Modern Auditing: Assurance Services and the Integrity

of Financial Reporting, 8th Edition

William C. Boynton California Polytechnic State

University at San Luis Obispo

Raymond N. Johnson Portland State University

Chapter 15 – Auditing the Expenditure Cycle

Chapter Overview

The Expenditure Cycle

Develop Audit Objectives

Understanding the Entity and

Environment

Inherent Risk, Including the Risk

of Fraud

• Management Misstatement of Expenditures

– Understate expenses

– Understate payables

• Other Misstatement Factors

– High volume of transactions

– Unauthorized purchases

– Misappropriation

– Duplication of payments

Analytical Procedures

Consideration of Internal Control

Components

• Control Environment

• Risk Assessment

• Information and Communication

• Monitoring

Purchase Transactions –

Documents and Records

• Purchase requisition

• Purchase order

• Approved vendor master file

• Open purchase order file

• Receiving report

• Receiving file

• Vendor Invoice

Purchase Transactions – Common

Documents and Records

• Voucher

• Exception reports

• Voucher summary

• Voucher register

• Purchase transactions file

• Accounts payable master file

• Suspense files

Purchase Transactions –

Functions and Control Activities

• Initiating Purchases – Placing vendors on an authorized vendor list

– Requisitioning goods and services

– Preparing purchase orders

• Receipt of Goods and Services – Receiving the goods

– Storing goods received for inventory

– Returning goods to vendor

• Recording Liabilities

Systems Flowchart – Purchase

Transaction

Systems Flowchart – Purchase

Transaction

Systems Flowchart – Purchase

Transaction

Cash Disbursement Transactions–

Common Documents and Records

• Check

• Check Summary

• Cash Disbursements Transaction File

• Cash Disbursements Journal or

Check Register

Cash Disbursement Transactions-

Function and Control Activities

• Computerized System

– Paying the Liability

– Recording the Disbursement

• Manual System

– Paying the Liability

– Recording the Disbursement

Systems Flowchart – Cash

Disbursement Transactions

Purchase Adjustment Transactions–

Common Documents and Records

• Purchase Return Authorization

• Shipping Report

• Debit Memo

Purchase Adjustment Function and

Controls

• Purchase Returns and Allowances

• Other Controls

• Tests of Controls

Substantive Tests of Accounts

Payable Balances

• Determining Detection Risk for Tests of

Details

– Existence and Occurrence

– Completeness

– Rights and Obligations

– Valuation and Allocation

– Presentation and Disclosure

Designing Substantive Tests

• Initial Procedures

• Analytical Procedures

Designing Substantive Tests

• Tests of Details of Transactions

– Vouch Recorded Payables to Supporting Documentation

– Perform Cutoff Tests • Purchases cutoff tests

• Cash disbursement cutoff tests

• Purchase return cutoff tests

– Perform Search for Unrecorded Payables • Subsequent payments

Designing Substantive Tests

• Tests of Details of Balances

– Accounts Payable Confirmations

– Reconcile Unconfirmed Payables to

Vendor Statements

• Tests of Details of Disclosures