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Prepared by:

Alex Almodiel, CPA, MBA

General Criteria for Expense Recognition
• When a specific event occurs to match
the revenue recognized (e.g. product
• When cash is spent or liabilities incurred
for goods and services that are used up
that time or shortly thereafter (e.g.
period cost).
• When the portion of assets are
systematically allocated to the periods in
which those are expected to provide
benefits (e.g. depreciation).

Purchasing & Disbursement Cycle

Receive AP
Requisitioning Order Disbursement
Order Voucher
Process Processing Process
Process Process
& Approval

Control Ledger
Purchase Return Cycle
Item from Inventory
Warehouse Control

AP Voucher
Shipping Process
Process (Debit Memo
Vendor Credit
Transaction Type & Ledger Accounts Affected
by the Purchasing & Disbursement Process
Type of Transactions Account Affected
Purchase Transactions • Accounts Payable
• Inventory
• Purchases or cost of goods sold
• Various asset and expense account
Cash Disbursement Transactions • Cash
• Accounts Payable
• Cash Discounts
• Various asset and expense account
Purchase Return & Allowance Transactions • Purchase Returns
• Purchase Allowances
• Cash Discounts
• Various asset and expense account
Documents and Records
Purchase Requisition Vendor Statement
Purchase Order Check
Receiving Report Cash Disbursement Journal/Check
Vendor’s Invoice Register
Voucher General Ledger (for control
Voucher Register/Purchases
Accounts Payable Subsidiary
Functions in the Purchasing & Disbursement Process
Major Function Details
Requisitioning Initiation and approval of requests for goods and services by
authorized individuals consistent with management criteria
Purchasing Approval of purchase orders and proper execution as to price,
quantity, quality and vendor.
Receiving Receipt of properly authorized goods or services.
Invoice processing Processing of vendor invoices for goods and services received; also,
processing of adjustment for allowances, discounts, and returns.
Disbursements Processing of payment to vendors.
Accounts payable Recording of all vendor invoices, cash disbursements, and
adjustments in individual vendor accounts.
General ledger Proper accumulation, classification, and summarization of
purchases, cash disbursements, and payables in the general ledger.

Key Segregation of Duties in the Purchasing &
Disbursement Process and Possible Errors & Fraud
Segregation of Duties Possible Errors or Fraud Resulting from Conflict of Duties
The purchasing function If one individual is responsible for the requisition,
should be segregated from the purchasing, and receiving functions, fictitious or
requisitioning and receiving unauthorized purchases can be made. This can result in the
functions theft of goods and possibly payment for unauthorized
The invoice processing If one individual is responsible for the invoice-processing and
function should be segregated the accounts payable functions, purchase transaction can be
from the accounts payable processed at the wrong price or terms, or a cash
function disbursement can be processed for goods or services not
received. This can result in overpayment for goods and
services or the theft of cash.

Key Segregation of Duties in the Purchasing &
Disbursement Process and Possible Errors & Fraud
Segregation of Duties Possible Errors or Fraud Resulting from Conflict of Duties
The accounts payable function If one individual is responsible for the accounts payable
should be segregated from the records and also for the general ledger, that individual can
general ledger function. conceal any defalcation that would normally be detected by
reconciling subsidiary records with the general ledger control

Recommended Segregation of Duties for Purchasing
& AP Functions by Department
Purchasing & AP Functions Purchasing Receiving Cashier IT
Preparation and approval of PO X
Receipt, counting, and inspection of purchased
Receipt of vendor’s invoices and matching
them with supporting documents
Coding (or checking) of account distributions X
Updating of accounts payable records X X
Preparation of vendor’s checks X
Signing and mailing of vendor’s checks X
Preparation of voucher register X
Reconciliation of voucher register to general
Inherent Risk Assessment

Industry related factors (e.g. adequacy of

supply of raw materials and volatility of prices).
Misstatements detected on prior audits

Control Risk Assessment
Components of Example of Specific Situations or Circumstances Risk
Internal Control that may Influence Control Risk Assessment Assessment
Control Environment Existence of policy on approval of purchase orders based on amount Low
and nature of item.
Entity’s Risk Training of new AP staff on the use of accounts payable and Low
Assessment Process payment program.
Control Procedures Three-way matching of documents relevant to AP is being done Low
before creating AP voucher and ordered items are counted and
inspected before acknowledging receipt.
Information Systems Detailed process manual is being followed by departments involve Low
& Communication in the purchasing process.
Monitoring Controls Internal audit done routinely on purchasing and payment process. Low

Examples of Assertions, Possible Misstatements, Internal Control & Audit Procedure
Assertion Possible Misstatement Control Procedure Audit Procedure
Occurrence Purchase recorded, goods Purchase not recorded without Test a sample of AP vouchers for
or services not ordered or approved purchase order and the presence of authorized PO and
received. receiving report. receiving report. If IT application,
examine application controls.
Completeness Purchase made but not Accounting for numerical Review client’s procedures for
recorded. sequence of purchase orders, accounting for numerical
receiving reports, and AP sequence of purchase orders,
vouchers. receiving reports, and vouchers.
Obligations Paid accounts payable to a AP voucher is marked “Paid” Send confirmation letter to
vendor remained and vendor subsidiary ledger is vendors to verify outstanding
outstanding. timely updated. balances.
Accuracy Amounts of AP Vouchers Vouchers reconciled to daily Match AP voucher amount against
was incorrectly posted to accounts payable listing. the postings to the vendor
vendor subsidiary ledger. subsidiary ledger.
Presentation & Trade payable classified as Chart of accounts use to Examine components of long-term
Disclosure long-term payable. classify payables. payables presented on financial
Primary Reference
• Philippine Standards on Auditing
• Auditing & Assurance Services 4th Edition by Messier/Glover/Prawitt