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Expenditure Cycle
AIS
| Question | Answer |
|---|---|
| What is an expenditure cycle? | A recurring set of business activities and related information processing operations associated with the purchase of and payment for goods and services. |
| What is the economic order quantity (EOQ)? | To maintain sufficient stock so that production can continue without interruption even if inventory use is greater than expected or if suppliers are late in making deliveries. |
| What is a reorder point? | Specifies when to order. |
| What is materials requirements planning (MRP)? | To reduce required inventory levels by improving the accuracy of forecasting techniques to better schedule purchases to satisfy production needs. |
| What is the just-in-time inventory system? | An attempt to minimize, if not totally eliminate, finished goods inventory by purchasing and producing goods only in response to actual, rather than forecasted, sales. |
| What is a purchase requisition? | A form that identifies the requisitioner; specifies the delivery location and date needed; identifies the item numbers, descriptions, quantity, and price of each item requested; and may suggest a supplier. |
| What is a purchase order? | A document or electronic form that formally requests a supplier to sell and deliver specified products at designated prices. |
| What is a blanket purchase order? | A commitment to purchase specified items at designated prices from a particular supplier for a set time period, often one year. |
| What is vendor-managed inventory? | A program that essentially outsources much of the inventory control and purchasing function: Suppliers are given access to sales and inventory data and are authorized to automatically replenish inventory when stock fall to predetermined reorder points. |
| What are kickbacks? | Gifts from suppliers to purchasing agents for the purpose of influencing their choice of suppliers. |
| What is are receiving reports? | Documents details about each delivery, including the date received, shipper, supplier,m and purchase order number. |
| What is a debit memo? | A document used to record a reduction to the balance due to a vendor. |
| What is a voucher package? | The combination of the supplier invoice and associated supporting documentation. |
| What is a nonvoucher system? | A method for processing accounts payable in which each approved invoice is posted to individual vendor records in the accounts payable file and is then stored in an open invoice file. |
| What happens with a nonvoucher system? | When a check is written to pay for an invoice, the invoice is removed from the open-invoice file, the invoice is marked paid, and then the voucher package is stored in the paid-invoice file. |
| What is the disbursement voucher? | A document that identifies the vendor, lists the outstanding invoices, and indicates the net amount to be paid after deducting any applicable discounts and allowances |
| What is an evaluated receipts settlement (ERS)? | An invoiceless approach to accounts payable that replaces the three-way matching process with a two-ay match of the purchase order and receiving report. It saves time and money by the number of mismatches and the time and expense to generate/track invoice |
| What is a procurement card? | A corporate credit card that employees can use to purchase specific kinds of items. |
| What is an imprest fund? | A cash account with two characteristics: 1.) It is set at a fixed amount, such as #100 2.) vouchers are required for every disbursement. Cash+vouchers = present fund balance. |
| Of the four threat categories listed in Table 5-1, which results in the greatest percent of security problems? | Unintentional acts (not only the greatest percent of security problems, but greatest dollar losses to organizations) |
| Legally, what makes an act fraudulent? | A false statement,representation,or disclosure;A material fact,which is something that induces a person to act;An intent to deceive;A justifiable reliance,that is,the person relies on the misrepresentation to take an action; |
| What are the two categories of fraud? | Misappropriation of assets and fraudulent financial reporting (Note that the ACFE report identifies a third type – corruption. Audit professional literature identifies corruption as a separate, unique category – illegal acts.) |
| Which category of fraud occurs most often? | Misappropriation of assets occur most often |
| Which category of fraud is most costly per occurrence? | Fraudulent financial reporting is most costly per occurrence |
| Which category of fraud is auditors more concerned with? | Auditors are typically more concerned with fraudulent financial reporting because auditors are concerned about material misstatements (including fraud) to the financial statements and footnotes. |
| Misappropriation of assets is often referred to as “employee fraud” while fraudulent financial reporting is often referred to as “management fraud”. Why do you think this is so? | Misappropriation of assets can be perpetrated by any employee within an organization. Fraudulent financial reporting can only be perpetrated by those who can materially misstate the financial statements, that being management of the organization. |
| Describe an example of misappropriation of assets in the revenue cycle. | One example that we have discussed in class is a lapping scheme; another is skimming sales; another is stealing inventory during shipping – see the ACFE report for other common schemes. |
| Describe an example of misappropriation of assets in the expenditure cycle. | One example we have discussed in class is a billing scheme using false vendors; another is stealing inventory when received; another is stealing a blank check – see the ACFE report for other common schemes. |
| Describe an example of fraudulent financial reporting in the revenue cycle. | Here are some examples: Intentionally recording sales that never occurred Intentionally failing to record sales that occurred Intentionally recording revenue in the wrong time period |
| Describe an example of fraudulent financial reporting in the expenditure cycle. | Here are some examples: Intentionally recording expenses that never occurred Intentionally failing to record expenses that occurred Intentionally recording expenses in the wrong time period |
| Explain the three sides of the fraud triangle. In your opinion, which side appears to be most under the control of organizations? Why do you think so? | Pressure/motive Opportunity Rationalization/attitude Opportunity is most under control because this side deals directly with internal control |
| Definition of Fraud | Deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage |
| Misappropriation of Assets is the theft of | Cash Equipment (cars, trucks, heavy machinery) Inventory (copper wire, computer chips, clothing) Office supplies |
| Fraudulent Financial Reporting | Intentional or reckless conduct, whether by act or omission, that results in materially misleading financial statements |
| Fraud Triangle | Pressure Opportunity Rationalization |
| Opportunity | A person's opportunity to commit the fraud A person's opportunity to conceal the fraud A person's opportunity to convert the fraud into personal gain |
| Rationalization | A person will justify their illegal behavior |
| Pressure | A person’s incentive to commit fraud |
| Auditors' Responsibility to Detect Fraud | Understand the specific company and its fraud risks Design procedures to address specific fraud risks Evaluate findings of procedures Communicate with those charged with governance Understand where fraud could happen in a given company |
| Independent checks on performance, particularly effective supervision | by the owner/manager may be the most important control in situations where proper separation of duties cannot be fully achieved. For example, the owner/manager should reconcile the bank account, examine invoices,review cash disbursements journal, analyze |
| Proper authorization of transactions and activities | by the owner/manager, and have employees sign documents to acknowledge responsibility for transactions. |
| Proper design and use of documents and records | for capturing all important data items for each transaction,as well as sequential numbering of documents to facilitate subsequent review.Separation of duties and an audit trail of documentation are the two basic aspects of any system of internal control |
| Safeguarding assets, records, and data | particularly by using computers with restricting access to data, and fidelity bonding of employees. |
| A preventive control deters problems before they arise (page 185 of your textbook). | Arise” is referring to fraud/errors that have occurred/recorded in the accounting records. A detective control discovers problems that are not prevented. Detective controls discover fraud/errors after occurrence/recorded. |
| Carefully study the controls selected in this problem, and consider the threat to which it is matched to. | “review of all changes to master data for the purpose of reducing the threat of inaccurate or invalid master data.” detective control b/c of reviewing happens AFTER the possible occurrence/recording of inaccurate or invalid master data. |
| “Shipping merchandise” combined with “Billing customers” | 1) “Shipping merchandise” is a custody activity, while “Billing customers” is a recording activity 2) Incompatible 3) One can more easily ship merchandise to a friend and not bill for the goods (see 13.1 in Table 12-1) |
| “Shipping merchandise” combined with “depositing customer payments” | 1) “Shipping merchandise” is a custody activity, while “depositing customer payments” is a custody activity 2) Compatible 3) The two duties do not interact with each other in such a way as to more easily conceal a fraud or error |
| “Billing customers” combined with “maintaining accounts receivable” | 1)“Billing customers” is a recording activity, while “maintaining accounts receivable” is a recording activity 2)Compatible 3)As two recording activities in the same cycle, the two do not conflict with each other to more easily conceal a fraud or error |
| “Depositing customer payments” combined with “Issuing credit memos” | 1)“Depositing customer payments” custody activity, while “Issuing credit memos” authorization activity 2)Incompatible 3)Could more easily conceal the theft of customer payments and adjustment of their accounts for some type of allowance/discount/writeof |
| “Maintaining accounts receivable” combined with “issuing credit memos” | 1)“Maintaining accounts receivable” is a recording activity, while “issuing credit memos” is an authorization activity 2)Incompatible 3)Can take a bribe from a customer to adjust balance and more easily conceal the fraud (see 16.1 in Table 12-1) |
| “Approve purchase orders” combined with “Cancel supporting documents in the voucher package” | 1)“Approve purchase orders” authorization “Cancel supporting documents in the voucher package” authorization 2)Compatible 3)As two authorization activities in the same cycle, the two do not conflict with each other to more easily conceal a fraud or erro |
| “Negotiate terms with suppliers” combined with “request inventory to be purchased” | “Negotiate terms with suppliers” is an authorization activity, while “request inventory to be purchased” is an authorization activity |
| “Negotiate terms with suppliers” combined with “request inventory to be purchased” | 2) Compatible, but out of practicality they are typically separated with respect to inventory purchases – negotiation is typically handled by purchasing function |
| “Negotiate terms with suppliers” combined with “request inventory to be purchased” | 3) As two authorization activities in the same cycle, the two do not conflict with each other to more easily conceal a fraud or error |
| “Reconcile the organization’s bank account” combined with “Sign checks” | 1)“Reconcile the organization’s bank account” is a reconciliation activity and “Sign checks” is an authorization/custody activity 2)Incompatible 3)More easily steal a check and hide the theft through the reconciliation process |
| “Approve supplier invoices for payment” combined with “mail checks” | 1)“Approve supplier invoices for payment” authorization act and “mail checks” custody act 2)Incompatible 3)Can more easily commit a cash disbursements scheme, such as a billing or check tampering scheme (like Teri Lyn in the ACFE Report assignment) |
| “Cancel supporting documents in the voucher package” combined with “Sign checks” | 1)“Cancel supporting documents in the voucher package” is an authorization activity, while “Sign checks” is an authorization activity 2)Compatible |
| “Cancel supporting documents in the voucher package” combined with “Sign checks” | 3)As two authorization activities in the same cycle, the two do not conflict with each other to more easily conceal an error or fraud. In fact, the two duties should be performed by the same individual for strongest control. |
| “Cancel supporting documents in the voucher package” combined with “Mail checks” | 1)“Cancel supporting documents in the voucher package” is an authorization activity, while “Mail checks” is a custody activity 2)Compatible |
| “Cancel supporting documents in the voucher package” combined with “Mail checks” | 3) Although the two activities are of different types in the same cycle, this is a unique situation. For strongest control, the check signer should not only sign the checks, but cancel the voucher packages and mail the checks. |
| “Mail checks” combined with “Inspect quantity and quality of inventory received” | 1)“Mail checks” custody activity, while “Inspect quantity and quality of inventory received” custody activity 2)Compatible 3)As two custody activities in the same cycle, the two do not conflict with each other to more easily conceal an error or fraud. |
| All of the following internal controls are appropriately matched with the threat that it can help reduce, except:Mailing of monthly statements to customers – uncollectible sales;Perpetual inventory system–theft of cash | Perpetual inventory system – theft of cash |
| All of the following would typically receive a copy of the purchase order, except the: a. Receiving department. b. Purchasing department. c. Requesting user department. d. Carrier. | d. Carrier. |
| Which of the following documents is externally generated to the expenditure cycle? a. Purchase order b. Receiving report c. Packing slip d. Purchase requisition | c. Packing slip |
| All of the following internal controls are appropriately matched with the control objective that it can help enhance,except: | c. Restrict access to blank checks – transactions are recorded |
| Which of the following is an example of a misappropriation of assets? Stealing payroll checks made out in the name of former employees;Purposely failing to record vendor invoices in the last month of the fiscal year. | b. Stealing payroll checks made out in the name of former employees. |
| According to the 2010 ACFE Report to the Nations on Occupational Fraud and Abuse, which of the following is a true statement? The typical organization loses 5% of its annual revenue to fraud;The median loss caused occupational cases is $1,000,000. | a. The typical organization loses 5% of its annual revenue to fraud. |
| According to the 2010 ACFE Report to the Nations on Occupational Fraud and Abuse, individuals in which of the following departments commits the most fraud? a. Executive/upper management b. Sales c. Operations d. Accounting | d. Accounting |
| Which of the following is a preventive control? ;Periodic physical inventory counts and reconciliation to inventory records for reducing threat of theft of inventory ;Requiring a complete voucher package for all payments for reducing threat of duplicate | b. Requiring a complete voucher package for all payments for reducing threat of duplicate payments |
| Choose the best answer below based on consideration of the following pairs of duties: 1. Approving changes to customer credit limits AND sign checks 2. Sales order entry AND shipping merchandise | a. Only #1 is a compatible pair of duties |
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