Chapter 9 Solutions Expenditures Processes and Controls –

Purchases

Concept Check
1. d
2. d
3. c.
4. b
5. b.
6. d
7. d
8. c
9. a
10. b
11. a
12. b
13. b
14. a
15. b
16. c
17. b
18. b

Discussion Questions
19. (SO 2) Name the first document that should be prepared when a
production employee recognizes that the quantity of goods on hand is
insufficient to meet customer demand. Purchase requisition.
20. (SO 2) How does the maintenance of a receiving log enhance internal
controls? A receiving log is a sequential listing of all goods received.
It serves as an audit trail and allows the physical goods received to be
matched against other documentation to ensure that all goods are
received
21. (SO 2) Why should a receiving clerk be denied access to information
on a purchase order? This practice is called a “blind PO” and the
advantage is that it forces a physical count of goods received. A clerk
cannot complete the “quantity received” field of a receiving report until
the goods have been counted. If the PO contained quantities ordered,
the clerk could assume that the quantity received is equal to quantity
purchased and therefore, skip the physical count. However,

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conducting the physical count is a much better practice and the blind
PO serves as a control to force such a count.
22. (SO 2) Under what circumstances would it be necessary to manually
update accounts payable prior to the receipt of a vendor’s invoice?
When the receipt of goods occurs at the end of a period, but the
invoice is not received until the next period, the liability should be
recorded in the first period even though the invoice has not yet been
received.
23. (SO 4) Which department is responsible for making sure that payments
are made in time to take advantage of vendor discounts? It is the
responsibility of accounts payable.
24. (SO 4) Why would some checks need to include two signatures?
Large checks over a specified amount may require two signatures.
Large checks entail more risk for the company and the dual signature
lessens risks.
25. (SO 4) During the process of reconciling the bank account, why is it
necessary to review the dates, payees, and signatures on the canceled
checks? Reviewing dates, payees, and signatures on cancelled checks
may help uncover unusual events. These unusual events can then be
checked to make sure that they are not part of a fraud scheme.
26. (SO 4,6) What specifically does a cash disbursements clerk do when
he or she “cancels” an invoice? How does this compare to the
procedures used when computer-based matching exists. To cancel an
invoice means to mark or stamp it with the date paid and check
number. The purpose is to help prevent duplicate payment of an
invoice. In an automated matching system, the system would be
programmed to ensure that there were no previous payments that
would make a new payment a duplicate payment.
27. (SO 4) Why should accountants periodically review the sequence of
checks issued? To ensure there are no missing or unaccounted
checks. This helps prevent errors and fraud.
28. (SO 2,4) What accounting records are used by accounts payable
personnel to keep track of amounts owed to each vendor? An
accounts payable subsidiary ledger is used to record the detail of
amounts owed to each vendor.
29. (SO 5) Identify some inefficiencies inherent in a manual expenditures
processing system. There is a physical matching of documents by
humans and this process is time consuming and error prone. Even if a
software system such as Microsoft Dynamics GP is used, there are
many human tasks that are time consuming and error prone. Those
tasks are: keying of data for a purchase order; the manual process of

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comparing an order received to the PO; keying in the receiving report

and finding the PO in the system to match it against; keying the invoice
into the system and finding the PO in the system to match it against;
and the human decision making process of which invoices to approve
for payment. These inefficiencies cause a large expenditure in salaries
and wages for the personnel who do the matching.
30. (SO 5) What are the advantages of BPR? Using BPR to design IT
systems can reduce the amount of paperwork, manual processing and
the costs inherent in paperwork and manual processing. The costs
include wages and salaries for the time to do manual processing and
to correct errors or mismatches that occur in the manual processes.
31. (SO 8) List three examples of BPR used in the expenditures
processes. BPR can be used to change a manual matching and
payment system into one of three IT systems. These three include
computer based three-way matching, Evaluated Receipt Settlement
(ERS), and EDI.
32. (SO 8) Explain how system logic errors could cause cash management
problems. When there are logic errors in a system, it may cause the
system to make the same error repetitively. If the logic error is in
approving payments, the system may repetitively approve payments a
the wrong times or in the wrong amounts. Since the error is repetitive,
it could quickly cause cash flow problems by paying too much cash,
too soon.
33. Explain how system availability problems could cause cash
management problems. Significant amounts of downtime in the
system could delay payments to vendors. In turn, vendors may delay
shipments of materials to the company, which would then delay sales
to customers and cash inflows.
34. (SO 8) How is an audit trail maintained in an IT system where no paper
documents are generated? Backup files and computer logs of
transactions can serve as part of an audit trail.
35. (SO 8) What can a company do to protect itself from business
interruptions due to power outages? A company should have a
disaster recovery plan and they should use uninterruptible power
supplies as a backup to the normal power source.
36. (SO 7) What paper document is eliminated when ERS is used? ERS is
an invoiceless match system. This means the invoice is eliminated
and the vendor is paid if the purchase order matches the goods
received.
37. (SO 7) Identify compensating controls needed for an effective ERS
system. Some of the compensating controls needed are: Established

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procedures in receiving to ensure goods are only accepted when

quantities and part numbers match exactly; there must be a much
more detailed negotiation with suppliers to establish accepted
practices and firm prices with suppliers; vendors must understand that
substitutions and partial shipments cannot be accepted; there should
be established procedures to handle exceptions that arise, but
exceptions should be very rare.
38. (SO 5) What is typically the most time-consuming aspect within the
expenditures process? It is the matching of documents in a three-way
match system. The time involved is usually very high because of the
manual steps and because of the time involved in reconciling
mismatches of part numbers, quantities, and prices in many
shipments.
39. (SO 8) Identify the category of risk that can be reduced by using
authority tables, computer logs, passwords, and firewalls. The
category of risk that these controls reduce is security and
confidentiality risk, and more specifically, unauthorized access.
40. (SO 6) Explain why the availability of computer systems in the
receiving department is such an important component of an automated
expenditures process. In most automated vendor payment systems,
there is a presumption that the receiving personnel must reject
shipments that do not match the purchase order. This means that the
receiving personnel must be able to look up the desired purchase
order at the same time the delivery is at the receiving dock. The
receiving personnel must be able to reject the shipment, of necessary,
while the delivery person is still at the receiving dock. In this
circumstance, the purchase order files must be online and readily
accessible to receiving personnel.
41. (SO 5,8) Identify three ways that buyers and sellers may be linked
electronically. EDI systems link buyers and sellers electronically, The
electronic link may be in the form of private leased lines, third-party
networks called value-added networks, or via the Internet.
42. (SO 8) What techniques can a company use to reveal problems
concerning potential exposure to unauthorized access to its systems?
Penetration testing, vulnerability assessment, and intrusion detection
systems all help expose potential unauthorized access.
43. (SO 9) How are Web browsers used in e-payables systems? In many
accounting systems, the accounting software has a custom designed
screen to view and enter data. In e-payable system, a web browser is
used as the interface to receive and review invoices, as well as to

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make vendor payments. The web browser is perceived to be a more

user friendly approach to the interface.
44. (SO 10) Explain how procurement cards provide for increased
efficiencies in the accounts payable department. P-cards are used for
purchases of things such as supplies, maintenance, and travel and
entertainment expenses. Without p-cards, many companies find they
have a large volume of these small dollar transactions that would still
require the regular matching process in accounts payable. The p-card
eliminates this time consuming matching process for items purchased
with the p-card. This eliminates soliciting bids, keying PO and invoice
data, matching documents, reconciling mismatches, and writing small
dollar amount checks. Instead, the company receives one monthly bill
from the credit card issuer.

Brief Exercises

45. (SO 2,4) Describe what is likely to occur if company personnel

erroneously recorded a purchase transaction for the wrong vendor?
What if a cash disbursement was posted to the wrong vendor? Identify
internal controls that would detect or prevent this from occurring. If a
company erroneously recorded a purchase transaction to the wrong
vendor, it is likely to make a payment to the wrong party. When the
correct vendor does not collect its payment, it will notify the company
and demand payment. This will likely result in the company making a
duplicate payment for the same transaction.
If a cash disbursement was posted to the wrong vendor account,
this would also likely result in the company making a duplicate
payment for the same transaction. Since the first payment did not get
recorded correctly, the company would not have proper record of the
payment. When it reviewed its vendor accounts, it would note that it
still needed to make a payment.
It would be difficult to discover an erroneous posting of a purchase
transaction or cash disbursement to the wrong vendor account. (An
incorrect posting of a cash disbursement is more likely to be
discovered in the document matching and subsequent posting
process.) The following internal controls could detect these types of
problems:
 When invoices arrive from the vendor companies, there should
be an attempt to match the invoice to the purchase order and
receiving report before the transaction is posted to the vendor
account within the accounts payable subsidiary ledger. During

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this posting, the employee who posts should verify that the
transaction is recorded in the proper vendor account.
 A reconciliation should be performed upon receipt of the vendor
statement. This should reveal any differences in terms of
purchase or payment information.
 A review of the vendor file should be performed periodically.
The vendor to which the purchase should have been recorded
or the vendor to which a payment was erroneously applied may
show a negative balance (paid more than recorded purchases).
The error may also be discovered when there is a reconciliation of
the accounts payable subsidiary ledger to the general ledger, although
this is not as likely. The reconciliation would still balance even if an
amount is recorded in the wrong vendor account. It is also possible
that this error would not be discovered particularly if there are always
outstanding balances in vendor accounts. The best internal control to
prevent these errors would be to use an automated, rather than
manual system. An automated system would automatically post to the
correct vendor as the purchase order is created.
46. (SO 4) Debate the logic used in the following statement: “The person
responsible for approving cash disbursements should also prepare the
bank reconciliation because he is most familiar with the checks that
have been written on that bank account.” It may be true that this
person is more familiar with the checks, but it would not represent a
good internal control process. If a separate person reconciles the
account, it prevents the first person from writing fraudulent checks and
covering it up by altering the bank reconciliation.
47. (SO 8) Expenditure systems are crucial in the automobile
manufacturing industry, where hundreds or thousands of parts must be
purchased to manufacture cars. Briefly describe how EDI would be
beneficial in this industry. Since there would be such a large volume of
purchase orders, invoices, and receiving reports, that handling so
many paper document would be inefficient. EDI would eliminate all of
the manual steps in handling these paper documents, eliminate the
keying of the data on these documents, and eliminate mail delays. An
EDI system would be faster, more efficient, and less error prone.
Therefore, it would also reduce the cost per transaction.
48. (SO 2,4) Describe how the matching of key information on supporting
documents can help a company determine that purchase transactions
have been properly executed. If the company has established proper
segregation of duties and matches documents, there is a likelihood
they have properly insured that purchase transactions are properly

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executed. Purchasing would not complete a PO and place an order

until they receive a purchase requisition. The PO would be forwarded
to accounts payable. The receiving department would complete and
forward a receiving report upon receiving the goods. The invoice
comes from a separate party – the vendor. If these three separate
documents match, it is a good assurance that it was a valid, authorized
order, it was properly received, and the vendor billed correctly for
goods ordered and received.
49. (SO 2,3) Describe how the use of pre-numbered forms for debit
memos can help a company determine that purchase return
transactions have not been omitted from the accounting records. It is
much easier to account for all debit memos if they are pre-numbered.
The sequence of numbers can be checked to ensure all have been
posted.
50. (SO 5,7) Describe how a ERS system could improve the efficiency of
expenditure processes? An ERS is an invoiceless system that pays
vendors if the goods received match the purchase order. This system
completely eliminates the document matching system that usually
occurs in accounts payable. This eliminates the most time consuming
aspect of paying vendors. However, it does require much more strictly
defined purchasing agreements with vendors. Vendors must
understand that the company cannot accept price differences from
those negotiated, substitution of products, undershipments,
overshipments, or partial shipments.
51. (SO 10) Describe how a procurement card improves the efficiency of
purchasing supplies. A procurement card is usually used to purchase
supplies or pay for travel and entertainment. Using a p-card for these
purchases eliminates the typically process of PO, receiving report, and
invoice matching. Individual users have much more control over the
purchase of their supplies and central inventories of supplies need not
be maintained.

Problems

52. (SO 2,3,4) Identify an internal control procedure that would reduce the
following risks in a manual system:
a. The purchasing department may not be notified when goods need
to be purchased. Require that an inventory control department
monitor inventory records and request purchases (purchase
requisition) when goods need to be reordered.

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b. Accounts payable may not be updated for items received. Require

that the receiving department complete a receiving report for all
goods received, and that a copy of the report is forwarded to
accounts payable.
c. Purchase orders may be prepared based on unauthorized
requisitions. Require that the appropriate manager approve each
purchase requisition by signing the requisition form.
d. Receiving clerks may steal purchased goods. Require good
physical security such as security cameras and good supervision of
receiving employees. Using a “blind” PO at receiving may also help
since constant shortages when goods are stolen is more likely to be
noticed.
e. Payments may be made for items not received. Require a three-
way match of the purchase order, receiving report, and invoice
before a payment can be approved.
f. Amounts paid may be applied to the wrong vendor account.
Assuming that the payment was to the correct vendor, but posted to
the wrong account, it is very difficult to uncover this error. A
reconciliation of subsidiary ledge to the accounts payable account
may not uncover this because the total balance would be the same.
It may be uncovered if someone notices that the records show
payments to a vendor are in excess of that owed. There is no
method to completely eliminate errors in posting.
g. Payments may be made for items previously returned. Require a
debit memorandum be completed for any goods returned, and that
a copy of this be forwarded to accounts payable so that the balance
owed can be changed.
h. Receiving clerks may accept delivery of goods in excess of
quantities ordered. First, there must be a clear policy on
overshipments that receiving personnel can apply. For example, a
policy may be written that overshipments under 5% can be
accepted, but all others should be rejected and returned. Second,
there must be a policy that all received goods are compared
against a purchase order. Also, the use a “blind” PO to force
receiving personnel to count goods and they might therefore more
easily detect overshipments.
i. Duplicate payments may be issued for a single purchase
transaction. Require that payment documentation be “cancelled’
when payment is made. This stamp on the documents should help
prevent duplicate payments.

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53. (SO 1, SO 10) Chris Smith’s coffee and pastry cart and a procurement
card. Suggest some controls that should be in place. Identify some
resources that need to be purchased for this business. The credit card
used should have a dollar amount limit as well as a daily limit. The
card can also be restricted to certain kinds of vendors. For example,
hotels, air fare, electronics stores, and liquor stores could all be
vendors that would be prohibited purchases on this credit card. The
types of resources that would be purchased are paper products such
as coffee filters, paper cups, napkins, and plates; plastic utensils;
ground coffee beans; creamer, sugar, sweetener, and milk; pastries;
and various cleaning supplies. Finally, Chris should review all charges
on the credit card each month to detect any misuse of the card.

54. (SO 1,5) AZO Company and business process reengineering project
(BPR). BPR involves the radical redesign of processes, along with IT
enablement of processes, to improve the efficiency and lower the cost
of processes. BPR in a manual expenditure system would involve
methods to convert manual processes into automated processes. Any
of the IT enablement methods suggested in this chapter are possible
solutions. Therefore, computer based document matching, evaluated
receipt settlement, e-business or EDI, e-payables, and procurement
cards are all possible. Some combination of these would also be
possible. For example, ABC could use an EDI system for purchases of
inventory, but use a procurement card for small supplies and travel
expenditures.

55. (SO 2,4) The following list presents statements regarding the
expenditure processes. Each statement is separate and should be
considered to be from a separate company. For each statement,
determine whether it is an internal control strength or weakness, then
describe why it is a strength or weakness. If it is an internal control
weakness, provide a method or methods to improve the internal
control.

a. A purchasing agent updates the inventory subsidiary ledger

when an order is placed. This is an internal control weakness.
The purchasing agent is part of the authorization of orders.
Therefore, he/she should not have record keeping duties for
those purchases. If one person has both duties, unauthorized
purchases can be initiated and records can be altered to cover
up these unauthorized purchases. These duties should be

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segregated and someone who does not authorize and does not
have custody of purchases should be assigned to the record
keeping.
b. An employee in accounts payable maintains the accounts
payable subsidiary ledger. This is an internal control strength.
The payable should be recorded when the invoice arrives and it
matches a purchase order and receiving report.
c. Purchasing agents purchase items only if they have received an
approved purchase requisition. This is an internal control
strength. The purchasing agents cannot initiate purchases
without proper approval from a separate department or person.
d. The receiving dock employee counts and inspects goods and
prepares a receiving document that is forwarded to accounts
payable. This is an internal control strength. The counting and
inspecting of goods ensures that goods are not damaged and
that the proper amount was received. This count and inspection
prevents companies from paying full price for damaged goods
or missing goods.
e. The receiving dock employee compares the packing list to the
goods received and if they match, forwards the packing list to
accounts payable. This is an internal control weakness. Goods
should not be compared to the packing list, they should be
compared to the purchase order. A comparison to the packing
list will not reveal any undershipments, overshipments, or
product substitutions. The improvement would be to compare
the goods received to the purchase order and forward a
receiving report, not the packing list, to accounts payable.
f. An employee in accounts payable matches an invoice to a
receiving report before approving a payment of the invoice.
This is an internal control weakness because there is one more
document that should be matched. The purchase order should
also be matched to the invoice and receiving report.
g. A check is prepared in the accounts payable department when
the invoice is received. This represents two internal control
weaknesses. First, there is no document matching mentioned
(po, invoice, and receiving report). Second, acoounts payable
should authorize payment by check, but should not write the
check. The matched documentation should be forwarded to
cash disbursements and the check is written by cash
disbursements.

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56. (SO 2) Hitchins, Inc. computerization.

Required:
Assume that Hitchins, Inc. is preparing to computerize the manual
input processes such as completing a receiving report. Use Microsoft
Excel to perform the following:
a. Design an appropriate format for a data entry screen that could be
used at the receiving dock to enter information from the packing slip
in the company’s expenditure system. See the excel file Problem
9-56.xls.

57. (SO 4) Since the accounts payable system of matching purchase

orders, invoices, and receiving reports can often be complex,
organizations must routinely check to ensure they are not making a
duplicate payment. The text book Web site contains a spreadsheet
titled “invoices.xls”. Using your knowledge of spreadsheets and the
characteristics of duplicate payments, identify any payments within
the spreadsheet that appear to be duplicate or problem payments.
For the following PO’s, there are duplicate payments in which the
invoice amounts are exactly the same, and the same PO is
referenced. PO 1514; invoices 5644 and 6871. PO 2635; invoices
7176 and 7700. PO 3477; invoices 7957 and 8340. PO 2818 was
invoiced twice, but in different amounts and it could be a duplicate
payment, or it could be two partial payments. We would need the
amount of the purchase order to determine.

58. (SO 8) Fracho and EDI Controls.

Required:
Describe the IT controls that Frimco should include when it
implements an internet EDI system. For each control you suggest,
describe the intended purpose of the control. Since Frimco will be
sending data electronically using a computer system, there are many
general and application controls that should be a part of this IT
system. Frimco may not be able to afford all of the general controls
mentioned below, but they should implement as many as are cost
effective. General controls include: user IDs, passwords, log-in
procedures, access levels, authority tables, firewalls, encryption of
data, vulnerability assessment, penetration testing, intrusion
detection, software testing, and computer logs, These general
controls limit unauthorized access to the IT system. To help prevent

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availability risks, general controls such as business continuity

planning, backup data and backup systems, firewalls, encryption of
data, vulnerability assessment, intrusion detection, and penetration
testing. The purchasing software and the EDI translation software
should also incorporate application input controls such as field check,
validity check, limit check, and reasonableness check

59. (SO 2,3,4) Wikkam Company and segregation of duties:

a. Accounts payable record keeping.

b. Authorization of new vendors
c. Authorization of purchase returns
d. Authorization of purchases
e. Cash disbursements record keeping
f. Check-signing authority
g. Custody of inventory in the receiving area.
h. Maintaining custody of cash.
i. Preparation of a debit memo for a purchase return

Required:
For each of the three employees (supervisor, employee 1, and
employee 2), consider the duties you would assign to each employee.
In assigning duties, no employee should have more than three tasks
and there should be a proper separation of duties to achieve
appropriate internal control. List the three people, the duties you
assigned to each employee and a description of why those
assignments achieve proper separation of duties. There are likely to
be a few possible answers that could be effective. The critical aspect
is to try to segregate authorization, custody, and record keeping for
related events as much as possible. There is no “perfect” segregation
since there are only three employees.

Supervisor: duties F, G, and H. The supervisor would be the most

logical person to sign checks. As a supervisor, he/she can override
internal controls so it is not as much a problem that there may be some
incompatibility for a supervisor.
Employee 1: duties A, E, I. This places all record keeping and
document preparation with employee 1. He/she has no custody or
authorization.
Employee 2: duties B, C, and D. He/she can authorize vendors,

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purchases, and purchase returns, but has no custody or record

keeping responsibility.

60. (SO 7) Using a search engine, search the internet for information
about Evaluated Receipt Settlement, or ERS. You may have more
success by searching for the terms ERS and invoices together in one
search. Based on what you read about ERS on the web, what appears
to be the difficulties encountered when a company chooses to
implement ERS? The most frequent problem appears to be the
reluctance of suppliers (vendors) to adopt the new processes. The
switch to an ERS system is a complete change of the invoice and
payment process and it requires that the company and its vendor have
negotiated firm prices, and polices on shipments. Since this is such a
radical change from the older way of doing business, vendors resist
the change.

61. (SO 9) Using a search engine, search the internet for information
about Electronic Invoice Presentment and Payment. You may have
more success by searching for the terms EIPP and invoices together in
one search. Based on what you read about EIPP on the web, what are
the advantages and disadvantages of EIPP? One of the concepts
about EIPP is that is should benefit both the buying company and the
selling company. What do you think the benefits are to buyer, and
what are the benefits to the seller? The website
http://www.accountis.com/overview/supplierbenefits/ (accessed
4/29/08) indicates that the supplier benefits are: (1) Time and cost
savings by reducing the labor, material and posting costs associated
with traditional payment systems. This includes an 82% cost reduction
per transaction and a 33% increase in invoice processing efficiency;
(2) error reduction; (3) quicker settlement which leads to the supplier
receiving payment more quickly; (4) Improved visibility from the 24/7
availability of archived e-documents. This improves the ability to
forecast cash flow and makes audits more efficient.

The website http://www.accountis.com/overview/buyerbenefits/

indicates that the buyers benefits are: (1) No manual data entry and
rekeying of data is eliminated; (2) real-time invoice access for
customers. Each customer has online access to each of their invoices;
(3) faster dispute resolution. Rather than requesting assistance via

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telephone, the buyer can query the invoice set using any line item (4)
One, consistent view of all invoices because an EIPP uses a standard
format; (5) reduced costs by reducing the number of workers in
accounts payable; a 50% - 75% processing cost savings; reduction of
overbilling and invoice errors.

62. (SO 9) Visit the e-commerce website for Jupitermedia Corporation at

www.ecommerce-guide.com and search for EIPP under the News and
Trends tab. Identify the company that introduced an EIPP product in
2002 as part of its Financial Management Solutions Package. What
does this company call its EIPP application? It is called eSettlements.
See http://www.ecommerce-
guide.com/news/news/article.php/1145211.

63. (SO 11) You are an accounts payable clerk for a small home
improvements contractor. Speculate on the type of fraud that could be
in process here. What (if anything) could you do to ascertain the
propriety of the transaction and still make the payment today? It is
possible that the site supervisor has created a fictitious vendor name
and a fictitious invoice and is seeking reimbursement for this false
documentation. In an attempt to verify whether the company exists,
you could examine telephone books or online listings of the address
and phone number for the company. It would be important to confirm
that any address is not a PO Box and it is not the same address as an
existing employee. This approach is not a guarantee because it is
easy to set up a “false storefront”. Ideally, the best controls are the
approval of a vendor before any purchases occur with that vendor and
payment through the existing accounts payable processes.

64. (SO 11) Two of the most common ways that employees commit fraud
against their employers is the misstatement of reimbursable expense
accounts and the misuse of office supplies for personal purposes.
Although these schemes are usually not individually significant, their
magnitude can be damaging if these practices are widespread.
Develop suggestions for internal controls that could curb the
occurrence of such fraudulent activities. Some useful controls would
be: approval of these transactions before they occur; requiring the
submission of original invoices or receipts before payment is made;
and periodic audits of these expenditures.

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Chapter 9 Solutions Expenditures Processes and Controls –
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Cases
65. Breston Incorporated has the following processes related to
purchasing.

Required:
1. Draw a document flowchart of the purchase processes of Breston.
Refer to the separate Microsoft Excel file “Chapter 9 Solutions
Process Maps.xls”.
2. Identify any weaknesses in internal controls within the purchase
processes and indicate the improvements you would suggest.

Weakness: No one person or department has been assigned

responsibility to monitor inventory levels and determine when to
order. Improvement: Assign responsibility to a department such as
inventory control.

Weakness: There is no purchase requisition completed and

forwarded to purchasing to initiate the purchasing process.
Improvement: Use a purchase requisition, approved by inventory
control, to initiate purchases.

Weakness: No copy of the purchase order is forwarded to accounts

payable for a document match. Improvement: Forward a copy of
the PO to accounts payable.

Weakness: the inventory control department updates inventory

records based on a PO, not the goods received. Improvement: the
inventory control department should update inventory from the
receiving report.

Weakness: No copy of the receiving report goes to inventory

control or accounts payable. Improvement: Copies of the receiving
report should be forwarded to accounts payable and inventory
control.

Weakness: The packing slip is forwarded to accounts payable

instead of the receiving report. Improvement: The receiving report
is forwarded to accounts payable.

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Chapter 9 Solutions Expenditures Processes and Controls –
Purchases

Weakness: The accounts payable matches the invoice to the

packing slip. Improvement: the accounts payable department
should match the invoice to the purchase order and receiving
report.

Weakness: the cash disbursements department forwards a copy of

the check to the general ledger department. Improvement: The
cash disbursements department should send a summary journal
voucher of check amounts, not a copy of each check. These
subtotals are posted to the general ledger, not each individual
check.

66. Mershay Enterprises is a wholesaler that purchases consumer

merchandise from many different suppliers.

Required:
1. List any strengths and weaknesses in the internal control
procedures of Mershay enterprises.

STRENGTHS:
A manager in purchasing approves the PO before it is mailed.
The PO is prepared in 4 parts and these copies are forwarded
to appropriate departments for future use.
If no PO exists for a shipment, it is returned.
The receiving report is prepared with three copies and those
copies are forwarded to appropriate departments (one
improvement would be a copy to a separate inventory control
department; see first weakness below.
Accounts payable does a three-way match of PO, receiving
report, and invoice before approval of payment.
The matched documents are reviewed by a manager,
The check signer (treasurer) is segregated from the preparation
of the check.

WEAKNESSES:
There is no separate inventory control department to maintain
inventory records.
The requisition should come from inventory control, not the
warehouse.
The packing slip is compared to the purchase order instead of

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Chapter 9 Solutions Expenditures Processes and Controls –
Purchases

counting and inspecting the order.

The quantities on the receiving report are from the packing slip
instead of a separate count by receiving employees.
If a separate inventory control department existed, a copy of the
receiving report should be forwarded there.
In general, there is nothing in the description about record
keeping – such as who updates inventory, accounts payable,
and general ledger records.

2. Draw a document flowchart of the expenditure processes. Refer

to the separate Microsoft Excel file “Chapter 9 Solutions
Process Maps.xls”. This would be an excellent time to reinforce
to students that the process map shows processes, but not
document flow. Since the document flowchart does show
document flows, it is easier to see where some potential control
weaknesses exist when viewing the document flowchart.
3. Describe any benefits that Mershay may receive by installing a
newer, IT system to process purchases, goods received,
accounts payable, and checks. Be specific as to how IT
systems could benefit each of the processes described. There
are many types of IT systems for purchases, so the exact
benefits would be somewhat dependent on the system chosen.
However, any IT system would reduce the number of manual
tasks which would improve efficiency, reduce costs, and
decrease errors. Examples would be:

An IT system could monitor inventory levels and automatically

generate a purchase order when quantities if individual items
reach a reorder point.
An IT system could store documents such as POs or receiving
reports online so that there need not be actual paper handling in
forwarding documents between departments.
An IT system could match the PO, receiving, report, and invoice
and leave accounts payable personnel free to work on
reconciliations of those that do not match correctly.
An IT system could prepare and print checks.
An IT system could update related records in realtime as goods
are ordered, received, or paid.
An IT system would provide better and more timely feedback to
management about inventory levels, items on order, future
expected cash flow, and details about expenditures.

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Chapter 9 Solutions Expenditures Processes and Controls –
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67. Hamburg Metals. is a manufacturer of aluminum cans for the beverage

industry.

Required:
a. Draw two process maps to reflect the business processes at
Hamburg. One process map should depict the purchase processes
and the second process map should depict the cash disbursements
processes. Refer to the separate Microsoft Excel file “Chapter 9
Solutions Process Maps.xls”.
b. Draw two document flowcharts to reflect the records and reports
used by these processes at Hamburg. One flowchart should depict
the purchase processes and the second flowchart should depict the
cash disbursements processes. Refer to the separate Microsoft
Excel file “Chapter 9 Solutions Process Maps.xls”. This would be
an excellent time to reinforce to students that the process map
shows processes, but not document flow. Since the document
flowchart does show document flows, it is easier to see where
some potential control weaknesses exist when viewing the
document flowchart.
c. Describe any weaknesses in these processes or internal controls.
As you identify weaknesses, also describe your suggested
improvement.

Weakness: Inventory is ordered when it “seems low”.

Improvement: There should be pre-established reorder levels for
each inventory item.

Weakness: The inventory control department is not initiating orders

by a purchase requisition.
Improvement: An inventory control department should maintain
inventory records and to complete purchase requisitions when
inventory items reach the reorder level.

Weakness: The purchase automatically goes to the last vendor

used.
Improvement: Purchasing agents should find the best price and not
automatically use the last vendor.

Weakness: No copy of the purchase order is forwarded to accounts

payable.

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Chapter 9 Solutions Expenditures Processes and Controls –
Purchases

Improvement: A copy of the PO should be forwarded to accounts

payable.

Weakness: The receiving report is prepared from the packing slp

rather than a separate count and inspection.
Improvement: require receiving personnel to count and inspect
goods and complete the receiving report based on this count.

Weakness: No copy of the receiving report is forwarded to accounts

payable.
Improvement: A copy of the receiving report should be forwarded to
accounts payable.

Weakness: No copy of the receiving report is forwarded to

inventory control.
Improvement: A copy of the receiving report should be forwarded to
inventory control so that inventory records can be updated.

Weakness: Accounts payable prepares a cash disbursements

voucher for all invoices and does not match the PO, invoice, and
receiving report before preparing the voucher.
Improvement: Match the three documents to ensure it is a valid
order that was received in good condition before the voucher is
approved.

Weakness: the cash disbursements department forwards a copy of

the check to the general ledger department. Improvement: The
cash disbursements department should send a summary journal
voucher of check amounts, not a copy of each check. These
subtotals are posted to the general ledger, not each individual
check.

d. Draw two new process maps that include your suggested

improvements. One process map should depict the purchase
processes and the second process map should depict the cash
disbursement processes. Refer to the separate Microsoft Excel file
“Chapter 9 Solutions Process Maps.xls”.

68. The United States General Accounting Office (GAO), Office of Special
Investigations was charged with investigating a potential purchase

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Chapter 9 Solutions Expenditures Processes and Controls –
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fraud case. The man who committed the alleged fraud was a former
civilian employee of the Air force, Mark J. Krenik.

Required:
Describe internal controls that should be in place at the Air Force to
help prevent such fraud. Internal controls that may help prevent or
detect this are:

A policy requiring that any special handling instructions be approved by

a manager above the person requesting the payment.

A policy requiring that a vendor cannot be paid unless that vendor has
been approved and established in the system through the regular
vendor approval system.

A segregation of approval so that the person requesting the payment

cannot also verify that work was completed or deliveries made.

A policy requiring a periodic audit of expenditures by the internal audit

department.

69. The following document flowchart shows part of the purchases and
cash disbursements processes for Jidd, Inc., a small manufacturer of
gadgets and widgets. Some of the flowchart symbols are labeled to
indicate operations, controls, and records.

Required:
For each of the symbols (numbered 1. through 12.), select one
response (lettered A. through T.) from the answer lists below. Each
response may be selected once or not at all.

1. __C__ 5. __M__ 9. __T__

2. __R__ 6. __O__ 10. __N__
3. __F__ 7. __P__ 11. __I__
4. __L__ 8. __H__ 12. __K__

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