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C H A P TER 5 The Expenditure Cycle Part I: Purchases and Cash Disbursements Procedures 249

10. DATA PROCESSING OUTPUT the due date. The clerk also updates the accounts pay-
able subsidiary ledger and records the liability amount in
Using the information provided in Problem 9, discuss all
the purchase journal from the department computer ter-
transaction listings and summary reports that would be
minal. The accounts payable clerk periodically reviews
necessary for a batch system with real-time input of data.
the cash disbursement file for items due and, when they
are identified, prepares a check for the amount due.
11. INTERNAL CONTROL
Finally, using the department terminal, the clerk removes
The following is a description of manufacturing com-
the liability from the accounts payable subsidiary file and
pany’s purchasing procedures. All computers in the com-
posts the disbursement to the cash account.
pany are networked to a centralized accounting system so
that each terminal has full access to a common database. Required
The inventory control clerk periodically checks in-
a. Create a system flowchart of the system.
ventory levels from a computer terminal to identify
items that need to be ordered. Once the clerk feels in- b. Analyze the internal control weaknesses in the sys-
tem. Model your response according to the six cate-
ventory is too low, he chooses a supplier and creates a
gories of physical control activities specified in
purchase order from the terminal by adding a record to
SAS 78/COSO.
the purchase order file. The clerk prints a hard copy of
the purchase order and mails it to the vendor. An elec- 12. ACCOUNTING DOCUMENTS
tronic notification is also sent to accounts payable and
receiving, giving the clerks of each department access
Required
to the purchase order from their respective terminals.
Answer the following questions.
When the raw materials arrive at the unloading dock,
a receiving clerk prints a copy of the purchase order a. Which department is responsible for initiating the
from his terminal and reconciles it to the packing slip. purchase of materials?
The clerk then creates a receiving report on a computer b. What is the name of the document generated by
system. An electronic notification is sent to accounts the department identified in (a) above?
payable and inventory control, giving the respective c. Typically, multiple copies of a purchase order are
clerks access to the receiving report. The inventory con- prepared. One copy should go to the vendor, and
trol clerk then updates the inventory records. one is retained in the purchasing department. To
When the accounts payable clerk receives a hard- achieve proper control, which other departments
copy invoice from the vendor, she reconciles the should receive copies of the purchase order?
invoice with the digital purchase order and receiving d. What documents does the accounts payable clerk
report and prepares a paper cash disbursements voucher. review before setting up a liability?
The cash disbursements voucher and invoice are placed e. Which document transfers responsibility for goods
in the open accounts payable file in a filing cabinet until sold to a common carrier?

Internal Control Cases

1. Smith’s Market (Small Business Cash include sales staff, shelf stockers, farm laborers, shift
Sales Accounting System) supervisors, and clerical staff. Recently Smith has
noticed a decline in profits and sales, while his pur-
In 1989 Robert Smith opened a small fruit and vegeta-
chases of products for resale have continued to rise.
ble market in Bethlehem, Pennsylvania. Originally
Although the company does not prepare audited
Smith sold only produce grown on his family farm
financial statements, Robert Smith has commissioned
and orchard. As the market’s popularity grew, however,
your public accounting firm to assess his company’s
he added bread, canned goods, fresh meats, and a lim-
sales procedures and internal controls. Smith’s Market
ited supply of frozen goods. Today Smith’s Market is a
expenditure cycle procedures are described below:
full-range farmers’ market with a strong local customer
base. Indeed, the market’s reputation for low prices and
high quality draws customers from other Pennsylvania Expenditure Cycle
cities and even from the neighboring state of New The expenditure cycle begins in the warehouse adjacent
Jersey. Currently Smith’s has 40 employees. These to the market where Smith’s keeps their inventory of