Steps needed to prepare a high-quality performance format audit program for tests of controls and
substantive tests of transactions for acquisitions and cash disbursements.
1. Segregation of the purchasing, receiving, and cash disbursements functions:
Expenditure Cycle
A. Internal Control- Purchases
The following functions in a purchase transaction should be segregated:
1. Purchase Requisition
The purchase requisition starts the purchasing cycle. The department in need of the asset or
services sends a properly approved, serially numbered requisition to the purchasing
department. The requisitioning department should not have the authority to actually place the
purchase order. This would indicate a weakness in internal control.
2. Purchase Orders
The purchasing department should place the order only after giving proper consideration to the
time to order and the quantity to order. The purchasing department should also obtain
competitive bids from various suppliers to make sure that the best price is obtained. The
purchase order is issued only after proper approval. For internal control purposes, it is best that
pre-numbered purchase orders can be used. There should be multiple copies that will be sent
to: (i) the requisitioning department; (ii) the vendor; (iii) the receiving department; and (iv) the
accounting department. If the purchase order is canceled, all copies should be recalled and filed
so that every purchase order number is accounted for.
3. Receipt of Goods or Services
The copy of the purchase order sent to the receiving department serves as an authorization to
accept the goods when they arrive. It is preferable that the copy not indicate the quantity
ordered. Thus, the receiving department is forced to count the goods upon arrival. A receiving
report is prepared by this department and forwarded to the accounting department. The goods
are forwarded to the requisitioning department .
B. Internal Control – Accounts Payable
The accounting department has three functions: (i) to record the payable, (ii) to approve the
invoice for payment; and (iii) to record the payment after it is paid by the Treasurer.
1. Recording the Payable
The copy of the purchase order sent to the accounting department notifies them that there will
be a future cash disbursement. The receiving report is compared with the purchase order and
the vendor’s invoice as to the quantity to prevent payment of charges for goods in excess of
those ordered and received. The accounting department records the goods as received in
inventory, and records a payable.
2. Approving Invoice for Payment and Recording Payment
When the invoice arrives, the accounting department approves it by matching the invoice,
purchase order, receiving report, and (sometimes) the requisition. When payment is made, the
payable is reversed. The accounting department should ensure that the invoice amount is
correct, and that it accurately reflects any purchase discounts, before approving it for payment.
C. Internal Control – Cash Disbursements
It is best for internal control purposes to pay invoices by check. For effective internal control,
the functions of approving the payment and signing the checks should be segregated. Approved
voucher packets (matched invoice, purchase order, receiving report, and requisition) prepared
by the accounting department (Accounts Payable) are received by the Treasurer, who prepares,
signs, and mails the checks and cancels all supporting documents after payment. Paid vouchers
are returned to the accounting department for posting of the payment and filing of the
documents.
2. Independent reconciliation of the monthly bank statements
Testing Controls Related to Cash Receipts
Department
Control Procedure
Sample Test of Control
Procedure
Mailroom
1. Separate checks
 Inspect checks
and remittance
prior to
advices.
deposit for
2. Stamp
endorsement
restrictive
(completeness
endorsement on
).
checks.
 Observe
3. Prepare
preparation of
prelisting of
prelisting
checks received.
(existence,
4. Forward checks
completeness,
to Cashier.
valuation).
Forward
remittance
advices to A/R.
Forward
prelisting to
Accounting,
Cashier, and
Accounts
Receivable.
Cashier
1. Receive checks
 Observe
and prepare
preparation of
deposit.
cash summary
2. Prepare daily
(existence,
cash summary
completeness,
(copy to A/R and
valuation).
Custody
Custody
Accounts Receivable
Accounting
Accounting).
3. Deliver checks
to bank.
4. File validated
deposit slip.

1. Match
remittance
advices and
check deposit
summary.
2. Update A/R
master file.
3. Print CR journal/
Updated A/R
master file.
4. Print CR
summary (copy
to Accounting).
1. Independent
check: Compare
the cash
summary
(Cashier), the
prelisting of
checks
(Mailroom), and
the CR summary
(A/R)
2. Post G/L
3. Prepare bank
reconciliation




Inspect
deposit slip
and compare
to cash
summary
(existence,
completeness,
valuation)
Observe
procedure
(completeness
).
Inspect
evidence of
independent
check
(existence,
completeness,
valuation).
Re-perform
independent
check for
selected dates
(existence,
completeness,
valuation).
Inspect bank
reconciliation
(existence,
completeness,
valuation.)
Segregation of Duties:
Recordkeeping:
Accounts Receivable/ Accounting
Custody:
Mailroom & Cashier (Treasurer)
1) Use of pre-numbered voucher packages, properly accounted for
Tests of Controls Related to the Expenditure Cycle
1. Testing Controls Related to Purchases
Record keeping
Record keeping
Testing Controls: Purchases
Department
Control Procedure
Requisitioner
1) Prepare
prenumbered
requisition
2) Obtain original copy
to Purchasing
3) Send original copy
to Purchasing
4) Inspect goods when
received from
Receiving Dept.
Sign receiving
report upon receipt
of goods
(independent
check).
1) Receive approved
requisition.
2) Contact approved
vendors
3) Issued
prenumbered
purchase order (PO)
a) Original to
vendor
b) Blind copy to
Receiving
c) Copy to A/P
d) File copy
1) Receive goods from
vendor
2) Inspect goods. All
shipments received
must have a PO
3) Prepare receiving
report (RR)
4) Match details of
order received with
blind copy of PO
and indicate
quantity received.
5) Send goods to
Requisitioning
department.
Obtain signature on
Purchasing
Receiving
Sample Test of Control
Procedure
 Inspect
requisitions for
proper
approval.
 Observe
procedures to
account for
prenumbering






What we:
want
Inspect
purchase orders
for approved
requisition
Observe
procedures to
account for
prenumbering
order
Inspect
receiving report
and matching
PO
Observe
performance by
receiving clerk.
Inspect
receiving report
for signed
receipt
(existence).
Trace a sample
of receiving
reports
(selection made
Receive
receiving report
that requisitioner
received goods.
6) Distribute receiving
report.
a) Original to A/P
b) Copy to
purchasing
c) File copy
Accounts Payable
Accounting
1) Receive vendor’s
invoice
2) Match documents:
vendor’s invoice,
RR, PO, requisition
3) Check
mathematical
accuracy, approvals,
G/L account coding
(independent
checks)
4) Prepare
prenumbered
voucher
5) Account for the
numerical sequence
of vouchers.
6) Data Entry:
a) Prepare
purchase
journal
b) Update A/P
master file
c) Daily purchase
summary
7) Reconcile daily
purchase summary
totals and daily
entries to purchases
journal.
1) Receive purchase
summary
2) Post to G/L
3) Reconcile G/L and
A/P file
4) Reconcile vendor’s
monthly statements
and A/P master fiel






from
prenumbered
documents) to
PO, requisition,
invoice, and
entry in the
purchase
journal and A/P
master file
(completeness).
Inspect
vouchers for
supporting
documents and
evidence of
independent
checks
(existence).
Observe
procedure,
reperform
(completeness)
Vouch a sample
of vouchers
(selection made
from the
purchases
journal) to all
required
supporting
documents
(existence)
Observe
evidence of
independent
check;
reperform
(valuation).
Observe
evidence of
independent
check;
reperform
Observe
evidence of
independent
Billed
Billed
(independent
check).
check;
reperform
(valuation,
existence,
completeness)
Treasury
Segregation of Duties:
Paid
Authorization:
Purchasing/ Requisitioning Dept.
Record keeping:
Accounts Payable/ Accounting
Custody:
Receiving
4. Use of prenumbered checks, properly accounted for
Control Procedures
Prenumbering
Checks should be prenumbered and accounted for
Existing cash disbursement transactions are recorded (completeness). Account for a sequence
of checks. Reconcile recorded cash disbursements with the cash disbursements on the bank
statement proof of cash disbursements).
5. Use of prenumbered receiving reports, properly accounted for.
Existing acquisition transactions are recorded (completeness). Account for a sequence
of receiving reports. Trace from a file of receiving reports to the acquisitions journal.
6. Internal verification of document package before check preparation.
Internal Control
Control procedures and tests of controls related to cash receipts and cash
disbursements were covered in the discussions of revenue cycle and expenditure cycle.
Segregation of duties is a key control over cash. Proper segregation of duties demands
that close consideration be given to check-writing authority. Separation of cash
handling, recordkeeping, and reconciliation of bank statements should exist, as well as
separation of petty cash activities. Good internal control for cash would include the use
of a voucher system for disbursements.
7. Review of supporting documents and signing of checks by an independent, authorized
person
Testing Controls Related to Payables and Cash Disbursements
Testing Controls: Payables and Cash Disbursement
Department
Treasurer
Control Procedure
1. Receive voucher for payment.
2. Review document for
completeness and approvals.
3. Prepare prenumbered checks
4. Prepare check summary
5. Sign checks (authorized
Sample Test of Control
Procedure
 Observe performance
of independent check
 Observe accounting
for sequence
(completeness)
signatory) and cancel voucher
and supporting documents.
6. Mail check to vendor.
7. Forward cancelled voucher/
supporting documents to
Accounts Payable.
8. Send copy of check summary:
a. Accounts Payable
b. Accounting



Inquire about
procedure; observe.
Select checks for
testing and inspect
signatures.
Observe cancellation
of vouchers by check
signer.
Inquire about
procedure. Observe
performance.
8. Cancellation of documents prior to signing of the check
Substantive Procedures Related to the Expenditure cycle
a. Completeness
The receiving report and vendor’s invoice should be stamped as “Paid” as a way of
canceling the document so that the voucher package will not be presented again for
payment. This procedure will prevent double payment of an invoice.
9. Monthly reconciliation of the accounts payable master file with the general ledger
Substantive Procedures Related to the Expenditure cycle
1. Auditing Accounts Payable
a. Completeness
The auditor should perform the following procedures:
a. Agree the accounts payable listing to the general ledger.
b. Obtain a sample of vendor statements and agree to the vendor accounts.
Cash disbursements made subsequent to year-end may be identified by reviewing the
cash disbursements journal, subsequent bank statements, or the voucher register.
For accounts payable, completeness, and accuracy are generally more relevant than
existence and rights and obligations because the risk of understatement is higher than
the risk of overstatement.