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Demonstrates deep, thorough understanding of the topic. Highly insightful. Connects topics to the reading, research, and own experience. Supports opinions with multiple specific examples of cited evidence. When reporting on own progress, provides a thorough, detailed description and analysis.

Assignment 3
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FStudents are advised to make their work clear and well presented, marks may be reduced
for poor presentation. This includes filling your information on the cover page.
• Students must mention question number clearly in their answer.
• Late submission will NOT be accepted.
• Avoid plagiarism, the work should be in your own words, copying from students
or other resources without proper referencing will result in ZERO marks. No
exceptions.
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font. No pictures containing text will be accepted and will be considered
plagiarism).
• Submissions without this cover page will NOT be accepted.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
1. Under the expenditure cycle ordering materials, supplies and services are
the first activity. Explain the following ordering threats with suitable example
with each of these.
a) Purchasing at inflated prices
b) Unreliable Suppliers
c) Kickbacks
Answer:
2. There may be several production operations threats. State any three production
operations threats and also suggest some measures to control these threats.
Answer:
3. Under the payroll system of an organization we find several components such
as HRM Department, Employees, Bank, Government Agencies, Insurance and
other companies, Various other departments. Take an example of an organization
and explain the relationship of these components with reference to Payroll
System of that organization.
Answer:
Chapter 13
The Expenditure Cycle: Purchasing to Cash Disbursements
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-1
Learning Objectives
 Explain the basic business activities and related
information processing operations performed in the
expenditure cycle.
 Discuss the key decisions to be made in the expenditure
cycle, and identify the information needed to make
those decisions.
 Identify major threats in the expenditure cycle, and
evaluate the adequacy of various control procedures for
dealing with those threats.
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-2
The Expenditure Cycle
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-3
The Expenditure Cycle
 Activities and information processing related to:
 Purchasing and payment of
 Goods and services
 Primary objective:
 Minimize the total cost of acquiring and maintaining
inventories, supplies, and the various services the
organization needs to function
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-4
Expenditure Cycle Activities
1. Ordering materials, supplies,
and services
2. Receiving materials, supplies,
and services
3. Approving supplier invoices
4. Cash disbursements
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-5
Expenditure Cycle General Threats
 Inaccurate or invalid master data
 Unauthorized disclosure of sensitive information
 Loss or destruction of data
 Poor performance
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-6
Expenditure Cycle General Controls
 Data processing integrity controls
 Restriction of access to master data
 Review of all changes to master data
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-7
Ordering Threats
 Inaccurate inventory records
 Purchasing items not needed
 Purchasing at inflated prices
 Purchasing goods of inferior quality
 Unreliable suppliers
 Purchasing from unauthorized suppliers
 Kickbacks
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-8
Ordering Controls

Perpetual inventory system

Bar coding or RFID tags

Periodic physical counts of inventory

Perpetual inventory system

Review and approval of purchase requisitions

Centralized purchasing function

Price lists

Competitive bidding

Review of purchase orders

Budgets

Purchasing only from approved suppliers
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-9
Ordering Controls (cont’d)

Review and approval of purchases from new suppliers

Holding purchasing managers responsible for rework and scrap costs

Tracking and monitoring product quality by supplier

Requiring suppliers to possess quality certification (e.g., ISO 9000)

Collecting and monitoring supplier delivery performance data

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)

Requiring purchasing agents to disclose financial and personal interests in suppliers

Training employees in how to respond to offers of gifts from suppliers

Job rotation and mandatory vacations

Supplier audits
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-10
Receiving Threats
 Accepting unordered items
 Mistakes in counting
 Verifying receipt of services
 Theft of inventory
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-11
Receiving Controls

Requiring existence of approved purchase
order prior to accepting any delivery

Do not inform receiving employees about
quantity ordered

Require receiving employees to sign
receiving report

Incentives

Document transfer of goods to inventory

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

Segregation of duties: custody of inventory
versus receiving
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Budgetary controls

Audits

Restriction of physical access to
inventory

Documentation of all transfers of
inventory between receiving and
inventory employees

Periodic physical counts of inventory
and reconciliation to recorded
quantities
13-12
Invoice Processing
 Non-Voucher
 Each approved invoice is posted to individual supplier
records in the accounts payable file and is then stored in an
open-invoice file.
 When a check is written to pay for an invoice, the voucher
package is removed from the open-invoice file, the invoice
is marked paid, and then the voucher package is stored in
the paid-invoice file.
 Voucher
 Disbursement voucher is also created when a supplier
invoice is approved for payment.
 Identifies the supplier, lists the outstanding invoices, and
indicates the net amount to be paid after deducting any
applicable discounts and allowances.
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-13
Advantages of Voucher System
1. Reduce number of checks
2. Can utilize pre-sequential-numbered voucher control
3. Allows for separation of invoice approval from invoice
payment
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-14
Approving Invoices Threats
 Errors in supplier invoices
 Mistakes in posting to accounts payable
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-15
Approving Invoices Controls
 Verification of invoice accuracy
 Requiring detailed receipts for
procurement card purchases
 Evaluated receipt settlement
 Match PO with receiving report
 Restriction of access to supplier master
data
 Verification of freight bill and use of
approved delivery channels
 Data entry edit controls
 Reconciliation of detailed accounts
payable records with the general ledger
control account
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-16
Cash Disbursement Threats
 Failure to take advantage of discounts for prompt
payment
 Paying for items not received
 Duplicate payments
 Theft of cash
 Check alteration
 Cash flow problems
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-17
Cash Disbursement Controls
 Filing of invoices by due date for discounts
 Cash flow budgets
 Requiring that all supplier invoices be matched to supporting
documents that are acknowledged by both receiving and inventory
control
 Budgets (for services)
 Requiring receipts for travel expenses
 Use of corporate credit cards for travel expenses
 Requiring a complete voucher package for all payments
 Policy to pay only from original copies of supplier invoices
 Cancelling all supporting documents when payment is made
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-18
Cash Disbursement Controls
 Cancelling all supporting documents when payment is made
 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 from accounts payable
 Requiring dual signatures on checks greater than a specific amount
 Regular reconciliation of bank account with recorded amounts by
someone independent of cash disbursements procedures
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-19
Cash Disbursement Controls
 Restriction of access to supplier master file
 Limiting the number of employees with ability to create onetime suppliers and to process invoices from one-time
suppliers
 Running petty cash as an imprest fund
 Surprise audits of petty cash fund
 Check protection machines
 Use of special inks and papers
 “Positive pay” arrangements with banks
 Cash flow budget
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
13-20
Chapter 14
The Production Cycle
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
14-1
Learning Objectives
 Describe the major business activities and related
information processing operations performed in the
production cycle.
 Identify major threats in the production cycle and
evaluate the adequacy of various control procedures for
dealing with those threats.
 Explain how a company’s cost accounting system can
help it achieve its manufacturing goals.
 Discuss the key decisions that must be made in the
production cycle and identify the information required to
make those decisions.
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
14-2
Production Cycle
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
14-3
The Production Cycle
 Business activities and information processing activities
 Related to manufacturing of products
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
14-4
Production Cycle Activities
1. Product design
2. Planning and
scheduling
3. Production operations
4. Cost accounting
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
14-5
Production Cycle General Threats
 Inaccurate or invalid master data
 Unauthorized disclosure of sensitive information
 Loss or destruction of data
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
14-6
Production Cycle General Controls
 Data processing integrity controls
 Restriction of access to master data
 Review of all changes to master data
 Access controls
 Encryption
 Backup and disaster recovery procedures
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
14-7
Product Design Threats
 Poor product design resulting in excess costs
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
14-8
Product Design Controls
 Accounting analysis of costs arising from product design
choices
 Analysis of warranty and repair costs
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
14-9
Planning and Scheduling Threats
 Over- or underproduction
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
14-10
Planning and Scheduling Controls
 Production planning systems
 Review and approval of production schedules and
orders
 Restriction of access to production orders and
production schedules
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
14-11
Production Operations Threats
 Theft of inventory
 Theft of fixed asset
 Poor performance
 Suboptimal investment in fixed assets
 Loss of inventory or fixed assets due to fire or other
disasters
 Disruption of operations
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
14-12
Production Operations Controls
 Physical access control
 Documentation of all inventory
movement
 Segregation of duties—custody of
assets from recording and
authorization of removal
 Restriction of access to inventory
master data
 Periodic physical counts of inventory
and reconciliation of those counts to
recorded quantities
 Physical inventory of all fixed assets
 Restriction of physical access to fixed
assets
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
 Maintaining detailed records of
fixed assets, including disposal
 Training
 Performance reports
 Proper approval of fixed asset
acquisitions, including use of
requests for proposals to solicit
multiple competitive bids
 Physical safeguards (e.g., fire
sprinklers)
 Insurance
 Backup and disaster recovery
plans
14-13
Cost Accounting Threats
 Inaccurate cost data
 Inappropriate allocation of overhead costs
 Misleading reports
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
14-14
Cost Accounting Controls
 Source data automation
 Data processing integrity controls
 Time-driven activity-based costing
 Innovative performance metrics
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
14-15
Assigning Production Costs
 Job-Order Costing
 Assigns costs to specific production batches, or jobs
 If the product or service is uniquely identifiable
 Process Costing
 Assigns costs to each process, or work center, in the production cycle,
and then calculates the average cost for all units produced.
 If the product or service is similar and produced in mass quantities
 Activity-Based Costing
 Traces costs to the activities that create them
 Uses a greater number of overhead pools
 Batch
 Product
 Organization
 Identifies cost drivers
 Cause-and-effect relationship
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
14-16
Chapter 15
The Human Resources Management and Payroll Cycle
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
15-1
Learning Objectives
 Describe the major business activities and related
information processing operations performed in the
human resources management (HRM)/payroll cycle.
 Discuss the key decisions to be made in the HRM/payroll
cycle and identify the information needed to make those
decisions.
 Identify the major threats in the HRM/payroll cycle and
evaluate the adequacy of various internal control
procedures for dealing with them.
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
15-2
HRM and Payroll Cycle
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
15-3
HRM and Payroll Cycle
 Managing Employees:
 Recruiting and hiring new employees
 Training
 Job assignment
 Compensation
 Performance evaluation
 Discharge of employees due to voluntary or involuntary
termination
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
15-4
HRM and Payroll Cycle Activities
1. Update master data
2. Validate time and
attendance
3. Prepare payroll
4. Distribute payroll
5. Disburse taxes and
miscellaneous
deductions
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
15-5
HRM and Payroll General Threats
 Inaccurate or invalid master data
 Unauthorized disclosure of sensitive information
 Loss or destruction of data
 Hiring unqualified or larcenous employees
 Violations of employment laws
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
15-6
HRM and Payroll General Controls

Data processing integrity controls

Restriction of access to master data

Review of all changes to master data

Access controls

Encryption

Backup and disaster recovery procedures

Sound hiring procedures, including verification of job applicants’ credentials, skills,
references, and employment history

Criminal background investigation checks of all applicants for finance-related
positions

Thorough documentation of hiring, performance evaluation, and dismissal
procedures
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
15-7
Update Master File Threats
 Unauthorized changes to payroll master data
 Inaccurate updating of payroll master data
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
15-8
Update Master File Controls
 Segregation of duties: HRM department updates master
data, but only payroll department issues paychecks
 Access controls
 Data processing integrity controls
 Regular review of all changes to master payroll data
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
15-9
Validation Threats
 Inaccurate time and attendance data
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
15-10
Validation Controls
 Source data automation for data capture
 Biometric authentication
 Segregation of duties (reconciliation of job-time tickets to
time cards)
 Supervisory review
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
15-11
Prepare Payroll Threats
 Errors in processing payroll
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
15-12
Prepare Payroll Controls
 Data processing integrity controls: batch totals, crossfooting of the payroll register, use of a payroll clearing
account, and a zero-balance check
 Supervisory review of payroll register and other reports
 Issuing earnings statements to employees
 Review of IRS guidelines to ensure proper classification of
workers as either employees or independent contractors
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
15-13
Disburse Payroll Threats
 Theft or fraudulent distribution of paychecks
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
15-14
Disburse Payroll Controls

Restriction of physical access to blank payroll checks and the check signature
machine

Restriction of access to the EFT system

Prenumbering and periodically accounting for all payroll checks and review of all
EFT direct deposit transactions

Require proper supporting documentation for all paychecks

Use of a separate checking account for payroll, maintained as an imprest fund

Segregation of duties (cashier versus accounts payable; check distribution from
hiring/firing; independent reconciliation of the payroll checking account)

Restriction of access to payroll master database

Verification of identity of all employees receiving paychecks

Re-depositing unclaimed paychecks and investigating cause
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
15-15
Disburse Taxes and Deduction Threats
 Failure to make required payments
 Untimely payments
 Inaccurate payments
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
15-16
Disburse Taxes and Deductions Controls
 Configuration of system to make required payments
using current instructions from IRS (Publication Circular E)
 Processing integrity controls
 Supervisory review of reports
 Employee review of earnings statement
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
15-17

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