The ABC Company performs its expenditure cycle activities using its integrated ERP system as follows:
- Employees in any department can enter purchase requests for items they note as being either out of stock or in small quantity.
- The company maintains a perpetual inventory system.
- Each day, employees in the purchasing department process all purchase requests from the prior day. To the extent possible, requests for items available from the same supplier are combined into one larger purchase order in order to obtain volume discounts. Purchasing agents use the Internet to compare prices in order to select suppliers. If an Internet search discovers a potential new supplier, the purchasing agent enters the relevant information in the system, thereby adding the supplier to the approved supplier list. Purchase orders above $10,000 must be approved by the purchasing department manager. EDI is used to transmit purchase orders to most suppliers, but paper purchase orders are printed and mailed to suppliers who are not EDI capable.
- Receiving department employees have read-only access to outstanding purchase orders. Usually, they check the system to verify existence of a purchase order prior to accepting delivery, but sometimes during rush periods they unload trucks and place the items in a corner of the warehouse where they sit until there is time to use the system to retrieve the relevant purchase order. In such cases, if no purchase order is found, the receiving employee contacts the supplier to arrange for the goods to be returned.
- Receiving department employees compare the quantity delivered to the quantity indicated on the purchase order. Whenever a discrepancy is greater than 5%, the receiving employee sends an email to the purchasing department manager. The receiving employee uses an online terminal to enter the quantity received before moving the material to the inventory stores department.
- Inventory is stored in a locked room. During normal business hours an inventory employee allows any employee wearing an identification badge to enter the storeroom and remove needed items. The inventory storeroom employee counts the quantity removed and enters that information in an online terminal located in the storeroom.
- Occasionally, special items are ordered that are not regularly kept as part of inventory, from a specialty supplier who will not be used for any regular purchases. In these cases, an accounts payable clerk creates a one-time supplier record.
- All supplier invoices (both regular and one-time) are routed to accounts payable for review and approval. The system is configured to perform an automatic 3- way match of the supplier invoice with the corresponding purchase order and receiving report.
- Each Friday, approved supplier invoices that are due within the next week are routed to the treasurer’s department for payment. The cashier and treasurer are the only employees authorized to disburse funds, either by EFT or by printing a check. Checks are printed on dedicated printer located in the treasurer’s department, using special stock paper that is stored in a locked cabinet accessible only to the treasurer and cashier. The paper checks are sent to
accounts payable to be mailed to suppliers.
- Monthly, the treasurer reconciles the bank statements and investigates any discrepancies with recorded cash balances.
Identify weaknesses in ABC’s expenditure cycle procedures, explain the resulting problems, and suggest how to correct those problems.
Weaknesses Recommended Improvements
The ABC Company performs its expenditure cycle activities using its integrated ERP system as follows:
- Employees in any department can enter purchase requests for items they note as being either out of stock or in small quantity.
- The company maintains a perpetual inventory system.
- Each day, employees in the purchasing department process all purchase requests from the prior day. To the extent possible, requests for items available from the same supplier are combined into one larger purchase order in order to obtain volume discounts. Purchasing agents use the Internet to compare prices in order to select suppliers. If an Internet search discovers a potential new supplier, the purchasing agent enters the relevant information in the system, thereby adding the supplier to the approved supplier list. Purchase orders above $10,000 must be approved by the purchasing department manager. EDI is used to transmit purchase orders to most suppliers, but paper purchase orders are printed and mailed to suppliers who are not EDI capable.
- Receiving department employees have read-only access to outstanding purchase orders. Usually, they check the system to verify existence of a purchase order prior to accepting delivery, but sometimes during rush periods they unload trucks and place the items in a corner of the warehouse where they sit until there is time to use the system to retrieve the relevant purchase order. In such cases, if no purchase order is found, the receiving employee contacts the supplier to arrange for the goods to be returned.
- Receiving department employees compare the quantity delivered to the quantity indicated on the purchase order. Whenever a discrepancy is greater than 5%, the receiving employee sends an email to the purchasing department manager. The receiving employee uses an online terminal to enter the quantity received before moving the material to the inventory stores department.
- Inventory is stored in a locked room. During normal business hours an inventory employee allows any employee wearing an identification badge to enter the storeroom and remove needed items. The inventory storeroom employee counts the quantity removed and enters that information in an online terminal located in the storeroom.
- Occasionally, special items are ordered that are not regularly kept as part of inventory, from a specialty supplier who will not be used for any regular purchases. In these cases, an accounts payable clerk creates a one-time supplier record.
- All supplier invoices (both regular and one-time) are routed to accounts payable for review and approval. The system is configured to perform an automatic 3- way match of the supplier invoice with the corresponding purchase order and receiving report.
- Each Friday, approved supplier invoices that are due within the next week are routed to the treasurer’s department for payment. The cashier and treasurer are the only employees authorized to disburse funds, either by EFT or by printing a check. Checks are printed on dedicated printer located in the treasurer’s department, using special stock paper that is stored in a locked cabinet accessible only to the treasurer and cashier. The paper checks are sent to
accounts payable to be mailed to suppliers.
- Monthly, the treasurer reconciles the bank statements and investigates any discrepancies with recorded cash balances.
Identify weaknesses in ABC’s expenditure cycle procedures, explain the resulting problems, and suggest how to correct those problems.
Weaknesses Recommended Improvements
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Related questions
Question 1
Identify the item below that is not one of the four different types of data processing activities.
deleting | ||
reading | ||
creating | ||
using |
Question 2
All of the following are advantages of an ERP system except
ERPs permit manufacturing plants to receive new orders in real time. | ||
in an ERP, data input is captured or keyed once. | ||
it takes considerable experience and training to use an ERP system effectively. | ||
ERPs permit management to gain greater visibility into every area of the enterprise. |
Question 3
Sam Jones has been the controller of Downtown Tires for 25 years. Ownership of the firm recently changed hands and the new owners are conducting an audit of the financial records. The audit has been unable to reproduce financial reports that were prepared by Sam. While there is no evidence of wrongdoing, the auditors are concerned that the discrepancies might contribute to poor decisions. Which of the following characteristics of useful information is absent in the situation described above?
relevant | ||
reliable | ||
complete | ||
timely | ||
understandable | ||
verifiable | ||
accessible |
Question 4
An ERP system might facilitate the purchase of direct materials by all of the following except
preparing a purchase order when inventory falls to reorder point. | ||
routing a purchase order to a purchasing agent for approval. | ||
communicating a purchase order to a supplier. | ||
selecting the best supplier by comparing bids. |
Question 5
Antia Carmie is the largest collector and retailer of Japanese fans in the St. Louis area. Antia uses computer technology to provide superior customer service. The store's database system was designed to make detailed information about each Japanese fan easily accessible to her customers. Accordingly, the fan price and condition are provided for each fan, along with many pictures of each fan. In Antia's database, the price of the Japanese fans is a(n)
entity. | ||
attribute. | ||
field. | ||
record. |
Question 6
Which of the following is not considered a source document?
A copy of the company's shipping document. | ||
A copy of the company's ledger. | ||
A copy of the company's sales journal. | ||
A copy of the company's financial statements. |
Question 7
In an ERP system, the module used to record data about transactions in the disbursement cycle is called
financial. | ||
order to cash. | ||
customer relationship management. | ||
purchase to pay. |
Question 8
Baggins Incorporated identifies new product development and product improvement as the top corporate goals. An employee developed an innovation that will correct a shortcoming in one of the company's products. Although Baggins current Return on Investment (ROI) is 12%, the product innovation is expected to generate ROI of only 10%. As a result, awarding bonuses to employees based on ROI resulted in
goal conflict. | ||
information overload. | ||
decreased value of information. | ||
goal congruence. |
Question 9
________ are examples of activities that constitute inbound logistics.
Activities that transform inputs into final products or services | ||
Activities that provide post-sale support to customers | ||
Activities that consist of receiving, storing, and distributing the materials used as inputs by the organization to create goods and/or services it sells | ||
Activities that help customers to buy the organization's products or services |
Question 10
In which transaction cycle would information for inventory purchases be most likely to pass between internal and external accounting information systems?
the revenue cycle | ||
the expenditure cycle | ||
the human resources / payroll cycle | ||
the financing cycle |
Question 11
The collection of customer payment is part of which transaction cycle?
the human resources cycle | ||
the production cycle | ||
the revenue cycle | ||
the expenditure cycle |
Question 12
Which of the following is an example of source data automation?
POS (point-of-sale) scanners in retail stores | ||
a bill of lading | ||
a subsidiary ledger | ||
a utility bill |
Question 13
All of the following are guidelines for developing a good coding system except
be as sophisticated as possible to promote usage. | ||
be consistent with its intended use. | ||
be flexible to allow for growth. | ||
be consistent with the company's organization structure. |
Question 14
What is a key decision that needs to be made with regards to borrowing money from lenders?
the location | ||
pro forma income statement | ||
how much capital to acquire | ||
job descriptions |
Question 15
Identify the false statement below.
A service company does not have an inventory system. | ||
Retail stores do not have a production cycle. | ||
Financial institutions have installment-loan cycles. | ||
Every organization should implement every transaction cycle module. |
Question 16
The chart of accounts of a fast-food restaurant would probably include
a list of customers. | ||
a list of financial statement accounts. | ||
a list of vendors. | ||
a list of employees. |
Question 17
Which statement below regarding the AIS is false?
Traditionally, most AIS have been designed so that both financial and operational data are stored in a manner that facilitates their integration in reports. | ||
The AIS must be able to provide managers with detailed and operational information about the organization's performance. | ||
Both traditional financial measures and operational data are required for proper and complete evaluation of performance. | ||
The AIS was often just one of the information systems used by an organization to collect and process financial and nonfinancial data. |
Question 18
In Petaluma, California, electric power is provided to consumers by Pacific Power. Each month Pacific Power mails bills to 186,000 households and then processes payments as they are received. What is the best way for this business to ensure that payment data entry is efficient and accurate?
well-designed paper forms | ||
turnaround documents | ||
source data automation | ||
sequentially numbered bills |
Question 19
Data must be converted into information to be considered useful and meaningful for decision making. There are seven characteristics that make information both useful and meaningful. If the same information can be reproduced by two independent and knowledgeable people, it is representative of the characteristic of
verifiability. | ||
truthful. | ||
relevance. | ||
reliability. |
Question 20
Antia Carmie is the largest collector and retailer of Japanese fans in the St. Louis area. Antia uses computer technology to provide superior customer service. The store's database system was designed to make detailed information about each Japanese fan easily accessible to her customers. Accordingly, the fan price and condition are provided for each fan, along with many pictures of each fan. In Antia's database, the data about each Japanese fan represents a(n)
entity. | ||
attribute. | ||
field. | ||
record. |
QUESTION 2: UNDERSTANDING THE INTERNAL CONTROL PROCESS, ASSESSING CONTROL RISK AND INVENTORY MANAGEMENT SYSTEM OF RUSSELL LTD.
Russell Ltd carries four types raw-chemicals under both product Line A and product Line B as shown in the table below. The company uses perpetual inventory system and adopts FIFO (first in and first out) method to estimate the inventory cost. Inventory level is managed and monitored by APEX, an inventory management system.
There are two central warehouses. One is located in Auckland, New Zealand and the other is in Adelaide, Australia. The warehouses dispatch clothes to all retailing stores within the country. In addition, the Australia warehouse dispatches stock to stores in Indonesia. On the balance date, the two central warehouses hold 20% of total inventory and all retailing stores hold 80% of total inventory.
Location | Number of stores |
Auckland | 5 |
Wellington | 4 |
Christchurch, | 3 |
Perth | 6 |
Adelaide | 6 |
Total | 24 |
INVENTORY AT YEAR END RETAIL STORES
Nature of the range | Label | Value $000 |
Product Line A | Chemicals-P2P | 173000 |
Chemical-T2P | 100000 | |
Product Line B | Chemicals-Paints | 89000 |
Chemicals-cosmetics | 100000 | |
Total Closing balance of inventory | 462000 |
APEX - INVENTORY MANAGEMENT SYSTEM
APEX, the companyâs inventory management system has a central server. It records information on inventory item code, item description, cost price per item, selling price per item, and the available quantities. It also tracks the available quantities of inventory in each warehouse and store. Reorder point was not set up in APEX. Instead, the order quantities are based on anticipated sales level.
Since some raw materials sell quicker than others, Russell has a policy of providing 30% discounts for inventories (raw materials) that have been on the shop floor for more than 4 weeks and 50% discount after 7 weeks. New inventory normally arrives in the store every 4 weeks. The discounts are automatically applied to the inventories based on their arrival dates in the stores, by using a Sales Register System â SALENET.
SALENET â THE SALES REGISTER SYSTEM
SALENET links to APEX (the companyâs inventory management system); and the terminals for the sales system are located in each store. SALENET records cash and credit card sales, calculate discounts, sales tax and produces Daily Sales Report (DSR) for each store. The DSR records all raw types of raw materials under both product lines and quantities sold on that day, and the sales and cost prices of those raw materials. The SALENET system automatically updates inventory levels in APEX at midnight daily, after which it also exports information on the DSR to the general accounting system (a separate software) for the recording of sales.
SUPPLIERS
In Russell Ltd, inventory (raw materials) code, description, and quantities ordered are assigned with a pre-numbered Purchase Order (PO). The Malaysian suppliers source the different inputs-raw materials used for producing chemicals from their local markets. The payment arrangement agreed between Russell and the Malaysian suppliers is as follows: (1) 40% of total costs as a deposit at the time when the completed negotiation and the PO are sent to the suppliers. (2) Once the raw materials are ready and shipped, Russell has 30 days to pay the remaining balance 60%. The suppliers provide a Bill of Lading as proof that the garments are shipped, its ownership transfers to Russell at the time of shipment. When the inventory are shipped (Russell receives a copy of the Bill of Lading via email), the accounting department records a journal entry to recognise both inventory-in-transit and account payable, but the actual inventory level in APEX is not updated until the inventory arrived at the warehouse.
RECEIVING INVENTORY
The shipment of raw-inputs arrives at the central warehouses. The barcodes and the quantities of inventory items shipped are printed on the outside of the cartons. A Packing Slip is attached to each shipment. Each barcode printed on the carton contains information on the inventory item code and raw materials description.
For each shipment that arrives, the warehouse assistant prints off the relevant pre-numbered PO. The warehouse assistant using a scanning device reads each barcode printed on the outside the cartons and compares it with the information on the PO. When the information agrees, the warehouse assistant ticks and signs the PO. He then logs into the APEX system to click on the âreceivedâ box on the PO filed in the system, after which the APEX system updates the inventory levels and also prints out a Receiving Report (RR). At this point, APEX also sends a copy of Receiving Report to the accounting department regarding the arrival of the inventory. The accounting department then initiates a journal entry to reverse inventory-in-transit and to increase inventory. The warehouse assistant is authorised to alter the quantities received in APEX to reflect the actual received quantities when there is a discrepancy in the information between the PO and the barcodes printed on the cartons. The Receiving Report and supplierâs Packing Slip are filed in the warehouse. The signed PO and a copy of Receiving Report are handed to the inventory manager for inventory distribution.
DISTRIBUTING INVENTORY TO RETAIL STORES
The inventory (chemicals) manager is responsible for distributing inventory to the retail stores. The inventory distribution is usually based on the size and turnover of the retail store. When the new inventories arrive, the inventory manager uses APEX to allocate inventory to each retail store. APEX generates and prints a pre-numbered Distribution Report which displays the inventory item code, item description and quantities and the location of the store. Two copies of the Distribution Report go to the warehouse for packing and then shipping via an external carrier. The warehouse files one copy of the Distribution Report and the other copy goes with the inventory to a retail store. When the inventories arrive at the retail store, the shop manager logs into the APEX system. She identifies the relevant shipment by checking its reference number on the Distribution Report and then confirms receipt of the inventories by clicking the âarrived in storeâ box, after which the shop manager and/or assistants unpack the inventory.
Russell carried out an annual inventory count on the 30 June 2016 at 6pm local time. During the inventory counts, the stores were shut. Each store manager has access to APEX. They can read and print out inventory reports, but they cannot edit the inventory levels in APEX. For the inventory counts, the store manager prints out a list of inventories held in the store, which shows the item code, description and quantities. Two staff members and the manager count the stock and write down the numbers counted next to each inventory item on the list. They take note of any differences. At end of the inventory count, the store manager prepares an Inventory level Report which notes the differences using SALENET. SALENET adjusts the inventory level in APEX at midnight to reflect the results from the inventory count. A copy of the Inventory Count Report from each individual store are sent to the accounting department, at where all reports are aggregated based on item codes. The accounting department then adjust the inventory level accordingly in the accounting system.
QUESTION 2: UNDERSTANDING THE INTERNAL CONTROL PROCESS, ASSESSING CONTROL RISK, AUDIT PROCEDURE FOR INVENTORIES
Identify three control strengths in the inventory system of Russell Ltd and explain why each control is a strength. For each control strength, identify audit procedures to test the effectiveness of control. Use the format to present your answers.
You are required to present your answers according to this format:
Identify a control strength | Why it is a strength | Audit Procedures to test the control |