5 the Expenditure Cycle

8/18/2019 5 the Expenditure Cycle

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The Expenditure Cycle


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Overview of Purchases and Cash Disbursements

Activities


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Activities Prepare purchase order

- a purchase order (PO) is prepared for each vendor- a copy of the PO is sent to the vendor

- a copy is sent to the set up accounts payable (AP) function for

filing temporarily in the AP pending file, and a blind copy is sent to

the receive goods function, where it is held until the inventoriesarrive

- the last copy is filed in the open/closed purchase order file

- inventory control function will supply much of the routine

ordering information that the purchasing department needs

directly from the inventory and valid vendor files

- the purchasing department may need to prepare detailed product

specifications and request bids from competing vendors


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Activities


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Activities Receive goods

- goods arriving from the vendor are reconciled with the blind copyof the PO

- shipments that are short or contain damaged or incorrect items

must be detected before the firm accepts and places the goods in

inventory

- upon completion of the physical count and inspection, the

receiving clerk prepares a receiving report stating the quantity and

condition of the inventories

- copies of the receiving report goes to the following: (1)

accompanies the physical inventories for safekeeping; (2) filed inthe open/closed PO file; (3) sent to the AP department, where it is

filed in the AP pending file; (4) sent to inventory control; (5) placed

in the receiving report file


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Activities


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Activities


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Activities Update inventory records

- organizations that use a standard cost system carry theirinventories at a predetermined standard value regardless of the

price actually paid to the vendor

- posting to a standard cost inventory ledger requires only

information about the quantities received from receiving report

- updating an actual cost inventory ledger requires additional

financial information, such as a copy of the supplier’s invoice when

it arrives


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ActivitiesSet-up accounts payable

- The organization has received inventories from the vendor and hasincurred an obligation to pay for the goods. At this point in the

process, however, the firm has not received the supplier’s invoice

containing the financial information needed to record the

transaction. The firm will thus defer recording the liability until the

invoice arrives. This common situation creates a slight lag in therecording process, during which time the firm’s liabilities are

technically understated.

- When the invoice arrives, the AP clerk reconciles the financial

information with the receiving report and PO in the pending file.This is called a three-way match.

- Once the reconciliation is complete, the transaction is recorded in

the purchases journal and posted to the supplier’s account in the

AP subsidiary ledger


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Activities- AP clerk transfers all source documents (PO, receiving report, and

invoice) to the open AP file, typically organized by payment duedate

- the AP clerk summarizes the entries in the purchases journal for

the period (or batch) and prepares a journal voucher for the general

ledger function


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Activities


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Activities


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Activities


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Activities• The Cash Disbursements Systems

- processes the payment of obligations created in the purchasessystem

- to ensure that only valid creditors receive payment and that

amounts paid are timely and correct

Identify liabilities due

- Each day, the AP function reviews the open AP file (or vouchers

payable file) for items due and sends payment approval in the form

of a voucher packet (the voucher and/or supporting documents) to

the cash disbursements department


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ActivitiesPrepare cash disbursement

- The cash disbursements clerk receives the voucher packet andreviews the documents for completeness and clerical accuracy.

- For each disbursement, the clerk prepares a check and records the

check number, peso amount, voucher number, and other pertinent

data in the check register, which is also called the cash

disbursements journal.

- Depending on the organization’s materiality threshold, the check

may require additional approval.

- The negotiable portion of the check is mailed to the supplier, and

a copy of it is attached to the voucher packet as proof of payment.


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Activities


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Activities- marks the documents in the voucher packets paid and returns

them to the AP clerk- cash disbursements clerk summarizes the entries made to the

check register and sends a journal voucher to the general ledger

department

Update AP record

- Upon receipt of the voucher packet, the AP clerk removes the

liability by debiting the AP subsidiary account or by recording the

check number and payment date in the voucher register

- The voucher packet is filed in the closed voucher file, and an

account summary is prepared and sent to the general ledgerfunction.


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Activities Post to general ledger

- The general ledger function receives the journal voucher fromcash disbursements and the account summary from AP. The

voucher shows the total reductions in the firm’s obligations and

cash account as a result of payments to suppliers. These numbers

are reconciled with the AP summary, and the AP control and cash

accounts in the general ledger are updated accordingly.


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Activities


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Expenditure Cycle Controls


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Expenditure Cycle Controls• Transaction Authorization

Purchases subsystem- Formalizing the authorization process promotes efficient inventory

management and ensures the legitimacy of purchases transactions.

- Unauthorized purchasing can result in excessive inventory levels

for some items, while others go out of stock. Cash disbursements subsystem

- To provide effective control over the flow of cash from the firm,

the cash disbursements function should not write checks without

this explicit authorization.

- A cash disbursements journal (check register) containing the

voucher number authorizing each check provides an audit trail for

verifying the authenticity of each check written.


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Expenditure Cycle Controls• Segregation of Duties

Segregation of inventory control from the warehouse- Inventory control keeps the detailed records of the inventory,

while the warehouse has custody. At any point, an auditor should

be able to reconcile inventory records to the physical inventory.

Segregation of the general ledger and accounts payable fromcash disbursements

- The records controlling cash are the AP subsidiary ledger and the

cash account in the general ledger. An individual with the combined

responsibilities of writing checks, posting to the cash account, and

maintaining AP could perpetrate fraud against the firm. Bysegregating these functions, we greatly reduce this type of

exposure.


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Expenditure Cycle Controls• Supervision

Inspection of assets- Inspecting and counting the items received protects the firm from

incomplete orders and damaged goods. Supervision is critical at this

point to ensure that the clerks properly carry out these important

duties.

Theft of assets

- Improper inspection procedures coupled with inadequate

supervision can create a situation that is conducive to the theft of

inventories in transit.


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Expenditure Cycle Controls• Accounting Records

- The control objective of accounting records is to maintain anaudit trail adequate for tracing a transaction from its source

document to the financial statements.

- The auditor’s concern is that obligations may be materially

understated on financial statements because of unrecordedtransactions.

• Access controls

Direct access

- include locks, alarms, and restricted access to areas that containinventories and cash

Indirect access

- limit access to documents that control its physical assets


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Expenditure Cycle Controls• Independent Verification

Independent verification by accounts payable- The AP function plays a vital role in the verification of the work

others in this system have done. Copies of key source documents

flow into this department for review and comparison. These

include:

1. The PO, which shows that the purchasing agent ordered only

the needed inventories from a valid vendor. This document should

reconcile with the purchase requisition.

2. The receiving report, which is evidence of the physical receipt of

the goods, their condition, and the quantities received. Thereconciliation of this document with the PO signifies that the

organization has a legitimate obligation.


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Expenditure Cycle Controls3. The supplier’s invoice, which provides the financial information

needed to record the obligation as an account payable. The APclerk verifies that the prices on the invoice are reasonable

compared with the expected prices on the PO.

Independent verification by the general ledger department

- The general ledger function receives journal vouchers and

summary reports from inventory control, AP, and cash

disbursements. From these sources, the general ledger function

verifies that the total obligations recorded equal the total

inventories received and that the total reductions in AP equal the

total disbursements of cash.

5 the Expenditure Cycle

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