AUDITING THE EXPENDITURE CYCLE

EXPENDITURE CYCLE ACTIVITIES AND TECHNOLOGIES:

1. Purchases and Cash Disbursement Procedures using Batch Processing
Technology
2. Reengineering the Purchases/Cash Disbursement System
Purchases and Cash Disbursement Procedures using Batch Processing Technology

PURCHASES: BATCH PROCESSING

STEPS:
1: Data processing department – Inventory Control Purchasing Department
2: Data processing department – P.O. Receiving Department
3: Data processing department – Batch Update Of Inventory Accounts Payable
4: Data processing department – Validates Vendors

CASH DISBURSEMENT: BATCH PROCESSING

STEPS:
5: Data processing department – scans for items due and prints checks for items received
6: Cash disbursements department – reconciles checks, submits checks to management for signature
7: Accounts payable – matches copies of checks with open vouchers, closes them and files documents
concludes expenditure cycle

CASH DISBURSEMENT: REENGINEERED—FULLY AUTOMATED

1. Inventory file scanned for items and reorder points
2. Purchase requisition record for all items needing replenishment
3. Consolidate requisitions by vendor
4. Retrieve vendor mailing information
5. P.O. prepared and sent to vendor (EDI)
6. Open P.O. record added for each transaction
7. List of P.O. sent to purchasing department
CONTROL IMPLICATIONS

BATCH AUTIOMATED SYSTEM VS. MANUAL REENGINEERED SYSTEM VS. BATCH

BATCH AUTOMATED SYSTEM

Segregation of Duties
Improved Inventory Control

Better Cash Management Accounting Records and Access Controls

Less Time Lag

Better Purchasing Time

Management

Reduction of Paper

Documents
PAYROLL PROCEDURES
 Drawbacks to using regular A.P. and cash disbursements systems to do payroll
 General expenditure procedures that apply to all vendors will not apply to employees
 Writing checks to employees requires special controls
 General expenditure procedures are designed to accommodate relatively smooth flow of
transactions
 Relationship Between Management Assertions and Expenditure Cycle Audit Objectives

MANAGEMENT ASSERTIONS EXPENDITURE CYCLE AUDIT OBJECTIVES

Existence or Occurrence Verify that the accounts payable balance
represents amounts actually owed by the
organization at the balance sheet date.
Completeness Determine that the accounts payable represent all
amounts owed by the organization for purchases of
goods and services as of the balance sheet date.
Accuracy Establish that purchases transactions are
accurately computed and based on correct prices
and correct quantities
Rights and Obligations Establish that the accounts payable accrued payroll
recorded at the balance sheet date are legal
obligations of the organization

Valuation or Allocation Verify that the accounts payable are stated at

correct amounts owed
Presentation and Disclosure Ensure that accounts payable, accrued payroll, and
expenses reported for the period are properly
described and classified in the financial statements.

INPUT CONTROLS
 Are designed to ensure the transactions are valid, accurate and complete
 Data validation controls
 Testing validation controls
 Batch controls
 Testing Batch controls
 Purchases authorization controls
 Testing purchases authorization controls
 Employee authorization
 Testing employee authorization procedures

PROCESS CONTROLS
 File update controls
Sequence check control
Liability validation control
Valid vendor file
Testing file update controls
  Access controls
 Warehouse security
 Moving assets promptly when received
 Paying employees by check vs. cash
 Risks
 Employees with access to A.P. subsidiary file
 Employees with access to attendance records
 Employees with access to both cash and A.P. records
 Employees with access to both inventory and inventory records
 Testing access controls

PROCESS CONTROLS
 Physical controls
 Purchase system controls
 Segregation of inventory control from warehouse
 Segregation of G.L. and A.P. from cash disbursements
 Supervision of receiving department
 Inspection of assets
 Theft of assets
 Reconciliation of supporting documents: P.O., receiving report, supplier’s invoice
 Payroll System controls
 Verification of timecards
 Supervision
 Paymaster
 Payroll imprest account
 Testing of physical controls

PROCESS CONTROLS
 Output controls
 A.P. change report
 Transaction logs
 Transaction listing
 Logs of automatic transactions
 Unique transaction identifiers
 Error listing
 Testing output controls

SUBSTANTIVE TEST OF EXPENDITURE CYCLE ACCOUNTS

 Risks and audit concerns
 Understanding data
 Inventory file
 Purchase order file
 Purchase order line item file
 Receiving report file
 Disbursement voucher file
 File preparation procedures
SUBSTANTIVE TEST OF EXPENDITURE CYCLE ACCOUNTS
 Testing accuracy and completeness assertions
 Review disbursement vouchers for unusual trends and exceptions
 Accurate invoice prices
 Testing completeness, existence, rights and obligations assertions
 Searching for unrecorded liabilities
 Searching for unauthorized disbursement vouchers
 Review of multiple checks to vendors
 Auditing payroll and related records