AUDIT OF THE

EXPENDITURE CYCLE
OBJECTIVES
1. Define expenditure cycle
2. Identify the forms and documents under the expenditure cycle
3. Identify the different departments under the expenditure cycle
4. Explain the substantive procedures under the expenditure cycle
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EXPENDITURE CYCLE

Two major business functions are:

1. Resources are acquired from vendors in

exchange for obligations to pay

2. Entity pays cash to vendors and employees

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EXPENDITURE CYCLE

Accounts affected include the following:

1. Purchases
2. Purchase returns, allowances and discount
3. Accounts payable
4. Cash
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EXPENDITURE CYCLE

Significant departments affecting the cycle are:

EXPENDITURE
1. User department
2. Purchasing
3. Receiving
4. Accounts payable
5. Accounting
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EXPENDITURE CYCLE

Significant departments affecting the cycle are:

DISBURSEMENT
1. Treasury
2. Accounting
 7

USER DEPARTMENT

The user department is the one that requests for

the purchase of an asset

Prepares requisition slip to be forwarded to

purchasing and accounts payable department

Example of user department is inventory control

department or warehouse
 8

PURCHASING DEPARTMENT
ACTIVITIES POSSIBLE CONTROLS

1. Receives approved
requisition slip from the user 1. Purchasing department has
department the exclusive function to
communicate with the
2. Locates the vendor and
vendor
negotiates with terms
2. Entity maintains list of
3. Prepares purchase orders
authorized vendors
and distributes copies to
vendor, receiving and 3. Entity compares purchase
accounts payable price to market prices
4. Monitors the status of the
order
5. Updates customers as to the
status of the order
RECEIVING DEPARTMENT
9

ACTIVITIES POSSIBLE CONTROLS

1. Files purchase orders until 1. Ensure that the receiving

goods are received department will count and
2. Upon receipt, counts and check the goods received, the
checks the goods for purchasing department sends
appropriate quantity and a blank purchase order
condition
3. Reviews and compares
purchase orders from
purchasing and shipping
document from the carrier
4. Prepares receiving reports to be
forwarded to purchasing and
accounts payable accompanied
by supporting documents
(purchase order and shipping
documents)
ACCOUNTS PAYABLE DEPARTMENT 10

ACTIVITIES POSSIBLE CONTROLS

1. Reviews and compares 1. Voucher should be

requisition slip, purchase supported by purchase
order, receiving report and order, receiving report and
vendors invoice (3-way supplier’s sales invoice or
match) any other supporting
2. Prepares voucher documents
3. Prepares voucher package 2. Accounts payable
(requisition slip, purchase department files voucher
order, receiving report, package by due date so as
vendors invoice, and to pay liability on time and
voucher) and daily summary take advantage of discounts,
to be forwarded to the if any
treasury and general
accounting respectively
TREASURY DEPARTMENT 11

ACTIVITIES POSSIBLE CONTROLS

1. The person last signing the

1. Reviews voucher package
check cancels the voucher
received
package by placing a mark
2. Prepares check and have it such as “paid”, “cancelled” or
signed by authorized check number
signatories 2. Entity may adopt any of the
3. Forwards checks to vendors following in relation to
4. Prepares daily summary issuance of checks
which is to be forwarded to I. Check over a certain
general accounting amount should have an
identified payee
II. No checks shall be issued
without an identified
payee
III. Checks should be signed
by at least two authorized
persons
EXPENDITURE CYCLE 12
EXPENDITURE CYCLE 13
EXPENDITURE CYCLE 14
EXPENDITURE CYCLE 15
FORMS AND DOCUMENTS 16

FORM DESCRIPTION INITIATED BY DISTRIBUTED TO

Requisition slip Contains the details of the user User department - Purchasing
department’s request

Purchase order Describes the goods to be Purchasing department - Vendor

acquired (quantity and - User
description) - Receiving
- Accounts payable
Receiving report Describes the goods received Receiving department - Purchasing
(quantity, description and - Accounts payable
condition)
Shipping document Describes the goods to be Vendor (thru the - Receiving
shipped and serves as contract carrier)
between the entity and carrier
Vendors invoice Describe the goods sold, Vendor - Accounts payable
amount due and the terms of
payment
Daily summaries Summarizes transactions Accounts payable - General accounting
recorded during the day by the
different department Treasury
 17

RECORDING OF ASSET OR
EXPENSE AND LIABILITY

Accounts payable are recorded when the

purchaser receives the goods and services
ordered.

The accounts payable department attaches a

voucher to the purchase order, vendor’s invoice
and receiving report.
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SIGNIFICANT ACCOUNTS AND ASSERTIONS

 19

SIGNIFICANT ACCOUNTS AND ASSERTIONS

The important assertions for accounts payable

are: completeness, cut off and valuation.

Completeness and cut off are important

because management may delay the
recognition of accounts payable for the current
period in order to reduce the current liabilities in
the FS.
 20

RISK OF MATERIAL MISSTATEMENT

The auditor determines the risk of material

misstatement in the acquisition and expenditure
cycle.

The auditor must question:

1. Are all liabilities properly recorded?
2. Are liabilities properly recoded in the correct
period?
3. Are liabilities recorded in their proper amounts?
INTERNAL CONTROLS IN THE 21

EXPENDITURE CYCLE

ENTITY LEVEL CONTROLS

The management must continually review the

expenses and comparing them to budgets and
forecasts, There must be proper authorization in
the purchasing cycle and there must be security
of purchase-related documents and all materials
and supplies received
INTERNAL CONTROLS IN THE 22

EXPENDITURE CYCLE
CONTROL CONSIDERATIONS

There must be separation of responsibilities in the

purchasing cycle. Different people and departments must
handle authorization, custody of assets received, record
keeping and reconciliation.

Purchase orders, vendor invoices and receiving reports

must match.

If any one person or department has two or more of these

functions, it may create opportunities for fraud or error.
INTERNAL CONTROLS IN THE 23

EXPENDITURE CYCLE

The auditor can perform tests of control related to the

purchasing cycle to determine whether company
controls are actually in place and operating effectively.

The auditor can trace purchase orders, receiving

reports and vendor invoices to accounts payable
journal to test completeness.

The auditor may inspect purchase-related documents

for proper authorization.
SUBSTANTIVE PROCEDURES IN THE 24

EXPENDITURE CYCLE
The auditor is concerned with the completeness assertion
for accounts payable because companies typically
understate expenses and liabilities account.

The auditor must perform procedures to search for

unrecorded liabilities. These are the following procedures:
• Inquire with client personnel to ensure all liabilities are
recorded
• Examine unmatched vendor invoices, tracing invoices
to the payables listing
• Review unmatched receiving reports and determine if
they are recorded in the proper accounting period
SUBSTANTIVE PROCEDURES IN THE 25

EXPENDITURE CYCLE

• Selecting sample cash disbursements

following balance sheet date, vouch them to
supporting documents to determine if they
are recorded in the proper accounting period.
• Confirm accounts payable with vendors
• Perform analytical procedures
• Perform purchase cutoff tests
SUBSTANTIVE PROCEDURES IN THE 26

EXPENDITURE CYCLE

The auditor must gather evidence related to

management’s assertion on PPEs and Intangibles by
performing physical inspection and vouching.

Audit procedures that may be performed:

1. Vouching invoices, purchase documents and titles
2. Inspection of PPEs used in operation
3. Recalculating depreciation and amortization
schedules
4. Inspection of patents, copyrights and trademarks
under the client’s name.
MULTIPLE CHOICE 27

All purchase orders are supported by requisitions

from proper persons is a specific example of which
assertion?
A. Existence or occurrence
B. Completeness
C. Rights and obligations
D. Presentation and disclosure

ANSWER: A
MULTIPLE CHOICE 28

Cash disbursements are authorized by

A. Purchase orders
B. Invoices
C. Receiving reports
D. Vouchers

ANSWER: D
MULTIPLE CHOICE 29

For the copy of the purchase order that goes to the

receiving department it is best to
A. Leave off the description of the goods ordered
B. Leave off the quantity of the goods ordered
C. Leave off the name of the vendor
D. Have the receiving department forward all copies
of the purchase order to accounts payable

ANSWER: B
MULTIPLE CHOICE 30

Which of the following would not include in the

supporting documents for a voucher?
A. Purchase order
B. Vendor invoice
C. Receiving report
D. Blank check

ANSWER: D
MULTIPLE CHOICE 31

When auditing PPE, the auditor’s approach is

generally to
A. Examine evidence supporting the amounts in the
ending balance
B. Examine evidence supporting additions during the
year
C. Follow a reliance strategy, testing internal controls
and analytical procedures
D. Concentrate on finding unrecorded assets

ANSWER: B
MULTIPLE CHOICE 32

Vouchers should be stamped PAID to

A. Prevent duplicate payment
B. Generate a new purchase order
C. Indicate posting in the voucher register
D. Facilitate preparation of the bank reconciliation

ANSWER: A