SM-06-new CHAPTER 6

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CHAPTER 6 THE EXPENDITURE CYCLE PART II: PAYROLL PROCESSING AND FIXED ASSETS PROCEDURES

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REVIEW QUESTIONS 1.

Job tickets capture the time spent on each job during the day and are used to allocate the labor charges to the WIP account.

2.

The personnel department, through the personnel action form authorizes changes to employee pay rates.

3.

A form of payroll fraud involves a supervisor submitting fraudulent time cards for nonexistent employees. The resulting paychecks, when given to the supervisor are then cashed by the supervisor. This type of fraud can be reduced or eliminated by using a paymaster to distribute paychecks to employees in person. Any uncollected paychecks are then returned to payroll.

4.

A separate imprest account is established for the exact amount of the payroll based on the payroll summary. When the paychecks are cashed, this account should clear leaving a zero balance. Any errors in checks (additional checks or abnormal amounts) would result in a non-zero balance in the imprest account and/or some paycheck would not clear. This will alert management to the problem so corrective action can be taken.

5.

A form of payroll fraud involves employees clocking the time cards of absent employees. By supervising the clocking in and out process, this fraud can be reduced or eliminated.

6.

The personnel action form is a list of personnel changes that enables the payroll department to prepare a list of currently active employees. Any submission of time cards by supervisors for fictitious or ex-employees should thus be detected.

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7.

The payroll clerk reconciles the information received from personnel and production, calculates the payroll and distributes the paychecks. Further, the payroll clerk sends summary information to the accounts payable clerk.

8.

a.

time cards, job tickets, and disbursement vouchers.

b.

journal information which comes from the labor distribution summary and the

payroll register.

9.

c.

subsidiary ledger accounts (employee records and expense accounts).

d.

general ledger accounts (payroll control, cash, and payroll clearing).

Biometric time clocks verify employees’ identities by using fingerprint or hand-vein scan technology. To protect employee privacy, these devices use a mathematical algorithm for verification rather than storing actual fingerprints in a database.

10.

Proximity cards are similar to swipe cards but don’t require the user to slide the card through a reader. Instead, the employee places the card in front of the reader to record attendance time. The advantage is that these cards can be read through wallets, purses, and card holders..

11.

1.

Process the acquisition of fixed assets as needed and in accordance with

formal management approval and procedures; 2.

Maintain adequate accounting records of asset acquisition, cost description,

and physical location in the organization; 3.

Maintain accurate depreciation records for depreciable assets in accordance

with acceptable methods;

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4.

Provide management with information to help them plan future fixed asset

investments; and 5. 12.

Properly record the retirement and disposal of fixed assets.

The fixed asset system processes nonroutine transactions for a wider group of users in the organization than the expenditure cycle. Further, the expenditure cycle processes routine acquisitions of raw materials inventories for the production function and finished goods inventories for the sales function. The expenditure cycle transactions are oftentimes automatically approved by the system, while fixed asset transaction approvals typically demand individual attention due to the uniqueness of the transactions.

Additionally, fixed asset systems must include cost allocation

procedures in order to account for the apportioned acquisition cost and depreciation of the fixed asset.

This is not required as part of the previously discussed

purchasing system, which handles inventory acquisitions that represent currentperiod expenses only. 13.

Asset acquisition, asset maintenance, and asset disposal.

14.

The typical information found on a depreciation schedule is: type of asset, description, month, current depreciation amount, accumulated depreciation amount, book value, and asset location. Also, a group code may be assigned. The physical location of the asset is recorded, and the verification that this asset exists should be performed by physically observing the asset. The date and amount of the purchase of the asset can be verified by locating the original purchase order and invoice amount for the asset.

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15.

Because the fixed asset department authorizes the removal of the asset from the general ledger, they must know when to record the authorization. Further, if improvements or asset disposals are made and the fixed asset department is unaware, then the depreciation amounts calculated and reported in the financial statements will be incorrect.

16.

The auditor should review the authorization control procedures to determine the reasonableness of authorizations used for acquisition of fixed assets. The auditors should also examine the supervision controls over the physical guarding of the assets. Lastly, the auditors should periodically verify the location, condition, and fair value of the organization’s fixed assets against the fixed asset records in the subsidiary ledgers. Also, the depreciation schedules should periodically be analyzed to determine the accuracy and completeness.

17.

The fixed asset department provides record keeping for fixed asset inventory.

18.

The fixed asset depreciation schedule shows when and how much depreciation to record. It also shows when to stop taking depreciation on fully depreciated assets. This information in a management report is also useful for planning asset retirement and replacement.

19.

When an asset is taken out of service, the responsible manager issues a request to dispose of it. Like any other transaction, the disposal of an asset requires proper approval that will be determined by its nature and materiality. In some cases multiple levels of management may be involved, in other situations the manager in charge of the asset may have the authority to dispose of it.

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20.

Unlike production assets, fixed asset inventory is distributed widely across the organization. Individual items such as automobiles, computers, and office furniture are in the custody of the end-users.

DISCUSSION QUESTIONS

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1.

The job ticket is used to allocate each labor hour of work to specific WIP accounts. These job tickets are very important for cost accounting. The job tickets are completed by production workers as they capture the total amount of time that they spend on each production job. Upon completion, they route these to the cost accountants who use them to post the labor costs to specific WIP accounts such as direct labor, indirect labor and overhead. The cost accountant prepares a labor distribution summary which contains the information for the general ledger clerk to make the necessary entries to the general ledger accounts.

2.

Payroll costs such as wages to workers accrue each minute, hour or day that they work. However, these costs are not recorded as a liability during the time between when the workers earn their wages and when they are paid. These time lags typically average from half a week to a week. This time lag is of no concern until the firm is closing its books or preparing interim financial statements. At these points, however, estimates or accruals of the amounts owed should be made and the books should be adjusted.

3.

In a mobile and/or distributed workforce environment in which employees directly enter time and attendance data into the system, the organization is at risk from data entry errors and payroll fraud. Input controls reduce these risks. For example, limit tests are used to detect excessive hours reported per period. Also, check digits detect transcription errors in employee identification numbers. Finally, the use of biometric scanners, swipe cards, and PINs reduce the risk of payroll fraud by ensuring that the individuals clocking into the system are valid employees.

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4.

The primary advantage of payroll outsourcing is cost savings. By transferring this function to a third party, the client organization avoids the salaries and benefit costs of running an in-house payroll department. Also, the cost of continuing education for payroll staff is a financial burden. An in-house payroll department needs to be up to date on an ever-changing array of legal and technical matters. Such training is disruptive, costly, and can be avoided by outsourcing the payroll function.

5.

One example is the reduction in the time it takes to record the receipt of inventory into the inventory records. Further, the automated system will be less likely to pay an invoice early, while at the same time not missing the discount period. Thus, cash management is improved.

6.

Law firms require their employees to log the amount of time spent on each client for billing purposes. Accounting firms also require that their employees keep job tickets for the time they spend on each client. Car repair shops are another example. The mechanic must keep track of how much time he/she spends working on each automobile.

7.

The risks associated with outsourcing are nontrivial. One is that an outside organization will have access to extremely confidential employee data and to the client firm’s financial resources. Another risk is that the service provider will have poor internal controls and/or act incompetently in a way that causes material errors or fraud. A client organization may outsource any function it chooses, but it cannot outsource its responsibility for implementing adequate internal controls.

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8.

Since the asset remains on the books, depreciation on it will continue to be calculated. Fixed assets will be overstated, the depreciation amount charged in each period will be overstated, and equity will be misstated. Further, if insurance is being paid on assets no longer owned, an unnecessary expense will be incurred, thus lowering net income and retained earnings.

9.

AUTHORIZATION CONTROLS. Because fixed assets are requested and employed by end-users asset acquisitions should be formal and explicitly authorized. Each material transaction should be initiated by a written request from the user or department. In the case of high-value items, there should be an independent approval process that evaluates the merits of the request on a cost-benefit basis. SUPERVISION CONTROLS. Because capital assets are widely distributed around the organization, they are more susceptible to theft and misappropriation than inventories that are secured in a warehouse. Therefore, management supervision is an important element in the physical security of fixed assets. Supervisors must ensure that fixed assets are being used in accordance with the organization’s policies and business practices. INDEPENDENT VERIFICATION CONTROLS. 1.

Periodically, the internal auditor should review the asset acquisition

and approval procedures to determine the reasonableness of key factors including: the useful life of the asset, the original financial cost, proposed cost savings as a result of acquiring the asset, the discount rate used, and the capital budgeting method used in justifying decisions to buy or dispose of assets.

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2.

The internal auditor should verify the location, condition, and fair value

of the organization’s fixed assets against the fixed asset records in the subsidiary ledger. 3.

The automatic depreciation charges calculated by the fixed asset

system should be reviewed and verified for accuracy and completeness. System errors that miscalculate depreciation can result in the material misstatement of operating expenses, reported earnings, and asset values. 10.

The responsible supervisors must authorize the disposal of the computer.

11.

Perform an annual physical inventory of fixed assets and adjust the records to reflect assets no longer on hand. Prepare reports about the disposal of assets.

12.

Prepare reports about the transfer of fixed assets. Perform an annual physical inventory and note the location of assets. Budget and then hold each department accountable for depreciation expense for assets located in each department.

13.

Authorize fixed asset acquisitions; part of the authorization is showing that a need for the asset exists.

14.

On the financial statements, assets will be overstated and depreciation expense could be overstated. Assets on property tax returns will be overstated and too much tax will be paid. Insurance premiums will be paid on nonexistent assets.

MULTIPLE CHOICE 1.

B

2.

A

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3.

C

4.

C

5.

C

6.

C

7.

B

8.

A

9.

C

10.

D

11.

A

PROBLEMS 1.

a.

An employee action report from the personnel department should list

all current employees. Time cards for terminated or non-existent employees should be identified when reconciled with the personnel report. b.

An independent paymaster should distribute the paychecks to the

employees. If an employee is not present to receive the paycheck, it will be returned to the payroll department. 2.

a.

The payroll department has no independent information as to changes

in an employee’s status. For example, the foreman may continue to submit time cards for terminated employees. Since the foreman also distributes paychecks, he could steal and forge the uncollected checks. b.

1.

An employee action report from the personnel department

should list all current employees. Time cards for terminated or non-existent

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employees should be identified when reconciled with the personnel report. 2. An independent paymaster should distribute the paychecks to the employees. If an employee is not present to receive the paycheck, it will be returned to the payroll department. 3.

Risks: 

Foremen have too much control over the human resources they are responsible

for recruiting, hiring, and firing. 

The high degree of casual labor creates an environment that lends itself to

abuse. 

High employee turnover rate makes identifying absent or nonexistent employees

difficult. 

Clock machines are unsupervised and located in remote areas.



Foremen submit personnel action forms.



Foremen distribute the paychecks to the employees, checks written for

nonexistent employees can be kept and cashed by the foremen. Controls: 

Authorization. A separated personnel function should be established to account

for employees and to authorize their payment 

Segregation of Duties. The foremen should not distribute the paychecks to

employees. This should be the task of a paymaster.  4.

Supervision. The clocking in and out process should be supervised.

The checks should be processed through accounts payable and the cash

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disbursement departments. The payroll personnel should not have access to a bank account with funds. The checks should be prepared, and the money should be transferred into the payroll account by the cash disbursements department. The payroll department should use personnel action forms (new employees and terminated employees) to validate employees before they are issued a check. 5.

The data contained in a human resource management database is extremely sensitive. Payroll employees should be able to verify that an employee has the status of an active employee, but should not be able to change this status. The personnel employees, on the other hand, should be able to activate new employees and change the status of an employee from active to terminated. The personnel employees should not be able to submit time cards for employees. This separation of tasks prevents either the payroll employee or the personnel employees from processing paychecks for nonexistent or terminated employees. The payroll employees should only be able to retrieve information which is necessary for payroll. The human resource database will most likely contain other information which the payroll employees have no business viewing, such as performance evaluation data, health records, pension plan balances, injury claims, etc. Thus, the central location of data needs good controls to make sure that this sensitive data cannot be viewed or tampered with. Performance evaluation data is very sensitive and passwords should be necessary to access this information. Payroll rate data is also very sensitive and should not be able to be tampered with.

6.

Risks:

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

Supervisor submits the personnel action form. This allows him/her to create

nonexistent employees. 

Supervisor distributes the paychecks to the employees. Checks written for

nonexistent employees can be kept and cashed by the supervisor. 

The appearance of control provided by accounts payable is deceiving. The

review and reconciliation of the payroll register is based on the presumption that the personnel action form and time cards are legitimate and accurate. Since they are both prepared by the supervisor, their integrity is brought into question. Controls: 

Authorization: A separated personnel function should be established to prepare

personnel action forms and manage the human resource. 

Segregation of Duties. The supervisor should not distribute the paychecks to

employees. This should task should be performed by an independent paymaster. 7.

Transaction authorization 

Payroll clerk prepares paychecks without authorization from a personnel action

form. 

Cash disbursements department prepares vendor payments based solely on the

Invoice. No supporting documents are used. Segregation of duties 

Cash disbursements department prepares the paychecks; this should be done

by payroll.

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

Cash disbursements department maintains the AP ledger and approves and

writes checks. 

Payroll checks and vendor check are paid through the general cash account. An

imprest account should be used to clear the payroll checks. 

The supervisor should not distribute the paychecks to employees. This should

task should be performed by an independent paymaster. Accounting records 

No journal vouchers are prepared. The general ledger is being updated from

source documents. 8.

Risks: 

The user’s authority to select vendors and prepare purchase orders without

independent approval allows for fraudulent behavior. 

The user’s authority to receive and validate the invoices without independent

verification allows purchasing frauds to be concealed. 

User receives, inspects, and takes custody of the asset.



Cash disbursements makes payment base only on the invoice from the user.



The absence of accounts payable form the process allows for the payment of

unauthorized purchases by the user. Controls: 

Implement formal procedure for approving user requests for assets.



The invoice, receiving report, and approved purchase order should be reviewed

by accounts payable, which authorizes payment by cash disbursements.

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

A fixed asset function should be implemented to account for acquisition, use, and

disposal of the assets. 9.

Risks: 

Users have custody of the assets and maintain usage records. Key information

about asset value is based on information provide by the user. 

The assets involved are particularly subject to misappropriation.



User can overstate mileage to accelerate the depreciation on a vehicle to reduce

the book value of the asset. 

Supervisor has discretion to dispose of the asset as he/she sees fit.



An over-depreciated asset can be sold at a fraction of its real value to the

employee. Controls: 

Periodic audits of the assets to verify their mileage and condition.



Formal procedures for disposal of assets by an independent group.



Private sale of used vehicles to employees should be on an open-bid basis.

10. Risks: 

User prepares purchase order for assets without independent approval.



User receives and validates the invoice. No independent verification.



User receives, inspects, and takes custody of the asset.



Cash disbursements makes payment base on the invoice and receiving report,

which are provided by the user.

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

Accounts payable is not involved in the process.



User has custody of the asset and maintains the fixed asset ledger.

Controls: 

Implement formal procedure for approving user requests for assets.



The invoice, receiving report, and approved purchase order should be reviewed

by accounts payable, which approves payment by cash disbursements. 

A fixed asset function should be implemented to account for acquisition, use, and

disposal of the assets. 11. a.

The source documents represent wells which are being drilled. Equipment which is used may be rented, in which case the invoice for rental would be the source document. Items purchased will probably be delivered to the drilling site, and the source document would be a receiving report. Many times the equipment used to drill the well is owned, and the source document for applying the cost of the equipment to drill the well would be the depreciation schedule. Employee time reports would be the source document for labor distribution reports, which would also be used by the fixed asset accounting department. Also food and lodging for the employees in the case of an off-shore site would be included in fixed asset accounting, and the source documents would be invoices for food, electricity, etc.

b.

The costs would be allocated by the fixed asset accountants based upon the method of accounting by the firm. Many firms would include the cost of

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both wells together (treated as an asset improvement) and deplete these costs over the estimated recoverable reserves (which would probably be adjusted upwards due to the improved recovery method) to be extracted by both wells. c.

The fixed asset accountant must constantly revise the depletion rate

being used to allocate the drilling and completion costs. The standard calculation is:

Total Drilling and Completion Costs Estimated Equivalent Units of Reserves In the above equation, the denominator may change periodically, as the production engineers revise their estimates about the recoverable reserves. The numerator may also change if improvements are made for better recovery. The fixed asset accountant must be advised of these changes. Figure 6-13 does not have to be changed; the user department, production, should complete changes in estimate forms. Invoices and labor distribution forms for improvements to the well would be distributed the FAAs, and they should then update their depletion calculations. d.

The auditors should trace the total well costs capitalized to each

individual well or reservoir. The accuracy and appropriateness of the recording of these transactions should be examined. Finally, the accountant should visit the well site and verify that reserves are being extracted. 12. 1. Internal Control Weaknesses

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

Supervision

There is inadequate supervision of employees with regards to filling out their time cards. Mary does not directly supervise the employees when they are checking “in” and “out.” The inherent threat here is that employees can misstate the amount of hours worked on their time cards. 

Transaction Authorization

Lack of personnel action form from Human Resources poses a threat that unauthorized employees are receiving paychecks. This document is essential for preventing payroll fraud by identifying authorized employees. 

Independent Verification

Coupled with the lack of a personnel action form, allowing supervisors to distribute paychecks keeps Harlan Manufacturing from verifying the existence of its employees. Supervisors are submitting time cards for employees no longer working there and are taking the checks during distribution. 

Accounting Records

Without a payroll imprest account, Harlan Manufacturing is unable to maintain a detailed audit for payroll. This keeps the general ledger department from being able to differentiate checks to employees and checks to suppliers when receiving the Accounts Payable summary. 2. 

Recommendations Supervision: someone other than Mary should supervise the employee’s

checking “in” and “out”.

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

Transaction authorization: prepare personnel action form. Paymaster should be

used to distribute paychecks.

13. a.



Independent verification: Use paymaster to distribute the paychecks.



Accounting records: Establish an imprest count in the bank.

Assets are items which have probable future economic benefit. The patent to produce this radar detector exclusively for 4 years should produce economic benefits for this firm in the future.

This asset should be capitalized and

amortized over the period in which the probable economic benefits are expected to be received. Thus, this asset should be amortized and is a responsibility of the fixed asset accounting department. b. The source document for capitalizing the patent would be the legal agreement of rights and the invoice for the $8M. The costs may be amortized using various methods. Straight-line depreciation is very common and if it used, the amortization schedule would be the source document. Some firms may try to project sales and use a per unit amortization schedule. If this approach is used, the project sales figures and the actual sales figures would be needed to support the amortization schedule. c.

The fixed asset accounting department needs to be notified to change the life of the asset, either in years or in total sales units. The amortization schedule would have to be changed to reflect the accelerated amortization. This notification of change would stem from market surveys assessing the demand for the product.

d. The auditors need to verify (for material assets) the appropriateness of the estimated life of the asset. The auditors must determine if the firm has

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accurately estimated the life in years or in sales units. If increased regulation is expected to decrease sales (the auditors should request market survey results and sales by territories as supporting evidence), then the asset may need to be impaired if it is worth less than was expected. Thus the depreciation, depletion, and amortization output of the fixed asset accounting system is based upon assumptions. The auditors should examine the source documents in support of these assumptions.

INTERNAL CONTROL CASES 1)

Solution for Holly Company Payroll Systems

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7

C. Control Weaknesses 1) Supervision – Timekeeping process is unsupervised 2) Segregation of Duties – Accounting Department Prepares Paychecks 3) Segregation of Duties – Accounting department maintains both sub and GL accounts 4) Accounting Records – Payroll drawn on general cash account 5) Segregation of Duties – Accounting clerk prepares and signs paychecks 6) Segregation of Duties – Foremen authorize time cards and distribute paychecks 7) Transaction verification - Payroll clerk prepares paychecks without authorization from a personnel action form.

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d) IT Contols

e. Student solutions should address the following: 1) Provide supervision over timekeeping Process

2) Paychecks should be prepared by Payroll Department 3) Create separate GL function or provide access control to GL 4) Establish separate cash disbursement department 5) Establish an Impress account for payroll 6) Employ a paymaster to distribute paychecks to employees 7) Verify the status of employees before preparing paychecks.

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2.

Solution for Walker Books, Inc.—Payroll and Fixed Asset Systems

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C. Control Weaknesses Payroll System 1) Supervision – Timekeeping process is unsupervised 2) Transaction verification - Payroll clerk prepares paychecks without authorization from a personnel action form. 3) Segregation of Duties – Accounts Payable department has access to accounting records and also writes checks. Fixed Asset System 1) Accounting Records – Requests for fixed assets are informally submitted 2) Accounting Records – Open PO is not closed when goods arrive 3) Supervision/Accounting Records – Blind copy of PO should be provided to the receiving clerk.

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4) Segregation of Duties – Accounts Payable department has access to accounting records and also writes checks.

D. IT Controls  

E. Flowcharts for this part of the case will vary. Solutions should address the issues presented in part C of the case.

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3. Solution for Steeles Payroll and Fixed Assets

a, b, see following pages. c, Control Weaknesses­Fixed Asset System 1. Segregation of duties necessary for asset acquisition, maintenance, and disposal (departmental manager has charge of all decisions). 2. Need fixed assets department to authorize the manager’s asset functions. 3. No receiving department to prepare a receiving report for AP to match with purchase order, etc.

Control Weaknesses­Payroll System 1. Should have personnel action form (prevents submitting time cards for past employees, transaction authorization of time cards). 2. Time-keeping and personnel function should be separated from supervisor, so pay rates are less likely to contribute to fraud. 3. Supervisor does the time card verification and collecting and distributing of paychecks. This allows the supervisor to verify paychecks for false employees and collect them for him/herself. A “paymaster” should take responsibility to verify and distribute checks to ensure no checks from non-existing employees. 4. AP should not review Cash Disbursement department activities regarding accuracy of paycheck amounts and creating voucher packet. 5. No (verified) journal voucher from cash disbursement sent to general ledger.

d,

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e, Student solutions will vary for this part of the case. They should address the internal control issues presented in part C.

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4. Solution for Music Source, Inc.—Payroll and Fixed Assets

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C. Internal Control Weaknesses Payroll 1) Transaction Authorization – Employees Validate their own time cards 2) Segregation of duties – Supervisors should submit time card and also prepare personnel action forms that authorize employees to be paid. 3) Independent Verification – The AP department should be in the process to authorize cash disbursements to write the payroll check. 4) Independent Verification – The general ledger department should receive a journal voucher from cash disbursements and an account summary from the AP department. 5) Cash disbursements should prepare a single payroll check that is deposited into an imprest account to cover the paychecks.

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Fixed Assets 1) Accounting Records – No formal receiving report is prepared 2) Independent Verification – No three way match is performed. Missing a receiving report. 3) Segregation of Duties – AP should not also update the FA inventory records. 4) Segregation of Duties – The end user should not be solely responsible for determining asset disposal. Need a fixed asset department to manage authorization, maintenance and disposition of fixed assets. D. IT Controls

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5)

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5.

Solution for Green Mountain Coffee Roasters, Inc.—Payroll and Fixed Asset Systems

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C. Internal Control Weaknesses Payroll 1) Transaction Authorization – No personnel action report to validate employees 2) Segregation of duties – Supervisors should not submit and review time cards and also distribute paychecks. 3) Segregation of duties – The AP department should not be writing checks. They should authorize cash disbursements to do so. 4) Accounting Records – No journal record of the cash disbursement 5) Independent Verification – The general ledger department should receive a journal voucher from cash disbursements and an account summary from the AP department. Fixed Assets 1) Accounting Records – PO is never closed when goods arrive 2) Independent Verification – No formal receiving report is prepared. 3) Segregation of Duties – AP should not also update the FA inventory records. 4) General Ledger should receive a journal voucher from Cash Disbursements 5) Segregation of Duties – The end user should not be solely responsible for determining asset disposal. Need a fixed asset department to manage authorization, maintenance and disposition of fixed assets.

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D.

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6.

Solution to Orbits a), b) see diagrams on the following pages. c) Internal Control Weakness. Control weaknesses in Orbits Purchases System 1) The inventory control is not separate from the purchasing. This could lead to unnecessary purchases. 2) Receiving does not get a blind copy of the PO. The blind copy would force the receiving clerk to count and inspect the goods to complete the receiving report. The clerk is only using the packing slip to prepare the receiving report. 3) The receiving department does not send a copy of the RR to the purchases/inventory control department, thus the PR and PO are used to update the inventory records before the goods arrive. 4) The accounts payable department doesn’t receive the supplier’s invoice, thus it only reconciles and posts the liability from the PR, PO, and RR. The supplier’s invoice instead is sent directly to the general ledger. 5) The General ledger should receive journal vouchers and account summaries not the vendor’s invoice or the CD voucher. Control weaknesses in Orbits Payroll System 1) The Payroll department receives no personnel action form thus when preparing the payroll register they are unable to verify employee names and salaries. 2) The current system has no paymaster. The paychecks are returned to the supervisors for distribution to employees. 3) General Ledger should not be updated from a CD disbursement voucher. It requires a formal Journal voucher Control weaknesses in Orbits Fixed Assets System 1) The accounts payable department sets up a fixed asset liability based only on the invoice. A three way match including the purchase order and the receiving report should be performed before recording the account payable. 2) The accounts payable department should prepare an accounts payable summary that goes to the general ledger function. 3) Cash disbursements should prepare a journal voucher and send it to the general ledger department. 4) No formal receiving function exists to produce a receiving report.

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Control weaknesses in Orbits Sales Order Processing System 1) No credit check is performed before processing customer sales orders 2) Customers are billed and the sales journal updated before the good are shipped 3) No shipping notice is prepared. Therefore, the accounts receivable department posts an AR based on what was ordered and not what was actually shipped. Control Weaknesses in Cash Receipts System 1) The mail room does not prepare a remittance list to control the movement of customer checks. 2) The bank reconciliation of cash deposits should not be performed by the cash receipts department. This should be an independent reconciliation. 3) Cash receipts should prepare a journal voucher that goes to the General Ledger Department.

D.

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