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

GBW 8th ed., Ch. 12 2

NATURE EXPENDITURE/DISBURSEMENT CYCLE

Goods, services acquired from vendors, employees in exchange for obligations to pay

Obligations to vendors, employees are paid

GBW 8th ed., Ch. 12 3

P R O C U R E M E N T C Y C L E(S U B S Y S T E M )

P u rch as in g

A cco u n ts P ayab le

R ece iv in g /In sp ec tio nC ash D isb u rsem en ts

P u rch ase R eq u is itio n

1 2

3

4

5

DFD of Purchases System

EXPENDITURE, DISBURSEMENT CYCLE

Flow of informationPurchase requisition received to purchase goodsPurchasing department issues purchase order to

vendor for purchase of goodsReceiving department creates report that identifies

information about goods receivedAccounts payable receives vendor’s invoiceAccounts payable creates voucher to authorize

payment

GBW 8th ed., Ch. 12 6

DOCUMENTS

Purchase requisitionRequest to purchase goods

Purchase orderRequest issued by Purchasing dept. to vendor

Receiving reportIdentifies information about goods received

Vendor’s invoiceFormal notice amount, terms of payment

Voucher packageVoucher & supporting documents

GBW 8th ed., Ch. 12 7

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

GBW 8th ed., Ch. 12 8

CASH DISBURSEMENTS

ProcessVoucher 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

GBW 8th ed., Ch. 12 9

INTERNAL CONTROL & RISK

Controls Risks

GBW 8th ed., Ch. 12 10

Authorization

Prenumbered receiving reportsRecording controlsRestricted access

Unauthorized purchases, vendorsGoods received not ordered, damagedReceived not recorded, used

Goods, records, forms misused

ASSESSING CONTROL RISKObtain Understanding

Document the client’s systemFlowchart, questionnaire, narrative

Perform transaction walk-through Identify control activities Test controls to reduce control risk below

maximum Assess control risk

GBW 8th ed., Ch. 12 11

TEST OF CONTROLSPurchasing, Disbursements

Provide a reasonable degree assurance that employees comply with management’s procedures

PurchasingProperly authorized, executed, recorded

DisbursementsPayments remitted, recorded promptly

GBW 8th ed., Ch. 12 12

CONTROL RISKPurchasing

Major risksUnauthorized purchasesNon-competitive prices

GBW 8th ed., Ch. 12 13

TESTING CONTROLSPurchasing

Select random sample paid voucher packagesExamine for cancellation, authorization,

details

Obtain Purchasing Department’s copy of requisition, purchase orderCompare to voucher packageTrace to competitive bids

GBW 8th ed., Ch. 12 14

CONTROL RISKReceiving

Major risksGoods received not counted, inspectedGoods received not compared to purchase

orders

GBW 8th ed., Ch. 12 15

TESTING CONTROLSReceiving

Obtain Receiving Department copy of receiving report for voucher sampleCompare receiving reportsReview receiving reports for evidence of

count, inspectionTrace receiving reports to receiving log

GBW 8th ed., Ch. 12 16

CONTROL RISKCash Disbursements, Recording

Major risksCash payments made to unauthorized

payeeDetails recorded in voucher register are

recorded for proper vendorTotals agree to general ledger

GBW 8th ed., Ch. 12 17

TESTING CONTROLSCash Disbursements, Recording Obtain canceled checks for voucher

packageExamine for signatures, endorsementsCompare detailed information about check

from voucher package to canceled checkTrace voucher packages, canceled checks

to postings○ Review for classification, accuracy○ Scan voucher register for unusual items

GBW 8th ed., Ch. 12 18

ASSESSING CONTROL RISK 2 Questions

Are controls effective?Can controls be relied upon?

If answer is yes to bothAssess control risk below maximumAssess detection risk above minimumRestrict substantive tests of sales,

receivables, cash

GBW 8th ed., Ch. 12 19

POTENTIAL ERRORS, FRAUDS

Cash disbursed to unauthorized parties Duplicate payments made Account balances inaccurate

GBW 8th ed., Ch. 12 20