Two of the processes that constitute the expenditure cycle:

1. Purchase processing
2. Cash disbursement processing

PURCHASE PROCESSING PROCEDURES

1. Monitor inventory level records

When inventories drop to a predetermined reorder point, a purchase requisition
- is prepared and sent to the prepare purchase order function to initiate the purchase process
- a separate purchase requisition will be prepared for each inventory item as the need is
recognized
- purchase requisitions need to be combined into a single purchase order which is then sent
to the vendor
- one purchase order = associated with many purchase requisitions
2. Prepare purchase order
- One copy – sent to the vendor
- One copy – sent to the set up accounts payable (AP) function for temporary filing in the AP
pending file
- Blind copy – sent to the receive goods function
- Last copy – open/closed purchase order file

Inventory control function – supplies much of the routine ordering information from the
inventory and valid vendor files
- info includes: name and address of primary supplier, economic order quantity and the
standard or expected unit cost of the item

To obtain the best prices and terms on special items – purchasing dept. prepares detailed
product specifications & request bids from competing vendors

Valid vendor file – lists only those vendors approved to do business with the organization

3. Receive goods
During the time lag between placing the order and receiving inventory – no economic event has
occurred, received no inventories and does not incur financial obligation
- Firms make memo entries of pending inventory receipts and pending financial obligations

DATA PROCESSING:

The ff. tasks are performed automatically:

1. Inventory file – searched for items that have fallen to their reorder points
2. Record is entered in the purchase requisition file for each item to be replenished
3. Requisitions are consolidated according to vendor number.
4. Vendor mailing information is retrieved from the vendor file
5. Purchase orders are prepared and added to the open PO file
6. Transaction listing of Pos is sent to the purchasing department for review.

RECEIVING DEPARTMENT
Tasks performed automatically:
1.Quantities of items received are matched against the open PO record, and a Y value is placed in a
logical field to indicate the receipt of inventories.
2. A record is added to the receiving report file.
3. The inventory subsidiary records are updated to reflect the receipt of the inventory items.
4. The general ledger inventory control account is updated.
5. The record is removed from the open PO file and added to the open AP file, and a due date for payment
is established

Each day, the DUE DATE fields of the AP records are scanned for items due to be paid. The following
procedures are performed for the selected items.
1. Checks are automatically printed, signed, and distributed to the mail room for mailing to vendors.
EDI vendors receive payment by electronic funds transfer (EFT). EFT is discussed in the appendix to
Chapter 12.
2. The payments are recorded in the check register file.
3. Items paid are transferred from the open AP file to the closed AP file.
4. The general ledger AP and cash accounts are updated.
5. Reports detailing these transactions are transmitted via terminal to the AP and cash disbursements
departments for management review and filing.

Vendor’s invoice – provides no critical info. That cannot be derived from the receiving report

CONTROL IMPLICATIONS

The Automated System

1. Improved Inventory Control – program errors or flawed inventory models can cause firms to find
themselves suddenly inundated with inventories or desperately short of stock
2. Better Cash Management
3. Time Lag
4. Purchasing bottleneck – purchasing dept. is directly involved in all purchasing decisions
5. Excessive paper documents – all operation departments create documents, which are sent to data processing
and which data processing must then convert to magnetic media

The Reengineered System

Improvements:
1. It uses real-time procedures and direct access files to the shorten the time lag in record keeping.
2. It eliminates routine clerical procedures by distiributing terminals to user areas
3. It achieves significant reduction in paper documents by using digital communications between
departments and by digitally storing records.

Control Implications:

1. Segregation of duties – removes the physical separation between transaction and authorization
processing – computer programs authorize and process Pos as well as authorize and issue
checks to vendors
2. Accounting Records and Access Controls – maintain accounting records on digital storage media
with little or no hard-copy backup

CONCEPTUAL FIXED ASSET SYSTEM

Fixed Assets – property, plant and equipment used in the business
- permanent items that collectilvey represent the fin. inv. Of the organization
The specific objectives of the fixed asset system are to:
1. Process the acquisition of fixed assets as needed and in accordance with formal management approval
and procedures.
2. Maintain adequate accounting records of asset acquisition, cost, description, and physical location in
the organization.
3. Maintain accurate depreciation records for depreciable assets in accordance with acceptable methods.
4. Provide management with information to help plan for future fixed asset investments.
5. Properly record the retirement and disposal of fixed assets.

Expenditure cycle – routine acquisitions of raw materials and finished goods inventories
Fixed Asset system – nonroutine transactions for a wider group of users in the organization

The second difference between these systems is that organizations usually treat inventory acquisitions
as an expense of the current period, while they capitalize fixed assets that yield benefits for multiple periods

LOGIC OF A FIXED ASSET SYSTEM

1. Asset Acquisition – dept. manager recognizing the need to purchase a new asset or replacing an existing
one
Once the request is approved and a supplier is selected, the fixed asset acquisition task is similar to the
expenditure cycle procedures, with two noteworthy differences.
- receiving department delivers the asset into the custody of the user/manager rather than a central store
- fixed asset department, not inventory control, performs the record-keeping function.
2. Asset Maintenance
- Involves adjusting the fixed asset subsidiary account balances as the assets depreciate over time with
usage.
- The method of depreciation and the period used should reflect, as closely as possible, the asset’s actual
decline in utility to the firm
- Depreciation calculations – transaction that the fixed asset system must be designed to anticipate
internally when no external event triggers the action
- Depreciation schedule – important record to initiate this task
o Shows when and how much depreciation to record
o Shows when to stop taking depreciation on fully depreciated assets
o Useful for planning asset retirement and replacemet
- Keeps track of the physical location of each asset
- When one department transfers custody of an asset to another department, information about the
transfer should be recorded in the fixed asset subsidiary ledger. – should indicate the current location
of the asset
- Ability to locate and verify the physical existence of fixed assets – important component of audit trail
3. Asset Disposal
- Asset is removed from the fixed asset subsididairy ledger
- Begins with the responsible manager issues a request to dispose the asset – disposal of an asset –
requires proper approval
- Disposal report – sent to the fixed asset accounting department to authorize its removal from the ledger

THE PHYSICAL FIXED ASSET SYSTEM

Computer-Based Fixed Asset System

ACQUISITION PROCEDURES
 1. fixed asset accounting clerk receives a receiving report and a cash disbursement voucher
- provides evidence that the has physically received the asset and show its cost
2. creates a record of the asset in the fixed asset subsidiary ledger
- contains historic cost information, asset’s useful life, salvage value, depreciation method to be used
and the asset’s location in the organization
3. Updates the fixed asset control account in the general ledger and prepares journal vouchers for the general
ledger dept. as evidence of the entry
4. Produces reports for accounting management
5. Prepares a depreciation schedule for each asset when its acquisition is originally recorded – stored on a
computer disk to permit future depreciation calculations

ASSET MAINTENANCE

1. Calculating the current period’s depreciation

2. Updating the accumulated depreciation and book value fields in the subsidiary records
3. Posting the total amount of depreciation to the affected general ledger accounts (depreciation expense and
accumulated depreciation)
4. Recording the depreciation transaction by adding a record to the general voucher file
5. Fixed asset depreciation report is sent to the fixed asset department for review

DISPOSAL PROCEDURES

1. Posts an adjusting entry to the fixed asset control account in the general ledger
2. Records any loss or gain associated with the disposal
3. Prepares a journal voucher
4. Fixed asset status report containing details of the deletion – sent to the fixed asset dept. for review

CONTROLLING FIXED ASSET SYSTEM

1. Authorization Controls – should be formal and explicitly authorized

- transaction should be initiated by a written request from the user or department
2. Supervision controls
- Important element in the physical security of fixed assets
- Ensure that assets are being used in accordance with the organization’s policies and business practices
3. Independent Verification Controls
- Internal auditor should review the asset acquisition and approval procedures to determine the
reasonableness of factors used in analysis
- Verify the location, condition and fair value of the organization’s fixed assets against the fixed assets
records in the subsidiary ledger
- Automatic depreciation charges calculated by the fixed asset system should be verified and reviewed
for accuracy and completeness

CHAPTER 4: THE REVENUE CYCLE

SALES ORDER PROCEDURES

1st process: Receive order

- Begins with the receipt of the customer order – type and quantity of merchandise desired
- may not be in a standard format and may or may not be in a physical document
1. Transcribe the customer order into a formal sales order – customer’s name, address, account number;
the name, number and description of items sold; and the quantities and unit prices of each item sold.
2. Copy is placed in the customer open order file for future reference – enables customer service
employees to respond promptly and accurately to customer questions
 2nd process: Check Credit
- circumstances of the sale will determine the degree and nature of credit check
- credit approval process – authorization control and should be performed as a separate function from the
sales activity

1. Receive-order task sends the sales order (credit copy) to the check-credit task for approval.
2. Approved sales order triggers the continuation of the sales process by releasing sales order info.
Simultaneously to various tasks.

3rd process: PICK GOODS

1. Receive order activity forwards the stock release document (picking ticket) to the pick goods function in
the warehouse. – identifies the items of inventory that must be located and picked from the warehouse
shelves.
- Provides formal authorization for the warehouse personnel to release the specified items
2. After picking, order is verified for accuracy and the goods and the verified stock release are sent to ship
goods task.
- If inv. Levels are insufficient to fill the order, warehouse employee adjusts the verified stock release to
reflect the amount actually going to the customer
3. Employees prepares a back order record – stays on file until the inventories arrive from the supplier
- Back-ordered items are shipped before new sales are processed (connected sa if inv. Levels are
sufficient)
4. Warehouse employee adjust the stock records to reflect the reduction in inventory
- Not formal records for controlling inv. Assets, used for wh management purposes only

4th process: SHIP GOODS

1. Before the arrival of the goods and the verified stock release document, the ship dept. receives the packing
slip and shipping notice from the receive order function
Packing slip – travel with the goods to the customer to describe the contents of the order
Shipping notice – forwarded to the billing function as evidence that the customer’s order was filed and
shipped
- Date of shipment, items and quantities actually shipped, name of the carrier and freight charges
2. Upon receiving goods, the shipping clerk reconciles the physical items with the stock release, packing slip
and shipping notice to verify that the order is correct.
- Important independent verification control point and is the last opportunity to detect errors before
shipment.
3. Shipping clerk packages the goods, attaches the packing slip, completes the shipping notice and prepares a
bill of lading.
Bill of lading – formal contract between the seller and the shipping company to transport the goods to the
customer.
- Establishes legal ownership and responsibility for assets in transit
4. The shipping clerk records the shipment in the shipping log, forwards the shipping notice and the stock
release to the bill-customer function as proof of shipment and updates the customer’s open order file.

5th process: BILL CUSTOMER

1. Upon credit approval, it Receives the sales order (invoice copy) from the receive-order task and places it
into the Sales order shipping file until the receipt of shipping notice.
2. Upon arrival of shipping notice, items shipped are reconciled with those ordered and unit prices, taxes and
freight charges are added to the invoice copy of the sales order.
3. Completed sales invoice – customer’s bill which formally depicts the charges to the customer
4. In addition, the billing function performs the following record keeping–related tasks:
Records the sale in the sales journal. – special journal used to record completed sales transactions
At the end of the period, these entries are summarized into a sales journal voucher, which is sent to the general
ledger task for posting to the following accounts:
DR CR
Accounts Receivable—Control XXXX.XX
Sales XXXX.XX
Forwards the ledger copy of the sales order to the update accounts receivable task.
Sends the stock release document to the update inventory records task.

6th process: UPDATE INVENTORY RECORDS

1. The inventory control function updates inventory subsidiary ledger accounts from information contained in
the stock release document. – each stock release document reduces the quantity on hand of one or more
inventory accounts
Cost of Goods Sold XXX.XX
Inventory—Control XXX.XX
- Financial value of the total reduction in inventory
7th process: UPDATE ACCOUNTS RECEIVABLE
- Customer records in the accounts receivable (AR) subsidiary ledger are updated from information the
sales order (ledger copy) provides
- AR Subsidiary ledger contains: customer name, address, current balance, available credit, transaction
dates, invoice numbers and credits for payments returns and allowances
- Account summary are forwarder to the GL function
8th process: POST TO GENERAL LEDGER
By the close of the transaction processing period, the general ledger function has received journal vouchers from the
billing and inventory control tasks and an account summary from the AR function.
First, the general ledger uses the journal vouchers to post to the following control accounts:
DR CR
Accounts Receivable Control XXXX.XX
Cost of Goods Sold XXX.XX
Inventory Control XXX.XX
Sales XXXX.XX
Second, this information supports an important independent verification control.

SALES RETURN PROCEDURES

_ The company shipped the customer the wrong merchandise.

_ The goods were defective.
_ The product was damaged in shipment.
_ The buyer refused delivery because the seller shipped the goods too late or they were delayed in transit.

1. Prepare return slip.

2. Prepare a credit memo.
3. Approve credit memo. – credit manager evaluates the circumsatnces of the return and makes a judgment to
grant or disapprove credit.
- return to the sales department
4. Update sales journal.
5. Update Inventory and AR Records.
6. Update general ledger.
DR CR
Inventory—Control XXX.XX
Sales Returns and Allowances XXXX.XX
Cost of Goods Sold XXX.XX
Accounts Receivable—Control XXXX.XX
CASH RECEIPT PROCEDURES
1st process: Open mail and prepare remittance advice
 1. A mail room employee opens envelopes containing customers’ payments and remittance advices. -info.
Needed to service individual customer accounts (payment date, account no., amount paid, customer check
no.)
2. Mail room personnel route the checks and remittance advices to an administrative clerk who endorses
the checks ‘‘For Deposit Only’’ and reconciles the amount on each remittance advice with the corresponding
check.
3. Clerk records each check on a form called a remittance list – where all cash received is logged.
2nd process: Record and deposit checks.
1. A cash receipts employee verifies the accuracy and completeness of the checks against the prelist.
2. Employee records the check in the cash receipts journal.
3. Clerk prepares a bank deposit slip showing the amount of the day’s receipts and forwards this along with
the checks to the bank.
DR CR
Cash XXXX.XX
Accounts Receivable Control XXXX.XX
3rd process: Update Accounts receivable. – remittance advices
4th process: Update general ledger – upon the receipt of journal voucher and account summary
5th process: Reconcile cash receipts and deposits – performed by clerk from the controller’s office
- compares the: copy of prelist, deposit slips received, related journal vouchers
REVENUE CYCLE CONTROLS

Transaction Authorization
1. Credit Check
2. Return policy – processed by the credit department
3. Remittance List – provides a means for verifying that customer checks and remittance advices match in
amount
Segregation of Duties
1. Transaction authorization should be separate from transaction processing.
2. Asset custody should be separate from the task of asset record keeping.
Inventory warehouse – physical custody of inventory assets
Inventory control – maintains records of inventory levels

Cash receipts dept – reports to the treasurer

Accounts receivable function – reports to the controller
3. The organization should be structured so that the perpetration of fraud requires collusion between two or
more individuals.
- Record-keeping tasks need to be carefully separate.
- Subsidiary ledger (AR and inventory), journals (sales and cash receipts), and general ledger should be
separately maintained.
Supervision
- Firms which have few employees rely on supervision as a form of compensating control to achieve an
adequate separation of function
- By closely supervising employees who perform potentially incompatible functions, a firm can
compensate for this exposure
- Provide control in the systems that are properly segregated
- Deterrent effect of supervision can provide an effective preventive control
ACCOUNTING RECORDS – form an audit trail to trace transactions thorugh various stages of processing
1. Prenumbered documents – sequentially numbered by the printer and allow every transaction to be
identified uniquely
- Permits the isolation and tracking of a single event through the accounting system
2. Special Journals – provides a concise record of an entire class of events
- Use the sales journal and cash receipts journal
3. Subsidiary ledgers – inventory and AR Subsidiary ledgers
4. General ledgers – basis for FS presentation
- Sales, inventory, cost of goods sold, AR and cask
FILES
 1. Open sales order file – shows the status of customer orders
2. Shipping logs – specifies order shipped during the period
3. Credit records file – provides customer credit data
4. Sales order pending file – contains open orders not yet shipped and billed
5. Back order file – contains customer orders for out-of-stock items
6. Journal voucher file – compilation of all journal vouchers posted to the general ledger
ACCESS CONTROLS
1. Warehouse security (fences, alarms and guards)
2. Depositing cash daily in the bank
3. Using a safe or night deposit box for cash.
4. Locking cash drawers and safes in the cash receipts dept.
INDEPENDENT VERIFICATION
- Verify the accuracy and completeness of tasks that other functions in the process perform
- Exists at the ff. points:
1. The shipping function verifies that the goods sent from the warehouse are correct in type and
quantity. Before the goods are sent to the customer, the stock release document and the packing
slip are reconciled.
2. The billing function reconciles the original sales order with the shipping notice to ensure that
customers are billed for only the quantities shipped.
3. Prior to posting to control accounts, the general ledger function reconciles journal vouchers and
summary reports prepared independently in different function areas. The billing function summarizes
the sales journal, inventory control summarizes changes in the inventory subsidiary ledger, the cash
receipts function summarizes the cash receipts journal, and accounts receivable summarizes the
AR subsidiary ledger.

SALES ORDER PROCESSING

1. Sales department – records the essential details on the sales order
2. Credit Depratment Approval – segregated from the sales dept.
3. Warehouse procedures – receives the stock release copy and then sends it with the inventory to the shipping
department
4. Shipping department – reconciles the sales order and shipping notice
- Sends the shipping notice and stock release to the billing department
5. Billing department – collects the relevant facts about transaction and bills the customer
- Enters it to the sales journal
- Summarizes all transactions and sends this to the general ledger department
6. Accounts Receivable, Inventory Control and General ledger departments

SALES RETURN PROCEDURES

1. Receiving department – prepares a return slip and forwards it to the sales dept. for processing
2. Sales department – prepares a credit memo
3. Processing credit memo

CASH RECEIPTS PROCEDURES

1. Mail Room – checks are sent to the cash receipts dept. and remittance advices to the AR dept.
2. Cash Receipts – records the cash receipts journal and promptly sends them to the bank, accompanied by 2
copies of deposit slip
- Prepares a journal voucher and send this to the GL dept.
3. Accounrs Receivable – uses remittance advices to reduce the customers’ account balances
- Prepares a summary of changes in account balances w/c is then sent to GL dept.
4. General departmet
5. Controller’s Office – bank reconciliation

COMPUTER-BASED ACCOUNTING SYSTEMS

Automation – using technology to improve the efficiency and effectiveness of a task
Reengineering – involves radically rethinking the business process and the work flow
AUTOMATED SYSTEM
Keystroke
- Begins with the arrival of shipping notices from the shipping dept.
- Converts the hard copy shipping notices to digital form to produce a transaction file of orders
Edit Run
- Validates all transaction records by performing clerical and logical tests on the data
- Recalculates the batch control totals to reflect the changes due to the removal of error records
Update Procedures
- Transaction is recorded to the journal using the secondary keys to locate them directly

REENGINEERING SALES ORDER PROCESSING WITH REAL TIME TECHNOLOGY

Transaction processing procedures
Sales Procedures
1. The system accesses the inventory subsidiary file and checks the availability of the inventory
2. It then performs a credit check by retrieving the customer credit data in the customer’s (AR) file
3. If credit approved, the system updates the customer’s current balance to reflect the sale and reduces the
inventory by the quantities of items sold
4. The system automatically transmits a digital stock release document to the warehouse, a digital shipping
notice to the shipping department, and records the sale in the open sales order file.
Closed – Y
Open – N
Warehouse Procedures
- produces a hard-copy printout of the electronically transmitted stock release document.
- then picks the goods and sends them, along with a copy of the stock release document, to the shipping
department.
Shipping department
- reconciles the goods, the stock release document, and the hard-copy packing slip produced on the
terminal.
- Transmit shipping notice containing shipping date and freight charges
- Updates the open sales order record in real time and places a Y Value in the closed field thus closing
the sales order
General Ledger Update Procedures
- batch update program searches the open sales order file for records marked closed and updates the
following general ledger accounts: Inventory—Control, Sales, AR—Control, and Cost of Goods Sold.
- Batch program prepares and mails customer bills and transfers the closed sales records to the closed
sales order file
AUTOMATED CASH RECEIPTS PROCEDURES
1. Mail Room
2. Cash receipts department
3. Accounts Receivable Department
4. Data processing department
REENGINEERED CASH RECEIPTS PROCEDURES

POS (Point-of-Sale Systems) – used in retail organizations, maintain no customer AR

Daily Procedures
- First, the checkout clerk scans the universal product code (UPC) label on the items being purchased
with a laser light scanner. – primary input device
- Connected online from the inventory file where it retrieves product price data and displays this on the
clerk’s terminal
- Quantity of inv on hand is reduced in real time to reflect the items sold
- When all the UPCs are scanned, the system automatically calculates taxes, discounts, and the total for
the transaction.
End-of-day procedures
- Prepares a three part deposit slip for the total amount of the cash received
CONTROL CONSIDERATIONS FOR COMPUTER BASED SYSTEMS
1. Authorization – automated task
- Concerned about the correctness of computer-programmed decision and quality of data used in the
decision
2. Segregation of Duties
- Programmers who write the original computer programs should not also be responsible for making
program changes. Both of these functions should also be separate from the daily task of operating the
system.
3. Supervision
- In a POS system, where both inventory and cash are at risk, supervision is particularly important.
Customers have direct access to inventory in the POS system, and the crime of shoplifting is of great
concern to management.
- Cash register’s internal tape
4. Access Control
ACCOUNTING RECORDS
1. Digital Journals and Ledgers – basis for financial reporting and many internal decisions
2. File backup – behind-the-scenes activities that may not appear on the system flowchart
- Essential in preserving the integrity of accounting records
INDEPENDENT VERIFICATION
- Performing batch control balancing after each run and by producing management reports and
summarizes for end users to review
PC Based Accounting Systems – general-purpose systems that serve a wide range of needs
- Popular with smaller firms
- Modular in design
PC Control issues
1. Segregation of duties - A single employee may be responsible for entering all transaction data, including
sales orders, cash receipts, invoices, and disbursements
2. Access Control – PC systems provide inadequate control over access to data files
- Data encryption, disc locks and physical security devices
3. Accounting records
Computer disk failure – primary cause of data loss
Backup copies of data files – relies on a conscious action by the users which too often fails to appreciate its
importance