BA 427 – Assurance and Attestation Services Lecture 5 Internal Controls: Purchases, Inventory and Payroll

CustomerMail room Cash Receipts BankGeneral Ledger ControllerAccounts Receivable Start Mail receipts checks & remittance advices Remittance advices Checks prepare daily remittance list Daily remit- tance list 2 = source document = action = summary list or document = ledger (G/L or subledger) = journal entry

CustomerMail room Cash Receipts BankGeneral Ledger ControllerAccounts Receivable Start Mail receipts checks & remittance advices B A AC deposit slip & cash receipts bank validates deposit slip Remittance advices Checks prepare G/L entry prepare deposit slip Daily Remit- tance list 1 2 checks & daily remit- tance list prepare daily remittance list Daily remit- tance list 2

CustomerMail room Cash Receipts BankGeneral Ledger ControllerAccounts Receivable Start Mail receipts checks & remittance advices B CA B AC General Ledger Post to G/L Dr cash Cr A/R deposit slip & cash receipts bank validates deposit slip Reconcile validated deposit slip Remittance advices Checks prepare G/L entry prepare deposit slip A/R sub ledger Post to A/R sub ledger Daily Remit- tance list 1 2 checks & daily remit- tance list prepare daily remittance list Daily remit- tance list 2

Lecture 5 – Internal Controls  Purchases and Inventory Cycle  Payroll Cycle

Purchases and Inventory  Control objectives for this cycle: Proper authorization of the purchase. Ordering the proper quality and quantity of goods on a timely basis. Acceptance only of goods that have been ordered.

Purchases and Inventory  Control objectives for this cycle: Receipt of proper terms and prices from the vendor. Payment only for goods and services that were ordered, received, and properly invoiced. Payment on a timely basis.

Purchases and Inventory  Organizational overview of purchases: Inventory Control  Responsible for maintaining the perpetual inventory records. Purchasing Department Receiving Department Inventory Warehouse  Responsible for physical control over inventory Accounts Payable Cash Disbursements

Purchases and Inventory  Segregation of Duties: Authorization for inventory purchases Recording of transactions Access to assets:  inventory and cash disbursements

Purchases and Inventory  Examples of controls over purchases: The following documents are pre-numbered:  Requisitions  Purchase orders  Receiving reports  Payment vouchers  Checks Also, the blank check stock is physically secured.

Purchases and Inventory  Examples of controls over purchases: Periodic physical counts of inventory are conducted, and reconciled to the perpetual records.

Payroll  Control objectives for this cycle: Proper authorization of the payroll. Appropriate calculation of the payroll. Safeguarding of assets associated with payroll. Proper distribution of the payroll. Proper accounting for payroll transactions.

Payroll  Segregation of Duties: Authorization of Payroll Transactions Recording of Payroll Transactions Custody of payroll checks

Payroll  Organizational overview of payroll: Human Resources Payroll Department Timekeeping Cost Accounting Accounts Payable Cash Disbursements

Payroll  Examples of Controls over Payroll Supervisors approve timecards Payroll is processed through its own checking account (often called an imprest account) Unclaimed paychecks are safeguarded by the Treasurer Timeclocks are used in many environments

Bank Cash Disburse- ments ShopsCost Accounting Time- keeping Payroll Accounts Payable H.R.

Bank Cash Disburse- ments ShopsCost Accounting Time- keeping Payroll Accounts Payable H.R. Authorize rates & deductions Start Authorize rates & deductions Job time tickets Post to job order cost sheets Reconcile & approve timecards Approved clock cards Employees punch clock Clock cards Payroll register Payment voucher, check & payroll register paychecks Imprest payroll fund To employees Check into imprest fund Sign & deposit check