Chapter 13
The Expenditure Cycle: Purchasing to Cash Disbursements
13-1
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Learning Objectives
Explain the basic business activities and related
information processing operations performed in the
expenditure cycle.
Discuss the key decisions to be made in the expenditure
cycle, and identify the information needed to make
those decisions.
Identify major threats in the expenditure cycle, and
evaluate the adequacy of various control procedures for
dealing with those threats.
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The Expenditure Cycle
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The Expenditure Cycle
Activities and information processing related to:
Purchasing and payment of
Goods and services
Primary objective:
Minimize the total cost of acquiring and maintaining
inventories, supplies, and the various services the
organization needs to function
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Expenditure Cycle Activities
1. Ordering materials, supplies,
and services
2. Receiving materials, supplies,
and services
3. Approving supplier invoices
4. Cash disbursements
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Expenditure Cycle General Threats
Inaccurate or invalid master data
Unauthorized disclosure of sensitive information
Loss or destruction of data
Poor performance
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Expenditure Cycle General Controls
Data processing integrity controls
Restriction of access to master data
Review of all changes to master data
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1. Order Goods (Materials/Supplies) or
Services Processing Steps
• Identify what, when, and how much to purchase
▫ Source document: purchase requisition
• Choose a supplier
▫ Source document: purchase order
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Ordering Threats
Inaccurate inventory records
Purchasing items not needed
Purchasing at inflated prices
Purchasing goods of inferior quality
Unreliable suppliers
Purchasing from unauthorized suppliers
Kickbacks
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Ordering Controls
Perpetual inventory system
Bar coding or RFID tags
Periodic physical counts of inventory
Perpetual inventory system
Review and approval of purchase requisitions
Centralized purchasing function
Price lists
Competitive bidding
Review of purchase orders
Budgets
Purchasing only from approved suppliers
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Ordering Controls (cont’d)
Review and approval of purchases from new suppliers
Holding purchasing managers responsible for rework and scrap costs
Tracking and monitoring product quality by supplier
Requiring suppliers to possess quality certification (e.g., ISO 9000)
Collecting and monitoring supplier delivery performance data
Maintaining a list of approved suppliers and configuring the system to permit purchase orders
only to approved suppliers
Review and approval of purchases from new suppliers
EDI-specific controls (access, review of orders, encryption, policy)
Requiring purchasing agents to disclose financial and personal interests in suppliers
Training employees in how to respond to offers of gifts from suppliers
Job rotation and mandatory vacations
Supplier audits
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2. Receiving Process
Goods arrive
Verify goods ordered against the purchase order (what, how
much, quality)
Source document: receiving report
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Receiving Threats
Accepting unordered items
Mistakes in counting
Verifying receipt of services
Theft of inventory
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Receiving Controls
Requiring existence of approved purchase Budgetary controls
order prior to accepting any delivery
Audits
Do not inform receiving employees about
quantity ordered Restriction of physical access to
inventory
Require receiving employees to sign
receiving report Documentation of all transfers of
inventory between receiving and
Incentives inventory employees
Document transfer of goods to inventory Periodic physical counts of inventory
and reconciliation to recorded
Use of bar-codes and RFID tags quantities
Configuration of the ERP system to flag
discrepancies between received and
ordered quantities that exceed tolerance
threshold for investigation
Segregation of duties: custody of inventory
versus receiving
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3. Approve Supplier Invoice and
Cash Disbursements
• Match the supplier invoice to:
▫ Purchase order
▫ Receiving report
supplier invoice + purchase order + receiving report = voucher
• Approve supplier invoice for payment
▫ Source document: disbursement voucher
• Pay vendor
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Approving Invoices Threats
Errors in supplier invoices
Mistakes in posting to accounts payable
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Approving Invoices Controls
Verification of invoice accuracy
Requiring detailed receipts for
procurement card purchases
Evaluated receipt settlement
Match PO with receiving report
Restriction of access to supplier master
data
Verification of freight bill and use of
approved delivery channels
Data entry edit controls
Reconciliation of detailed accounts
payable records with the general ledger
control account
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4. Cash Disbursement Threats
Failure to take advantage of discounts for prompt
payment
Paying for items not received
Duplicate payments
Theft of cash
Check alteration
Cash flow problems
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Cash Disbursement Controls
Filing of invoices by due date for discounts
Cash flow budgets
Requiring that all supplier invoices be matched to supporting
documents that are acknowledged by both receiving and inventory
control
Budgets (for services)
Requiring receipts for travel expenses
Use of corporate credit cards for travel expenses
Requiring a complete voucher package for all payments
Policy to pay only from original copies of supplier invoices
Cancelling all supporting documents when payment is made
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Cash Disbursement Controls
Cancelling all supporting documents when payment is made
Physical security of blank checks and check-signing machine
Periodic accounting of all sequentially numbered checks by cashier
Access controls to EFT terminals
Use of dedicated computer and browser for online banking
ACH blocks on accounts not used for payments
Separation of check-writing function from accounts payable
Requiring dual signatures on checks greater than a specific amount
Regular reconciliation of bank account with recorded amounts by
someone independent of cash disbursements procedures
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Cash Disbursement Controls
Restriction of access to supplier master file
Limiting the number of employees with ability to create one-
time suppliers and to process invoices from one-time
suppliers
Running petty cash as an imprest fund
Surprise audits of petty cash fund
Check protection machines
Use of special inks and papers
“Positive pay” arrangements with banks
Cash flow budget
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Key Terms
Expenditure cycle Vendor-managed inventory
Economic order quantity (EOQ) Kickbacks
Reorder point Receiving report
Materials requirement planning (MRP) Debit memo
Just-in-time (JIT) inventory system Voucher package
Purchase requisition Nonvoucher system
Purchase order Voucher system
Blanket purchase order Disbursement voucher
Evaluated receipt settlement (ERS)
Procurement card
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Imprest fund
