What appropriate control is necessary to prevent or minimize receiving unordered goods?

Chapter 11 MULTIPLE CHOICE

1. In the expenditure cycle, the primary external exchange of information occurs with

a) customers. b) suppliers. c) management. d) the audit committee.

2. Within the expenditure cycle, internal information flows

a) from the production cycle to the expenditure cycle. b) from the revenue cycle to the expenditure cycle. c) to the general ledger from the expenditure cycle. d) All of the above are correct.

3. To accomplish the objectives set forth in the expenditure cycle, a number of key

management decisions must be addressed. Which of the decisions below is not

ordinarily found as part of the expenditure cycle?

a) How can cash payments to vendors be managed to maximize cash flow? b) What is the optimal level of inventory and supplies to carry on hand? c) Where should inventories and supplies be held? d) What are the optimal prices for each product or service?

4. There are three basic activities in the expenditure cycle. One of the basic activities is

the receiving and storage of goods, supplies, and services. What is the counterpart of

this activity in the revenue cycle?

a) the sales order entry process b) the shipping function c) the cash collection activity d) the cash payments activity

5. The first major business activity in the expenditure cycle is ordering inventory and

supplies. The traditional approach to management of inventory to ensure sufficient

inventory to maintain production is known as

a) safety stock. b) just-in-time production. c) economic order quantity. d) optimal inventory quantity.

6. EOQ includes several variables that must be taken into consideration when

calculating the optimal order size. One variable, the costs associated with holding

inventory, is referred to as

a) ordering costs. b) carrying costs. c) the reorder point. d) stockout costs.

7. The decision of when to place an order in a traditional inventory system is specified

by the

a) company inventory policies.

CH 13 The Expenditure Cycle

a) demand for inventory is fairly predictable. b) demand for inventory is mostly unpredictable. c) product has a short life cycle. d) None of the above are correct.

15. A key decision in ordering is selecting a suitable vendor. Which of the following

would not be a major criterion in vendor selection?

a) prices of goods b) quality of goods c) credit rating of the vendor d) ability to deliver on time

16. Once a vendor is selected for a product, the company's identity is recorded in the

a) general ledger. b) purchase requisition file. c) product inventory transaction file. d) product inventory master record.

17. The paper document or electronic form that formally requests a supplier to sell and

deliver specified products at designated prices is called

a) a purchase order. b) a materials requisition. c) a sales invoice. d) a receiving report.

18. A purchase order is

a) a document formally requesting a vendor to sell a certain product at a certain price. b) a request for delivery of certain items and quantities. c) a contract between the buyer and vendor once accepted by the vendor. d) All of the above are true.

19. A standing order to purchase specified items at a designated price, from a particular

supplier for a set period of time, is called a

a) set order. b) blanket purchase order. c) purchase order. d) commodity order.

20. A major cost in the purchasing function is the number of purchase orders processed.

One technique that may reduce purchasing-related expenses is to have suppliers

compete with each other to meet demand at the lowest price. This name of this

technique is

a) an EDI auction. b) a trading exchange. c) a reverse auction. d) a supplier consortium.

21. The receiving and storage of goods is the responsibility of the receiving department,

which usually reports to the __________ function in the company.

a) inventory control b) stores c) production d) purchasing

22. The receiving department has two major responsibilities in connection with the

expenditure cycle. Identify one of these responsibilities.

a) shipping products most efficiently and at the lowest cost b) deciding if the delivery should be accepted c) verifying any purchase discounts for the delivery d) deciding on the location where the delivery will be stored until used

23. Which of the following is generally not shown on a receiving report?

a) price of the items b) quantity of the items c) purchase order number d) counted and inspected by

24. A receiving clerk notes that a delivery of 10 units has been received, but the purchase

order specified 12 units. A debit memo will be prepared to adjust for the difference

in the quantity ordered and received. Who should prepare this document?

a) the receiving clerk b) management c) the sales department d) the purchasing department

25. Identify which of the following scenarios the buyer could adjust by using a debit

memo document.

a) quantity different from that ordered b) damage to the goods c) goods that fail inspection for quality d) All of the above are possible scenarios.

26. What is one of the best ways to improve the overall efficiency and effectiveness of

the receipt and storage of ordered items?

a) requiring all suppliers to have a second party verify quantities purchased before shipment b) requiring all suppliers to have bar-codes on their items to allow electronic scanning upon delivery by the receiving department c) requiring all suppliers to use EDI to expedite the receiving department function d) requiring all delivery trucks to have satellite data terminals to expedite the receiving department function

27. All of the following technologies could be useful aids in the receiving process except

a) bar coding. b) radio frequency identification tags. c) EFT. d) satellite technology.

28. Vendor invoices are approved by the __________, which reports to the __________.

a) purchasing department; controller

36. What is the final activity in the expenditure cycle?

a) ordering goods b) receipt and storage of goods c) approving vendor invoices for payment d) the payment of approved invoices

37. In a typical cash disbursement procedure, who usually handles the checks and may

even be able to sign checks up to a certain dollar limit?

a) the accounts payable supervisor b) the controller c) the cashier d) the treasurer

38. Duties in the expenditure cycle should be properly segregated to promote internal

control. This means that the authorization function is performed by __________, the

recording function is performed by __________, and the cash disbursement function

is performed by the __________.

a) accounts payable; purchasing; cashier b) purchasing; accounts payable; cashier c) purchasing; cashier; accounts payable d) purchasing; accounts payable; treasurer

39. A voucher package should include

a) a purchase requisition, vendor invoice, and receiving report. b) a purchase order, vendor invoice, and receiving report. c) a purchase requisition, purchase order, and receiving report. d) a bill of lading and vendor invoice.

40. The evaluated receipt settlement (ERS) replaces the more traditional 3-way matching

process with a 2-way match of the purchase order and the

a) vendor invoice. b) sales invoice. c) receiving report. d) disbursement voucher.

41. What may be the biggest opportunity to improve the efficiency of accounts payable?

a) convert a manual AIS system to EDI and EFT b) streamline noninventory purchases c) use ERS d) use disbursement vouchers

42. When purchasing miscellaneous supplies, companies can reduce costs, improve

efficiency, and combat employee fraud by using

a) procurement cards. b) a JIT inventory system. c) credit cards. d) debit cards.

43. If available, a 1% discount for payment within 10 days represents an approximate

savings of __________ % annually.

a) 1 b) 12 c) 18 d) 36

44. When a legacy system is replaced with an integrated Enterprise Resource Planning

(ERP) system, many benefits are realized for the organization. What is a key

improvement in the record keeping function?

a) Any department can now submit a request to purchase items. b) The system tracks the exact time of delivery. c) Major suppliers send electronic notification of incoming deliveries. d) Inventory records are more accurate and timely.

45. The threat of paying prices that are too high for goods ordered can pose a problem in

the expenditure cycle. What is an appropriate control that would be applicable to

help mitigate this threat?

a) require the receiving department to verify the existence of a valid purchase order b) use only approved suppliers and solicit competitive bids c) only pay invoices that are supported by the original voucher package d) use bar-code technology

46. What is probably the most effective control for the prevention of kickbacks to

purchasing agents?

a) purchasing from approved vendors b) good supervision in the purchasing area c) a corporate policy to prohibit purchasing agents from accepting kickbacks d) reviews of vendor performance

47. There are several threats that are associated with the process and activity of receiving

and storing goods. Identify one of these threats below.

a) errors in counting b) kickbacks c) requests for unnecessary items d) errors in vendor invoices

48. What is the easiest way to prevent the acceptance of unordered goods?

a) order only from approved vendors b) always require that a valid purchase order exists before goods can be accepted at the time of delivery c) have an appropriate conflict of interest policy in place d) require receiving personnel to call the vendor before accepting any goods

49. Which of the following is not a common control for ensuring inventory is secure and

inventory counts are accurate?

a) control of physical access to the inventory storage areas b) transfers of inventory with proper documentation c) sending "blind" copies of purchase orders to inventory control for data entry

b) purchasing from unauthorized vendors c) requisitioning goods not needed d) All of the above are threats in the purchase requisition process.

57. The loss of data is a threat encountered in the expenditure cycle. What is the related

process/activity and applicable control used to counteract the threat?

a) order goods; backup and disaster recovery plans b) general issues; backup and disaster recovery plans c) general issues; development of periodic review of appropriate performance reports d) order goods; various data entry and processing edit controls

SHORT ANSWER

58. a) Define expenditure cycle. b) What are the basic expenditure cycle activities?

59. What is the EOQ approach? What are the components of EOQ?

60. Define the materials requirement planning (MRP)

61. Define just-in-time (JIT) inventory methods.

62. Briefly discuss the differences among EOQ, MRP, and JIT.

63. a) What is the major cost driver in the purchasing function? b) How can information

technology be used to control this cost driver?

64. How is the expenditure cycle a "mirror image" of the revenue cycle?

65. What are the possible problems associated with receiving goods ordered from a

vendor?

66. Name and describe the two common systems for approving vendor payments.

67. How can information technology be used to improve the vendor invoice approval

process?

ESSAY

68. Under what conditions is MRP preferable to JIT and vice versa?

69. In the expenditure cycle, the majority of payments made are by check. What are

some control issues related to payment of vendors by check?

70. Identify ten threats and applicable control procedures for each in the expenditure

cycle.

71. What types of decision-making and strategic information should the AIS provide in

the expenditure cycle?

72. How can using bar codes on goods or products provide significant benefit in the

expenditure cycle?

ANSWER KEY

1) B

2) D

3) D

4) B

5) C

6) B

7) D

8) D

9) B

10) A

11) C

12) A

13) D

14) A

15) C

16) D

17) A

18) D

19) B

20) C

21) C

22) B

23) A

24) D

25) D

26) B

27) C

28) D

29) C

30) A

31) B

32) D

33) D

34) D

35) D

36) D

37) C

38) B

39) B

40) C

41) B

42) A

43) C

44) D

45) B

46) C

47) A

48) B

49) C

50) C

51) A

52) A

53) B

54) B

1. Non-voucher (open invoice) system - approved invoices are posted to vendor records and stored in an open invoice file; checks are written for each individual invoice; when paid, the documents are marked "paid" and placed in a paid invoice file. Voucher system - a disbursement voucher is prepared to summarize information contained in a set of vendor invoices and specify the general ledger accounts to be debited; the voucher authorizes the cashier to make payment to the vendor. The voucher system reduces the number of checks written since several invoices can be paid by one check.

2. EDI eliminates the need to enter invoice data and the matching of payment documents - all of this can be done using computers and network technologies. Technology can eliminate the need for vendor invoices by approving payment upon receipt of the goods. Imaging systems can eliminate paper flow, and universal languages such as XML can provide a paperless means of receiving and storing vendor invoices. Use of procurement cards, credit cards, and electronic expense forms can improve the efficiency of non-inventory purchases.

3. MRP systems schedule production based on estimated sales, and JIT systems schedule production based on customer demand. The choice between these two systems is based on the types of products a company sells. For example, products that have predictable patterns of demand and a long life cycle are more suitable for MRP systems. In this case, sales can be forecast with greater accuracy. Conversely, if the product has an unpredictable pattern of demand and a shorter life cycle, then a JIT system is more suitable. JIT is able to adapt better to continuously changing production levels.

4. Key control problems in the area of payment by check can give rise to fraudulent activity. Fraudulent disbursements made by check to fictitious suppliers are one of the most common types of fraud. Control over checks can be strengthened in a number of ways. First, all checks should be sequentially pre-numbered and kept under lock and key until use. The cashier should randomly audit the supply of unused checks and verify that none are missing. Use of the voucher system will also provide control over paying a "phantom" supplier, since several supporting documents must be present in the voucher packet in order to have a check issued. The cashier and/or treasurer should be the only parties authorized to sign checks. Two signatures should be required on all checks in excess of a predetermined dollar amount to provide independent review of large expenditures. Also, signed checks should not be returned to accounts payable, but should be mailed by the cashier or treasurer. When a check is issued, all documents in the voucher package should be cancelled so that the voucher cannot be resubmitted for payment. To provide another independent review of checking account activity, someone not connected with either accounts payable or the treasurer's office should reconcile all bank accounts. To help circumvent check alteration and forgery, check protection machines should be used to write the dollar amount of the check as well as the date. The paper the check is printed on should have some special watermark or identifying mark that is readable at a certain angle as well.

5. Answers can include the following information:1: Stock-outs - Controls: Inventory control system; accurate perpetual inventory; and vendor performance analysis is needed to prevent this problem 2: Requesting goods not needed - Controls: Review and approval by supervisors; use of pre- numbered requisition forms; and restricted access to blank purchase orders 3: Purchasing goods at inflated prices - Controls: Competitive bidding and proper supervision; approved purchase orders; and price list consultations are needed to prevent this problem 4: Purchasing goods of inferior quality - Controls: Use experienced buyers who know good vendors; review purchase orders; and incorporate approved vendor list into formal procedures 5: Purchasing from unauthorized vendors - Control: Pre-numbered purchase orders should be approved; restrict access to approved vendor list and have procedures in place for any change to the list 6: Kickbacks paid to buyers to influence their decisions - Controls: Clear conflict of interest policy prohibiting the acceptance of any gift from vendors; disclosure of financial interest policy for purchasing agents; and vendor audits

7: Receiving unordered goods - Controls: Receiving department must reject any goods for which there is no approved purchase order 8: Errors in counting goods received - Controls: Use "blind" P. copies to force receiving personnel to actually count goods; provide incentives for counting goods 9: Theft of inventory - Controls: Secure inventory storage locations; make transfers of inventory with proper approval and documentation; do periodic physical count and reconciliation with recorded amounts 10: Errors in vendor invoices - Controls: Invoice accuracy should be verified and compared to P.O and receiving report data 11: Paying for goods not received - Controls: Voucher package and original invoice should be necessary for payments 12: Failure to take available purchase discounts - Controls: File approved invoices by due date; track invoices by due date; use a cash budget to plan for cash needs 13: Paying same invoice twice - Controls: Invoices should be approved only with a full voucher package and paid ones should be canceled so they cannot be used again; do not pay invoices marked "Duplicate" or "Copy" 14: Recording and posting errors for purchases and payments - Controls: Data entry controls, and periodic reconciliation of subsidiary ledger with general ledger control account 15: Misappropriation of cash by paying fictitious vendors and alteration of checks - Controls: Restrict access to cash, blank checks, and check signing machine; use check protection, pre- numbered checks, and imprinted amounts on checks to cut down on forgery and fraud; use petty cash fund for small expenditures only; have proper segregation of duties and independent bank reconciliation function 16: Theft associated with EFT use - Controls: Access controls to the system; encryption of transmissions; time-stamp and number transmissions; control group should monitor all EFT activity 17: Loss of data - Controls: Use file labels, back up of all data files regularly; and, use access controls 18: Poor performance - Controls: Preparation and review of performance reports

1. The AIS should provide decision making information to: Determine when and how much additional inventory to order. Select the appropriate vendors from whom to order. Verify the accuracy of vendor invoices. Decide whether purchase discounts should be taken. Monitor cash flow needs to pay outstanding obligations. AIS should also provide the following strategic and performance evaluation information on: Efficiency and effectiveness of the purchasing department. Analysis of vendor performance such as on-time delivery, quality, etc. Time taken to move goods from the receiving dock into production. Percentage of purchase discounts taken

2. Bar codes can significantly improve the process of receiving goods from suppliers for several reasons. First, a bar code can easily be scanned electronically. Electronically capturing the unique bar code number of a product not only provides identification and quantity data about the product; it can also provide specific production information such as date and time of manufacture, production run information, etc. Electronically encoding such information into an integrated AIS provides up-to-the-minute inventory counts, as well as counts of units sold, and returns for use in a perpetual inventory system. One significant factor in the wide use of bar codes is that it is cost effective to maintain such a system. Also, both vendor and suppliers can read bar codes, and certain bar code formats are universal in nature. This allows goods to be sold virtually anywhere in the world, allowing for easier global marketing efforts to be made by businesses.

What is the most effective technique used to minimize the risk of inaccurate inventory counts?

Which of the following controls could be used to mitigate the threat of accepting unordered items?

What are the controls in expenditure cycle?

Which document is used to reduce the balance owed to a supplier?