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