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4. Theft of cash

  • Restriction of access to supplier master file
  • Limiting the number of employees with ability to create one-time suppliers and to process invoices from one-time suppliers
  • Running petty cash as an imprest fund
  • Surprise audits of petty cash fund

5. Check alteration

  • Check-protection machines
  • Use of special inks and papers
  • "Positive Pay" arrangements with banks

General Threats and Controls throughout entire Expenditure Cycle

Blanket Purchase Order

1. Inaccurate or invalid master data

  • Data processing integrity controls
  • Restriction of access to master data
  • Review of all changes to master data

2. Unauthorized disclosure of sensitive information

  • Access controls
  • Encryption

3. Loss or destruction of data

  • Backup and disaster recovery procedures
  • a commitment to purchase specified items at designated prices from a particular supplier for a set time period, often a year.

  • it reduces the buyer's uncertainty about reliable sources of raw materials and help the supplier plan its capacity and operations more effectively

4. Poor performance

  • Managerial reports

3 Advantages of Disbursement Voucher

Nonvoucher System

  • each approved invoice is posted to individual supplier records in the Accounts Payable file and is then stored in the Open Invoice File

Ordering Goods, Supplies, and Services

  • Reduce the number of checks that need to be written

  • It can be pre-numbered to simplify tracking payables

  • Facilitates separating the time of invoice approval from the time of Invoice payment

Approving Supplier Invoices Threats and Controls

Voucher System

  • The first major business activity in the expenditure cycle

  • The key decisions made in this initial step are identifying what, when, and how much to purchase, as well as identifying from which supplier to purchase

Cash Disbursements Threats and Controls

Pay Approved Invoices

  • disbursement voucher - document that identigies the supplier, lists the outstanding invoices, and indicates the net amount to be paid after deducting any applicable discounts and allowances

1. Errors in supplier invoices

  • Verification of invoice accuracy
  • Requiring detailed receipts for procurement card purchases
  • ERS
  • Restriction of access to supplier master data
  • Verification of freight bill and use of approved delivery channels

2. Mistakes in posting to Accounts Payable

  • Data entry edit controls
  • Reconciliation of detailed Accounts Payable records with the general ledger control account

  • Final activity in expenditure cycle

  • Voucher package - combination of a vendor invoice and supporting documentation forms

4. Theft of cash

  • Physical security of blank checks and check-signing machine
  • Periodic accounting of all sequentially numbered checks by cashier
  • Access controls to EFT terminals
  • Use of dedicated computer and browser for online banking
  • ACH blocks on accounts not used for payments
  • Separation of check-writing function for Accounts Payable
  • Requiring dual signatures on checks greater than a specific amounts
  • Regular reconciliation of bank account with recorded amounts by someone independent of cash disbursements procedures

Pay for Goods and Services

  • Third main activity in the expenditure cycle
  • Involves two steps: Approve vendor invoices (Accounts Payable) and Pay Vendor Invoices (Cash Disbursements)

Receive and Store goods Threats and Controls

Approve Vendor Invoices for Payment

Key Decisions

  • Objective of Accounts Payable: To authorize payment only for goods and sices that were ordered and actually received
  • 2 ways to process vendor invoices: Nonvoucher system and Voucher Systems

3. Verifying receipt of services

  • Budgetary controls
  • Audits

4. Theft of inventory

  • Restriction of physical access to inventory
  • Documentation of all transfers of inventory between receiving and inventory employees
  • Periodic physical counts of invetory and reconciliation to recorded quantities
  • Segregation of duties: custody of inventory versus receiving

Expenditure Cycle

Order goods Threats and Controls

Expenditure Cycle Business Activities

  • What is the optimal level of inventory and supplies to carry?
  • Which suppliers provide the best quality and service at the best prices?
  • Where should inventories and supplies be held?
  • How can the organization consolidate purchases across units to obtain optimal prices?
  • How can IT be used to improve both the effieciency and accuracy of the inbound logistics function?
  • Is sufficient cash available to take advantage of any discount suppliers offer?
  • How can payments to vendors be managed to maximize cash flow?
  • The primary objective of this cycle is to minimize the total cost of acquiring and maintaining inventories, supplies, and the various services organization needs to function.
  • It is a recurring set of business activities and refined information processing operations associated with the purchase of and payment for goods.

3. Purchasing at inflated prices

  • Price lists
  • Competitive bidding
  • Review of Purchase Orders
  • Budgets

1. Ordering goods, supplies, and services;

2. Receiving and storing goods, supplies and services;

3. Paying for goods, supplies, and services

1. Stockouts and excess inventory

  • Perpetual inventory system
  • Bar coding of RFID tags
  • Periodic physical counts of inventory

2. Purchasing items not needed

  • Perpetual inventory system
  • Review and approval of purchase requisitions
  • Centralized purchasing function

Cash Disbursements Threats and Controls

Receive and Store goods Threats and Controls

Generating Purchase Orders

Receive and Store Goods

6. Cash flow problesm

  • Cash flow budget

Order goods Threats and Controls

1. Accepting unordered items

  • Requiring existence of approved purchase order prior to accepting any delivery

2. Mistakes in counting

  • Do not inform receiving employees about quantity ordered
  • Require receiving employees to sign receiving report
  • Incentives
  • Use of bar codes and RFID tags
  • Configuration of the ERP system to flag discrepancies between received and ordered quantities that exceed tolerance threshold for investigation
  • The second major business activity in the expenditure cycle
  • It is responsible for accepting delivery from suppliers

Order goods Threats and Controls

Expenditure Cycle General Threats

  • Purchasing agents - buyers
  • factors to consider in selecting suppliers: price, quantity of materials, dependability in making deliveries
  • Purchase order - document or electronic form that formally requests a supplier to sell or deliver specified products at designated prices

Receiving report is the primary document used in the receiving subsystem of the expenditure cycle

  • it documents details about each delivery, including the date received, shipper, supplier, and purchase order number

Debit memo - records the adjustment being requested

4. Purchasing goods of inferior quality

  • Purchasing only from approved suppliers
  • Review and approval of purchases from new suppliers
  • Tracking and monitoring product quality by supplier
  • Holding purchasing managers responsible for rework and scrap costs

5. Unreliable suppliers

  • Requiring suppliers to possess quality certification
  • Collecting and monitoring supplier delivery performance data
  • Inaccurate or invalid master data
  • Unauthorized disclosure of sensitive information
  • Loss or destruction of data
  • Poor performance

6. Purchasing from unauthorized suppliers

  • Maintaining a list of approved suppliers and configuring the system to permit purchase orders only to approved suppliers
  • Review and approval of purchases from new suppliers
  • EDI-specific controls (access, review of orders, encryption, policy)

7. Kickbacks

  • Prohibit acceptance of gifts from suppliers
  • Job rotation and mandatory vacations
  • Requiring purchasing agents to disclose financial and personal interests in suppliers
  • Supplier audits

Just In Time Inventory System

Economic Order Quantity

Materials Requirements Planning

Pay Goods and Services

Economic Order Quantity

  • attempts to minimize, if not totally eliminate, carrying inventory by only purchasing and producing goods in response to actual, rather than for sales
  • characterized by frequent deliveries of small amounts of materials, parts and supplies directly to the specific locations that require them when they are needed
  • involves two steps: approve vendor invoices (Accounts Payable); pay vendor invoices (Cash Disbursements)

Ordering Costs - includes all expenses sociated with processing purchase transactions

Carrying Costs - associated with holding inventory

Stockout Costs - are those result from invetory shortages, such as loss sales or production delays

Reorder Point - specifies when to order

  • seek to reduce required inventory levels by improving the accuracy of forecasting techniques to better schedule purchases to satisy production needs
  • reduce uncertainties about when raw materials are needed and therefore enable companies to carry less inventory

Approve Vendor Invoices for Payment

  • traditional approach in managing inventory
  • maintaining sufficient stock to the production can continue without interruption even if the inventory use is greater than expected or if suppliers are late in making deliveries
  • based on calculating an optimal order size to minimize the sum of ordering, carrying and stockout costs

Purchase Requests

  • objective of Accounts Payable: to authorize payment only for goods and services r were ordered and actually received
  • 2 ways to process vendor invoices: Non Voucher and Voucher systems

Purchase Requisition - Document or electronic form, that identifies the requisitioner; specifies the delivery location and date needed, identifies the item numbers, descriptions, quantity and price of each item requested

Cash disbursements Threats and Controls

1. Failure to take advantage of discounts for prompt payment

  • Filing of invoices by due date for discounts
  • Cash flow budgets

2. Paying for items not received

  • Budgets (for services)
  • Requiring receipts for travel expenses
  • Use of corporate credit cards for travel expenses

3. Duplicate payments

  • Requiring a complete voucher package for all payments
  • Policy to pay only from original copies of supplier invoices
  • Cancelling all supporting documents when paymeny is made

Expenditure Cycle Information Needs

AIS must provide the following strategic and performance evaluation information:

The Expenditure Cycle

  • Determine when and how much additional inventory to order

  • Select the appropriate suppliers from whom to order

  • Verify accuracy of vendor invoices

  • Decide if purchase discounts should be taken

  • Monitor cash flow needs to pay outstanding obligations
  • Efficiency and effectiveness of the purchasing department

  • Analysis of supplier performance such as on-time delivery and quality

  • Time taken to move goods from the receiving dock into production

  • Percentage of purchase discounts taken
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