1. Purchases and disbursements

2. 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

3. 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

4. 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

5. DFD of Purchases System

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

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

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

14. 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

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

16. 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

17. 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

18. 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

19. 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

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