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Expenditure Cycle - Auditing Theory
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Expen
diture
Cycle
The Expenditure Cycle
Activities and information processing related to:
Purchasing and Payment (Disbursement)
Expenditure Cycle Activities1. Ordering materials, supplies, and services
2. Receiving materials, supplies, and services
3. Approving supplier invoices
4. Cash disbursements
Important Documents NeededDOCUMENTS
Purchase requisition
• A prenumbered document that originates in the inventory stockroom or an operating dept. and indicates that goods should be ordered.
AUDIT S IGNIF ICANCE
• Provides evidence that the purchasing department was authorized to initiate a purchase
Important Documents NeededDOCUMENTS
Purchase Order• A prenumbered
document recording the description, quantity, and related information for goods and services the company intends to purchase.
AUDIT S IGNIF ICANCE
• Contains the signature of the employee who authorized a purchase from a vendor.
Important Documents NeededDOCUMENTS
Receiving Report• A prenumbered
document prepared at the time tangible goods are received that indicates the description of goods, quantity received, the date received, and other relevant data.
AUDIT S IGNIF ICANCE
• Provides evidence that the goods were received
Important Documents NeededDOCUMENTS
Vendor’s Invoice• A document that
indicates the description and quantity of goods and services received, price, including freight, cash discount terms, and date of the billing
AUDIT S IGNIF ICANCE
• Provides evidence about a purchase of goods or services
Important Documents NeededDOCUMENTS
Debit Memo• A prenumbered
document indicating a reduction in the amount owed to a vendor because of returned goods or an allowance granted.
AUDIT S IGNIF ICANCE
• Provides evidence about a purchase of goods or services
Important Documents NeededDOCUMENTS
Voucher• A prenumbered
document to establish a formal means of recording and controlling acquisitions prepared by a payables clerk for each payment.
AUDIT S IGNIF ICANCE
• Provides documentation for the recording of a transaction.
Important Documents NeededDOCUMENTS
Check• A prenumbered
document written authorization to a bank to transfer funds to the payee.
AUDIT S IGNIF ICANCE
• Provides evidence about payments that an entity has made, such as date, payee, and amount.
Important Documents NeededDOCUMENTS
Vendor’s Statement • A statement prepared
monthly by the vendor indicating the beginning balance, acquisitions, returns and allowances, payments to the vendor, and ending balance.
AUDIT S IGNIF ICANCE
• Can be used to determine that all transactions recorded on the statements have been recorded in the books.
Purchas
ing
Ordering Threats1. Inaccurate inventory records
2. Purchasing items not needed
3. Purchasing at inflated prices
4. Purchasing goods of inferior quality
5. Unreliable suppliers
6. Purchasing from unauthorized suppliers
7. Kickbacks
Ordering Controls1. Perpetual inventory system
2. Bar coding or RFID tags
3. Periodic physical counts of inventory
4. Review and approval of purchase requisitions
5. Centralized purchasing function
6. Price lists
7. Competitive bidding
8. Review of purchase orders
9. Budgets
10. Purchasing only from approved suppliers
Ordering Controls1. Review and approval of purchases from new suppliers
2. Holding purchasing managers responsible for rework and scrap costs
3. Tracking and monitoring product quality by supplier
4. Requiring suppliers to possess quality certification (e.g., ISO 9000)
5. Collecting and monitoring supplier delivery performance data
6. Maintaining a list of approved suppliers and configuring the system to permit purchase orders only to approved suppliers
7. Review and approval of purchases from new suppliers
8. Requiring purchasing agents to disclose financial and personal interests in suppliers
9. Job rotation and mandatory vacations
Receiving Threats1. Accepting unordered items
2. Mistakes in counting
3. Verifying receipt of services
4. Theft of inventory
Receiving Controls1. Requiring existence of approved
purchase order prior to accepting any delivery
2. Do not inform receiving employees about quantity ordered
3. Require receiving employees to sign receiving report
4. Incentives
5. Document transfer of goods to inventory
6. Use of bar-codes and RFID tags
7. Configuration of the ERP system to flag discrepancies between received and ordered quantities that exceed tolerance threshold for investigation
8. Segregation of duties: custody of inventory versus receiving
1. Budgetary controls
2. Audits
3. Restriction of physical access to inventory
4. Documentation of all transfers of inventory between receiving and inventory employees
5. Periodic physical counts of inventory and reconciliation to recorded quantities
Invoice Processing1. Non-Voucher Each approved invoice is posted to individual supplier records in
the accounts payable file and is then stored in an open-invoice file.
When a check is written to pay for an invoice, the voucher package is removed from the open-invoice file, the invoice is marked paid, and then the voucher package is stored in the paid-invoice file.
2. Voucher Disbursement voucher is also created when a supplier invoice is
approved for payment. Identifies the supplier, lists the outstanding invoices, and indicates the net
amount to be paid after deducting any applicable discounts and allowances.
Advantages of Voucher System1. Reduce number of checks
2. Can utilize pre-sequential-numbered voucher control
3. Allows for separation of invoice approval from invoice payment
The Expenditure Cycle
Cash
Disburs
emen
t
Cash Disbursement Controls• Filing of invoices by due date for discounts• Cash flow budgets• Requiring that all supplier invoices be matched to supporting
documents that are acknowledged by both receiving and inventory control
• Budgets (for services)• Requiring receipts for travel expenses• Use of corporate credit cards for travel expenses• Requiring a complete voucher package for all payments• Policy to pay only from original copies of supplier invoices• Cancellation of all supporting documents when payment is made
• Physical security of blank checks and check-signing machine• Periodic accounting of all sequentially numbered checks by
cashier• Access controls to EFT terminals• Use of dedicated computer and browser for online banking• ACH blocks on accounts not used for payments• Separation of check-writing function from accounts payable• Requiring dual signatures on checks greater than a specific
amount• Regular reconciliation of bank account with recorded amounts
by someone independent of cash disbursements procedures
Cash Disbursement Controls
• Restriction of access to supplier master file• Limiting the number of employees with ability to create one-
time suppliers and to process invoices from one-time suppliers
• Running petty cash as an imprest fund• Surprise audits of petty cash fund• Check protection machines• Use of special inks and papers• Cash flow budget
Cash Disbursement Controls
Cash Disbursement Threats• Failure to take advantage of discounts for prompt
payment• Paying for items not received• Duplicate payments• Theft of cash• Check alteration• Cash flow problems
Auditors assess the following assertions when testing cash disbursements:• Existence or Occurrence• Completeness• Rights and obligations• Valuation or allocation• Presentation and disclosure
Test of Controls: Cash Disbursement Transactions
Controls Test of Controls
Existence orOccurrence
1. Authorized individual signs and mails promptly the checks after reviewing documentation.
The auditor may inquire of the check signer and employees who work with him or her about whether this procedure is being followed.
2. A review should be made by a person not responsible for handling disbursements to determine that checks are processed on a timely basis.
The auditor may inquire about whether this procedure is being followed or may examine the outstanding check list to determine that checks are being processed promptly.
Completeness
3. Checks should be pre-numbered and accounted for to ensure that all checks that were written are entered in the check register.
To test this control, the auditor should observe whether the employee who prepares and check register accounts for the sequence of the checks.
4. An employee who does not handle cash disbursements and cash receipts prepares the bank reconciliation.
The auditor observes that the employee who prepares the reconciliation does not handle cash receipts or disbursement. In addition, the auditor inspects the reconciliation.
Rights andObligations
5. Check signer who is independent of voucher preparation should examine the supporting documentation before signing checks to determine that the payment is for an obligation of the entity.
The auditor tests this control by inquiring about the segregation of duties and observing whether separation really exists. He/she can also inquire about the check signers procedures for reviewing documents in support of cash disbursement and may observe the check signer performing these procedures.
Valuation orAllocation
6. Amounts and calculations on vendors’ invoices are independently verified. Employee signs the voucher after verification is done.
To test this control, the auditor should observe the procedure. He/she can examine signatures on paid vouchers.
Presentationand
Disclosure
7. Chart of accounts adequately describes accounts to be used, and account coding is assigned by one person and checked by another.
The auditor can test this control by observing the procedures. He can also examine the signatures of the employees performing the review account coding.
Possible errors that may result due to control weakness over
payments into vendors follow: Control Weakness Possible Errors
1. Documentation of cash disbursements is inadequate or incomplete.
Unauthorized disbursements.
2. Payments are not always based on approved vouchers.
Errors in recording cash disbursements.
3. Access to disbursement checks is not limited and responsibility not fixed.
Unauthorized disbursements.
4. Disbursement checks mailed to vendors by personnel
Unauthorized disbursements.
5. Checks signed in advance. Unauthorized disbursements.
6. Documents not effectively canceled upon payment of vendor’s invoices.
Unauthorized disbursements.
Substantive test of Transactions: Cash Disbursement
Assertions Audit objectives Audit Procedures1. Existence or
OccurrenceTo determine that recorded cash
disbursements occurred.Examine paid checks for appropriate
endorsements. Examine documents underlying
payments.
2. Completeness To determine that all cash disbursements made are recorded.
Reconcile cash disbursements per books with cash disbursements per the bank. Prepare or test bank reconciliation.
3. Rights and obligations
To determine that all cash disbursements made were the entity’s obligations.
Examine underlying documents.
4. Valuation or Allocation
To determine that debits to various accounts and credits to cash
Recalculate invoices paid.
5. Presentation and Disclosure
To determine that cash disbursements transactions are recorded to result in presentation and disclosure in accordance with PAS/PFRS
Check accuracy of accounts on invoices by reference to chart of accounts.