Term
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Definition
| purchases-payables-cash disbursements cycle |
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Term
| management's responsibility for establishing controls over the PPC cycle to ensure... |
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Definition
Proper authorization of the purchase
Ordering the proper quality and quantity of goods on a timely basis
Acceptance only of goods that have been ordered
Receipts of proper terms and prices from the vendor
Payment only for those goods and services that were ordered, received, and properly invoiced
Payment on a timely basis |
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Term
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Definition
separate authorization and recording of transactions, as well as custody of assets related to the transaction.
If separation is not feasible, compensating controls include more supervision and owner direct involvement in the process. |
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Definition
| authorizes purchase of goods |
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Definition
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| accepts goods for approved purchases, counts, and inspects the goods, and prepares the receiving report |
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Definition
| provides physical control over goods |
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Definition
| assembles voucher documentation and records the A/P |
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Definition
| evaluates the documentation to support payment and signs and mails the check |
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Definition
| maintains the A/P control account |
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Term
| document flow in PPC cycle |
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Definition
START- copies of documents are numbered so they may be referenced through the system.
Inventory control authorizes purchase of goods based on EOQ- 1 copy for purchasing agent and the other for A/P.
Inv. control maintains perpetual inventory records.
Purch. agent authorizes goods and determines appropriate vendor. (5-part PO)
2 copies sent to vendor
3rd copy sent to A/P
4th to Receiving
5th to open PO file
When goods arrive, Receiving accepts based on copy 4. Receiving inspects goods and prepares a receiving report.
Copy 1 sent to Inv. control for journal entry.
Copy 2 accompanies goods to Inv. Warehouse.
PA posts copy 2 to the open PO file, so the Purchasing Agent can follow up with vendors.
When invoice is received from vendor, it is directed to PA, who checks it with PO. The, PA approves the invoice for payment and sends it to A/P.
A/P matches invoice w/acquisition, POs, and receiving report, then does journal entry (DR: Purchases, CR: A/P)
Voucher is then filed and, on the due date, it is sent to Cash Disbursements, which verifies it and cuts the check. Then, entry forwarded to G/L to record (DR: A/P, CR: Cash). |
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Term
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Definition
If goods are produced, the objective of safeguarding assets is still the same. Custody of work-in-process and finished goods should be properly maintained.
Inventories should be in the custody of a storekeeper, and transfers should be properly documented and recorded to establish accountability. |
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Term
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Definition
| Requisitions, POs, receiving reports, payment vouchers, and checks are all prenumbered and accounted for. |
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Definition
| Purchases made only on proper authorizations. Receiving should not accept merchandise unless an approved PO is on hand. |
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Definition
| Receiving's copy of the PO omits the quantity so that employees must count the goods to determine the quantity to record on the receiving report. |
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Term
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Definition
| compares prices and terms from vendor invoice w/requested and acknowledged terms from the vendor. |
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Term
| When are vouchers and the related journal entries prepared? |
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Definition
| only when goods are received that have been authorized, ordered, and appropriately invoiced. |
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Term
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Definition
| permits timely payment to realize available cash discounts. |
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Term
| Cash Disbursements responsibility |
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Definition
Ascertains that proper support exists for the voucher and check before signing the check (Two signatures may be required for checks larger than a present limit)
Mails the checks so that no one internal to the entity can gain access to signed checks.
Cash disbursements cancels payment documents to prevent their use in duplicate vouchers or checks. |
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Term
| check authorization and signatures |
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Definition
| Two signatures may be required for checks larger than a present limit. |
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Term
| To whom does cash disbursements report? |
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Definition
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Term
| periodic reconciliation of the vouchers in the tickler file w/A/P |
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Definition
| assures proper recording in the A/P control account. |
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Term
| periodic inventory counts |
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Definition
| Periodic counts of inventory, independently reconciled w/perpetual records, provide assurance that physical controls over inventory are effective. |
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Term
| independent internal verification of inventory |
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Definition
| independent if performed by an individual who is not responsible for custody of assets or the authorization and recording of transactions. |
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Term
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Definition
Examines the vendor invoice for mathematical errors.
Compares vendor invoice w/receiving report, the requisition, and the PO to assure that a valid transaction occurred. |
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Term
| voucher-disbursement system uses |
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Definition
| applicable to virtually all required payments by the entity, not just purchases of inventory as described previously. |
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Term
| additional considerations for voucher-disbursement system |
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Definition
Authorizations may come from other departments based on budget or policy.
A/P would require different documents to support the preparation of the payment voucher and check.
A debit other than purchases would be entered on the payment voucher and recorded in the G/L. A/P would still be credited.
The use of the tickler file and the functions of Cash Disbursements would not change when other types of payments were made. |
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Term
| Computer processing changes |
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Definition
Computer processing ordinarily replaces the activities of clerks performing recording functions.
No physical voucher is prepared, the tickler file is maintained by the computer, and no check is prepared until the due date.
Sophisticated systems may replace the internal paper flows w/electronic transmissions.
Ordinarily, manual files and ledgers are replaced by digital files. |
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Term
| document flow in computerized PPC cycle |
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Definition
START- shipping of inventory for sales orders and the related reduction of inventory on the inventory master file cause inventory master levels to fall below the reorder point.
Then, a requisition request goes to PA. All of relevant info is on the computer for the PA to review and modify (if necessary) before approving requisition.
Once the requisition is approved, the PO program prints the PO for mailing the vendor, records it in the open PO file, and authorizes Receiving to accept the shipment.
When the goods arrive, Receiving accepts the shipment and enters the count and other relevant information into the receiving program. This step updates the PO and inventory master files. The goods are taken to the Inventory Warehouse.
When the invoice arrives, the Purchasing Agent enters the information into the invoice program, which tests the terms against those in the record in the open PO file. If the information is complete and the goods have been received, a record is created in the A/P master file. Furthermore, the G/L is updated for the debit to purchases and the credit to A/P.
The A/P program generates a check when the terms of purchase require it to do so. |
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Term
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Definition
| Access to the programs and data is restricted by password and device authorization tables. |
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Term
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Definition
| Access logs are maintained that automatically record each transaction, the time of the transaction, and the ID of the person who entered the transaction. |
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Term
| preformatted data entry screens |
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Definition
| used to ensure proper input. |
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Term
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Definition
| tests the characters input to ensure they are of an appropriate type for that field |
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Term
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Definition
| used to ensure the propriety of supplier transactional data prior to accepting the input |
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Term
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Definition
| used to test quantities ordered and received to determine if they are within acceptable limits. |
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Term
| electronic data interchange (EDI) |
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Definition
| communication of electronic documents directly for a computer in one entity to a computer in another entity. |
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Term
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Definition
| Advantages include reduction of clerical errors, speed, and the elimination of repetitive clerical tasks. EDI also eliminates document preparation, processing, filing, and mailing costs, and even the electronic equivalents of paper documents. |
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Term
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Definition
| EDI eliminates the paper documents, both internal and external, that are the traditional basis for may audit procedures. |
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Term
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Definition
Purchase orders, invoices, and receiving reports are replaced with a long-term contract establishing
Quantities, prices, and delivery schedules;
Production schedules;
Advance shipment notices;
Evaluated receipts settlements (periodic payment authorizations transmitted to the trading partner); and
Payments by EFT |
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Term
| electronic funds transfer (EFT) |
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Definition
| a process based on EDI that transfer money from one account to another by computer. |
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Term
| evidence sought by auditor to support assertions about EDI transactions |
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Definition
EDI long-term contract,
Electronic completed production schedule image, and
Internal and external evidence of evaluated receipts settlements sent to the trading partner. |
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Term
| audit procedures for EDI transactions |
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Definition
Auditors must seek new forms of evidence to support assertions about EDI transactions.
Auditors should evaluate electronic signatures and reviews when testing controls.
Auditors may need to consider other subsystems when testing a particular system.
Consideration of the audit trail, an essential component of which is the activity log. |
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Term
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Definition
| allows for the tracing of a transaction from initiation to disposition. Because of this, an activity log provides a key link in the audit process. |
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Term
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Definition
provides information about the:
Users who have accessed the system,
Files accessed,
Processing accomplished,
Time of access, and
Amount of time the processing required. |
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Term
| What kind of network does EDI often use? |
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Definition
| EDI often uses a VAN as a third-party service provider, and controls provided by the VAN may be critical. |
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Term
| value-added network (VAN) |
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Definition
privately-owned telecommunications carriers that sell capacity to outside users.
mailbox-type services in which sender and receiver computers are never directly connected to each other, but a 3rd-party VAN is used.
B/c of third-party buffer, VAN users are not required to conform to same standards, conventions, and protocols.
Also, VANs can store messages, so the parties can batch outgoing and incoming communications. |
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Term
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Definition
| Among other things, a VAN provides a mailbox service permitting EDI messages to be sent, sorted, and held until needed in the recipient's computer system. |
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Term
| Is encryption of EDI messages sent through VANs more secure when performed by hardware or software? |
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Definition
| Physically secure hardware. |
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Term
| initial phase of EDI implementation |
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Definition
Successful implementation of EDI begins with identifying the work processes and flows that support the entity's objectives.
The initial phase of EDI implementation includes understanding the entity's mission and an analysis of its activities as part of an integration solution to its needs. |
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Term
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Definition
| focus on procedures to convert written documents into a uniform electronic document-messaging format to facilitate EDI |
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Term
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Definition
| procedures for arranging data elements in specified formats for various accounting transactions. |
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Term
| American National Standards Institute (ANSI) |
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Definition
| To provide standardization and structure for EDI, organizations such as the American National Standards Institute (ANSI) have defined virtually every type of business transaction in terms of their fields and information content. |
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Term
| What must EDI users do to comply with ANSI standards for conventions? |
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Definition
| EDI users must map their data elements into the standard data fields of each transmission set; these sets facilitate communication between trading partners. |
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Term
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Definition
| rules on how each envelope or package of information is structured and processed by the communications devices so that messages are kept separate. |
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Term
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Definition
| traditional EDI connection; both parties have fixed computer connections, and the computers are used solely for EDI. The direct connection that is created forces all the computers to be compatible with each other. |
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Term
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Definition
means of conducting business directly w/trading partner. Can be used in a more open environment in which one firm transmits documents to another.
Often based on less formal agreements between the trading partners than in EDI and requires the sender to reconfigure documents into the recipient's format. |
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Term
| XML (extensible markup language) |
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Definition
| codes all information in such a way that a user can determine not only how it should be presented but also what it is; all computerized data may be tagged w/identifiers. Software for an industry can be written w/agreed upon codes if there is agreement w/in the industry. |
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Term
| XBRL (extensible business reporting language) |
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Definition
for F/S; developed by AICPA for companies reporting in accordance w/U.S. GAAP
Variation of XML expected to decrease the costs of generating financial reports, reformulating information for different uses, and sharing business information using electronic media.
SEC requires issuers, unless specifically excluded, to submit and post their F/S and F/S schedules on their corporate websites using XBRL. The SEC rules do not require assurance on the XBRL files. |
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Term
| management's responsibility for establishing controls over payroll cycle to ensure |
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Definition
Proper authorization of payroll
Appropriate calculation of payroll
Safeguarding of assets associated w/payment of payroll
Proper distribution of payroll
Proper accounting for payroll transactions |
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Term
| organizational subunits in payroll cycle |
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Definition
| HR, payroll, timekeeping, cost accounting, A/P, cash disbursements |
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Term
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Definition
| provides authorized list of employees and associated pay rates, deductions, and exemptions. |
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Term
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Definition
| accounting function responsible for calculating the payroll based on authorizations from HR and the authorized time records from Timekeeping. |
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Term
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Definition
| accounting function that oversees the employees' recording of hours on time cards (using time clock) and that receives and reconciles the job time tickets from Manufacturing. |
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Term
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Definition
| accumulates DM, DL, and MO on job-order cost sheets to determine costs of production |
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Term
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Definition
| prepares payment voucher based on payroll register prepared by Payroll |
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Term
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Definition
| signs and deposits a check based on the payment voucher into a separate payroll account, prepares individual employee paychecks, and distributes paychecks. |
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Term
| document flow for payroll cycle |
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Definition
START
HR provides authorized list of employees and associated pay rates, deductions, and exemptions.
Employees punch the time close w/time cards in Timekeeping before and after each shift.
Shop supervisor assigns employees production-order tasks to be performed, and each employee completes a job time ticket for each task performed. Indirect labor also required and shop supervisor reviews time tickets before forwarding to Timekeeping.
Timekeeping reconciles the clock cards w/job time tickets to ensure that employees were present and working. Clock cards are approved by Timekeeping.
Clock cards are forwarded to Payroll as authorization of the hours worked. Authorized employees, rates, and deductions from HR + authorized hours from Timekeeping = payroll for period. Payroll register is prepared listing each employee, gross pay, all deductions, and net pay. Payroll register is sent to A/P.
A/P uses the payroll register as authorization to prepare a payment voucher and check for the payroll equal to the total of the net pay to employees.
The check, voucher, and supporting documentation will be sent to Cash Disbursements (CFO) for signing. Check for net payroll is deposited into a payroll account from which each employee check is cut and distributed.
The job time tickets are sent to Cost Accounting to charge the WIP recorded on job cost sheets for the DL used in production. Nonproductive labor is accumulated and reported as overhead incurred.
Accounting entries are forwarded to the G/L. DR: A/P and CR: Cash. |
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Term
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Definition
| has no functional responsibility other than authorization of employees, pay rates, and deductions. |
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Term
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Definition
| approve (authorize) work performed (executed) by employees. |
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Term
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Definition
| Timekeeping reconciliation of the clock cards and job time tickets ensures that employees are present and working. Punching another person's clock card would be detected b/c of the absence of job time tickets. |
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Definition
| calculates pay only. It does not authorize transactions or take custody of related assets. |
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Term
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Definition
| signs the check but does not authorize, prepare, or account for the transaction. |
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Term
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Definition
| distributed by cash disbursements, usually by the paymaster. This individual has no functions relative to payroll. Supervisors should not distribute paychecks b/c they have an authorization function. |
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Definition
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Term
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Definition
| allows for ease in reconciling bank statements |
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Term
| payroll technology considerations |
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Definition
Most information can be collected directly by the computer.
Physical preparation, handling, and safeguarding of checks can be avoided. Direct deposit into employees' bank accounts is a typical control.
Digital files and data transmission replace the file cabinets and forms.
Several of the accounting clerk's functions are replaced by computer programs. These include some of the duties of Timekeeping and Payroll.
Objectives of control do not change.
The daily processing is immediate because the files are updated as the activities are recorded. However, the calculation of the payroll is normally batch oriented b/c checks to employees are prepared periodically. |
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Term
| payroll computer system flowchart |
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Definition
Eliminates virtually all paper flow.
HR makes authorized changes in the personnel master file.
As employee enters the plant, a clock card record is initiated by passing an ID card through a terminal containing the Timekeeping program.
Production orders, based on production schedule, are released to the shops via terminal. Shops supervisors assign production employees to the tasks. Prior to beginning, the production employee logs into the system using his/her ID card. When job is complete, the employee logs out, thereby updating the production record. Information is passed to the timekeeping program to be reconciled w/time records and to update the payroll master file.
Periodically, information from the payroll master file is matched w/ wage rate, deduction, and exemption information to calculate the payroll. Checks are printed and G/L is updated. |
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Term
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Definition
| passwords and IDs. Only HR has access to the personnel master file and can make changes. Other departments are limited to the changes that can be made to files. Each shop employee is issued an ID card used as input to initiate timekeeping transactions. |
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Term
| preformatted data entry screens |
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Definition
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Term
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Definition
| made to ensure that an employee record exists on the personnel file before any transactions are accepted. |
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Term
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Definition
| Time records from Timekeeping are automatically reconciled w/production time logged in the shops. |
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Term
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Definition
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Term
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Definition
| printed, identifying all questionable and potentially incorrect transactions. These transactions are investigated and any correction are made for reprocessing. |
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Term
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Definition
| Other cycles follow the basic pattern of the separation of duties (authorization, recording, and custody of related assets) illustrated in the previous discussions of controls. |
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Term
| plant, property and equipment (PPE) cycle controls |
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Definition
Formal budgeting process w/subsequent variance analysis
Written policies for acquisition and retirement of fixed assets
Written authorizations for acquisition and retirement of fixed assets
The same person should not both approval removal work orders and dispose of equipment.
Separation of recordkeeping and accountability for physical custody
Limited physical access to assets when feasible
Periodic reconciliation of subsidiary ledgers and the G/L control account
Periodic comparisons of physical assets w/subsidiary records |
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Term
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Definition
Written authorizations for the BOD
Separation of recordkeeping and accountability from physical custody
Physical safeguards over assets
Specific identification of certificate numbers when possible
Periodic reconciliation of subsidiary ledgers and the G/L control account
Periodic comparisons of physical assets w/subsidiary records |
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Term
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Definition
| Concerns obtaining and repaying capital through noncurrent debt and shareholders' equity transactions. These major transactions are authorized by the BOD or other ultimate authority. |
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Term
| inventory and warehousing cycle |
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Definition
Transfers of RM, FG, and costs subject to cost accounting IC activities.
Objectives of IC include safeguarding assets and promoting the reliability of financial reporting. Thus, IC includes physical controls over storage, assignment of custody to specific individuals, use of prenumbered documents for authorization of transfers, and perpetual inventory records. |
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