INTRODUCTION

The primary external exchange of information is with

Expenditure Cycle : 
 suppliers (vendors).

Purchasing and Cash Disbursements
 Information flows to the expenditure cycle from other
cycles, e.g.:

The revenue cycle, production cycle, inventory control,
Zaldy Adrianto

zaldy.adrianto@unpad.ac.id
and various departments provide information about the
need to purchase goods and materials.

Information also flows from the expenditure cycle:

Information is provided to the general ledger and
reporting function for internal and external financial
reporting.

EXPENDITURE CYCLE
INTRODUCTION
BUSINESS ACTIVITIES
The three basic activities performed in
the expenditure cycle are:

The primary objective of the
expenditure cycle is to minimize Ordering goods, supplies, and services.

the total cost of acquiring and Receiving and storing these items.

maintaining inventory, supplies, and Paying for these items.

services. These activities mirror the activities in
the revenue cycle.

ORDERING GOODS, ORDERING GOODS,

SUPPLIES, AND SERVICES SUPPLIES, AND SERVICES
Key decisions in this process involve Alternate inventory control methods

identifying what, when, and how much to We will consider three alternate
purchase and from whom.

approaches to inventory control:

Weaknesses in inventory control can create
significant problems with this process:
Economic Order Quantity (EOQ)

Inaccurate records cause shortages.
Just in Time Inventory (JIT)

One of the key factors affecting this process Materials Requirements Planning
is the inventory control method to be used. (MRP)
 Economic Order Quantity Materials Requirements
(EOQ) Planning (MRP)
the traditional approach to managing inventory.

Goal: Maintain enough stock so that production doesn’t get
interrupted.
MRP seeks to reduce inventory
Under this approach, an optimal order size is calculated by
minimizing the sum of several costs:
levels by improving the accuracy of
Ordering costs
forecasting techniques and
Carrying costs

Stockout costs
carefully scheduling production and
The EOQ formula is also used to calculate reorder point, i.e., purchasing around that forecast.
the inventory level at which a new order should be placed.

Other, more recent approaches try to minimize or eliminate
the amount of inventory carried.

Similarities and differences

Just in Time Inventory (JIT) between MRP and JIT:
Scheduling production and inventory
JIT systems attempt to minimize or eliminate accumulation.

inventory by purchasing or producing only in MRP schedules production to meet
response to actual (as opposed to forecasted)
estimated sales and creates a stock of
sales.

finished goods inventory to be available for
These systems have frequent, small deliveries
those sales.

of materials, parts, and supplies directly to
the location where production will occur.
JIT schedules production in response to
actual sales and virtually eliminates finished
A factory with a JIT system will have multiple
receiving docks for their various work centers. goods inventory, because goods are sold
before they’re made.

Similarities and differences Similarities and differences

between MRP and JIT: between MRP and JIT:
Scheduling production and inventory Scheduling production and inventory
accumulation
accumulation

Nature of products

Nature of products

MRP systems are better suited for products that
have predictable demand, such as consumer staples.
Costs and efficiency

JIT systems are particularly suited for products Both can reduce costs and improve efficiency over
with relatively short life cycles (e.g., fashion items) traditional EOQ approaches.
and for which demand is difficult to predict (e.g.,
toys associated with movies).
 Similarities and differences ORDERING GOODS,
between MRP and JIT: SUPPLIES, AND SERVICES
Scheduling production and inventory accumulation
Whatever the inventory control system, the order
Nature of products
processing typically begins with a purchase request
Costs and efficiency
followed by the generation of a purchase order.

Too much or too little
A request to purchase goods or supplies is
In either case, you must be able to:
triggered by either:

Quickly accelerate production if there is The inventory control function; or

unanticipated demand.
An employee noticing a shortage.

Quickly stop production if too much Advanced inventory control systems automatically
inventory is accumulating. initiate purchase requests when quantity falls below
the reorder point.

ORDERING GOODS, ORDERING GOODS,

SUPPLIES, AND SERVICES SUPPLIES, AND SERVICES
The need to purchase goods typically results in the creation
of a purchase requisition. The purchase requisition is a The purchase requisition is received by a
paper document or electronic form that identifies:

purchasing agent (aka, buyer) in the
1. Who is requesting the goods

2. Where they should be delivered
purchasing department, who typically
3. When they’re needed
performs the purchasing activity.

4. Item numbers, descriptions, quantities, and prices

5. Possibly a suggested supplier
In manufacturing companies, this
6. Department number and account number to be charged
function usually reports to the VP of
Most of the detail on the suppliers and the items purchased
can be pulled from the supplier and inventory master files. Manufacturing.

ORDERING GOODS, ORDERING GOODS,

SUPPLIES, AND SERVICES SUPPLIES, AND SERVICES
A crucial decision is the selection of supplier.

Once a supplier has been selected for a
Key considerations are:
product, their identity should become
Price
part of the product inventory master file
Quality
so that the selection process does not
Dependability
have to be carried out for every
Especially important in JIT systems because
late or defective deliveries can bring the
purchase.

whole system to a halt.
A list of potential alternates should also be
maintained.

Consequently, certification that suppliers meet
For products that are seldom ordered, the
quality standards is important.
selection process may be repeated every time.
 ORDERING GOODS, ORDERING GOODS,
SUPPLIES, AND SERVICES SUPPLIES, AND SERVICES
It’s important to track and periodically evaluate A purchase order is a document or electronic form
supplier performance, including data on:
that formally requests a supplier to sell and deliver
specified products at specified prices.

Purchase prices

The PO is both a contract and a promise to pay. It
Rework and scrap costs
includes:

Supplier delivery performance
Names of supplier and purchasing agent

The purchasing function should be evaluated Order and requested delivery dates

and rewarded based on how well it minimizes Delivery location

total costs, not just the costs of purchasing Shipping method

the goods. Details of the items ordered

ORDERING GOODS, Procurement eCatalog

SUPPLIES, AND SERVICES (LKPP)
Multiple purchase orders may be completed for one
purchase requisition if multiple vendors will fill the
request.

The ordered quantity may also differ from the
requested quantity to take advantage of quantity
discounts.

A blanket order is a commitment to buy specified items
at specified prices from a particular supplier for a set
time period.

Reduces buyer’s uncertainty about reliable material
sources

Helps supplier plan capacity and operations

Procurement eCatalog
ORDERING GOODS,
(LKPP) SUPPLIES, AND SERVICES
IT can help improve efficiency and effectiveness of
purchasing function.

The major cost driver is the number of purchase
orders processed. Time and cost can be cut here
by:

1. Using EDI to transmit purchase orders.

2. Using vendor-managed inventory systems.

3. Reverse auctions.

4. Pre-award audits.
 RECEIVING AND RECEIVING AND
STORING GOODS STORING GOODS
The receiving department accepts deliveries from The two major responsibilities of the receiving
suppliers.
department are:

Normally, reports to warehouse manager, who Deciding whether to accept delivery.

reports to VP of Manufacturing.
Verifying the quantity and quality of
Inventory stores typically stores the goods.
delivered goods.

Also reports to warehouse manager.
The first decision is based on whether there is a
The receipt of goods must be communicated to the valid purchase order.

inventory control function to update inventory Accepting un-ordered goods wastes time,
records. handling and storage.

RECEIVING AND RECEIVING AND STORING GOODS

STORING GOODS
Verifying the quantity of delivered goods is important so:
When goods arrive, a receiving clerk compares the PO
1. The company only pays for goods received.
number on the packing slip with the open PO file to
2. Inventory records are updated accurately.
verify the goods were ordered.

The receiving report is the primary document used in this Then counts the goods.

process:

Examines for damage before routing to warehouse
1. It documents the date goods received, shipper, supplier, and
PO number.

or factory.

2. Shows item number, description, unit of measure, and Three possible exceptions in this process:

quantity for each item.
1. The quantity of goods is different from the amount
3. Provides space for signature and comments by the person ordered;

who received and inspected.
2. The goods are damaged; and

Receipt of services is typically documented by supervisory
approval of the supplier’s invoice.
3. The goods are of inferior quality.

RECEIVING AND RECEIVING AND

STORING GOODS STORING GOODS
If one of these exceptions occurs, the purchasing agent
resolves the situation with the supplier.

1. Supplier typically allows adjustment to the invoice for
IT can help improve the efficiency and
quantity discrepancies.
effectiveness of the receiving activity:

2. If goods are damaged or inferior, a debit memo is
prepared after the supplier agrees to accept a return or Bar-coding

grant a discount.

RFID

One copy goes to supplier, who returns a credit memo
in acknowledgment.
EDI and satellite technology

One copy to accounts payable to adjust the account
payable.
Audits
One copy to shipping to be returned to supplier with
the actual goods.
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PAYING FOR GOODS Approval of vendor invoices

AND SERVICES
Approval of vendor invoices is done by
the accounts payable department, which
There are two basic sub-processes reports to the controller.

involved in the payment process:

The legal obligation to pay arises when
Approval of vendor invoices
goods are received.

But most companies pay only after receiving and
Actual payment of the invoices approving the invoice.

This timing difference may necessitate adjusting
entries at the end of a fiscal period.

Approval of vendor
Approval of vendor invoices
invoices
Objective of accounts payable:


Authorise payment only for goods and
services that were ordered and actually
There are two basic approaches to
received.

processing vendor invoices:


Requires information from:

Non-voucher system


Purchasing—about existence of valid
purchase order.

Voucher system
Receiving—for receiving report
indicating goods were received.
Actual payment of the invoices
Payment of the invoices is done by the
cashier, who reports to the treasurer.
The cashier receives a voucher package,
which consists of the vendor invoice and
supporting documentation, such as
purchase order and receiving report.
5. Using company credit cards and electronic forms for
This voucher package authorizes
issuance of a check or EFT to the
supplier.
PAYING FOR GOODS
AND SERVICES
Processing efficiency can be improved by:
1. Requiring suppliers to submit invoices by EDI.
2. Having the system automatically match invoices to
POs and receiving reports.
3. Eliminating vendor invoices.
4. Using procurement cards for non-inventory purchases.
travel expenses.
6. Preparing careful cash budgets to take advantage of
early-payment discounts.
7. Using FEDI to pay suppliers.

PARTIAL ORGANIZATION CHART PARTIAL ORGANIZATION CHART

FOR UNITS INVOLVED IN FOR UNITS INVOLVED IN
EXPENDITURE CYCLE EXPENDITURE CYCLE

•  Decides whether to accept

•  Selects suitable suppliers deliveries
•  Issues purchase orders •  Counts and inspects
deliveries

PARTIAL ORGANIZATION CHART PARTIAL ORGANIZATION CHART

FOR UNITS INVOLVED IN FOR UNITS INVOLVED IN
EXPENDITURE CYCLE EXPENDITURE CYCLE

•  Approves invoices
•  Stores goods that for payment
have been
delivered and
accepted
 PARTIAL ORGANIZATION CHART
FOR UNITS INVOLVED IN
EXPENDITURE CYCLE
•  Issues payment to
vendors
CONTROL: OBJECTIVES,
THREATS, AND PROCEDURES
There are several actions a company can take with
respect to any cycle to reduce threats of errors or
irregularities. These include:
Using simple, easy-to-complete documents with clear
instructions (enhances accuracy and reliability).
recording of valid and only valid
Using appropriate application controls, such as validity
checks and field checks (enhances accuracy and
reliability).
(reduces risk of unauthorized transaction).
Providing space on forms to record who completed and
who reviewed the form (encourages proper
authorizations and accountability).
CRIME TIME
Before we discuss specific threats, it may
be helpful to have some background on a
form of occupational fraud and abuse
which is broadly referred to as corruption.
Corruption cases often involve
arrangements between a company’s
purchasing agent and a sales
representative for one of the company’s
vendors.
CONTROL: OBJECTIVES,
THREATS, AND PROCEDURES
In the expenditure cycle (or any cycle), a well-designed AIS
should provide adequate controls to ensure that the
following objectives are met:
1. All transactions are properly authorized.
2. All recorded transactions are valid.
3. All valid and authorized transactions are recorded.
4. All transactions are recorded accurately.
5. Assets are safeguarded from loss or theft.
6. Business activities are performed efficiently and
effectively.
7. The company is in compliance with all applicable laws
and regulations.
8. All disclosures are full and fair.
CONTROL: OBJECTIVES,
THREATS, AND PROCEDURES
Pre-numbering documents (encourages
transactions).
Restricting access to blank documents
CRIME TIME
The vendor’s representative may try to induce the
purchasing agent to buy goods that:
Are over-priced
Are of inferior quality
Aren’t even needed
Aren’t even delivered
In exchange, the vendor’s rep typically offers the
purchasing agent something of value. That
“something” might be money, payment of a debt, a
job offer, an expensive vacation, or anything the
purchasing agent might value.
 CRIME TIME Bribery
Typically involves the vendor offering
According to the Fraud Examiner’s Manual
a kickback (something of value) to the
published by the Association of Certified
Fraud Examiners, these schemes usually buyer to buy inflated, substandard,
take four forms:

un-needed, or un-delivered goods,
Bribery

etc.


Conflict of interest

Alternately, may involve an inducement
Economic extortion

to the buyer to rig a competitive
bidding process so that the vendor
Illegal gratuities
gets the bid.

Conflict of interest Economic extortion

In conflict of interest cases, the
purchasing agent is usually
arranging for his employer to make
purchases from a company in which
he has a concealed interest.
the vendor that he must provide
For example, perhaps his wife
owns the vendor company.
Economic extortion is basically the reverse
of a bribe.
Instead of the vendor making an offer
of something of value to the purchasing
agent, the purchasing agent may tell
something of value to the purchasing
agent if he wants to continue to do
business with his employer.

THREATS IN ORDERING
Illegal gratuities
GOODS
Illegal gratuities involve gifts that are
Threats in the process of ordering goods
given to the purchasing agent by a vendor
include:

after the vendor has been selected.

THREAT 1: Stockouts and/or excess inventory

There was no intent by the vendor to THREAT 2: Ordering unnecessary items

influence the selection process; the gift THREAT 3: Purchasing goods at inflated prices

was provided after the fact.
THREAT 4: Purchasing goods of inferior quality

But the problem is that the gift is likely THREAT 5: Purchasing from unauthorized suppliers

THREAT 6: Kickbacks

to impact future decisions by the
EDI-Related threats

purchasing agent. Threats related to purchases of services
THREAT NO. 1—Stockouts THREAT NO. 1—Stockouts
and/or excess inventory and/or excess inventory
Why is this a problem?
Supplier performance reports that highlight
If you run out of merchandise, you may lose deviations in product quality, price, and on-time
sales.
delivery.

If you carry too much merchandise, you incur Online accounting information systems to record
excess carrying costs and/or have to mark the
changes to inventory in real time.

inventory down.

Bar-coding or RFID of inventory to improve
Controls:
accuracy.

Accurate inventory control and sales forecasting
systems.
Periodic physical counts of inventory to verify
Use of the perpetual inventory method. accuracy of the records.

THREAT NO. 2—Ordering THREAT NO. 2—Ordering

unnecessary items unnecessary items
Why is this a problem?

Excess carrying costs.
Controls:

Obsolete inventory that can’t be sold or has to be
marked down.
Design the AIS to integrate the
A related problem is multiple purchases of the databases of various units.

same item by different units of the organization.

Often occurs when different departments or Produce reports that link item
divisions have different numbering systems for
descriptions to part numbers.
parts.

Causes company to miss out on volume discounts.

THREAT NO. 3—Purchasing THREAT NO. 3—Purchasing

goods at inflated prices goods at inflated prices (con’t)

Why is this a problem?

Bids should be solicited for high-cost and
Increases product costs.
specialised products.

Reduces profitability and/or damages competitive Purchase orders should be reviewed to be sure
position.
policies have been followed.

Controls:
Budgetary controls and responsibility accounting
Price lists for frequently purchased items—stored should be utilized to achieve accountability for
in master file and consulted.
cost overruns.

Prices of low-cost items determined from Performance reports should highlight significant
catalogs. variances for investigation.
THREAT NO. 4—Purchasing THREAT NO. 4—Purchasing
goods of inferior quality goods of inferior quality
Why is this a problem?
Track and review supplier
Can result in costly production delays.
performance.

Scrap and rework costs may make these materials Hold purchasing managers responsible
more expensive than high-quality alternatives.

for the total cost of purchases,
Controls:
including rework and scrap costs.

Compile list of approved suppliers known to provide
goods of acceptable quality.
Requires that the AIS can track
Review purchase orders to ensure use of approved these costs.
suppliers

THREAT NO. 5—Purchasing THREAT NO. 5—Purchasing

from unauthorized suppliers from unauthorised suppliers
Why is this a problem?
Periodically review approved
May result in goods of inferior quality.
supplier list for unauthorized
May cause legal issues .
changes.

Controls:

Review purchase orders for use of Work with issuers of
approved suppliers.
procurement cards to control
Restrict access to approved supplier which suppliers can accept the
list. card.

THREAT NO. 6—Kickbacks THREAT NO. 6—Kickbacks

Controls:

Why is this a problem?
Prohibit purchasing agents from accepting gifts from
suppliers.

Kickbacks are gifts from suppliers to Train employees to respond appropriately to gifts from
purchasing agents for the purpose of suppliers.

influencing their choice of suppliers. They Rotate jobs so the same purchasing agent does not deal
typically result in many of the preceding with the same suppliers indefinitely.

threats, including:
Audit the activities of purchasing agents.

Paying inflated prices.
Enforce mandatory vacations.

Have purchasing agents review and sign annual conflict of
Buying unneeded items.

interest statements.

Buying goods of inferior quality. Include clauses allowing vendor audits in contracts with
suppliers.
 EDI-related threats EDI-related threats
Why is this a problem?
EDI systems should send an acknowledgment for each
transaction:

Users who have malicious intent and/or have
Provides an accuracy check.

unauthorized access to EDI can submit multiple
Helps protect against transmission problems that
unauthorized transactions quickly.

could result in loss of an order.

Controls:
A log of all EDI transactions should be maintained and
Access to the EDI system should be limited to reviewed by an independent party.

authorized personnel through passwords, user Encryption should be used to ensure privacy,
IDs, access control matrices, and physical particularly for competitive bids.

access controls.
Digital signatures should be used to ensure authenticity.

Companies should have agreements with suppliers over
Procedures should be in place to verify and
EDI-related concerns.
authenticate EDI transactions.

Threats related to THREATS IN RECEIVING

purchases of services AND STORING GOODS
Why is this a problem?

Services are not a physical product and can’t be
Threats in the process of receiving and
counted. It can be difficult to “audit” whether they storing goods include:

were provided.

THREAT 7: Receiving unordered goods

Controls:

Hold supervisors responsible for all costs incurred by THREAT 8: Errors in counting received
their departments.
goods

Compare actual vs. budgeted expenses, and investigate
discrepancies.
THREAT 9: Theft of inventory
Conduct periodic reviews of contracts for services,
including audits of supplier records

THREAT NO. 7—Receiving THREAT NO. 8—Errors in

unordered goods counting received goods
Why is this a problem?
Why is this a problem?

Company pays for goods that weren’t received.

Results in unnecessary costs to Inventory records are inaccurate, possibly
unload, store, and return the items.
leading to stock-outs and lost sales.

Controls:
Controls:

Bar code and RFID of ordered goods.

Instruct receiving department to Design receiving forms so clerks cannot see the
accept goods only if there is an quantity ordered.

approved copy of the purchase order. Require receiving clerks to sign receiving
reports to create accountability.
THREAT NO. 8—Errors in THREAT NO. 9—Theft of
counting received goods inventory
Why is this a problem?

Loss of assets

Offer bonuses for catching Inaccurate records

discrepancies.
Controls:

Store inventory in secure locations with restricted
Have inventory control count the
access.

items transferred from receiving. Document all intra-company inventory transfers, e.g.:

Goods moving from receiving to warehouse.

Goods moving from warehouse to production floor.

THREAT NO. 9—Theft of THREATS IN APPROVING AND

inventory (con’t) PAYING VENDOR INVOICES
Threats in the process of approving and
Periodic physical count of inventory and
paying vendor invoices include:

comparison to records.
THREAT 10: Failing to catch errors in vendor
More critical items should be counted more invoices

frequently.
THREAT 11: Paying for goods not received

Segregation of duties
THREAT 12: Failing to take available purchase
Separate those who have physical access to discounts

inventory from those who keep records.
THREAT 13: Paying the same invoice twice

Separate both those who have custody and those THREAT 14: Recording and posting errors to
who can authorize inventory adjustments from those accounts payable

who work in the receiving and shipping functions. THREAT 15: Misappropriating cash, checks, or EFTs

THREAT NO. 10: Failing to THREAT NO. 10: Failing to

catch errors in vendor invoices catch errors in vendor invoices

Why is this a problem?

Freight-related terminology can be
Overpaying for merchandise.
challenging, so provide accounts payable
Controls:
staff with training on transportation
Check mathematical accuracy of invoices.
practices and terminology.

Obtain receipts from procurement card users
and verify monthly statement accuracy.
When freight is paid by the purchaser,
Adopt Evaluated Receipt Settlement ( ERS) use the same carrier in order to receive
approach—i.e., pay for goods when received discounts.
at the price stated in the purchase order.
 THREAT NO. 11: Paying THREAT NO. 12: Failing to take
for goods not received available purchase discounts
Why is this a problem?
Why is this a problem?

Increased costs.
Reduces profitability.

Controls:
Controls:

Compare quantities on invoice with quantities File approved invoices by due date and track
reported by receiving and inventory control that way.

departments.

Prepare cash flow budgets to determine
Use ERS (Evaluated Receipt Settlement)

whether the company has adequate cash flow
With respect to services, have tight to take advantage of early payment discounts.
budgetary controls and provide careful review
of departmental expenses.

THREAT NO. 13: Paying THREAT NO. 13: Paying the

the same invoice twice same invoice twice (con’t)
Why is this a problem?
Cancel the invoice once the check is
Reduces profitability.
signed.

Can create a cash crunch if a large invoice is Have internal auditors or consultants
paid twice.

help detect and recover
Controls:
overpayments.

Approve invoices for payment only when
accompanied by a complete voucher package (PO
In invoice-less accounts payable
& receiving report).
systems, control access to the master
Only pay on original copies of invoices. file and monitor all changes.

THREAT NO. 14: Recording and

THREAT NO. 15: Misappropriating
posting errors to accounts
cash, checks, or EFTs
payable
Why is this a problem?

Why is this a problem?
Loss of assets.

May result in disgruntled suppliers.

Potentially misleading financial statements if
Causes errors in financial and performance reports.

theft is large enough.

Controls:

Controls:

Appropriate data entry and processing controls,
such as comparing the differences in vendor Restrict access to cash, blank checks, and
balances before and after processing checks with check signing machines.

the total amount of invoices processed.
Have checks numbered sequentially and
Reconcile supplier balances (or unpaid vouchers) periodically accounted for by the cashier.
with the accounts payable control account.
 GENERAL CONTROL THREAT NO. 16—Loss, alteration,
ISSUES or unauthorized disclosure of data

Two general objectives pertain to activities in Why is this a problem?

every cycle:

Loss or alteration of data could cause:

Accurate data should be available when
Errors in external or internal reporting.

needed.

Inaccurate payment of vendors.

Activities should be performed efficiently and
effectively.
Unauthorized disclosure of confidential vendor
The related general threats are:
information can cause:

THREAT 16: Loss, alteration, or unauthorized Legal sanctions and fines.

disclosure of data
Vendor bidding irregularities.
THREAT 17: Poor performance

THREAT NO. 16—Loss, alteration, THREAT NO. 17—Poor

or unauthorized disclosure of data
performance
Controls:

The purchases file, cash disbursements file, accounts payable
master file, and most recent transaction file should be backed Why is this a problem?

up regularly.

At least one backup on site and one offsite.
May damage vendor relations

All disks and tapes should have external and internal file
labels to reduce chance of accidentally erasing important data.
Reduces profitability

Access controls should be utilized:

1. User IDs and passwords
Controls:

2. Compatibility matrices

3. Controls for individual terminals (e.g., so the sales order
Prepare and review performance
department can’t create a receiving report)
reports
4. Logs of all activities, particularly those requiring
specific authorizations