Chapter 10:

Auditing the Expenditure

Cycle

IT Auditing & Assurance, 2e, Hall & Singleton

 PURCHASES: BATCH
PROCESSING
 Step 1: Data processing department –
inventory control
 Purchasing Department
 Step 2: Data processing department – P.O.
 Receiving Department
 Step 3: Data processing department – batch
update of inventory
 Accounts Payable
 Step 4: Data processing department –
validates vendors
IT Auditing & Assurance, 2e, Hall & Singleton
 CASH DISBURSEMENT:
BATCH PROCESSING
 Step 5: Data processing department – 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
IT Auditing & Assurance, 2e, Hall & Singleton
 CASH DISBURSEMENT:
REENGINEERED—FULLY 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

IT Auditing & Assurance, 2e, Hall & Singleton

 CASH DISBURSEMENT:
REENGINEERED– FULLY AUTOMATED

 Goods arrive at receiving department

 Quantities received entered per item

IT Auditing & Assurance, 2e, Hall & Singleton

 CASH DISBURSEMENT:
REENGINEERED—FULLY AUTOMATED
 Data processing steps performed
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
IT Auditing & Assurance, 2e, Hall & Singleton
 CASH DISBURSEMENT:
REENGINEERED—FULLY AUTOMATED

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

scanned for items where payment is
due

IT Auditing & Assurance, 2e, Hall & Singleton

 CASH DISBURSEMENT:
REENGINEERED—FULLY AUTOMATED
 Data processing steps performed
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

IT Auditing & Assurance, 2e, Hall & Singleton

 CASH DISBURSEMENT:
REENGINEERED—FULLY AUTOMATED
 Control implications
 General in nature
 Similar to those of Chapter 9

IT Auditing & Assurance, 2e, Hall & Singleton

BATCH AUTOMATED SYSTEM
VS. MANUAL BATCH
 Improved inventory control
 Better cash management
 Less time lag
 Better purchasing time management
 Reduction of paper documents

IT Auditing & Assurance, 2e, Hall & Singleton

REENGINEERED SYSTEM VS.
BATCH AUTOMATED SYSTEM

 Segregation of duties
 Accounting records and access
controls

IT Auditing & Assurance, 2e, Hall & Singleton

 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

IT Auditing & Assurance, 2e, Hall & Singleton

 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

IT Auditing & Assurance, 2e, Hall & Singleton

 REENGINEERED PAYROLL
SYSTEM
 Personnel
 Cost accounting
 Timekeeping
 Data processing
1. Labor costs are distributed to accounts
2. Online labor distribution summary
3. Online payroll register
4. Employee records are updated
5. Payroll checks are prepared and signed
6. Disbursement system generates check to fund the
payroll imprest account
7. G.L. updated

IT Auditing & Assurance, 2e, Hall & Singleton

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

IT Auditing & Assurance, 2e, Hall & Singleton

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 with access to A.P. subsidiary file
• Employees with access to attendance records
• Employees with access to both cash and A.P. records
• Employees with access to both inventory and inventory records
 Testing access controls

IT Auditing & Assurance, 2e, Hall & Singleton

 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
 Inspection of assets
 Theft of assets
 Reconciliation of supporting documents: P.O., receiving
report, supplier’s invoice

 Payroll System controls

• Verification of timecards
• Supervision
• Paymaster
• Payroll imprest account
 Testing of physical controls
IT Auditing & Assurance, 2e, Hall & Singleton
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

IT Auditing & Assurance, 2e, Hall & Singleton

 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

IT Auditing & Assurance, 2e, Hall & Singleton

 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
IT Auditing & Assurance, 2e, Hall & Singleton
 Chapter 10:
Auditing the Expenditure
Cycle

IT Auditing & Assurance, 2e, Hall & Singleton