Page 258 - Accounting Information Systems

C H A P TER 5 The Expenditure Cycle Part I: Purchases and Cash Disbursements Procedures 229

SEGREGATION OF THE GENERAL LEDGER AND ACCOUNTS PAYABLE FROM CASH
DISBURSEMENTS. The asset subject to exposure in the cash disbursements subsystem is cash. The
records controlling this asset are the AP subsidiary ledger and the cash account in the general ledger. An
individual with the combined responsibilities of writing checks, posting to the cash account, and main-
taining AP could perpetrate fraud against the firm. For instance, an individual with such access could
withdraw cash and then adjust the cash account accordingly to hide the transaction. Also, he or she could
establish fraudulent AP (to an associate in a nonexistent vendor company) and then write checks to dis-
charge the phony obligations. By segregating these functions, we greatly reduce this type of exposure.
Supervision
In the expenditure cycle, the receiving department is the area that most benefits from supervision. Large quan-
tities of valuable assets flow through this area on their way to the warehouse. Close supervision here reduces
the chances of two types of exposure: (1) failure to properly inspect the assets and (2) the theft of assets.

INSPECTION OF ASSETS. When goods arrive from the supplier, receiving clerks must inspect items
for proper quantities and condition (damage, spoilage, and so on). For this reason, the receiving clerk
receives a blind copy of the original PO from purchasing. A blind PO has all the relevant information
about the goods being received except for the quantities and prices. To obtain quantities information,
which is needed for the receiving report, the receiving personnel are forced to physically count and
inspect the goods. If receiving clerks were provided with quantity information via an open PO, they may
be tempted to transfer this information to the receiving report without performing a physical count.
Inspecting and counting the items received protect the firm from incomplete orders and damaged
goods. Supervision is critical at this point to ensure that the clerks properly carry out these important
duties. A packing slip containing quantity information that could be used to circumvent the inspection
process often accompanies incoming goods. A supervisor should take custody of the packing slip while
receiving clerks count and inspect the goods.
THEFT OF ASSETS. Receiving departments are sometimes hectic and cluttered during busy periods.
In this environment, incoming inventories are exposed to theft until they are securely placed in the ware-
house. Improper inspection procedures coupled with inadequate supervision can create a situation that is
conducive to the theft of inventories in transit.

Accounting Records
The control objective of accounting records is to maintain an audit trail adequate for tracing a transaction
from its source document to the financial statements. The expenditure cycle employs the following
accounting records: AP subsidiary ledger, voucher register, check register, and general ledger. The audi-
tor’s concern in the expenditure cycle is that obligations may be materially understated on financial state-
ments because of unrecorded transactions. This is a normal occurrence at year-end closing simply
because some supplier invoices do not arrive in time to record the liabilities. This also happens, however,
as an attempt to intentionally misstate financial information. Hence, in addition to the routine accounting
records, expenditure cycle systems must be designed to provide supporting information, such as the pur-
chase requisition file, the PO file, and the receiving report file. By reviewing these peripheral files, audi-
tors may obtain evidence of inventory purchases that have not been recorded as liabilities.

Access Controls
DIRECT ACCESS. In the expenditure cycle, a firm must control access to physical assets such as cash
and inventory. These control concerns are essentially the same as in the revenue cycle. Direct access con-
trols include locks, alarms, and restricted access to areas that contain inventories and cash.
INDIRECT ACCESS. A firm must limit access to documents that control its physical assets. For exam-
ple, an individual with access to purchase requisitions, purchase orders, and receiving reports has the
ingredients to construct a fraudulent purchase transaction. With the proper supporting documents, a fraud-
ulent transaction can be made to look legitimate to the system and could be paid.