Accounting information systems controls and process 2nd tunnwe weickgenannt chapter 12

SECOND EDITION

Chapter
12-1

Prepared
by CobybyHarmon
Prepared
Coby Harmon
University
of California,
Santa Barbara
University
of California,
Santa Barbara
Westmont
Westmont
CollegeCollege


Administrative Processes
and Controls
Chapter
12-2


Study
Study Objectives
Objectives
1.

An introduction to administrative processes

2.

Source of capital processes

3.

Investment processes

4.

Risks and controls in capital and investment processes

5.

General ledger processes

6.

Risks and controls and risks in general ledger processes

7.

Reporting as an output of the general ledger processes

8.

Ethical issues related to administrative processes and reporting

9.

Corporate governance in administrative processes and reporting

Chapter
12-3


Alcoa, Inc., the world’s leading producer of
Real
World
Real
World
aluminum, is well known for its accomplishments in the areas of
sustainability and innovation in the transportation, aerospace,
construction, and electronics industries. In 2012, Alcoa was appointed to
Fortune magazine’s list of Most Admired Companies for the twenty-ninth
consecutive year.
A lesser known fact about Alcoa is that it is often
the first of the Dow Jones Industrial companies to report its quarterly
earnings. Alcoa has worked hard to achieve a fast close, whereby it has
fine-tuned its accounting processes and information systems to facilitate
the completion of periodic transaction processing and closing of the
general ledger within two days of the end of the period. Then, it can
report its consolidated financial results externally within one week. In
today’s fast-paced business environment, companies can gain
competitive advantage by closing their books quickly and delivering
timely information to internal and external stakeholders.
Chapter
12-4

Administrative
Administrative Processes
Processes
Three administrative processes described in this
chapter:
1. Source of capital processes
2. Investment processes
3. General ledger processes

Chapter
12-5


Introduction
Introduction to
to Administrative
Administrative Processes
Processes
Administrative processes are transactions and activities that
either are specifically authorized by top managers or are used
by managers to perform administrative functions.
First set of processes: Examples include sale of stocks or
bonds, the initiation of loans, bonds or notes payable, and the
investment of funds in marketable securities.
Second set of processes: financial information being
recorded in general ledger accounts.

Chapter

12-6

SO 1 An introduction to administrative processes


Exhibit 12-2
Overall View of
Transactions, Processes, and
Resulting Reports

Introduction
Introduction to
to
Administrative
Administrative
Processes
Processes
Chapter
12-7

SO 1 An introduction to administrative processes


Introduction
Introduction to
to Administrative
Administrative Processes
Processes
Concept Check
Which of the following is not part of an administrative

process?
a. The sale of stock
b. The sale of bonds
c. The write-off of bad debts
d. The purchase of marketable securities

Chapter
12-8

SO 1 An introduction to administrative processes


Sources
Sources of
of Capital
Capital Processes
Processes
Capital is the funds used to acquire long-term, capital
assets of an organization.
Source of capital processes are those processes to

Chapter
12-9



authorize the raising of capital,



the execution of raising capital, and



the proper accounting of that capital.

SO 2 Source of capital processes


Sources
Sources of
of
Capital
Capital
Processes
Processes

Chapter
12-10

Exhibit 12-3
Sources of Capital
Process Map

SO 2 Source of capital
processes


Sources
Sources of

of Capital
Capital Processes
Processes
Concept Check
Which of the following statements is not true regarding source of
capital transactions?
a. These processes should not be initiated unless there is specific
authorization by management at a top level.
b. Source of capital processes will result in potential dividend or
interest payments.
c. Retirement of debt is a source of capital process.
d. The fact that these transactions and processes cannot occur
without oversight by top management means other controls are
not necessary.
Chapter
12-11

SO 2 Source of capital processes


Investment
Investment Processes
Processes
Management should properly manage, or administer, the
investment of excess funds.
Investment processes are those processes which
►

authorize,

►

execute,

►

manage, and

►

properly account for

investments of excess funds.
Chapter
12-12

SO 3 Investment processes


Investment
Investment
Processes
Processes
Exhibit 12-4
Investment Process
Map

Chapter
12-13

SO 3 Investment processes


Investment
Investment Processes
Processes
Concept Check
The officer within a corporation that usually has oversight
responsibility for investment processes is the
a. controller.
b. treasurer.
c. chief executive officer (CEO).
d. chief accounting officer (CAO).

Chapter
12-14

SO 3 Investment processes


Risks
Risks and
and Controls
Controls in
in Capital
Capital and
and
Investment
Investment Processes
Processes

For both source of capital processes and investment
processes, the important control is the specific authorization
and oversight by top management.
Generally, the risks are not related to employee fraud, but are
instead related to management fraud.

Chapter
12-15

SO 4 Risks and controls in capital and investment processes


Risks
Risks and
and Controls
Controls
Concept Check
Which of the following statements is not true regarding internal
controls of capital and investment processes?
a. Internal controls aimed at preventing and detecting employee
fraud in capital and investment processes are not as effective.
b. Top management fraud, rather than employee fraud, is more
likely to occur.
c. Any fraud is likely to involve manipulating capital and investment
processes.

Chapter
12-16

d. Because of top management oversight, the auditor need not

review these processes.
SO 4


Real
Real World
World

In the early 2000s, the Securities and Exchange
Commission investigated Nathan A. Chapman, Jr.
and three of his companies. One of the companies, echapman.com, was
scheduled to sell tock through an initial public offering (IPO). In an IPO, the
company offering stock must explain to potential investors the manner in
which funds from the IPO will be used.
The SEC found that Chapman lied about the use
of IPO funds. Chapman was actually using proceeds from the sale of new
stock to buy more of his own stock. These purchases were only intended to
show a larger volume of sales of the stock, thereby making it look like a more
attractive stock. He was attempting to artificially pump up the price of the
stock through these purchases of his own stock. To conceal this fraud, his
company falsified the financial statements.
In this case, typical internal controls such as
segregation of duties and reconciliations would not likely prevent or detect
these frauds. The more important controls of specific authorization by top
management and close scrutiny by the internal and external auditors are
especially important in capital and investment processes.

Chapter
12-17

SO 4


General
General Ledger
Ledger

Exhibit 12-5
Accounting Cycle
Process Map

Chapter
12-18

SO 5 General ledger processes


General
General Ledger
Ledger Process
Process
Concept Check
Which of the following statements is true?
a. Routine transactions are recorded in the general
journal.
b. Nonroutine transactions are entered in the general
journal.
c. Nonroutine transactions are recorded in a subsidiary
ledger.

Chapter
12-19

d. Nonroutine transactions are recorded in a special
journal.
SO 5 General ledger processes


General
General Ledger
Ledger Process
Process
Concept Check
Regarding subsidiary ledgers and general ledger control accounts,
which of the following is not true?
a. Total balances in a subsidiary ledger should always equal the
balance in the corresponding general ledger account.
b. The general ledger maintains details of subaccounts.
c. Control is enhanced by separating the subsidiary ledger from
the general ledger.
d. Reconciling a subsidiary ledger to the general ledger can
help to detect errors or fraud.
Chapter
12-20

SO 5 General ledger processes


Risks
Risks and

and Controls
Controls in
in General
General Ledger
Ledger
Processes
Processes
Common procedures associated with the general ledger:

Chapter
12-21

►

Authorization of transactions

►

Segregation of duties

►

Adequate records and documents

►

Security of the general ledger and documents

►

Independent checks and reconciliation

►

Cost-benefit considerations

SO 6 Risks and controls and risks in general ledger processes


Real
Real World
World

Authorization of transactions

Consider the checkout lanes at a department store such as WalMart. Around the world, there are employees working checkout
lanes who are scanning products by passing them over the bar
code scanner and accepting payment. In a large company such
as Wal-Mart, it would be tremendously inefficient for the system to
delay the general ledger posting until a specific employee logs in
to conduct the posting. Rather, when the checkout lane employee
completes a sale by accepting payment and printing a sales
receipt, he or she has authorized an event that will automatically
update sales, inventory, and cash balances.

Chapter
12-22

SO 6 Risks and controls and risks in general ledger processes

Real
Real World
World

Authorization of transactions

Wal-Mart and Procter & Gamble (P&G) have interconnected IT
systems. P&G sells consumer products such as soap, shampoo,
and diapers to Wal-Mart. A sale by P&G to Wal-Mart is actually
triggered by the Wal-Mart IT inventory system. As Wal-Mart
inventory levels of certain products fall below established reorder
points, the systems interact and authorize a transfer of products
from P&G to Wal-Mart. This means that P&G’s sale and the
subsequent update of its sales and receivable accounts are
activated by its customer’s computer system. Similarly, WalMart’s purchase and update of its inventory and payables
accounts are triggered by this system.
Chapter
12-23

SO 6 Risks and controls and risks in general ledger processes


Risks
Risks and
and Controls
Controls in
in General
General Ledger
Ledger

Processes
Processes
Concept Check
Which of the following statements regarding the authorization of general
ledger posting is not true?

Chapter
12-24

a.

Posting to the general ledger always requires specific authorization.

b.

User IDs and passwords can serve as authorization to post
transactions to the general ledger.

c.

A journal voucher serves as authorization for manual systems.

d.

As IT systems become more automated, the authorization of
general ledger posting is moved to lower levels of employees.
SO 6 Risks and controls and risks in general ledger processes


Risks

Risks and
and Controls
Controls in
in General
General Ledger
Ledger
Processes
Processes
Concept Check
In a manual system with proper segregation of duties, an
employee in the general ledger department should only
a. authorize posting to the general ledger.
b. post transactions to the general ledger.
c. reconcile the subsidiary ledger to the general ledger.
d. post transactions to the subsidiary ledger.
Chapter
12-25

SO 6 Risks and controls and risks in general ledger processes