AUDITING
CHAPTER 12
Purchases & Cash
Disbursements Transactions
By
David N. Ricchiute
TOPICS
Nature of expenditure/disbursement
cycle

Flow of information
Auditor’s assessment of control risk

Audit of internal control for purchases,
cash disbursements
Computer auditing, sampling, tests of
controls
Assurance, consulting services
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GBW 8th ed., Ch. 12
NATURE EXPENDITURE/
DISBURSEMENT CYCLE
Goods, services acquired from vendors,
employees in exchange for obligations
to pay
Obligations to vendors, employees are
paid
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GBW 8th ed., Ch. 12
EXPENDITURE,
DISBURSEMENT CYCLE
Flow of information





4
Purchase requisition received to purchase goods
Purchasing department issues purchase order to
vendor for purchase of goods
Receiving department creates report that identifies
information about goods received
Accounts payable receives vendor’s invoice
Accounts payable creates voucher to authorize
payment
GBW 8th ed., Ch. 12
DOCUMENTS
Purchase requisition

Request to purchase goods
Purchase order

Request issued by Purchasing dept. to
vendor
Receiving report

Identifies information about goods received
Vendor’s invoice

Formal notice amount, terms of payment
Voucher package

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Voucher & supporting documents
GBW 8th ed., Ch. 12
CONTROLS OVER
PURCHASING
Purchase requisition must be approved
Prenumbered purchase order describes price,
quantity, terms of goods ordered
Goods received compared to purchase order
in receiving department
Accounts payable matches purchase order,
receiving report, invoice before authorizing
payment
Accounts payable prepares voucher for
recording by General Accounting
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CASH DISBURSEMENTS
Process



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
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INTERNAL CONTROL & RISK
Controls
Authorization
Prenumbered
receiving reports
Recording
controls
Restricted access
8
Risks
Unauthorized purchases,
vendors
Goods received not ordered,
damaged
Received not recorded, used
Goods, records, forms misused
GBW 8th ed., Ch. 12
ASSESSING CONTROL RISK
Obtain Understanding
Review Sarbanes-Oxley Section 404
documentation for sales process
Document the client’s system

Flowchart, questionnaire, narrative
Perform transaction walk-through
Identify control activities
Test controls to reduce control risk below
maximum
Assess control risk
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TEST OF CONTROLS
Purchasing, Disbursements
Provide a reasonable degree
assurance that employees comply
with management’s procedures
Purchasing

Properly authorized, executed,
recorded
Disbursements

10
Payments remitted, recorded
promptly
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CONTROL RISK
Purchasing
Major risks


11
Unauthorized purchases
Non-competitive prices
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TESTING CONTROLS
Purchasing
Select random sample paid voucher
packages

Examine for cancellation, authorization,
details
Obtain Purchasing Department’s copy of
requisition, purchase order


12
Compare to voucher package
Trace to competitive bids
GBW 8th ed., Ch. 12
CONTROL RISK
Receiving
Major risks


13
Goods received not counted, inspected
Goods received not compared to purchase
orders
GBW 8th ed., Ch. 12
TESTING CONTROLS
Receiving
Obtain Receiving Department copy of
receiving report for voucher sample



14
Compare receiving reports
Review receiving reports for evidence of
count, inspection
Trace receiving reports to receiving log
GBW 8th ed., Ch. 12
CONTROL RISK
Cash Disbursements, Recording
Major risks



15
Cash payments made to unauthorized
payee
Details recorded in voucher register are
recorded for proper vendor
Totals agree to general ledger
GBW 8th ed., Ch. 12
TESTING CONTROLS
Cash Disbursements, Recording
Obtain canceled checks for voucher
package



Examine for signatures, endorsements
Compare detailed information about check
from voucher package to canceled check
Trace voucher packages, canceled checks
to postings
 Review for classification, accuracy
 Scan voucher register for unusual items
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ASSESSING CONTROL
RISK
2 Questions


Are controls effective?
Can controls be relied upon?
If answer is yes to both



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Assess control risk below maximum
Assess detection risk above minimum
Restrict substantive tests of sales,
receivables, cash
GBW 8th ed., Ch. 12
PRELIMINARY OPINION ON
INTERNAL CONTROL
Required 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
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TESTS OF CONTROLS
Promotion Accrual
Review reconciliation promotion
payments

Test calculation
Review accrual
Search for post period-end payments
for evidence of unrecorded promotions
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COMPUTER AUDITING &
SAMPLING
Understand the system
Tests of controls

Input controls
 Code verification
 Data entry controls

Processing controls
 Control totals
 Limit tests
Assess control risk
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POTENTIAL ERRORS,
FRAUDS
Cash disbursed to unauthorized parties
Duplicate payments made
Account balances inaccurate
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ASSURANCE,
CONSULTING SERVICES
Especially for government procurement
contracts


22
Competitive bids
Compliance with local laws
GBW 8th ed., Ch. 12