The Expenditure Cycle Part 1: Purchases and Cash Disbursements Procedures

Chapter 5
The Expenditure Cycle Part 1:

Purchases and Cash
Disbursements Procedures
Introduction to Accounting Information

Systems, 8e
James A. Hall
1
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Objectives for Chapter 5
 Fundamental tasks performed during purchases and
cash disbursement processes
 Functional areas involved in purchases and cash
disbursements and the flow of these transactions
through the organization
 Documents, journals, and accounts that provide audit
trails, promote the maintenance of records, and support
decision making and financial reporting
 Risks associated with purchase and cash disbursements
activities and the controls that reduce these risks
 Operational features and the control implications of
technology used in purchases and cash disbursement
systems
2
Organization of Chapter 5
 The conceptual expenditure cycle

 The physical expenditure cycle
 Basic technology system
 Advanced technology system
 Reengineering using EDI
• Address functionality, efficiency issues, work flow
characteristics and Internal control issues in each system at
different points on the technology/human continuum
3
Conceptual Expenditure Cycle
 Purchase processing
 Vouchers payable system
 Cash disbursement system
4
Purchase Processing
 Monitor inventory records

 Prepare purchase order
 Receive goods
 Update inventory records
 Set up accounts payable
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DFD for Purchase System
Figure 5-1
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Vouchers Payable System
 An alternate to AP procedures
 Uses cash disbursement vouchers
 Each voucher recorded in the voucher register
 Post to general ledger
 inventory and voucher control accounts
7
Cash Disbursements
 Identify liabilities due

 Prepare cash disbursement
 Update AP records
 Post to general ledger
8
DFD for Cash Disbursements System
Figure 5-10
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Physical Expenditure Cycle
 Physical accounting information systems

combine technology and human activity.
 As a general rule, smaller businesses tend to rely
less on technology and more on manual
procedures, whereas larger companies tend to
employ advanced technologies.
 The nature of the technology/human mix
employed in a particular system has a direct
bearing on the nature of internal controls
needed to control the system.
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Basic Technology Expenditure
Cycle
 Computers tend to be independent PCs.
 Information between departments is
communicated via hard-copy documents.
 Maintaining physical files of source documents
is critical to the audit trail.
 In the following flowcharts notice that in many
departments, after an individual completes his
or her assigned task, documents are filed as
evidence that the task was performed.
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Basic Technology Purchases System
Figure 5-13
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Basic Purchases System
 Begins when inventory clerk prints purchase requisitions

by accessing the purchase requisition file
 This file was created when inventories dropped to
predetermined reorder point.
 The purchasing department receives the requisition
 Adds a record to the open purchase order file
• PO copies are sent to
– Vendor
– Inventory control
– AP
– Blind copy to receiving
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Basic Purchases System
 Receiving clerk receives the goods and reconciles with

packing slip and blind copy of PO
 Sends receiving report to
• Inventory storeroom
• Purchasing department
• Files hard copy
 AP department reconciles invoice, purchase order and
receiving report
 Records transaction in the purchases journal
 Gender ledger department receives journal voucher from
AP dept and account summary from inventory control.
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Basic Technology Cash Disb. System
Figure 5-13
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Basic Cash Disbursement System
 AP clerk reviews AP packets each day, identifies items

due, sends supporting documents to cash
disbursements department.
 Cash disbursements department reviews documents for
completeness and accuracy and prepares the payment
for signature.
 AP department removes the liability and sends AP
summary to GL department.
 GL department posts to the general ledger control
accounts and files the documents.
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Basic Technology: Physical Controls
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Authorization Controls
 Purchases of inventory should be authorized by

the Inventory Control department, not by
purchasing agents
 Accounts Payable authorizes the payments of

bills, not the cash disbursements clerk, who
writes the checks
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Segregation of Duties
 Segregation of inventory control from the

warehouse
 Segregation of the general ledger and
accounts payable from cash disbursements
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Supervision
 Within the expenditure cycle, supervision is of

highest importance in the Receiving department,
where the inventory arrives and is logged in by a
receiving clerk. Need to minimize:
 failures to properly inspect the assets
 theft of the assets
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Accounting Records
 Accounting records rest on the reliability and
security of stored digitalized data.
 Accountants should be skeptical about the accuracy
of hard-copy printouts.
 Backups - the system needs to ensure that backups
of all files are continuously kept
 Most automated systems still have a lot of paper
documents.
 This is good for audit trail purposes but is often
inefficient.
 As the system becomes increasing paperless,
maintaining an audit trail becomes more difficult.
21
Access Controls
 Access to:
 inventories (direct)
 cash (direct)
 accounting records (indirect)
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Independent Verification
 A/Payable dept. verifies much of the work done
within the expenditure cycle.
 PR, PO, receiving reports, and suppliers’ invoices must
be checked and verified by A/P.
 G/Ledger dept. verifies:
 the total obligations recorded equal the total inventories
received
 the total reductions in accounts payable equal the total
disbursements of cash
23
IT Application Controls
 Input Controls
 Edit controls to check for missing and invalid data
 Process
 Error messages
 Passwords
 File backup
 Output
 Primarily journal vouchers and account summaries
• Secure mail boxes/physical control
24
Advanced Technology
Expenditure Cycle
 Integration of accounting and other business

functions.
 Improved operational performance and
reduce costs by eliminating non-value-added
tasks.
 Advanced technologies significantly alter and
simply the expensiture cycle.
25
Integrated Purchases System
26
Integrated Purchase Processing
 Computer operations
 Many tasks performed automatically (e.g. identify
items to be ordered, send orders to vendors)
 Receiving department
 Clerk automatically prompted to enter quantities
received; system automatically creates receiving
report, updates inventory, sends info to G/L
 AP department
 System links vendor invoice, PO, receiving report;
creates virtual AP packet, automatically approves
payment
27
Integrated Cash Disb. System
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Integrated Cash Disbursements
 Due items are automatically paid

 Payments recorded
 Payments sent
 Invoices closed
 AP control and cash accounts updated
 Reports sent to AP and cash disbursement departments
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Advanced Technology Physical
Controls
30
Advanced Tech. Expenditure
Cycle Controls
 Automated purchase approval

 Computer logic, not a human, decides
 Automated three-way match and payment
approval
 Multilevel security
 Automated posting to subsidiary and GL
accounts
31
Advanced Technology IT Controls
32
Reengineering using EDI
 Expedites routine transaction processing

between business partners
 Requires trading partner agreement
 Reengineering receiving function and the AP
tasks produce considerable cost savings
 EDI poses unique control risks that must be

recognized and controlled – only valid
transactions must be processed
33

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Chapter 5

The Expenditure Cycle Part 1:

Introduction to Accounting Information

 The conceptual expenditure cycle

 Monitor inventory records

 Identify liabilities due

 Physical accounting information systems

 Begins when inventory clerk prints purchase requisitions

 Receiving clerk receives the goods and reconciles with

 AP clerk reviews AP packets each day, identifies items

 Purchases of inventory should be authorized by

 Accounts Payable authorizes the payments of

 Segregation of inventory control from the

 Within the expenditure cycle, supervision is of

 Integration of accounting and other business

 Due items are automatically paid

 Automated purchase approval

 Expedites routine transaction processing

 EDI poses unique control risks that must be

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