ACCT90030 Information Processes & Controls
Information Processes & Controls
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ACCT90030 Information Processes & Controls
By the end of this week, you should be able to:
• Describe the primary activities in the expenditure cycle and their key objectives
• List the key data stores in the expenditure cycle
• Briefly describe common technologies for enabling the expenditure cycle
• Analyse the risks pertinent to the primary activities in the expenditure cycle
• Explain how these risks can affect the quality of the information in the financial
statement accounts
• Identify and explain control plans that can minimize these risks
• Apply the four-step control analysis framework to analyse the extent to which an
expenditure cycle achieves the information quality goals
Expenditure cycle: an
overview
Expenditure Cycle: An Overview
• Expenditure (purchasing) cycle: a set of business activities associated with the
purchase and payment for goods and services
• Poor purchasing decisions create operational problems, which could impact
financial reporting risks
• Poor management of accounts payable could damage relationships with suppliers
and hurt cashflow of the business
Key sub-processes and goals
• Sub-process 1: Purchase Requisition
to Receiving Goods
▪ Key objective: to procure the right
goods for the right amount, and to
receive those goods in time
• Sub-process 2: Payment to Supplier
• Key objective: to pay the right people
the right amount at the right time
Create
Purchase
Requisiti
on
Create
Purchase
Order
Receive
Goods
Receive
Invoice
Pay
Invoice
Enabling Technologies
6
Manual:
• Keying (internal system in the organisation)
• Writing (paper-based)
Automated:
• Image Scanners
• RFID / QR / Bar Code Readers
• Supply chain management software (SCM)
• Integrated within ERP system or operated independently
• Electronic payments
Data Stores used and updated
7
• Sales: Details of each sale made and its status
Sales ID Customer # Staff # Date Store Payment Amount Status
101 654 24 1/8/22 City Cash $65.75 Closed
102 982 26 1/8/22 City Credit $98.43 Billed
103 994 21 2/8/22 City Credit $125.98 Billed
104 999 24 2/8/22 City Cash $249.37 Closed
• Inventory: Details of items stocked or regularly ordered.
Item
#
Description Cost
price
Sell
price
On
Hand
Reserved Reorder
point
Ordered Expected
Arrival
Supplier
A10 Component A 35.48 55.95 15 10 16 25 3/9/22 S101
A 12 Component A Deluxe 42.33 75.25 8 0 10 5 15/9/22 S101
B 14 B Series Model 1 59.36 88.00 22 3 5 0 - S155
B 51 B Series Old Model 49.28 80.00 12 8 13 12 16/10/22 S155
Note: both financial and non-financial data are captured and updated
Data Stores used and updated
8
• Supplier: Details of approved suppliers including their performance
Supplier
ID
Business Name Added by Contact
person
Contact No. Reliability Average
Turnaround
Current
Orders
S101 Dynamic Delivery 43 Sam Smith +613XXXXXXX High 4 days 1
S155 Shades Away 43 Jun Sato +613XXXXXXX High 5.5 days 3
S201 Reliability Plus 43 Jim Roberts +613XXXXXXX Med 8 days 0
S472 Service Now 43 Sally Wong +613XXXXXXX High 2 days 2
P/R No Date Entered by Approved by Item Quantity Priority Status
201 17/8/22 11 14 A10 4 High Ordered
202 17/8/22 11 14 B14 5 Med Ordered
203 17/8/22 11 14 A12 3 High Ordered
204 19/8/22 11 16 B51 3 High
• Purchase requisition: Details of internal requests sent to purchasing to procure goods
Consider DIFOT (Delivery In
Full On Time)
Data Stores used and updated
9
P/O
No
Date Entered
by
Approved
by
P/R
No
Supplier Item
No
Quantity
Ordered
Status Quantity
Received
Delivery
No
254 21/8/22 56 61 201 S101 A10 4 Received 4 1111
255 21/8/22 56 61 202 S155 B14 5 Received 5 1112
256 22/8/22 56 61 203 S201 A12 3
257 23/8/22 56 61 204 S155 B51 3
Purchase order: Details of external order sent to suppliers
Goods received: Details of deliveries from suppliers
Delivery
No
P/O
No
Date
Received
Entered
by
Item No Quantity
Received
Comments
1111 254 27/8/22 22 A10 4 Goods in fine condition
1112 255 27/8/22 22 B14 5 No damage
Data Stores used and updated
• Accounts payable: Details of unpaid vendors (invoices received, payments made)
• Cash payments: Details of each cash payment made
Invoice ID Delivery
No.
P/O No. Supplier
No.
Date
received
Amount Terms Entered
by
Status
222 1111 254 S101 29/8/22 $200 Net 7 69 Paid
223 1112 255 S155 31/9/22 $7000 Net 30 69
Payment ID Invoice ID Date paid Cheque ID Approved by
111 222 28/8/22 249 88
Information / Data Outputs
11
• Discrepancy report: lists any differences between quantities or amounts
on the purchase order, the receiving report, and the purchase invoice.
• Cash requirements forecast: predicts cash required for future payments
and dates.
• Cheque register: list all cheques issued for a particular period.
Let’s dig deeper
• Recall that expenditure cycle has two sub-processes:
o Purchase Requisition to Receiving Goods
o Payment to supplier
• For each of these sub-processes, we will now discuss:
1. Key activities
2. Risks
3. Controls
1. Business (Sub-)
processes
(Key activities)
Data Informationgenerate processed
into
2. Risks and 3. controls!
Sub-process 1: Purchase
Requisition to Receiving
Goods
Purchase Requisition to Receive Goods:
Goals
14
• Operational Goal: to procure the right goods for the right amount, and to receive
those goods at the right time.
• Activities in this sub-process work towards achieving this operational goals:
• Initiated purchases are properly approved and authorized.
• Goods and services are obtained from authorized or pre-vetted suppliers.
• All purchase commitments and obligations are accurately recorded.
• Accepted goods and services meet quality and delivery specifications.
Purchase Requisition to Receiving Goods:
Key Activities
15
• Primary activities:
• Purchase requests
• Ordering goods
• Receiving goods
Purchase request: key steps
Main activities:
• Purchase requests are placed by different departments that require goods or services.
• Inventory purchase may be triggered by reaching an automatic re-order point.
• A purchase requisition document is created.
• Relevant authorities (e.g., purchasing managers) approve the requisition
• The Purchase Requisition Data Store is updated.
• Purchase requisition is forwarded to the purchasing officer.
Risks and Controls: Purchase requisition
stage
17
Risks IQG Potential Impact on F/S accounts Control
Order unnecessary inventory V Inventory could be overstated if
ordered goods become obsolete.
• Check inventory levels before
ordering goods
• Check purchase requests with
large or unusual amounts.
• Approval of purchase requisitions
Order goods: key steps
18
• Purchasing staff needs to decide who to order goods from.
• Authorized list of suppliers (in supplier data store): ensures quality of goods received and
minimizes fraud risks
• A Purchase Order is created after the purchase requisition is received.
• Upon approval of the purchase order, the Purchase Order, Inventory and Purchase
Requisitions data stores are updated.
Risks and Controls when ordering goods
19
Risks IQG Potential Impact on F/S accounts Control
Purchase from unauthorized
suppliers (i.e., these suppliers
are likely to supply poor quality
goods).
V Inventory (overstated) • Maintain an authorized list of
suppliers
• Regularly review supplier and
track supplier performance
• Independent approval of
Purchase Orders
Buying poor quality goods V Inventory (overstated); Revenue
(overstated)
• Maintain an authorized list of
suppliers
• Regular review supplier details
• Independent approval of
Purchase Orders
Purchasing poor quality goods V Inventory (overstated) • Maintain an authorized list of
suppliers and only use pre-vetted,
high-quality suppliers
• Regularly review supplier and
track supplier performance
Data entry errors when creating
purchase order
A Depends on error • Automated fill of data
• Data entry input controls
Receiving Goods: key steps
20
• The supplier sends the goods ordered accompanied by a delivery docket (packing slip).
• The receiving department is responsible for accepting deliveries from suppliers.
• Goods receiving staff should check for valid purchase order(s) and inspect the goods before
accepting deliveries
Risks and Controls: Receiving Goods stage
21
Risks IQG Potential Impact on F/S
accounts
Control
Receiving unordered goods V Inventory
(overstated)
• Check existence of valid Purchase
Order and its details before
accepting delivery
Receiving damaged goods V Inventory
(overstated)
• Inspect quality of goods before
accepting
Errors in counting A Inventory
(over or understated)
• Blind count (quantity obscured)
• Have a second person double check
the count
• Use of RFID or Barcodes for
gathering delivery data
- or understated)
purchase order (with quantity
obscured)
• Have a second person double-check
the count
• Use of technolog (RFID or barcodes)
or inferior
goods
the quality f goods b fore
goods
A note on inspection
• Inspection should be done both on:
o Quality of goods (i.e., whether it meets our requirement)
o Quantity of goods (e.g., whether it matches what we ordered)
• Can be done either manually or via technology
• Manual:
• Risk: human errors → accuracy of counts
• Controls: Double-check count, provide a blind copy of the purchase order to receiving staff
etc.
• Automated (e.g., via RFID, Barcodes)
• Risk: scanning errors
• The choice of whether to employ manual vs. automated counts depends on
the quantity and value of goods received (cost-benefit trade-off!)
• Quantity (few items vs many items)
• Value (low-value vs high-value items)
Risks and Controls: Receiving Goods stage
23
Risks IQG Potential Impact on F/S
accounts
Control
Receiving unordered goods V Inventory
(overstated)
• Check existence of valid Purchase
Order and its details before
accepting delivery
Receiving damaged goods V Inventory
(overstated)
• Inspect quality of goods before
accepting
Errors in counting A Inventory
(over or understated)
• Blind count (quantity obscured)
• Have a second person double check
the count
• Use of RFID or Barcodes for
gathering delivery data
- or understated)
purchase order (with quantity
obscured)
• Have a second person double-check
the count
• Use of technolog (RFID or barcodes)
or inferior
goods
the quality f goods b fore
goods
Data entry errors when
recording goods received
A, C(D) Inventory
(over- or understated)
• Automated fill of data (use
RFID/barcodes)
• Data input controls (mandatory field
checks, etc.)
Risks and Controls: Receiving Goods stage
24
Risks IQG Potential Impact on F/S
accounts
Control
Theft of inventory V Inventory (overstated) • Restrict physical access to
inventory
• Periodic stocktake of inventory
and reconciliation to recorded
quantities
Data entry errors when
recording goods received.
A, C(D) Inventory
(over or understated)
• Automated fill of data (use
RFID/barcodes)
Goods received, but not
ed
C (E)
understated)
Regularly monitor open
purchase rders
Sub-process 2:
Payment to Supplier
Payment to Suppliers: Goals
26
• Operational Goal: Pay the right people the right amount at the right time
• Activities in this sub-process work towards achieving this operational goals:
• Payments only made for valid items/invoices
• Payments made by authorized employees only
• Payments are accurate and timely
• All accounts payable liabilities are recorded accurately
• All payments are recorded accurately
Payment to Suppliers: Key activities