AUDITING

CHAPTER 12
Purchases & Cash
Disbursements Transactions
By
David N. Ricchiute
TOPICS
Nature of expenditure/disbursement
cycle
Flow of information
Auditors assessment of control risk
Audit of internal control for purchases,
cash disbursements
Computer auditing, sampling, tests of
controls
Assurance, consulting services
2 GBW 8th ed., Ch. 12
NATURE EXPENDITURE/
DISBURSEMENT CYCLE

Goods, services acquired from vendors,

employees in exchange for obligations
to pay
Obligations to vendors, employees are
paid

3 GBW 8th ed., Ch. 12

EXPENDITURE,
DISBURSEMENT CYCLE
Flow of information
Purchase requisition received to purchase goods
Purchasing department issues purchase order to
vendor for purchase of goods
Receiving department creates report that identifies
information about goods received
Accounts payable receives vendors invoice
Accounts payable creates voucher to authorize
payment

4 GBW 8th ed., Ch. 12

DOCUMENTS
Purchase requisition
Request to purchase goods
Purchase order
Request issued by Purchasing dept. to
vendor
Receiving report
Identifies information about goods received
Vendors invoice
Formal notice amount, terms of payment
Voucher package
Voucher & supporting documents
5 GBW 8th ed., Ch. 12
CONTROLS OVER
PURCHASING
Purchase requisition must be approved
Prenumbered purchase order describes price,
quantity, terms of goods ordered
Goods received compared to purchase order
in receiving department
Accounts payable matches purchase order,
receiving report, invoice before authorizing
payment
Accounts payable prepares voucher for
recording by General Accounting
6 GBW 8th ed., Ch. 12
CASH DISBURSEMENTS
Process
Voucher package sent to Treasury
department (separate from accounts
payable)
Treasury department reviews, reconciles,
authorizes payment
Checks drawn for payment
May require 2 signatures over a limit

7 GBW 8th ed., Ch. 12

INTERNAL CONTROL & RISK
Controls Risks
Authorization Unauthorized purchases,
vendors
Prenumbered Goods received not ordered,
receiving reports damaged
Recording Received not recorded, used
controls
Restricted access Goods, records, forms misused

8 GBW 8th ed., Ch. 12

ASSESSING CONTROL RISK
Obtain Understanding

Review Sarbanes-Oxley Section 404

documentation for sales process
Document the clients system
Flowchart, questionnaire, narrative
Perform transaction walk-through
Identify control activities
Test controls to reduce control risk below
maximum
Assess control risk

9 GBW 8th ed., Ch. 12

TEST OF CONTROLS
Purchasing, Disbursements
Provide a reasonable degree
assurance that employees comply
with managements procedures
Purchasing
Properly authorized, executed,
recorded
Disbursements
Payments remitted, recorded
promptly

10 GBW 8th ed., Ch. 12

CONTROL RISK
Purchasing

Major risks
Unauthorized purchases
Non-competitive prices

11 GBW 8th ed., Ch. 12

TESTING CONTROLS
Purchasing

Select random sample paid voucher

packages
Examine for cancellation, authorization,
details
Obtain Purchasing Departments copy of
requisition, purchase order
Compare to voucher package
Trace to competitive bids
12 GBW 8th ed., Ch. 12
CONTROL RISK
Receiving

Major risks
Goods received not counted, inspected
Goods received not compared to purchase
orders

13 GBW 8th ed., Ch. 12

TESTING CONTROLS
Receiving

Obtain Receiving Department copy of

receiving report for voucher sample
Compare receiving reports
Review receiving reports for evidence of
count, inspection
Trace receiving reports to receiving log

14 GBW 8th ed., Ch. 12

CONTROL RISK
Cash Disbursements, Recording

Major risks
Cash payments made to unauthorized
payee
Details recorded in voucher register are
recorded for proper vendor
Totals agree to general ledger

15 GBW 8th ed., Ch. 12

TESTING CONTROLS
Cash Disbursements, Recording

Obtain canceled checks for voucher

package
Examine for signatures, endorsements
Compare detailed information about check
from voucher package to canceled check
Trace voucher packages, canceled checks
to postings
Review for classification, accuracy
Scan voucher register for unusual items

16 GBW 8th ed., Ch. 12

ASSESSING CONTROL
RISK
2 Questions
Are controls effective?
Can controls be relied upon?
If answer is yes to both
Assess control risk below maximum
Assess detection risk above minimum
Restrict substantive tests of sales,
receivables, cash

17 GBW 8th ed., Ch. 12

PRELIMINARY OPINION ON
INTERNAL CONTROL

Required by Sarbanes-Oxley
Auditor must form opinion on
managements assessment of internal
control over financial reporting based on
Reports of internal auditors
Auditors tests of controls
Substantive audit tests

18 GBW 8th ed., Ch. 12

TESTS OF CONTROLS
Promotion Accrual
Review reconciliation promotion
payments
Test calculation
Review accrual
Search for post period-end payments
for evidence of unrecorded promotions

19 GBW 8th ed., Ch. 12

COMPUTER AUDITING &
SAMPLING
Understand the system
Tests of controls
Input controls
Code verification
Data entry controls
Processing controls
Control totals
Limit tests
Assess control risk
20 GBW 8th ed., Ch. 12
POTENTIAL ERRORS,
FRAUDS
Cash disbursed to unauthorized parties
Duplicate payments made
Account balances inaccurate

21 GBW 8th ed., Ch. 12

ASSURANCE,
CONSULTING SERVICES
Especially for government procurement
contracts
Competitive bids
Compliance with local laws

22 GBW 8th ed., Ch. 12