AUDIT OF THE

EXPENDITURE CYCLE
1.
2.
3.

4.

PURCHASING / ACQUISITION
PAYMENT / DISBURSEMENT
PRODUCTION &
WAREHOUSING
PAYROLL

TOPIC OUTLINE

DEFINITION, CATEGORIES & NATURE

ACCOUNTS
DOCUMENTS
INTERNAL CONTROL REQUIREMENTS
TEST OF CONTROLS
SUBSTANTIVE TESTS

PURCHASING CYCLE

 DISBURSEMENT

money paid

out or spent
-means payment of/for
purchases
expenses
PURCHASING the act or
process of seeking and obtaining
something (Acquisition)

PURCHASING DEPARTMENT
Purchasing department refers to a people or group of
people in an organization attempting to acquire goods
or services to accomplish the goals of the enterprise.
Though there are several organizations that attempt
to set standards in the purchasing process,
processes can vary greatly between organizations.
Procurement - includes Expediting, Supplier Quality,
and Traffic and Logistics (T&L) in addition to
Purchasing.

OVERVIEW OF THE
PURCHASING CYCLE

1. An employee recognizes a
need for a purchase; completes a requisition and sends
it to purchasing.
Ace Company
PURCHASE
REQUISITION
The production
dept. needs 200
kgs. of dry #4
solvent.
authorized
employee

PURCHASING
DEPARTMENT

2. Purchasing shops for the

appropriate quality at the best
price, then prepares a
purchase order.

PURCHASING
DEPARTMENT

Ace Company
PURCHASE
ORDER
To: Big Chemical Co.
Please ship 200
kgs. of dry #4 solvent
by 6/2/12
Price P38.40/kg.

purchasing agent

BIG

Chemical Co.

3. When goods arrive from the

vendor, the receiving dept.
inspects, counts, and prepares a receiving report.
Ace Company
RECEIVING
REPORT

BIG

Chemical Co.

RECEIVING
DEPARTMENT

BIG
Chemical Co.

Received 200
kgs. of dry #4
solvent on 6/1/12.
Condition: OK
receiving employee

4. Goods are moved from

receiving to a warehouse;
(if perpetual inventory, it is updated).
RECEIVING
DEPARTMENT

WAREHOUSE

perpetual inventory
description
Php
6/1/12-dry #4
solvent-200 kgs.7680

5. When needed, goods are moved from

the warehouse to production; perpetual inventory and cost accounting records are updated.
WAREHOUSE

perpetual inventory
description
Php
6/1/12-dry #4
solvent-200 kgs.7680
6/8/12-trans.200
kgs.to prod. -7680

PRODUCTION
DEPARTMENT
cost acctg. system
description
_ Php _
June 8, 2012
Raw matl added
- dry #4 solvent
(200 kgs.)
7680

6. When finished, goods are moved from

production to the warehouse; perpetual inventory and cost accounting records are updated.
WAREHOUSE

perpetual inventory
description
Php
6/9/12-fin.goods
50 litres x7g 9680

PRODUCTION
DEPARTMENT

cost acctg. system

description
_ Php _
6/9/12-trans.
50 litres of
finished x7g
to warehouse 9680

7. When sold, goods are shipped

and perpetual inventory records are updated.
A
C
E

Ace Co.

perpetual inventory
description
Php
6/9/12-fin.goods
50 litres-x7g 9680
8/5/12- sold 30
litres-x7g
-5808

TYPES OF TRANSACTIONS

Purchase of goods and services for cash

or credit.
Payment of the liabilities arising from such
purchases.
Return of goods to suppliers for cash or
credit.

FINANCIAL STATEMENT
ACCOUNTS AFFECTED

Purchase transaction:

Purchase return transaction:

Accounts payable
Inventories
Purchases or cost of goods sold
Various asset and expense
accounts requiring cash payment
Purchase returns & allowances
Purchase discounts
Accounts payable

Cash disbursement transaction:

Cash
Accounts payable - trade
Cash discounts

DOCUMENTS AND RECORDS

Purchase requisition.
Purchase order.
Receiving report.
Vendor invoice.
Voucher.

Voucher register/purchase journal.

Accounts payable subsidiary
ledger.
Vendor statements.
Cheque.
Cash disbursements
journal/cheque register.

DOCUMENTS AND RECORDS

PURCHASE REQUISITION

FROM: inventory
stockroom or operating
department
PURPOSE: indicates to
the purchasing dept. that
goods should be ordered
CONTENT: item
description, qty. needed,
the requester

AUDIT SIGNIFICANCE

EVIDENCE THAT THE

PURCHASING
DEPARTMENT WAS
AUTHORIZED TO
INITIATE A PURCHASE

DOCUMENTS AND RECORDS

PURCHASE ORDER

FROM: Purchasing dept.

to supplier
PURPOSE: indicates
authorization to procure
goods & services
CONTENT: item
description, qty. needed,
related information for
goods & services

AUDIT SIGNIFICANCE

PO contains the
signature of the
employee who
authorized a purchase
from a vendor

DOCUMENTS AND RECORDS

RECEIVING REPORT

FROM: Receiving report

PURPOSE: prepared at
the time tangible goods
are received
CONTENT: item
description, qty. received,
the date received & other
relevant data

AUDIT SIGNIFICANCE

This report is prepared

within the entity &
provides evidence that
goods were received

DOCUMENTS AND RECORDS

VENDORS INVOICE

FROM: Supplier
PURPOSE: indicates the
details of the items
received
CONTENT: item
description, qty. received,
price, freight, cash
discount, terms & date of
billing

AUDIT SIGNIFICANCE

This document is
created externally &
provides evidence
about a purchase of
goods or services

DOCUMENTS AND RECORDS

DEBIT MEMO

AUDIT SIGNIFICANCE

FROM: Supplier
This document is
PURPOSE: indicates a
created externally &
reduction in the amount
owed to a vendor because
provides evidence of
of returned goods or an
reduction of accounts
allowance
payable
CONTENT: item
description, amount &
quantity of goods returned

DOCUMENTS AND RECORDS

VOUCHER

AUDIT SIGNIFICANCE

FROM: Accounting
A voucher provides
dept./Payables Clerk to
Treasury Dept.
documentation for the
PURPOSE: establish a formal
recording of a
means of recording &
transaction.
controlling acquisitions
CONTENT: brief details of
payment to be paid; vendors
invoice, RR & PO are attached
to it

DOCUMENTS AND RECORDS

CHECK

AUDIT SIGNIFICANCE

FROM: Treasurer

PURPOSE: a means of
payment that authorized a
bank to transfer funds to the
payee
CONTENT: payee, date to
be paid, amount in words &
figures, signatures

A check that has been

presented for payment
is referred to as PAID
or CANCELED CHECK.
A paid check provides
evidence about
payments that an
entity has made

DOCUMENTS AND RECORDS

VENDORS STATEMENT

AUDIT SIGNIFICANCE

FROM: Vendor
This can be used to
PURPOSE: indicates the
determine that all
beg. Balance, acquisitions,
returns & allowances,
transactions recorded
payments to vendor &
on the statements have
ending balance

been recorded in the

books

MAJOR FUNCTIONS

Requisitioning
Purchasing
Receiving
Invoice processing
Disbursements
Accounts payable
General ledger

KEY SEGREGATION OF DUTIES

The purchasing function should be

segregated from the requisitioning and
receiving functions.
The invoice-processing function should be
segregated from the accounts payable
function.
The disbursement function should be
segregated from the accounts payable
function.
The accounts payable function should be
segregated from the general ledger
function.

STATEGIC SYSTEMS
APPROACH INHERENT RISK
ASSESSMENT

Auditor should gain a comprehensive

understanding of the purchasing
process
Industry-related factors
Misstatements detected in prior audits

CONTROL RISK
ASSESSMENT
Understanding and documenting
the purchasing internal control system based
on the planned level of control risk

Planning and performing tests of controls

on purchasing cycle transactions

Assessing and documenting the

control risk for the purchasing cycle

TEST OF CONTROLS
EXISTENCE OR
OCCURRENCE

Recorded acquisitions are for

items that were acquired

COMPLETENESS

Acquisitions that occurred are

recorded

RIGHTS &
OBLIGATIONS

Recorded acquisitions are the

entitys purchases & liabilities

TEST OF CONTROLS
VALUATION OR
ALLOCATION

Acquisitions are recorded

for the proper amounts

Acquisitions are recorded

PRESENTATION
to result in presentation &
AND
disclosure in accordance
DISCLOSURE
with PAS/PFRS

TEST OF CONTROLS:
Existence or Occurrence
ACQUISITION CONTROLS

Approval by authorized
personnel, which is
evidenced by signature on
the PO
Prepared voucher
supported by properly
executed PRF, PO, RR &
Vendors Invoice
The check signer should
examine the supporting
documentation & cancel the
documents (mark paid or
write the date & no. of
check in the doc.)

TEST OF CONTROLS

Examine the
approval
signature

Observes the
procedure &
examine file of
documents
Examine
cancellation of
documents. if not
done, scan the
voucher register

TEST OF CONTROLS:
Completeness
ACQUISITION CONTROLS

Prenumbered RR should
be used & accounted for

Vouchers are
prenumbered and
accounted as they are
entered in the voucher
register

TEST OF CONTROLS

Observe the
procedure &
account for
numerical
sequence of the
RR

Observe the
procedure &
account for
numerical
sequence of the
Voucher

TEST OF CONTROLS:
Rights & Obligations
ACQUISITION CONTROLS

RR should be prepared by
persons having access
only to a blind copy of PO
details

TEST OF CONTROLS

Observe that the

procedure is
being performed

TEST OF CONTROLS:
Valuation or Allocation
ACQUISITION CONTROLS

Invoice amounts are

verified by a clerk by
reference to the PO and
RR. Mathematical
accuracy is also
rechecked.

TEST OF CONTROLS

Examine the
voucher for
signature
indicating
performance

TEST OF CONTROLS:
Presentation & Disclosure
ACQUISITION CONTROLS

Require employees to use

a chart of account that
adequately describes
accounts. Account coding
is assigned by 1 person &
checked by another

TEST OF CONTROLS

Examine the chart

of accounts & the
signature of
employee
performing the
checking or
verification

CONTROL PROCEDURES AND

TESTS OF CONTROLS PURCHASE RETURNS
TRANSACTIONS

The number and magnitude of purchase returns

transactions is generally not material for most
entities.
Because of the possibility of manipulation the
auditor should at a minimum inquire about how
the client controls purchase return transactions.
When goods are returned to a vendor, the client
usually prepares a debit memo that reduces the
amount of the vendor's accounts payable.
Analytical procedures are usually performed.

SUBSTANTIVE TESTS OF
TRANSACTIONS: ACQUISITIONS
ASSERTIONS &
AUDIT OBJECTIVES
EXISTENCE OR
OCCURRENCE
To determine that
recorded purchases are
for items that were
acquired

AUDIT PROCEDURES
Examine underlying
documents for
authenticity &
reasonableness.
Scan voucher register for
large or unusual items.
Inspect items
Trace inventory
purchased to perpetual
records
Scan voucher register for
duplicate payments

SUBSTANTIVE TESTS OF
TRANSACTIONS: ACQUISITIONS
ASSERTIONS &
AUDIT OBJECTIVES
COMPLETENESS
To determine that
purchases that occurred
are recorded

AUDIT PROCEDURES
Trace a sequence of RR
to entries in the voucher
register.
Cut-off tests

SUBSTANTIVE TESTS OF
TRANSACTIONS: ACQUISITIONS
ASSERTIONS &
AUDIT OBJECTIVES
RIGHTS &
OBLIGATIONS
To determine that
purchases are the entitys
acquisitions & liabilities

AUDIT PROCEDURES
Trace from invoices to
perpetual inventory records.
Examine vendors invoices &
supporting documents to
ascertain that:

Goods were not received on

consignment
Ordered goods were received
Goods were not delivered to
another location

SUBSTANTIVE TESTS OF
TRANSACTIONS: ACQUISITIONS
ASSERTIONS &
AUDIT OBJECTIVES
VALUATION OR
ALLOCATION
To determine that
purchases are recorded
for the proper amounts

AUDIT PROCEDURES
Recompute invoices &
compare invoice price to PO.

Testing of prices paid by

tracing in published catalogs
at the time of purchase

SUBSTANTIVE TESTS OF
TRANSACTIONS: ACQUISITIONS
ASSERTIONS &
AUDIT OBJECTIVES
PRESENTATION &
DISCLOSURE
To determine that
purchases are recorded
to result in presentation &
disclosure in accordance
with PAS/PFRS

AUDIT PROCEDURES
Check accuracy of accounts
on invoices by reference to
chart of accounts

EVALUATING THE AUDIT

FINDINGS - PURCHASING

11-45

Compare total projected misstatement

to tolerable misstatement.
Analyze misstatements for causes of
errors.
Conclude

AUDITING ACCOUNTS
PAYABLE AND ACCRUED
EXPENSES

Substantive tests of transactions

Analytical procedures
Tests of account balances

SUBSTANTIVE TESTS OF
TRANSACTIONS

The intended objective of such tests is

to detect monetary misstatements.

ANALYTICAL PROCEDURES

Compare payables turnover and days

outstanding in accounts payable to previous
years and industry data.
Compare the current-year balances in accounts
payable and accruals with prior years' balances.
Compare amounts owed to individual vendors in
the current year's accounts payable listing to
amounts owed in prior years.
Compare purchase returns and allowances as a
percentage of revenue or cost of sales to prior
years and industry data.

ACCOUNTS PAYABLE
CONFIRMATIONS

Accounts payable confirmations are

generally used less frequently by auditors
than accounts receivable confirmations
because the auditor generally has access
to vendor invoices and monthly vendor
statements.
The auditor focuses on large dollar
accounts, regular vendors with small or
zero balances, and a sample of other
accounts.

ACCOUNTS PAYABLE
CONFIRMATIONS (cont.)

When confirming accounts payable,

auditors generally use a form of positive
confirmation referred to as a blank or zero
balance confirmation.

PRODUCTION
CYCLE

This cycle involves a

series of functions that
transform raw materials
into finished products

PRODUCTION CYCLE

Production planning and control

Inventory management and controls
Manufacturing activities

Revenue

INVESTING

PRODUCTION

EXPENDITURE

FINANCING

Production plans are prepared

based on sales forecasts
The actual production of goods is initiated
by issuing production orders to the
departments where processing will take
place
Materials requisition forms are prepared to
authorize the storekeeper to release
the materials to production personnel.
If materials are to be purchased,
purchased requisitions are prepared and
the transaction is processed through the
purchasing/disbursement cycle.

DOCUMENTS
PRODUCTION ORDER
FROM: INVENTORY
(FINISHED GOODS) TO
PRODUCTION
PERSONNEL
PURPOSE: instruct to
produce a quantity of a
particular product

AUDIT SIGNIFICANCE
Records approval for
production personnel to
produce goods

DOCUMENTS
BILL OF MATERIAL
PURPOSE: a list of raw
material components
required to produce a
product

AUDIT SIGNIFICANCE
Indicates components
to be used in producing
a product

DOCUMENTS
MATERIALS REQUISITION
PURPOSE: use to
request and approve the
issuance of materials
from inventory

AUDIT SIGNIFICANCE
Records approval to
issue materials in the
production

DOCUMENTS
MATERIALS REQUISITION
SUMMARY

PURPOSE: summarizes
the materials
requisitioned by job or by
process, for a period such
as a day, a week, or a
month

AUDIT SIGNIFICANCE

Records materials used

in any given period and
is the basis for
assigning costs to an
account

DOCUMENTS
COST ACCUMULATION
REPORT

PURPOSE: a form that

accompanies goods as
they are transferred
through production.

As additional costs are

incurred, the costs are
recorded in the report

AUDIT SIGNIFICANCE

Records cost of raw

materials placed in
production

DOCUMENTS
AUDIT SIGNIFICANCE
LABOR TICKET

PURPOSE: records of a
time worked on a job

Record the specific

activity of a laborer and
is the basis for
assigning costs to an
account

DOCUMENTS
LABOR TICKET
SUMMARY

PURPOSE: summarizes
the daily labor tickets by
job or by process

AUDIT SIGNIFICANCE

Record labor used in

production on any
given day

DOCUMENTS
COMPLETED
PRODUCTION REPORT

PURPOSE: summarizes
costs for cost control
purposes and for
determining the amount
of costs to assign to
goods remaining in the
production process

AUDIT SIGNIFICANCE

Provides a basis for

inventory valuation

Values is added to inventory acquired

and finished goods are sold
As value is added to raw materials,
quantity and cost must be monitored.
Quantity is monitored primarily through the
use of perpetual inventory records
or stock cards.
Perpetual records should be continually
updated as goods are moved in and out
of the storeroom, providing a running
records of quantities on hand

Several systems are used for

assigning and tracking inventory
Job Order Cost System
Process Cost System
Activity-Based Cost System
Just In Time
Hybrid or Mixed Cost System

Ending inventory and cost of goods

sold are computed
A physical count is conducted periodically
and the perpetual records are reconciled
to the figure per count.
If a periodic system is used, ending inventory
is set up after assigning costs to the units
in ending inventory

INVENTORY WAREHOUSING

Activities

Receipt of goods by the storeroom

Issuance of goods

Misstatements / Irregularities
1.

2.
3.

4.
5.
6.

Fictitious receipts / issues may be recorded

Goods may be received or issued but not recorded
Errors may be recorded in the quantity of goods
transferred
Inventory may be misvalued
Goods on consignment may be treated as inventory
Receipt or issue may be charged or credited to
wrong accounts

AUDIT PROCEDURES

Testing Quantities

Periodic
Perpetual

Testing Prices

FIFO
Weighted Average Method