Purchases and disbursements

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

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

The time lag splits the expenditure transaction cycle into two phases physical phase (purchasing cycle) financial phase (cash disbursements) The payroll cycle is typically kept separate from the other cash disbursements

DFD of Purchases System

EXPENDITURE, DISBURSEMENT CYCLE Flow of information Purchase requisition received to purchase goods Purchasing department issues purchase order to vendor for purchase of goods Receiving department creates report that identifies information about goods received Accounts payable receives vendor’s invoice Accounts payable creates voucher to authorize payment GBW 8th ed., Ch. 12

DOCUMENTS Purchase requisition Purchase order Receiving report Request to purchase goods Purchase order Request issued by Purchasing dept. to vendor Receiving report Identifies information about goods received Vendor’s invoice Formal notice amount, terms of payment Voucher package Voucher & supporting documents GBW 8th ed., Ch. 12

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

CASH DISBURSEMENTS Process Voucher 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

INTERNAL CONTROL & RISK Controls Risks Authorization Prenumbered receiving reports Recording controls Restricted access Unauthorized purchases, vendors Goods received not ordered, damaged Received not recorded, used Goods, records, forms misused GBW 8th ed., Ch. 12

ASSESSING CONTROL RISK Obtain Understanding Document the client’s system Flowchart, 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

TEST OF CONTROLS Purchasing, Disbursements Provide a reasonable degree assurance that employees comply with management’s procedures Purchasing Properly authorized, executed, recorded Disbursements Payments remitted, recorded promptly GBW 8th ed., Ch. 12

CONTROL RISK Purchasing Major risks Unauthorized purchases Non-competitive prices GBW 8th ed., Ch. 12

TESTING CONTROLS Purchasing Select random sample paid voucher packages Examine for cancellation, authorization, details Obtain Purchasing Department’s copy of requisition, purchase order Compare to voucher package Trace to competitive bids GBW 8th ed., Ch. 12

CONTROL RISK Receiving Major risks Goods received not counted, inspected Goods received not compared to purchase orders GBW 8th ed., Ch. 12

TESTING CONTROLS Receiving Obtain Receiving Department copy of receiving report for voucher sample Compare receiving reports Review receiving reports for evidence of count, inspection Trace receiving reports to receiving log GBW 8th ed., Ch. 12

CONTROL RISK Cash Disbursements, Recording Major risks Cash payments made to unauthorized payee Details recorded in voucher register are recorded for proper vendor Totals agree to general ledger GBW 8th ed., Ch. 12

TESTING CONTROLS Cash Disbursements, Recording Obtain canceled checks for voucher package Examine for signatures, endorsements Compare detailed information about check from voucher package to canceled check Trace voucher packages, canceled checks to postings Review for classification, accuracy Scan voucher register for unusual items GBW 8th ed., Ch. 12

ASSESSING CONTROL RISK 2 Questions Are controls effective? Can controls be relied upon? If answer is yes to both Assess control risk below maximum Assess detection risk above minimum Restrict substantive tests of sales, receivables, cash GBW 8th ed., Ch. 12

POTENTIAL ERRORS, FRAUDS Cash disbursed to unauthorized parties Duplicate payments made Account balances inaccurate GBW 8th ed., Ch. 12