Modern Auditing:

Assurance Services and the Integrity

of Financial Reporting, 8th Edition

William C. Boynton
California Polytechnic State
University at San Luis Obispo
Raymond N. Johnson
Portland State University

Chapter 15 – Auditing the Expenditure Cycle

Chapter Overview
The Expenditure Cycle
Develop Audit Objectives
Understanding the Entity and
Environment
Inherent Risk, Including the Risk
of Fraud
• Management Misstatement of
Expenditures
– Understate expenses
– Understate payables

• Other Misstatement Factors

– High volume of transactions
– Unauthorized purchases
– Misappropriation
– Duplication of payments
Analytical Procedures
Consideration of Internal Control
Components
• Control Environment

• Risk Assessment

• Information and Communication

• Monitoring
 Study Break
1. The expenditure cycle consists of
all of the following activities,
except:
A. Purchase transactions
B. Cash disbursement transactions
C. Sales transactions
D. Purchase adjustments

C. Sales transactions
 Study Break
2. This analytical procedure calculates the
average number of days it takes to
retire accounts payables.
A. Current ratio
B. Quick ratio
C. Cost of Goods Sold to Accounts Payable
D. Accounts Payable Turn Days

D. Accounts Payable Turn Days

 Purchase Transactions –
Documents and Records
• Purchase requisition

• Purchase order

• Approved vendor master file

• Open purchase order file

• Receiving report

• Receiving file

• Vendor Invoice
 Purchase Transactions – Common
Documents and Records
• Voucher

• Exception reports

• Voucher summary

• Voucher register

• Purchase transactions file

• Accounts payable master file

• Suspense files
 Purchase Transactions –
Functions and Control Activities
• Initiating Purchases
– Placing vendors on an authorized vendor list
– Requisitioning goods and services
– Preparing purchase orders

• Receipt of Goods and Services

– Receiving the goods
– Storing goods received for inventory
– Returning goods to vendor

• Recording Liabilities
Systems Flowchart – Purchase
Transaction
Systems Flowchart – Purchase
Transaction
Systems Flowchart – Purchase
Transaction
 Study Break
3. This item is a written offer from the
purchasing department to a vendor or
supplier to purchase goods or services
specified in the order.
A. Purchase requisition
B. Purchase order
C. Receiving report
D. Receiving file

B. Purchase order
 Study Break
4. This function of processing of purchase
transaction includes placing vendors on
an authorized vendor list and preparing
purchase orders.
A. Initiating purchases
B. Receipt of goods and services
C. Recording liabilities
D. Paying liabilities

A. Initiating purchases
Cash Disbursement Transactions–
Common Documents and Records
• Check

• Check Summary

• Cash Disbursements Transaction File

• Cash Disbursements Journal or

Check Register
Cash Disbursement Transactions-
Function and Control Activities
• Computerized System
– Paying the Liability
– Recording the Disbursement

• Manual System
– Paying the Liability
– Recording the Disbursement
Systems Flowchart – Cash
Disbursement Transactions
 Study Break
5. This record is a report of total
checks issued in a batch or during
a day.
A. Check
B. Check summary
C. Cash disbursements transaction file
D. Check register

B. Check summary
Purchase Adjustment Transactions–
Common Documents and Records
• Purchase Return Authorization

• Shipping Report

• Debit Memo
Purchase Adjustment Function and
Controls
• Purchase Returns and Allowances

• Other Controls

• Tests of Controls
 Substantive Tests of Accounts
Payable Balances
• Determining Detection Risk for Tests of
Details
– Existence and Occurrence

– Completeness

– Rights and Obligations

– Valuation and Allocation

– Presentation and Disclosure

 Designing Substantive Tests
• Initial Procedures

• Analytical Procedures
 Designing Substantive Tests
• Tests of Details of Transactions
– Vouch Recorded Payables to Supporting
Documentation

– Perform Cutoff Tests

• Purchases cutoff tests
• Cash disbursement cutoff tests
• Purchase return cutoff tests

– Perform Search for Unrecorded Payables

• Subsequent payments
 Designing Substantive Tests
• Tests of Details of Balances
– Accounts Payable Confirmations

– Reconcile Unconfirmed Payables to

Vendor Statements

• Tests of Details of Disclosures

 Study Break
6. This is a report prepared on the
shipment of goods to vendors
showing the kinds and quantities
of goods shipped.
A. Purchase Return Authorization
B. Shipping Report
C. Debit Memo
D. Check Summary

B. Shipping Report
 Study Break
7. These items include all checks
issued or vouchers paid after the
balance sheet date.
A. Purchase return cutoff tests
B. Check summary
C. Subsequent payments
D. Confirmation of accounts payable

C. Subsequent payments