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Chapter 10:

Auditing the Expenditure Cycle

Member Group
Hanan Arn Hilda C1L012042
Shoffan Maruf C1L012057
Afif Rido Herlambang C1L012058
Aryni Freginia C1L012059
Fiska Aprily C. C1L012060
M. Reza Taufiq C1L012061

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:
REENGINEEREDFULLY AUTOMATED
Data processing steps performed
automatically:
1.
2.
3.
4.
5.
6.
7.

Inventory file scanned for items and reorder


points
Purchase requisition record for all items
needing replenishment
Consolidate requisitions by vendor
Retrieve vendor mailing information
P.O. prepared and sent to vendor (EDI)
Open P.O. record added for each transaction
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:
REENGINEEREDFULLY AUTOMATED
Data processing steps performed
automatically:
1. Quantities keyed matched to open P.O.
2.
3.
4.
5.

record
Receiving report file record added
Update inventory subsidiary records
G.L. inventory updated
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:
REENGINEEREDFULLY 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:
REENGINEEREDFULLY AUTOMATED
Data processing steps performed
automatically:
1.
2.
3.
4.
5.

Checks are printed, signed and distributed to


mailroom (unless EDI/EFT)
Payments are recorded in check register file
Items paid are transferred from open A.P. to
closed A.P. file
G.L.- A.P. and cash accounts are updated
Appropriate reports are transmitted to A.P. and
cash disbursements departments for review

IT Auditing & Assurance, 2e, Hall & Singleton

CASH DISBURSEMENT:
REENGINEEREDFULLY 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.
2.
3.
4.
5.
6.
7.

Labor costs are distributed to accounts


Online labor distribution summary
Online payroll register
Employee records are updated
Payroll checks are prepared and signed
Disbursement system generates check to fund the
payroll imprest account
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

Payroll System controls

Inspection of assets
Theft of assets
Reconciliation of supporting documents: P.O., receiving
report, suppliers invoice

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