SUMMARY OF STUDY OBJECTIVES
An introduction to expenditure processes. There are five typical types of processes related to expenditures. The three that are covered in this chapter are purchasing processes, purchase return processes, and cash disbursement processes.
Purchasing processes and the related risks and controls. Purchasing processes include obtaining a purchase requisition; comparison of the requisition with stock levels; authorizing the purchase request; selecting the vendor; preparing a purchase order; receiving goods at the receiving department; counting, inspecting, and preparing a receiving order for goods received; and updating accounts payable, inventory, and general ledger records. Purchasing process controls can be categorized into authorization, segregation, adequate records, security of assets and records, and independent checks.
Purchase return processes and the related risks and controls. Purchase return processes include rejecting goods already received, matching goods to be returned to the original purchase order, preparing a debit memorandum; receiving credit and/or check from the vendor, and updating accounts payable, inventory, and general ledger records. Purchase return process controls can be categorized into authorization, segregation, adequate records, security of assets and records, and independent checks.
Cash disbursement processes and the related risks and controls. Cash disbursement processes include determining which invoices are due; matching purchase order, invoice, and receiving report; preparing payment; signing and mailing the check; and updating cash, accounts payable, and general ledger records.
An overview of IT systems of expenditure and cash disbursement processes that enhance the efficiency of expenditures processes. Manual tasks of entering and matching documents are extremely time-consuming and expensive. Purchasing and payments can become complex because a vendor may occasionally substitute items, ship a different quantity (undership or overship), notify the buyer of back orders, or partially fill an order. Thus, matching takes a large amount of human time to reconcile and approve for payment. IT systems can be used to reduce or eliminate these manual, time-consuming tasks. IT systems for purchasing related processes are computer-based matching, evaluated receipt settlement (ERS), e-business and electronic data interchange (EDI), and e-payables or electronic invoice presentment and payment (EIPP).
Computer-based matching of purchasing documents and the related risks and controls. A computer software system can match an invoice to its related purchase order and receiving report to approve payment of an invoice. To institute an automated matching system, all of the purchasing and receiving files must be online and constantly ready for processing. The system can then access the online purchase order and receiving files and check the match of items, quantities, and prices. The system will not approve an invoice for payment unless the items and quantities match with the packing slip and the prices match the purchase order prices. This ensures that the vendor has billed for the correct items, quantities, and prices. An automated matching system exposes several risks that a company must manage, including security, availability, processing integrity, and confidentiality risks.
Evaluated receipt settlement systems and the related risks and controls. An ERS system conducts a comparison by matching the purchase order to the goods received. If the PO matches the goods, payment is made to the vendor. This eliminates the need for the vendor to send an invoice, since payment is approved as soon goods are received (when they match a purchase order). Thus, it is an invoiceless system. An ERS system poses several risks that a company must manage, including security, availability, processing integrity, and confidentiality risks.
E-business and electronic data interchange (EDI) systems and the related risks and controls. E-business and EDI systems were covered in Chapter 8 from the seller's perspective. This chapter describes only the difference from the buyer's perspective. The buyer receives goods and pays cash in the exchange, while the seller receives the cash and ships the goods. When these exchanges are viewed from the buyer's perspective as opposed to the seller's, the processes, risks, and controls are very similar. E-business and EDI systems carry with them several risks that a company must manage, including security, availability, processing integrity, and confidentiality risks.
E-payables systems. EIPP systems take advantage of the connectivity of the Internet to electronically send invoices or payments. This means that an accounts payable process in an organization could receive invoices electronically via the Internet and make payment via the Internet. These systems typically utilize Web browsers as the interface across which accounts payable employees receive and view invoices and make payments.
Procurement cards. Procurement cards are essentially credit cards that the organization gives to certain employees to make designated purchases. These cards are normally not used to purchase raw materials or products, but are used for small-dollar-amount purchases such as supplies or maintenance, and to pay for travel and entertainment expenses.
Ethical issues related to expenditure processes. The board of directors and management of an organization have an ethical obligation to establish the proper tone at the top, strong internal controls, and high ethical standards. If they do not, owners of the organization are harmed when the company is defrauded through management fraud, fictitious vendor payments, and expense reimbursement fraud. It is important to establish internal control policies and IT controls to help prevent or detect such fraud, ethical lapses, or errors.
Corporate governance in expenditure processes. Corporate governance policies are critically important within expenditure processes, as they help to ensure that funds are expended only in an approved manner. Corporate governance policies should incorporate the four areas of management oversight, internal controls, financial stewardship, and ethical behavior. A strong form of corporate governance should help prevent fraud, theft, and misuse of corporate assets.