AUDITING THE EXPENDITURE CYCLE

EXPENDITURE CYCLE AUDIT OBJECTIVES, CONTROLS, AND TEST OF

CONTROLS

Transaction and Account Balances

1. Transactions and account balances involve in expenditures cycle are those involve in
expenditures cycle are those related to providing goods and services for operational
activities including operational activities which includes the payment of its payable.

Materiality and Inherent Risks

1. Materiality is depends on the level of control risks and inherent risks.

2. Inherent risks
a. Pressures to understate expenses to increase profitability targets or industry norms.
b. Pressures to understate payables to increase liquidity increase liquidity.
c. The high volume of transactions, it cause increasing risk of material misstatement,
increasing risk of material misstatement, except otherwise supported by reliable ICS
d. Unauthorized purchases and cash disbursements may be made.
e. Purchase assets may be misappropriated.
f. There may be duplicate payment of vendor’s invoices.
g. Contentious accounting issues may arise concerning such matters as whether a cost
should be capitalized or expensed (e.g. the treatment of repairs and maintenance costs
or treatment of repairs and maintenance costs or the classification of a lease as an
operating or capital lease).

Analytical Procedures

 Analytical procedures are commonly cost effective.

 If the company is growing it is common to expect purchase, inventory, and to expect
purchase, inventory, and accounts payable to grow at consistent rates.
 The auditor’s knowledge of the volume or purchases combined with prior or purchases,
combined with prior experience is useful in estimating current year’s payable.

Documents and Records – Payable

1. Purchase requisition. Written request for goods or services by an authorized individual

or department to the purchasing department.
2. Purchase order. Written offer from the purchasing department to a vendor or supplier to
purchase department to a vendor or supplier to purchase goods or services specified in the
order.
 3. Receiving report. Report prepared on the receipt of goods showing the kinds and
quantities of goods received from vendors.
4. Vendor invoice. The bill from the vendor stating the items shipped or services rendered,
the amount due the payment terms and the date amount due, the payment terms, and the
date billed.
5. Voucher. An internal form indicating the vendor, the amount due, and payment date for
purchase received. It is used to authorize recording and paying a liability It is used to
authorize recording and paying a liability.
6. Exception reports. Reports with information about transactions identified for further
investigation by computer application controls
7. Voucher summary. Report of total vouchers processed in a batch or during a day
processed in a batch or during a day.
8. Voucher register. Formal accounting record of recorded liabilities app p y roved for
payment.
9. Approved vendor master file. Computer file containing pertinent information on
vendors and suppliers that have been approved to purchase service suppliers that have
been approved to purchase service from and make payments to.
10. Open purchase order file. Computer file of purchase orders submitted to vendors for
which the goods or services have not been received.
11. Receiving file. Computer file with receiving information on quantities or inventory
received information on quantities or inventory received from vendors.
12. Purchase transactions file
13. Account payable master file
14. Suspense files. Computer files that hold transactions that have not been processed
because they have rejected by computer application controls application control.

Functions

1. Initiating purchases, including: placing vendors on an authorized vendor list,

requisitioning goods and services, preparing purchases orders.
2. Receipt of goods and services, including: receiving the goods, storing goods received for
inventory, returning goods to vendor
3. Recording liabilities, including: preparing the payment voucher and recording the
liability, accountability for recorded transactions.
Control Risk – Purchase Transactions
Initiating Purchases

Potential Misstatement

 Lack of control over purchases and unrecorded liabilities, control: pre-numbered

purchase requisitions and purchase order, and checks numerical sequence.
 Purchases for unauthorized purposes control; verification of employee authorization code
to enter requisition or purchase order.
 Fictitious vendor and bill for services not received, control: compare vendor on purchase
order to master file vendor. Access control to vendor master file.

Receiving Goods and Services

Potential Misstatement

 Goods may be received but not recorded, control: checks for goods ordered and not
received within a reasonable period of time.
 Accepting goods that were not ordered or authorized, control, checks validity of purchase
order in order to initiate receiving report.

Recording Liabilities

Potential Misstatement Potential Misstatement

 Goods or services may be received but not be recorded appropriately, recorded

appropriately, control, control, checks the record of checks the record of liabilities for
reasonable period of time
 Liabilities may be recorded for goods or services not received or may be recorded at an
incorrect amount, control, matching information inside the voucher with matching
information inside the voucher with the underlying supporting documents, such as
purchase orders and receiving report.
 Payment invoice twice, control, stamp paid to the paid invoice, and review prior payment
before decide to pay the voucher.
 Recording in the wrong accounting period, control, comparing the date in the invoice
with the date of comparing the date in the invoice with the date of recording the invoice.
 Mathematical error may be made in processing the vouchers, control, checks the
mathematical accuracy of the vouchers and supporting documents.
 Purchase may be incorrectly posted or summarized, control, compare sum of the
subsidiary ledger accounts with the general ledger control account accounts with the
general ledger control account.
  Purchase may be posted to the wrong accounts, control, compares account distribution on
the compares account distribution on the voucher with the account distribution on
purchase requisition or purchase order
 Purchase may be recorded for goods or services not received, they may be posted to the
wrong account, or in the wrong amount, or in the wrong amount, control independent
review independent review to all purchases charged to the responsibility center as well as
reviewing vendors, amount, and accounts charged on timely basis.

Documents and Records

1. Check
2. Check summary Check summary
3. Cash disbursements transaction file. Information on payments by check to Information on
payments by check to vendors and others. Used for posting to the accounts payable and
general ledger the accounts payable and general ledger master files.
4. Cash disbursements journal or check register. Formal accounting record of check issued
to vendors and others.

Control Risk – Cash Disbursement

 A check may not be recorded, control, computer accounts for pre-numbered check
computer accounts for pre-numbered check series, compare total on check summary to
total vouchers submitted for payment, control access to blank check and signature plates.
 A check may not be recorded promptly, control, prints report of checks due but not yet
paid, compare beginning cash less cash disbursement with ending cash balance as well
disbursement with ending cash balance, as well as, beginning payable less disbursement
with ending payable
 A check may be issued for unauthorized purchases, control, compare checks with
compare checks with its supporting documents, such as authorized purchase order
receiving authorized purchase order, receiving report, and voucher. Also limit test on
large disbursement and these check large disbursement, and these check must be
manually signed.
 A voucher may be paid twice A voucher may be paid twice, control, stamp paid to paid
voucher package.
 A check may be issued for wrong amount, control, independent check matching the
independent check matching the check with related voucher package.
 A check may g, be altered after signed, control, put certain sign in the beginning and
ending part of the amount of check which written in word, i.e. by putting sign # and word
only#
 Error in recording check, control, independent check comparing check, voucher, and
check register.
Purchase Adjustments ‐ Documents

 Purchase return authorization, it is a form showing the description, quantity, and other
showing the description, quantity, and other data pertaining to the goods that the vendor
has authorized to return.
 Shipping report, it is a report prepared on the shipment of goods to vendor showing the
kinds and quantities of goods shipped.
 Debit memo, it is a form stating the particulars of debit to account payable, including the
specific items returned, prices, and amount credited.

Substantive Tests of Payable

1. Obtain understanding of business and industry and Obtain understanding of business and
industry and determine:
a. The significance of purchases and account payable to the entity.
b. Key economic drivers that influence the entity’s purchases and resultant account
payables.
c. Standard trade terms in the industry, including seasonal dating seasonal dating.
d. The extent of concentration of activity with the suppliers and related purchase
commitments suppliers and related purchase commitments.
2. Perform initial procedures on the A/P balance and records that will be subjected to further
testing.
a. Trace beginning balance to prior years working papers.
b. Review activities in the GL accounts and
c. Investigate entries that appear unusual in amount or source.
d. Obtain listing of A/P at balance sheet date and c. Obtain listing of A/P at balance
sheet date and determine that it accurately represents the underlying accounting
records by: underlying accounting records by:
I. Footing the listing and determining agreement with (1) the total of unpaid
voucher file, subsidiary ledger, or A/P master file, and (2) the GL control
account balance.
II. Testing agreement of vendors and balance on listing with those included in the
underlying listing with those included in the underlying accounting records.

Analytical Procedures:
1. Develop an expectation for A/P using knowledge of entity’s business activities,
normal trade terms, and history of A/P turnover of A/P turnover.
2. Calculate ratio and analyze the results relative to expectations. Pay attention to
indication of understatement.
Tests of Details of Transactions

1. Vouch sample of recorded transactions to supporting A/P t h ting documents. Credit

A/P to vouchers package (vouchers + vendor invoices + receiving reports + purchase
orders purchase orders + other supporting other supporting information. Debit A/P to
cash disbursements or purchase returns memoranda.
2. Perform purchases cut-off test.
a. Select sample of recorded purchase transactions several days before and after
balance sheet date, and examine the supporting documents and tests the
appropriateness of documents and tests the appropriateness of cut-off transactions.
b. Observe the numbers of the last receiving report issued on the last day of the audit
period and trace sample of lower and higher and trace sample of lower and higher
numbered receiving reports to ensure that purchases were recorded in the proper
period.
3. Perform cash disbursements cut-off test.
a. Observe the number of check issued and mail or the last payment of payable, on
the last day of accounting period, and trace to the accounting records to verify
accuracy of cutoff accounting records to verify accuracy of cutoff.
b. Trace dates of “paid” checks returned with yearend cut end cut-off bank
statements to dates recorded.
4. Purchase returns cut-off.
a. Review purchase return on the last days of accounting period to ensure accuracy
the date of recording.
b. Vouch the last purchased returns in the books of original entry (journal) to
vendor’s authorization and shipping reports.
5. Perform search for unrecorded liabilities.
a. Examine subsequent payments until the end date of fieldwork and trace it to the
payable balance at the balance sheet.
b. Investigate unmatched purchase documents.
c. Inquire accounting and purchasing personnel about unrecorded liabilities.
d. Review capital budgets, work orders, and construction contracts for evidence of
construction contracts for evidence of unrecorded payables

Tests Details of Balances

1. Confirm account payable.

a. Identifying major vendors by reviewing voucher register or account payable
subsidiary ledger and send confirmation to vendors with large balance.
b. Investigate and reconcile the differences.
2. Reconcile unconfirmed payable to monthly statements received by client from
vendors.
Presentation and Disclosures
Compare presentation with GAAP Compare presentation with GAAP

a. Identify the proper identification and classification of payable classification of payable.

b. Determine the existence of debit balance of payable that need to be reclassified.
c. Determine the sufficiency of disclosures.
d. Inquire about undisclosed commitment and contingent liabilities
e. Evaluate completeness of presentation and disclosures.
f. Read the disclosures and independently evaluate the appropriateness of classification and
disclosures, as well as the and disclosures, as well as the understandability of
classification and disclosures.

https://www.slideshare.net/search/slideshow?searchfrom=header&q=expenditure+cycle

Data Flow Diagram for Purchases and Cash Disbursement

Data Flow Diagram Expenditure Cycle