The Expenditure Cycle: Purchases and Cash Disbursements Procedures

CHAPTER 5
THE EXPENDITURE CYCLE

PART 1:
PURCHASES AND CASH
DISBURSEMENTS PROCEDURES
Purchasing
Purchase
Requisition
Receiving/
Cash PROCUREMENT Inspection
Disbursements CYCLE
Accounts
Payable
The Conceptual System
•Purchase processing procedures:
• Monitor inventory records, prepare purchase order. receive
goods, update inventory records, set up accounts payable.
•Vouchers payable system:
• Alternate to AP procedures that uses cash disbursement
vouchers and maintains a voucher register, providing
improved control over cash disbursements. Vouchers payable
file equivalent to AP file.
• GL function posts journal voucher data.
•Cash disbursement system:

• Identify liabilities due, prepare cash disbursements, update AP
record and post to general ledger.
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classroom use.
A Manual Purchases System
• Begins in Inventory Control when inventory
levels drop to reorder levels
• A purchase requisition (PR) is prepared and
copies to sent to Purchasing and Accounts
Payable (A/P)
• Purchasing prepares a purchase order (PO) for
each vendor and sends copies to Inventory
Control, A/P, and Receiving
• Upon receipt, Receiving counts and inspects
the goods.
• A blind copy of the PO is used to force
workers to count the goods.
• A receiving report is prepared and copies sent
to the raw materials storeroom, Purchasing,
Inventory Control, and A/P.
•A/P eventually receives copies of the
PR, PO, receiving report, and the
supplier’s invoice.
•A/P reconciles these documents, posts
to the purchases journal, and records
the liability in the accounts payable
subsidiary ledger.
• A/P periodically summarizes the entries in
the purchases journal as a journal voucher
which is sent to the General Ledger (G/L)
department.
Inv-Control or Purchases DR
Accts Payable-Control CR
• A/P also prepares a cash disbursements
voucher and posts it in the voucher register.
•G/L department:
•posts from the accounts payable journal
voucher to the general ledger
•reconciles the inventory amount with the
account summary received from
inventory control
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Manual Cash Disbursements
System
•Periodically, A/P searches the open
vouchers payable file for items with
payments due:
•A/P sends the voucher and supporting
documents to Cash Disbursements
•A/P updates the accounts payable
subsidiary ledger
System
•Cash Disbursements:
• prepares the check
• records the information in a check register (cash
disbursements journal)
• returns paid vouchers to accounts payable, mails
the check to the supplier
• sends a journal voucher to G/L:
Accounts Payable DR
Cash CR
System
•G/L department receives:
• the journal voucher from cash
disbursements
• a summary of the accounts payable
subsidiary ledger from A/P
•The journal voucher is used to update the
general ledger.
•The accounts payable control account is
reconciled with the subsidiary summary.
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Physical Systems
•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 note that, in many
departments, after an individual completes his or
her assigned task, documents are filed as evidence
task was performed.
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Physical Systems: Integrated Purchases
Processing
•Departmental activity lower than basic
technology system.
•Purchases computer application reads
purchase requisition file for reorders, prepares
and sends PO, updates records.
•Receiving reconciles goods with packing slip
and blind PO.
•Record added to receiving report file and PO
closed.
•Inventory and GL control accounts
automatically updated.
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Physical Systems: Integrated Purchases
Processing
•AP clerk receives invoice, adds record to

vendor file and files hard-copy.
•System automatically links vendor
invoice, PO and receiving report,
reconciles documents and creates virtual
AP packet.
•AP clerk reviews virtual packet and if no
discrepancies are found, system
automatically approves payment.
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Physical Systems: Integrated Cash Disbursements
•Each day the DUE DATE fields of vendor invoices
are scanned for items due to be paid.
•Checks are automatically printed, signed, and
distributed to the mail room for mailing.
•Large checks receive additional signatures before
mailing.
•Payments automatically recorded in check register
file.
•Vendor invoices are closed.
•General ledger AP control and cash accounts
updated.
•Reports transmitted to AP and cash disbursements
departments for management review and filing. 36
Summary of Internal Controls
General Internal Controls
•Organization controls
•segregation of duties
•Documentation
•Asset Accountability Controls
•Management Practices
•Data Center Operations Controls
•Authorization Controls
•Access Controls
Manual
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
How do these controls change in a CBAS?

Computer-Based Authorization
Controls
• Authorizations are automated.
• programmed decision rules must be debugged
• Automating inventory in EDI and JIT
• faulty inventory model can lead to over-
purchasing or under-purchasing
• Cash disbursements may automate check printing
and signing.
• programming logic must be flawless
• automated signing only below a dollar threshold
Traditional Segregation of Duties
• Warehouse (stores)
• Inventory control
• Accounts payable
• General ledger
• Requisitioning
• Purchases
• Purchases returns and allowances
• Cash disbursements
Manual
Segregation of Functions
•Custody of the asset, inventory, by the
Warehouse must be separate from
recordkeeping for the assets by the
Inventory Control.
•Custody of the asset, cash, by Cash
Disbursements must be kept separate
from recordkeeping for the asset by A/P.

Computer-Based Segregation of
Functions
•Extensive consolidation by the
computer of tasks traditionally
segregated
•computer programs authorize and
process purchase orders
•computer programs authorize and issue
checks to vendors
Manual
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

Computer-Based Supervision
• Automation often leads to a collapsing of the
traditional segregation of duties.
• requires greater supervision
• Supervision takes on new aspects as technology
advances.
• electronic monitoring
• Supervision because more difficult as the
workplace becomes more sophisticated.
• employees may have advanced IT training
Manual
Accounting Records
•Must maintain adequate records for:
•accounts payable
•vouchers payable
•checks
•general ledger
•subsidiary ledgers

Computer-Based
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.
Manual
Access Controls
•Access to:
•inventories (direct)
•cash (direct)
•accounting records (indirect)

Computer-Based
Access Controls
•Magnetic records are vulnerable to
both authorized and unauthorized
exposure and should be protected
•must have limited file accessibility
•programs must be safeguarded and
monitored
Manual
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

Computer-Based
Independent Verification
•Automating the accounting function
reduces the need for verification by
reducing the chances of fraud and error in
the expenditure cycle.
•However, the need for verification shifts
to the computer program and the
programmers where fraud and error may
still be present.
Expenditure Cycle Risks and Internal Controls
• Risk of unauthorized inventory purchases.

• Physical Controls: Transaction authorization
• IT Controls: Automated purchase approval
• Risk of receiving incorrect items, quantities or damaged

goods.
• Physical Controls: Independent verification and supervision
• IT Controls: Scanner technology
• Risk of inaccurately recording transactions.

• Physical controls: Transaction authorization, accounting
records and independent verification.
• IT controls: Input data edits, error messages, automated
postings, and file backups.
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Expenditure Cycle Risks and Internal
Controls
• Risk of misappropriation of cash and inventory.
• Physical Controls: Supervision, independent
verification, segregation of duties – inventory control
from inventory warehouse and accounts payable from
cash disbursements.
• IT Controls: Automated three-way match and payment
approval and multilevel security.
• Risk of unauthorized access to accounting records and
reports.
• Physical Controls: Access controls and segregation of
duties.
• IT Controls: Password control and multilevel security.
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Reengineered Purchases/Cash Disbursements
Reengineering Using EDI
• Key element of success in the implementation of
a trading partner agreement to eliminate
discrepancies that require human involvement to
resolve.
• Some organizations have eliminated the receiving
function.
• Objective is to send goods directly to production
which avoids delays and associated handling
costs.
• Accounting and auditing issues:
• How to account for inventory receipts with no
receiving function and report?
• Accounting for scrap in the production process.
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Reengineering Using EDI
• Unique risks that need to be recognized and

controlled.
• Includes ensuring only valid transactions are
processed and risk of unauthorized access to
accounting records.
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CHAPTER 5

THE EXPENDITURE CYCLE

•Cash disbursement system:

© 2015 Cengage Learning. All rights reserved. May not be

•AP clerk receives invoice, adds record to

How do these controls change in a CBAS?

How do these controls change in a CBAS?

How do these controls change in a CBAS?

How do these controls change in a CBAS?

How do these controls change in a CBAS?

How do these controls change in a CBAS?

• Risk of unauthorized inventory purchases.

• Risk of receiving incorrect items, quantities or damaged

• Risk of inaccurately recording transactions.

• Unique risks that need to be recognized and

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