AUDITINGCHAPTER 12

Purchases & Cash Disbursements TransactionsBy Luis Antonio C. Bullina (Special Thanks to)David N. Ricchiute

TOPICSNature of expenditure/disbursement cycle

Purchasing and Cash Disbursement Activities

Common forms and documentsAuditor’s assessment of control risk

Audit of internal control for purchases, cash disbursements

Computer auditing, sampling, tests of controlsAssurance, consulting services

EXPENDITURE /DISBURSEMENT CYCLE

Expenditure/Disbursement Cycle-encompasses both the acquisition of goods and services(expenditure) and the payment of cash(disbursement) for the goods and services. This cycle is directly related to other three cycles since:1. Uses resources information provided by the

revenue/receipt cycles2. Provides resources and information for the

financing and conversion cycles

PURCHASING AND CASH DISBURSEMENT ACTIVITIESPURCHASING

Accept approved purchased requisitions from user departments

Prepare purchase order, distribute copies and retain file copy

RECEIVING File purchase orders until goods are

received Upon receipt of goods, count quantities

and compare with purchase orders Prepare receiving report Forward goods to inventory control Forward copies of receiving report to

Accounts payable and Purchasing; retain file of receiving report, purchase order, and updated receiving log

ACCOUNTS PAYABLE Compare purchase requisition, purchase

order, receiving report and vendors invoice

Prepare voucher and daily summary; assemble voucher package

File voucher package due date; forward to cash disbursements (Treasurer’s Department) on due date

Forward daily summary to General Accounting for recording; retain file copy

CASH DISBURSEMENTS (TREASURER’S DEPARTMENT) Review voucher packages received from

Accounts Payable on due date Prepare checks and daily summary Have checks signed by authorized

signatories Forward checks to vendors Forward summary to General Accounting

and Accounts Payable for recording; retain file copy summary

Cancel and file voucher packages

FORMS/DOCUMENTSPurchase requisition-written request to the Purchasing Department from an employee or department requesting that goods be purchased

Purchase Orders-written request the Purchasing Department issues to the vendor to purchase goodsReceiving Reports-a document containing information about goods received from a vendorVendor’s Invoice-a document containing information about goods received from a vendorVouchers Package-set of documents (purchase requisition, purchase order, receiving report, voucher, and invoice) relating to a purchase transaction

CONTROLS OVER PURCHASINGPurchase requisition must be approved

Prenumbered purchase order describes price, quantity, terms of goods orderedGoods received compared to purchase order in receiving departmentAccounts payable matches purchase order, receiving report, invoice before authorizing paymentAccounts payable prepares voucher for recording by General Accounting

CASH DISBURSEMENTSProcess

Voucher package sent to Treasury department (separate from accounts payable)

Treasury department reviews, reconciles, authorizes payment

Checks drawn for payment May require 2 signatures over a

limit

INTERNAL CONTROL & RISK Controls Risk

Authorization Unauthorized purchases, vendors

Prenumbered receiving Goods received not

Reports ordered, damaged

Recording controls Received not recorded, used

Restricted access Goods, records, forms misused

ASSESSING CONTROL RISKObtain Understanding

Obtain an understanding of client’s prescribed policies and procedures through the performance of preliminary reviewDocument the client’s system

Flowchart, questionnaire, narrativePerform transaction walk-throughIdentify control activitiesTest controls to reduce control risk below maximumAssess control risk

CONTROL RISKPurchasing

Major risks Unauthorized purchases Non-competitive prices

TEST OF CONTROLSPurchasing

Randomly select a sample of paid voucher packages

1. Review each voucher package for appropriate cancellation (eg perforation; stamped paid)

2. Review documents in each sampled voucher package for appropriate authorization

3. Compare details on purchase requisitions, purchase orders, receiving reports, vendor’s invoices, and voucher; and verify mathematical accuracy

For each sampled voucher package, obtain a copy of the related purchase

order and requisition from Purchasing Department files

1. Compare purchase orders in voucher packages with copies of purchase orders in Purchasing Department files

2. Trace prices on purchase orders to competitive bids, formal price quotations, or other pricing sources

3. Examine periodic reports by personnel independent of the Purchasing Dept regarding prices and vendor selection practices

CONTROL RISKReceiving

Major risks Goods received not counted, inspected Goods received not compared to purchase

orders

TEST OF CONTROLSReceiving

Receiving For each sampled voucher package,

obtain the related copy of the receiving report from receiving department

1. Compare receiving reports in voucher packages with copies of receiving reports in Receiving Department files

2. Review receiving reports for evidence that received goods have been inspected, counted, and compared with packing slips and purchase orders

3. Trace receiving reports to entries in the receiving log

CONTROL RISKCash Disbursements, Recording

Major risks Cash payments made to unauthorized

payee Details recorded in voucher register are

recorded for proper vendor Totals agree to general ledger

TEST OF CONTROLS Cash Disbursement and Recording For each sampled voucher package,

obtain the cancelled check 1. Examine cancelled checks for appropriate signatures and endorsement

2. Compare details of the voucher package with the cancelled check: check number, date, payee and amount

3. Trace voucher packages and cancelled checks to postings in the accounts payable SL and to entries in the voucher register

a. Review entries in the voucher register for appropriate account distribution (classification)

b. Verify mathematical accuracy of the voucher register for selected periods and trace totals to entries in the general ledger

b. Scan the voucher register for unusual items (eg. unfamiliar vendor names and unusually large amounts, and investigate any items identified.

ASSESSING CONTROL RISK2 Questions

Are controls effective? Can controls be relied upon?

If answer is yes to both Assess control risk below maximum Assess detection risk above minimum Restrict substantive tests of sales,

receivables, cash

PRELIMINARY OPINION ON INTERNAL CONTROLRequired by Sarbanes-Oxley

Auditor must form opinion on management’s assessment of internal control over financial reporting based on

Reports of internal auditors Auditor’s tests of controls

Substantive audit tests

TESTS OF CONTROLSPromotion Accrual

Review reconciliation promotion payments Test calculation

Review accrualSearch for post period-end payments for evidence of unrecorded promotions

COMPUTER AUDITING & SAMPLINGUnderstand the systemTests of controls

Input controls Code verification Data entry controls

Processing controls Control totals Limit tests

Assess control risk

POTENTIAL ERRORS, FRAUDSCash disbursed to unauthorized partiesDuplicate payments madeAccount balances inaccurate

ASSURANCE, CONSULTING SERVICESEspecially for government procurement contracts

Competitive bids Compliance with local laws