Chapter 5

The Expenditure Cycle

Part I: Purchases and
Cash Disbursements
Procedures
P u rc h a s e R e q u is itio n P u rc h a s in g
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PR O C U R EM EN T C Y C LE
(S U B S Y S T E M )
R e c e iv in g /
C a s h D is b u rs e m e n ts In s p e c tio n
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A c c o u n ts P a y a b le
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DFD of Purchases System
Manual Purchases System
DFD of Cash Disbursements System
Cash Disbursements System
 The Expenditure Cycle
• The time lag splits the expenditure
transaction cycle into two phases:
– physical phase (purchasing cycle)
– financial phase (cash disbursements)
 Expenditure Cycle Database
• Master Files • Other Files
– supplier (vendor) master file
– supplier reference and
– accounts payable master file
history file
– merchandise inventory
master file – buyer file
– accounts payable detail file
• Transaction and Open
Document Files
– purchase order file
• open purchase order file
– supplier’s invoice file
– open vouchers file
– cash disbursements file
 The Purchase Requisition
• A need for an item starts the expenditure cycle
– based on reorder point or reorder quantity
– manual: to initiate a credit purchase, someone in the
organization recognizes a need for a good or service;
an authorized person requests the good or service
using a purchase requisition form
– computerized: to initiate a credit purchase,
someone in the organization recognizes a need for a
good or service; an authorized person requests the
good or service using a terminal and a purchase
requisition screen
CUSTOMER (PURCHASES CYCLE)
EDI SELLER (REVENUE CYCLE)
Internal Data Flows External Data Flows External Data Flows Internal Data Flows

Purchase Customer
Order Order
Sales
Order

Receiving Shipping
Report Documents

Goods
Vendor’s Sales
Invoice Invoice

Check Check

or EFT or EFT
Summary of Internal 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 CB environment?

 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
 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 department
• Custody of the asset, cash, by Cash
Disbursements must be kept separate
from recordkeeping for the asset by the
Accounts Payable department
How do these controls change in a CB environment?
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

How do these controls change in a CB environment?

 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

How do these controls change in a CB environment?

 Computer-Based
Accounting Records
• Maintaining an audit trail becomes more difficult.
• Accounting records rests on reliability and security of
magnetically stored data.
– Be skeptical about accepting, on face value, the accuracy of
computer produced hard-copy printouts of journals and ledgers.
• The system needs to ensure that backup of all files is
continuously kept.
• Traditional automated systems still have a lot of paper
documents. This is good for audit trail purposes but is often
inefficient.
– As IS becomes increasing paperless, notice the conflict with SAS
78 objectives.
 Manual
Access Controls
• Access to:
– inventories (direct)
– cash (direct)
– accounting records
(indirect)

How do these controls change in a CB environment?

 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
• The Accounts Payable department verifies much of
the work done within the expenditure cycle.
– Purchase requisitions, purchase orders, receiving
reports, and suppliers’ invoices must be checked and
verified by Accounts Payable.
• The General Ledger department verifies:
– the total obligations recorded equal the total inventories
received
– the total reductions in accounts payable equal the total
disbursements of cash
How do these controls change in a CB environment?
 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.