Modern Auditing:
Assurance Services and the Integrity
of Financial Reporting, 8th Edition
William C. Boynton
California Polytechnic State
University at San Luis Obispo
Raymond N. Johnson
Portland State University
Chapter 15 – Auditing the Expenditure Cycle
Chapter Overview
The Expenditure Cycle
Develop Audit Objectives
Understanding the Entity and
Environment
Inherent Risk, Including the Risk
of Fraud
• Management Misstatement of
Expenditures
– Understate expenses
– Understate payables
• Other Misstatement Factors
–
–
–
–
High volume of transactions
Unauthorized purchases
Misappropriation
Duplication of payments
Analytical Procedures
Consideration of Internal Control
Components
• Control Environment
• Risk Assessment
• Information and Communication
• Monitoring
Study Break
1. The expenditure cycle consists of
all of the following activities,
except:
A.
B.
C.
D.
Purchase transactions
Cash disbursement transactions
Sales transactions
Purchase adjustments
C. Sales transactions
Study Break
2. This analytical procedure calculates the
average number of days it takes to
retire accounts payables.
A.
B.
C.
D.
Current ratio
Quick ratio
Cost of Goods Sold to Accounts Payable
Accounts Payable Turn Days
D. Accounts Payable Turn Days
Purchase Transactions –
Documents and Records
• Purchase requisition
• Purchase order
• Approved vendor master file
• Open purchase order file
• Receiving report
• Receiving file
• Vendor Invoice
Purchase Transactions – Common
Documents and Records
• Voucher
• Exception reports
• Voucher summary
• Voucher register
• Purchase transactions file
• Accounts payable master file
• Suspense files
Purchase Transactions –
Functions and Control Activities
• Initiating Purchases
– Placing vendors on an authorized vendor list
– Requisitioning goods and services
– Preparing purchase orders
• Receipt of Goods and Services
– Receiving the goods
– Storing goods received for inventory
– Returning goods to vendor
• Recording Liabilities
Systems Flowchart – Purchase
Transaction
Systems Flowchart – Purchase
Transaction
Systems Flowchart – Purchase
Transaction
Study Break
3. This item is a written offer from the
purchasing department to a vendor or
supplier to purchase goods or services
specified in the order.
A.
B.
C.
D.
Purchase requisition
Purchase order
Receiving report
Receiving file
B. Purchase order
Study Break
4. This function of processing of purchase
transaction includes placing vendors on
an authorized vendor list and preparing
purchase orders.
A.
B.
C.
D.
Initiating purchases
Receipt of goods and services
Recording liabilities
Paying liabilities
A. Initiating purchases
Cash Disbursement Transactions–
Common Documents and Records
• Check
• Check Summary
• Cash Disbursements Transaction File
• Cash Disbursements Journal or
Check Register
Cash Disbursement TransactionsFunction and Control Activities
• Computerized System
– Paying the Liability
– Recording the Disbursement
• Manual System
– Paying the Liability
– Recording the Disbursement
Systems Flowchart – Cash
Disbursement Transactions
Study Break
5. This record is a report of total
checks issued in a batch or during
a day.
A.
B.
C.
D.
Check
Check summary
Cash disbursements transaction file
Check register
B. Check summary
Purchase Adjustment Transactions–
Common Documents and Records
• Purchase Return Authorization
• Shipping Report
• Debit Memo
Purchase Adjustment Function and
Controls
• Purchase Returns and Allowances
• Other Controls
• Tests of Controls
Substantive Tests of Accounts
Payable Balances
• Determining Detection Risk for Tests of
Details
– Existence and Occurrence
– Completeness
– Rights and Obligations
– Valuation and Allocation
– Presentation and Disclosure
Designing Substantive Tests
• Initial Procedures
• Analytical Procedures
Designing Substantive Tests
• Tests of Details of Transactions
– Vouch Recorded Payables to Supporting
Documentation
– Perform Cutoff Tests
• Purchases cutoff tests
• Cash disbursement cutoff tests
• Purchase return cutoff tests
– Perform Search for Unrecorded Payables
• Subsequent payments
Designing Substantive Tests
• Tests of Details of Balances
– Accounts Payable Confirmations
– Reconcile Unconfirmed Payables to
Vendor Statements
• Tests of Details of Disclosures
Study Break
6. This is a report prepared on the
shipment of goods to vendors
showing the kinds and quantities
of goods shipped.
A.
B.
C.
D.
Purchase Return Authorization
Shipping Report
Debit Memo
Check Summary
B. Shipping Report
Study Break
7. These items include all checks
issued or vouchers paid after the
balance sheet date.
A.
B.
C.
D.
Purchase return cutoff tests
Check summary
Subsequent payments
Confirmation of accounts payable
C. Subsequent payments