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

- Purchase requisition is a document that authorizes a purchase transaction while a purchase order is a
document based on purchase requisition that specific items ordered from a vendor or supplier.

3. Explain how a voucher payable system works. How is the balance of AP determined?
- Under this system, the AP department uses cash disbursement voucher and maintain a voucher
register. After the AP clerk performs the three-way match, he or she prepares a cash disbursement
voucher to approve payment. Vouchers provide improved control over cash disbursements and allow
firms to consolidate several payments to the same supplier on a single voucher, thus reducing the
number of checks written. Each voucher is recorded in the voucher register. The voucher register
reflects the AP liability of the firm. The sum of the unpaid vouchers in the register is the firm’s total
AP balance.

4. Discuss the steps taken in the purchasing department in a basic technology expenditure cycle.
- The purchasing department receives the purchase requisitions, sorts them by vendor, and prepares a
multipart PO for each vendor. Two copies of the PO are sent to the vendor. One copy of the PO is sent
to inventory control, where the clerk files it with the open purchase requisition. One copy of the PO is
sent to AP for filing in the AP pending file. One copy (the blind copy) is sent to the receiving
department, where it is filed until the inventories arrive. The clerk files the last copy with the purchase
requisition in the open PO file.

5. What are steps taken in the receiving department under a basic technology expenditure cycle?
- Goods arriving from the vendor are reconciled with the blind copy of the PO. Upon completion of the
physical count and inspection, receiving clerk prepares a multipart receiving report stating the quantity
and condition of the inventories. One copy of the receiving report accompanies the physical
Inventories to the store room. Another copy is sent to the purchasing department, where the bird
chasing clerk reconciles it with the open PO. The clerk closes the open PO by filing the purchase
requisition, the PO, and the receiving report in the closed PO file. A third copy of the receiving report
is sent to inventory control where the inventory subsidiary ledger is updated. A fourth copy of the
receiving report is sent to the AP department, where it is filed in the AP pending file. The final copy of
the receiving report is filed in the receiving department.

6. What are the key authorization issues in purchasing and cash disbursements?
- In purchasing, inventory control function continually monitors inventory levels. As inventory levels
drop to their predetermined reorder points, inventory control formally authorizes replenishment with a
purchase requisition. In cash disbursements, the AP function authorizes cash disbursements via the
cash disbursement voucher. To provide effective control over the flow of cash from the firm, the cash
disbursements function should not write checks without this explicit authorization.

7. Identify six classes of physical controls employed in the expenditure cycle and give one example of
each.
- Transaction authorization example is the inventory control under purchases processing system and
AP authorizes payment under the cash disbursements system. Segregation of duties example is
inventory control separate from purchasing and inventory custody under the purchases processing
system. Supervision example is receiving area under the purchases processing system. Accounting
records example is but your payable file under the cash disbursements system. Access example is
proper security over cash under cash disbursements system. Independent verification example is AP
reconciles documents before liability is recorded under purchases processing system.

8. Describe two areas where segregation of duties is important in the expenditure cycle.
 - The two areas are 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
as it 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 maintaining AP could
perpetrate fraud against the firm.

9. Describe how the IT controls of automated purchase approval and automated postings to subsidiary
and general ledger accounts help reduce risk. What is necessary to ensure these controls function
properly?

10. The Golf Club Company makes custom golf clubs. The manufacturing supervisor interviews people
who have specialized manufacturing skills, and he informs payroll when an employee is hired. The
employees use a time clock to record the hours they work. The employees are also required to keep a
record of the time they spend working on each order. The supervisor approves all time cards.

The accountant analyzes the job tickets and prepares a labor distribution summary. Payroll prepares
the payroll register and paychecks. The supervisor distributes the paychecks to the employees. Payroll
informs cash disbursement of the funds required to cover the entire payroll amount. The cash
disbursements clerk ensures that there are adequate funds in the company's regular checking account to
cover the payroll.

Describe at least three internal control weaknesses; for each weakness suggest an improvement to
internal control.

11. Explain the integration of payroll with the human resource management (HRM) system that often
happens in moderate and large sized organizations.

12. The Baccus Corp. manufactures medical equipment. This is a capital intensive industry and
investments in fixed assets exceed $5 million a year. The minimum cost for production equipment is
$75,000. When supervisors want new production machinery, they contact the plant manager. The plant
manager approves or denies the request based on discussions with the production supervisor, the repair
and maintenance supervisor, and the quality control supervisor.

A purchase order is prepared by the purchasing department and sent to one of the three major suppliers
of production machinery for medical equipment. The equipment is delivered immediately to the
production floor and put into service. At the end of the month, the production supervisor informs the
general ledger clerk about the receipt of the machinery. The general ledger clerk establishes an asset
record for the machine. At the end of the year, the general ledger clerk computes straight-line
depreciation based on a 10-year life with a 10 percent salvage value. Depreciation expense is recorded
as a direct reduction of the asset cost.

The repair department performs routine maintenance on all of the production equipment. Occasionally
the repair department rebuilds a machine to extend its useful life. All of the costs associated with the
repair department are charged to manufacturing overhead. When a machine becomes obsolete,
production employees move it to a corner of the factory floor and break it down so that parts can be
used in other machines. Production employees routinely remove parts for personal use. Some smaller
machines have disappeared completely from the factory floor.
 The general ledger clerk takes a physical inventory every three years. About 75 percent of the fixed
assets can be located and identified. Other assets have serial numbers that are inaccessible, so the item
cannot be matched to a fixed asset record. Some fixed asset records cannot be traced to an actual item.
Several machines that have been scrapped and are being used for spare parts were matched to fixed
asset records. At the last inventory, the general ledger clerk did not make any adjustments to the fixed
asset records explaining that 75 percent accuracy in the fixed asset physical inventory was excellent.

Describe five internal control weaknesses and explain how to correct them.

13. Discuss outsourcing the payroll function. What are the advantages and risks?
The