Chapter 5 - The Expenditure Cycle
Part 1: Purchases and Cash Disbursements Procedures
The Conceptual System
1. Purchase processing procedures:
Monitor inventory records, prepare purchase orders, receive
goods, update inventory records, set up accounts payable.
2. Vouchers payable system:
Alternate to AP procedures that uses cash disbursement
vouchers and maintains a voucher register, providing
improved control over cash disbursements. Vouchers
payable file equivalent to AP file.
GL function posts journal voucher data.
3. Cash disbursement system:
Identify liabilities due, prepare cash disbursements, update
AP record and post to general ledger.
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Physical Systems: Basic Purchases Processing
Begins when the inventory clerk prints purchase requisitions by
accessing the purchase requisition file.
File created when inventory dropped to reorder point.
Purchasing department receives the purchase requisition.
Adds record to the digital open purchase order file.
PO copies to vendor, inventory control, AP and receiving
(blind)
Receiving reconciled goods with packing slip and blind PO.
Report to the storeroom and purchasing department, files
hard copy.
AP reconciles invoice, purchase order and receiving report.
Record transaction in the purchases journal.
General ledger department receives journal vouchers from AP and
account summary from inventory control.
Physical Systems
Basic Technology Expenditure Cycle:
Computers tend to be independent PCs.
Information between departments is communicated via
hard-copy documents.
Maintaining physical files of source documents is critical to
the audit trail.
In the following flowcharts note that, in many departments, after an
individual completes his or her assigned task, documents are filed as
evidence that the task was performed.
Physical Systems: Basic Cash Disbursements System
AP clerk reviews AP packet in open AP file, identifies items due, and
sends documents to cash disbursements.
Cash disbursements reviews documents, prepares three-part checks
and records pertinent data in the check register.
Check and support documents sent for signature and
mailing.
AP packet and check copy returned to AP.
Files check copy and send summary journal voucher to GL.
The AP department removes the liability and sends the AP summary
to the GL department.
GL department posts to the general ledger control accounts and files
the documents.
Physical Systems: Integrated Purchases Processing
Departmental activity is lower than the basic technology system.
Purchases computer application reads purchase requisition file for
reorders, prepares and sends PO, updates records.
Receiving reconciled goods with packing slip and blind PO.
Record added to receiving report file and PO closed.
Inventory and GL control accounts automatically updated.
AP clerk receives invoice, adds record to vendor file and files hardcopy.
System automatically links vendor invoice, PO and receiving
report, reconciles documents and creates virtual AP packets.
AP clerk reviews virtual packets and if no discrepancies are
found, the system automatically approves payment.
Physical Systems: Integrated Cash Disbursements
Each day the DUE DATE fields of vendor invoices are scanned for
items due to be paid.
Checks are automatically printed, signed, and distributed to the
mailroom for mailing.
Large checks receive additional signatures before mailing.
Payments automatically recorded in the check register file.
Vendor invoices are closed.
General ledger AP control and cash accounts updated.
Reports transmitted to AP and cash disbursements departments for
management review and filing.
Expenditure Cycle Risks and Internal Controls
Risk of unauthorized inventory purchases.
Physical Controls: Transaction authorization
IT Controls: Automated purchase approval
Risk of receiving incorrect items, quantities or damaged goods.
Physical Controls: Independent verification and supervision
IT Controls: Scanner technology
Risk of inaccurately recording transactions.
Physical controls: Transaction authorization, accounting
records and independent verification.
IT controls: Input data edits, error messages, automated
postings, and file backups.
Risk of misappropriation of cash and inventory.
Physical Controls: Supervision, independent verification,
segregation of duties – inventory control from inventory
warehouse and accounts payable from cash disbursements.
IT Controls: Automated three-way match and payment
approval and multilevel security.
Risk of unauthorized access to accounting records and reports.
Physical Controls: Access controls and segregation of duties.
IT Controls: Password control and multilevel security.
Reengineering Using EDI
Key element of success in the implementation of a trading partner
agreement to eliminate discrepancies that require human
involvement to resolve.
Some organizations have eliminated the receiving function.
Objective is to send goods directly to production which
avoids delays and associated handling costs.
Accounting and auditing issues:
How to account for inventory receipts with no
receiving function and report?
Accounting for scrap in the production process.
Unique risks that need to be recognized and controlled.
Includes ensuring only valid transactions are processed and
risk of unauthorized access to accounting records.