202201120915120560004010 Case 2 - Expenditure Cycle
Expenditure Cycle (Lex steel) Lex Steele is a leading manufacturer of steel furniture. Although the company has manufacturing plants and distribution facilities throughout the United States, the purchasing, accounting, and treasury functions are centralized at corporate headquarters. While discussing the management letter with the external auditors, Ray Lansdown, controller of Lex Steele, became aware of potential problems with the accounts payable system. The auditors had to perform additional audit procedures to attest to the validity of accounts payable and cutoff procedures. The auditors have recommended that a detailed systems study be made of the current procedures. Such a study would not only assess the exposure of the company to potential embezzlement and fraud, but would also identify ways to improve management controls. Lansdown has assigned the study task to Dolores Smith, a relatively new accountant in the department. Because Smith could not find adequate documentation of the accounts payable procedures, she interviewed those employees involved and constructed a flowchart of the current system. The Problem 11 flowchart is presented on page 538. A description of the current procedures follows.
The host computer mainframe is located at corporate headquarters with interactive, remote job-entry terminals at each branch location. In general, data entry occurs at the source and is transmitted to an integrated database maintained on the host computer. Data transmission is made between the branch offices and the host computer over leased telephone lines. The software allows flexibility for managing user access and editing data input. Procedures for Purchasing Raw Materials Production orders and appropriate bills of materials are generated by the host computer at corporate headquarters. Based on these bills of materials, purchase orders for raw materials are generated by the centralized purchasing function and mailed directly to the vendors. Each purchase order instructs the vendor to ship the materials directly to the appropriate manufacturing plant. Assuming that the necessary purchase orders have been issued, the manufacturing plants proceed with the production orders received from corporate headquarters. When goods are received, the manufacturing plant examines and verifies the count with the packing slip and transmits the receiving data to accounts payable at corporate headquarters. In the event that raw material deliveries fall behind production, each branch manager is given the authority to order materials and issue emergency purchase orders directly to the vendors. Data
about the emergency orders and verification of materials receipt are transmitted via computer to accounts payable at corporate headquarters. Because the company employs a computerized perpetual inventory system, physical counts of raw materials are deemed not to be cost effective and are not performed.
Accounts Payable Procedures
Vendor invoices are mailed directly to corporate headquarters and entered by accounts payable personnel when received; this often occurs before the receiving data are transmitted from the branch offices. The final day of the invoice term for payment is entered as the payment due date. This due date must often be calculated by the data entry person using information listed on the invoice. Once a week, invoices due the following week are printed in chronological entry order on a payment listing, and the corresponding checks are drawn. The checks and the payment listing are sent to the treasurer’s office for signature and mailing to the payee. The check number is printed by the computer and displayed on the check, and the payment listing is validated as the checks are signed. After the checks are mailed, the payment listing is returned to accounts payable for filing. When there is insufficient cash to pay all the invoices, certain checks and the payment listing are retained by the treasurer until all checks can be paid. When the remaining checks are mailed, the listing is then returned to accounts payable. Often, weekly check mailings include a few checks from the previous week, but rarely are there more than two weekly listings involved. When accounts payable receives the payment listing back from the treasurer’s office, the expenses are distributed, coded, and posted to the appropriate plant or cost centre accounts. Weekly summary performance reports are processed by accounts payable for each cost centre and branch location reflecting all data entry to that point.
(Source: IT Auditing, James A. Hall 3rd Edition, Problem 10, page 533)
1. Identify and discuss three areas where Lex steel Corporation may be exposed to fraud or embezzlement due to weaknesses in the procedures described and recommend improvements to correct these weaknesses.
2. Describe three areas where management information could be distorted due to weaknesses in the procedures and recommend improvements to correct these weaknesses