infor- mation between them.

2. The documents, journals, and accounts needed to pro- vide audit trails, maintain historical records, and support internal decision making and financial reporting.

3. The areas of exposure and the control techniques that reduce these risks.

The chapter examined the impact of technology on items 1, 2, and 3 in the preceding list. From this perspective, we saw that automated systems use computers to replicate traditional manual tasks. Reengineered systems, however, involve and require new and innovative ways of dealing with traditional problems. Any technological solution carries control implications. Computers remove a fundamental separation of functions between authorizing and processing transactions. Also at risk is the integrity of accounting records. To control these risks, systems must be designed to provide users with documents and reports that permit independent verification and support audit trail needs.

Review Questions

1. Differentiate between a purchase requisition and a purchase order.

2. What purpose does a purchasing department serve?

3. Distinguish between an accounts payable file and a vouchers payable file.

4. What are the three logical steps of the cash dis- bursements system?

5. What general ledger journal entries does the pur- chases system trigger? From which departments do these journal entries arise?

6. What two types of exposures can close supervi- sion of the receiving department reduce?

7. How can a manual purchases cash disbursements system be reengineered to reduce discrepancies, be more accurate, and reduce processing costs?

8. What steps of independent verification does the general ledger department perform?

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

10. How do computerized purchasing systems help to reduce the risk of purchasing bottlenecks?

11. What is the purpose of the blind copy of a pur- chase order?

12. Give one advantage of using a vouchers payable system.

Discussion Questions

1. What three documents must accompany the pay- ment of an invoice? Discuss where these three documents originate and the resulting control implications.

2. Are any time lags in recording economic events typically experienced in cash disbursements sys- tems? If so, what are they? Discuss the accounting profession’s view on this matter as it pertains to financial reporting.

3. Discuss the importance of supervision controls in the receiving department and the reasons behind blind fields on the receiving report, such as quantity and price.

4. Why do the inventory control and general ledger departments seem to disappear in computer-based purchasing systems (Figure 5-14)? Are these functions no longer important enough to have their own departments?

5. How does the procedure for determining inventory requirements differ between a basic batch-process- ing system and batch processing with real-time data

input of sales and receipts of inventory? What about for the procedures the receiving department uses?

6. What advantages are achieved in choosing

a. a basic batch computer system over a manual system?

b. a batch system with real-time data input over a basic batch system?

7. Discuss the major control implications of batch systems with real-time data input. What compensating procedures are available?

8. Discuss some specific examples in which information systems can reduce time lags and how the firm is positively affected by such time lags.

9. You are conducting an end-of-year audit. Assume that the terms of trade between a buyer and a seller are free on board (FOB) destination. What document provides evidence that a liability exists and may be unrecorded?

10. Describe a three-way match.

Multiple-Choice Questions

1. Which document helps to ensure that the receiv- ing clerks actually count the number of goods received?

a. packing list

b. blind copy of purchase order

c. shipping notice

d. invoice

2. When the goods are received and the receiving report has been prepared, which ledger may be updated?

a. standard cost inventory ledger

b. inventory subsidiary ledger

c. general ledger

d. accounts payable subsidiary ledger

3. Which statement is NOT correct for an expenditure system with proper internal controls?

a. Cash disbursements maintain the check register.

b. Accounts payable maintains the accounts pay- able subsidiary ledger.

c. Accounts payable is responsible for paying invoices.

d. Accounts payable is responsible for authoriz- ing invoices.

4. Which duties should be segregated?

a. matching purchase requisitions, receiving reports, and invoices and authorizing payment

b. authorizing payment and maintaining the check register

c. writing checks and maintaining the check register

d. authorizing payment and maintaining the accounts payable subsidiary ledger

5. Which documents would an auditor most likely choose to examine closely to ascertain that all expenditures incurred during the accounting period have been recorded as

a liability?

a. invoices

b. purchase orders

c. purchase requisitions

d. receiving reports

6. Which task must still require human intervention in an automated purchases/cash disbursements system?

a. determination of inventory requirements

b. preparation of a purchase order

c. preparation of a receiving report

d. preparation of a check register

7. Which one of the following departments does not have a copy of the purchase order?

a. the purchasing department

b. the receiving department

c. accounts payable

d. general ledger

8. Which document typically triggers the process of recording a liability?

a. purchase requisition

b. purchase order

c. receiving report

d. supplier’s invoice

9. Which of the following tasks should the cash disbursement clerk NOT perform?

a. review the supporting documents for completeness and accuracy

b. prepare checks

c. approve the liability

d. mark the supporting documents paid

10. Which of the following is true?

a. The cash disbursement function is part of accounts payable.

b. Cash disbursements is an independent accounting function.

c. Cash disbursements is a treasury function.

d. The cash disbursement function is part of the general ledger department.