Expenditure Cycle Tests of Controls and Substantive Tests: IT Auditing, Hall, 3e

Chapter 10:
Expenditure Cycle
Tests of Controls and
Substantive Tests
IT Auditing, Hall, 3e
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Purchases: Batch
Processing
Step 1: Data processing department

inventory control
Purchasing Department

P.O.
Receiving Department

batch update of inventory
Accounts Payable

validates vendors
Hall, 3e
Cash Disbursement: Batch

Processing
scans for items due and prints checks
for items received
Step 6: Cash disbursements
department reconciles checks,
submits checks to management for
signature
Step 7: Accounts payable matches
copies of checks with open vouchers,
closes them and files documents
Concludes expenditure cycle
Hall, 3e
Cash Disbursement:
ReengineeredFully Automated
Data processing steps performed

automatically:
1. Inventory file scanned for items and
reorder points
2. Purchase requisition record for all items
needing replenishment
3. Consolidate requisitions by vendor
4. Retrieve vendor mailing information
5. P.O. prepared and sent to vendor (EDI)
6. Open P.O. record added for each
transaction
7. List of P.O. sent to purchasing department
Hall, 3e
Cash Disbursement:
Goods arrive at receiving department
Quantities received entered per item
Hall, 3e
Cash Disbursement:

automatically:
1. Quantities keyed matched to open P.O.
record
2. Receiving report file record added
3. Update inventory subsidiary records
4. G.L. inventory updated
5. Record removed from open P.O. file and
added to open A.P. file, due date
established
Hall, 3e
Cash Disbursement:
Each day, due date filed of A.P. are

scanned for items where payment is
due
Hall, 3e
Cash Disbursement:

automatically:
1. Checks are printed, signed and
distributed to mailroom (unless EDI/EFT)
2. Payments are recorded in check register
file
3. Items paid are transferred from open A.P.
to closed A.P. file
4. G.L.- A.P. and cash accounts are updated
5. Appropriate reports are transmitted to
A.P. and cash disbursements departments
for review
Hall, 3e
Cash Disbursement:
Control implications
General in nature
Similar to those of Chapter 9
Hall, 3e
Reengineered System vs.

Batch Automated System
Improved inventory control

Better cash management
Less time lag
Better purchasing time management
Reduction of paper documents
Hall, 3e
10
Reengineered System vs.

Batch Automated System
Segregation of duties
Accounting records and access controls
Hall, 3e
11
Payroll Procedures
Drawbacks to using regular A.P.
and cash disbursements systems
to do payroll
General expenditure procedures that

apply to all vendors will not apply to
employees
Writing checks to employees requires
special controls
General expenditure procedures are
designed to accommodate relatively
smooth flow of transactions
Hall, 3e
12
Reengineered Payroll System

Often integrated with H.R.
Differs from previous automate
system
Operations departments transmit

transactions to D.P. electronically
Direct access to files are used for data
storage
Many processes are now performed in
real time
Hall, 3e
13
Reengineered Payroll
System
Personnel
Cost accounting
Timekeeping
Data processing
1.
2.
3.
4.
5.
6.
Labor costs are distributed to accounts

Online labor distribution summary
Online payroll register
Employee records are updated
Payroll checks are prepared and signed
Disbursement system generates check to
fund the payroll imprest account
7. G.L. updated
Hall, 3e
14
Expenditure Cycle Audit Objectives

Input controls
Data validation controls

Testing validation controls
Batch controls
Testing batch controls
Purchases authorization controls
Testing purchases authorization controls
Employee authorization
Testing employee authorization
procedures
Hall, 3e
15
Expenditure Cycle Audit

Objectives
Process controls
File update controls
Sequence check control

Liability validation control
Valid vendor file
Testing file update controls
Access controls
Warehouse security
Moving assets promptly when received
Paying employees by check vs. cash
Risks
Employees
Employees
Employees
Employees
records
with
with
with
with
access
access
access
access
to
to
to
to
A.P. subsidiary file

attendance records
both cash and A.P. records
both inventory and inventory
Testing access controls
Hall, 3e
16
Expenditure Cycle Audit

Objectives
Process controls
Physical controls
Purchase system controls
Segregation of inventory control from warehouse

Segregation of G.L. and A.P. from cash disbursements
Supervision of receiving department
Payroll System controls
Inspection of assets
Theft of assets
Reconciliation of supporting documents: P.O., receiving
report, suppliers invoice
Verification of timecards
Supervision
Paymaster
Payroll imprest account
Testing of physical controls
Hall, 3e
17
Expenditure Cycle Audit Objectives

Process controls
Output controls
A.P. change report

Transaction logs
Transaction listing
Logs of automatic transactions
Unique transaction identifiers
Error listing
Testing output controls
Hall, 3e
18
Expenditure Cycle Substantive

Tests
Risks and audit concerns
Understanding data
Inventory file
Purchase order file
Purchase order line item file
Receiving report file
Disbursement voucher file
File preparation procedures
Hall, 3e
19
Expenditure Cycle Substantive

Tests
Testing accuracy and completeness

assertions
Review disbursement vouchers for

unusual trends and exceptions
Accurate invoice prices
Testing completeness, existence, rights

and obligations assertions
Searching for unrecorded liabilities

Searching for unauthorized disbursement
vouchers
Review of multiple checks to vendors
Auditing payroll and related records
Hall, 3e
20

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Chapter 10:

Step 1: Data processing department

Step 2: Data processing department

Step 3: Data processing department

Step 4: Data processing department

Cash Disbursement: Batch

Data processing steps performed

Goods arrive at receiving department

Quantities received entered per item

Data processing steps performed

Each day, due date filed of A.P. are

Data processing steps performed

Reengineered System vs.

Improved inventory control

Reengineered System vs.

Accounting records and access controls

General expenditure procedures that

Reengineered Payroll System

Operations departments transmit

Labor costs are distributed to accounts

Expenditure Cycle Audit Objectives

Data validation controls

Expenditure Cycle Audit

File update controls

Sequence check control

A.P. subsidiary file

Testing access controls

Expenditure Cycle Audit

Purchase system controls

Segregation of inventory control from warehouse

Payroll System controls

Testing of physical controls

Expenditure Cycle Audit Objectives

A.P. change report

Expenditure Cycle Substantive

Expenditure Cycle Substantive

Testing accuracy and completeness

Review disbursement vouchers for

Accurate invoice prices

Testing completeness, existence, rights

Searching for unrecorded liabilities

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