Expenditure Cycle

ingestion turnLearning OutcomesDescribe and discuss the ph superstar line activities that related to selective information processing operations that performed in the in crap cycle and identify the information mandatory to make those decisions.Spot and dealing with the study threats and approximate the adequacy of various control procedures in the expenditure cycle.Understand and familiar with a data model (REA diagram) of the expenditure cycle.IntroductionWhat Should You Know The Expenditure Cycle The expenditure cycle involves interactions with your providers. You buy goods or services and pay cash. The primary objective of the expenditure cycle is to diminish the total cost of acquiring and maintaining list, supplies, and services. too to ensure that all goods and services argon ordered as needed, receive and verify that they ar in good condition as were ordered. Accounting for expenditures is an resultant for all questions related to activity in any organization. Accoun ting entities have increased requirements due to budgetary reporting needs and the variety of different memory board types related to the expenditure cycle. The recording of expenditure related transactions must be carefully monitored and controlled to meet these requirements.Objectives of the Expenditure CycleThe primary objective of the expenditure cycle is to minimize the total cost of acquiring and maintaining inventory, supplies, and services.Other objectives related to expenditure cycleTo ensure that all goods and services are ordered as neededTo receive all ordered goods and verify that they are in good conditionTo safeguard goods until neededTo ensure that invoices pertaining to goods and services are binding and correctTo record and classify the expenditures promptly and accuratelyTo post obligations and cash disbursements to proper suppliers accounts in the accounts payable ledgerTo ensure that all cash disbursements are related to authorized expendituresTo record and cl assify cash disbursements promptly and accuratelyFigure 3.1 Context Diagram of the Expenditure CycleFigure 3.2 Level of Expenditure CycleBasic Activities for Expenditure CycleThere are three basic activities performed in the expenditure cycle are1. riging goods, supplies, and services the get wind decisions in this process involve identifying what, when, and how much to corrupt from whom to purchase. Weaknesses in inventory control can create consecrateificant problems on inaccurate records cause shortages and one of the key factors affecting this process is the inventory control method to be used. We will consider three alternate approaches to inventory controlEconomic Order Quantity (EOQ)-traditional approach to managing inventory just in Time Inventory (JIT)*-seeks to reduce inventory levels by improving the accuracy of forecasting techniques Materials Requirements Planning (MRP)*-to minimize or eliminate inventory by buy or producing only in response to actual sales The ord er processing typically begins with a purchase request followed by the generation of a purchase order for inventory control system. The demanding to purchase goods or supplies is triggered by the inventory control break or an employee noticing a shortage. For advanced inventory control systems, initiate purchase were automatically requests when quantity falls below the reorder point. The need to purchase goods typically results in the creation of a purchase requisition. The purchase requisition is a paper text file or electronic form that identifiesWho is requesting the goodsWhere they should be deliveredWhen theyre neededItem numbers, descriptions, quantities, and pricesPossibly a suggested supplierDepartment number and account number to be chargedThe purchase requisition is received by a purchasing purchaser (Agent) in the purchasing department that typically performs the purchasing activity and the detail on the suppliers and the items purchased can be pulled from the supplier and inventory ensure files. A crucial decision is the selection of supplier and basic considerations are price, quality and dependability. Based on this three criterias, the supplier has should selected and identify a harvest-feast so its can become part of the product inventory master file so the supplier does not have to be carried out and retell every time for every purchasing for products that are seldom ordered. Its withal important to track and periodically evaluate supplier performance including data on purchase prices, rework and scrap costs and supplier speech performance to make sure the process its done on time. get OrderA purchase order is a document or electronic form that formally requests a supplier to sell and deliver undertake products at specified prices. The PO is both a contract and a promise to pay. It includesNames of supplier and purchasing factorOrder and requested delivery datesDelivery locationShipping methodDetails of the items orderedMultiple purch ase orders whitethorn be unblemished for one purchase requisition if fivefold sellers will fill the request. The ordered quantity may also differ from the requested quantity to take advantage of quantity discounts.Blanket OrderA blanket order is a commitment to buy specified items at specified prices from a particular supplier for a set time period.Reduces buyers uncertainty around reliable material sourcesHelps supplier plan capacity and operationsinformation Technology on orderingIn AIS, Information technology also can help and improve for readiness and effectiveness of purchasing function found on time and cost usingelectronic Data Interchange(EDI) to transmit purchase ordersvendor- coiffed inventory systemsreverse auctionspre-award auditsprocurement cards for small purchases2. Receiving and storing these items The receiving department is responsible to accepts deliveries from vendor or suppliers and reports it to warehouse manager that who reports to criminality President (VP) of Manufacturing. Inventory stores department typically stores the goods and also reports to warehouse manager. The receipt of goods must be communicated to the inventory control function to update inventory records. The twain major responsibilities of the receiving department are deciding whether to accept delivery and verifying the quantity and quality of delivered goods.The first decision is based on whether there is a valid purchase order is accepting an unordered goods wastes time, handling and storage. Verifying the quantity of delivered goods is really important so the company only pays for goods received and inventory records are updated accurately Companies must an effectively and clearly communicate with their staff especially receiving clerk so that all deliveries counting accurately. The receiving clerk need to sign receiving report, record the quantity received and also carefully examine each delivery for signs of obvious damage before routing the inventory to the warehouse. The receiving report is the primary document used in this processIt documents the date goods received, shipper, supplier, and Purchase Order (PO) numberShows item number, description, unit of measure, and quantity for each itemProvides space for signature and comments by the person who received and inspectedReceipt of services is typically documented by supervisory approval of the suppliers invoice. When goods arrive a receiving clerk compares the PO number on the packing slip with the open PO file to verify the goods were ordered.Then counts the goodsExamines for damage before routing to warehouse or factory tercet possible exceptions in this processThe quantity of goods is different from the amount orderedThe goods are damagedThe goods are of inferior qualityIf one of these exceptions occurs, the purchasing agent resolves the situation with the supplier and typically allows adjustment to the invoice for quantity discrepancies. If goods are damaged or inferior, a debit memo is prepared after the supplier agrees to accept a return or grant a discount.One imitation goes to supplier, who returns a credit memo in acknowledgment and other copy to accounts payable to adjust the account payable and other one go to shipping to be returned to supplier with the actual goods.IT can help improve the efficiency and effectiveness of the receiving activityBar-codingRFIDEDI and satellite technologyAudits3. Paying for these items There are two basic sub-processes involved in the defrayment processApproval of vendor invoices-by the accounts payable department, which reports to the controller. The legal obligation to pay arises when goods are received and the basic approach for processing vendor invoices are non-voucher system and voucher system real payment of the invoices-Payment of the invoices is done by the cashier, who reports to the treasurer.The cashier receives a voucher package, which consists of the vendor invoice and supporting documentation, such as pu rchase order and receiving report.Internal jibe for Expenditure CycleBefore we move on to discuss internal controls in the expenditure cycle, lets do a brief look backward of the organization chart, includingWho does what in the expenditure cycleTo whom they typically reportPurchasing selects suitable suppliers and issues purchase orders. Receiving decides whether to accept deliveries and counts and inspects deliveries. Inventory Stores stores goods that have been delivered and accepted. Account Payable approves invoices for payment Cashier Issues payment to vendors.Figure 3.3 Partial organization chart for units involved in expenditure cycleIn the expenditure cycle, Accounting Information arrangement (AIS) should provide internal and external controls to ensure that the following objectives are metAll transactions are properly authorizedAll recorded transactions are validAll valid and authorized transactions are recordedAll transactions are recorded accuratelyAssets are safeguar ded from loss or theftBusiness activities are performed efficiently and effectivelyThe company is in compliance with all applicable laws and regulationsAll disclosures are full and fair menace and ControlThere are several actions a company can take with respect to any cycle to reduce threats of errors or irregularities. These include development simple, easy to complete documents with clear instructionsUsing appropriate application controls, such as validity checks and field checksProviding space on forms to record who completed and who reviewed the formPre-numbering documents to encourages recording of valid and only valid transactions.Restricting access to blank documents (reduces risk of unauthorized transaction).The threats that may arise in the three major steps of the expenditure cycle, as well as general threats, Electronic Data Interchange (EDI) related threats, and threats related to purchases of services. Before we discuss specific threats, it may be helpful to have some b ackground on a form of occupational fraud and abuse which is broadly referred to as corruption. Corruption cases ofttimes involve arrangements between a companys purchasing agent and a sales representative for one of the companys vendors. The vendors representative may try to induce the purchasing agent to buy goods that are over-priced, inferior quality. Arent all the same needed and also arent even delivered. In exchange, the vendors rep typically offers the purchasing agent something of value. That something might be money, payment of a debt, a job offer, an expensive vacation, or anything the purchasing agent might value.According to the Fraud Examiners Manual published by the Association of Certified Fraud Examiners, these schemes usually take four formsBriberyConflict of interestEconomic extortionIllegal gratuitiesInformation Needs for Expenditure CycleInformation is needed for the following operational tasks in the expenditure cycle, includingDeciding when and how much inven tory to orderDeciding on appropriate suppliersDetermining if vendor invoices are accurateDeciding whether to take purchase discountsDetermining whether adequate cash is available to meet current obligationsInformation is also needed for the following strategic decisions based on setting prices for products/services, establishing policies on returns and warranties, deciding on credit terms, determining short-term borrowing needs and planning new marketing campaigns. The AIS needs to provide information to evaluate purchasing efficiency and effectiveness, supplier performance, time taken to move goods from receiving to production and percent of purchase discounts taken.Both financial and operating information are needed to manage and evaluate these activities. Both external and internal information are needed when the AIS integrate information from the various cycles, sources, and types, the reports that can be generated are unlimited. They include reports onSupplier performanceOutsta nding invoicesPerformance of expenditure cycle employeesNumber of POs processed by purchasing agentNumber of invoices processed by A/P clerkNumber of deliveries handled by receiving clerkNumber of inventory moves by warehouse workerInventory turnoverClassification of inventory based on contribution to profitabilityWe also know that an accountant should continually refine and improve these performance reportsSummaryIn this subtopic, we really learned about the basic business activities and data processing operations that are performed in the expenditure cycle on Ordering goods, supplies, and services Receiving and storing them Approving invoices and paying for them We also learned how IT can improve the efficiency and effectiveness of these processes and learned about decisions that need to be made in the expenditure cycle and what information is undeniable to make these decisions. This subtopic also discuss about the major threats that present themselves in the expenditure cycle an d the controls that can mitigate those threats