THE EXPENDITURE CYCLE -Cash Disbursement Journal containing

[Purchases and Cash Disbursements voucher number authorizing each check

Procedures] provides an audit trail for verifying authenticity
of each check.

Phases of the Procurement Process:

Physical phase- acquisition of the resources Segregation of duties
Financial phase- disbursement of cash Segregation of Inventory Control From
Most businesses operate on a credit basis and Warehouse
only pay after acquiring the resources.
-At any point, an auditor should be able to
reconcile inventory records to the physical
Purchases Processing Procedures: inventory
• Monitor inventory records
Segregation of the General Ledger and
• Prepare purchase order
• Receive goods Accounts Payable from Cash
• Update inventory records Disbursements
• Set up accounts payable
-An individual with the combined
• Post to the general ledger
responsibilities of writing checks, posting to the
The tasks apply to both manufacturing and cash account, and maintaining AP could
merchandising entities; however, they just perpetrate fraud against the firm.
differ on the way the purchases are authorized. -Withdraw cash then adjust cash account.
For manufacturing entities: their purchasing
decisions are authorized by the production
planning and control function *Refer to table 5-1 for the summary of
expenditure cycle controls
For merchandising entities: the inventory
control function provides the purchase Supervision
authorization. Inspection of Assets

-Receiving clerk receives a blind PO from

*Refer to another page for the figure 1 of the purchasing
vouchers payable system
-Receiving personnel are forced to manually
Cash Disbursements System count and inspect the goods.
• Identify Liabilities Due Protect the firm from incomplete orders and
• Prepare Cash Disbursement damaged goods.
• Update Accounts Payable Record
• Post to General Ledger Theft of Assets

Processes the payment obligations created in -Improper inspection procedures coupled with
the purchases system. inadequate supervision can create a situation
that is conducive to the theft of inventories in
Objective is to ensure that only valid creditors
transit.
receive payment and that amounts paid are
timely and correct. Accounting records
The control objective of accounting records is
to maintain an audit trail adequate for tracing
[Expenditure cycle controls] a transaction from its source.
Expenditure cycle controls Expenditure Cycle Systems must be designed
Transaction Authorization to provide supporting information, such as
Segregation of Duties purchase requisition file, the PO file, and the
Supervision receiving report file.
Accounting Records Access controls
Access Controls
Independent Verification Direct Access
-In the expenditure cycle, a firm must control
Transaction Authorization access to physical assets such as cash and
Purchase Subsystem inventory. (Locks, alarms, and restricted
access to areas that contain inventories and
-As inventory level drop to their predetermined cash)
reorder points, inventory control formally
authorizes replenishment with a purchase Indirect Access
requisition. -Firm must limit access to documents that
Cash Disbursement Subsystem control physical assets.

-Cash disbursement function should not write An individual with access to purchase
check without explicit authorization. requisitions, purchase orders, and receiving
reports has the ingredients to construct a Receiving Department
fraudulent purchase transaction.  When the goods arrive, the receiving
clerk accesses the Open PO file in real
time by entering the PO number taken
Independent verification from the packing slip.
 The receiving screen the prompts the
Independent Verification by Accounts clerk to enter the quantities received
Payable for each item in the PO.
The control objective of accounting records is
to maintain an audit trail adequate for tracing
a transaction from its source.

Independent Verification by General

Ledger Department

The general function verifies that the total

obligations recorded equal the total inventories
received and that total reductions in AP equal
the total disbursements of cash.

Physical systems

*Refer to the figures for the flow, figure 5-12

and 5-13

[Computer –Based Purchases and

Cash Disbursements Applications]
Batch Purchase System

*Refer to figure 5-14 and 5-14 (continued)

Cash Disbursements Procedures

Data Processing Department
Each day, the system scans the due date field
of the voucher register for items due. Checks
are printed for this items and each check is
recorded in the check register.
Cash Disbursement Department
The clerk reconciles the checks with the
transaction listing and submits the negotiable
portion of the checks to management for
signing. The checks are then mailed to the
supplier.
Accounts Payable Department
Upon receipt of the check copies, the AP clerk
matches them with open vouchers and
transfers these now closed items to the closed
voucher file.

Reengineering the Purchases /Cash

Disbursement System
*Refer to figure 5-17
Data Processing
The following tasks are performed
automatically:
1. The inventory file is searched for items that
have fallen to their reorder points
2. A record is entered in the purchase
requisition file for each item to be replenished
3. Requisitions are consolidated according to
vendor number
4. Vendor mailing information is retrieved from
the valid vendor file
5. Purchase orders are prepared and added to
the Open PO file
6. A transaction listing of POs is sent to the
purchasing department for review.