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The Expenditure Cycle
Chapter 13
Introduction
Because this cycle involves the outflow of cash, it is the counterpoint to the revenue cycle
Two subsystems include:The purchases processing systemThe cash disbursements processing system
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PROCUREMENT CYCLE(SUBSYSTEM)
Purchasing
Accounts Payable
Receiving/InspectionCash Disbursements
Purchase Requisition
1 2
3
4
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Objectives of the CycleTo ensure that all goods and services are ordered as neededTo receive all ordered goods and verify that they are in good conditionTo safeguard goods until neededTo ensure that invoices pertaining to goods and services are valid and correct
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Objectives of the Cycle (cont..)
To record and classify the expenditures and cash disbursements promptly and accuratelyTo post obligations and cash disbursements to proper suppliers’accounts in the accounts payable ledgerTo ensure that all cash disbursements are related to authorized expenditures
Relationships of Organizational Units to Expenditure Cycle Functions
VPLogistics
VPFinance
Purchasing Receiving Inventory Production
Budgeting& Cash Planning
InventoryControl
AccountsPayable
CashDisbursements
GeneralLedger
PlaceOrder
Receiveand Store
goods
Determine validityof payment obligation
Make CashDisbursements
MaintainAccountsPayable
Post Transactions& Prepare Financial
ReportsFigure 13-1
Recognize needfor goods &
services
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1
ReviewCatatan
2
InventoryPembelian
4
UpdateCatatan
3
PenerimaanBarang
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Siapkan Account Payable
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Update GL
Catatan Sediaan
Catatan Sediaan
Supplier
Pur
chas
e or
der
Info penerimaan
Requirement sediaan
Barang
RekeningPengendali
SImpan
Supplier
Catatan Supplier
AccountPayable
Level sediaan
Req
uire
men
t sed
iaan
Purchase order
Terima Barang
Info penerimaanposting
posting
Ringkasan info
posting
invoice
Ringkasan info
A Manual Purchases System
Begins in Inventory Control when inventory levels drop to reorder levelsA purchase requisition (PR) is prepared and copies to sent to Purchasing and Accounts Payable (A/P)Purchasing prepares a purchase order (PO) for each vendor and sends copies to Inventory Control, A/P, and Receiving
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Upon receipt, Receiving counts and inspects the goods.
A blind copy of the PO is used to force workers to count the goods.
A receiving report is prepared and copies sent to the raw materials storeroom, Purchasing, Inventory Control, and A/P.
A Manual Purchases System
A/P eventually receives copies of the PR, PO, receiving report, and the supplier’s invoice.A/P reconciles these documents, posts to the purchases journal, and records the liability in the accounts payable subsidiary ledger.
A Manual Purchases System
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A/P periodically summarizes the entries in the purchases journal as a journal voucher which is sent to the General Ledger (G/L) department.Inv-Control or Purchases DR
Accts Payable-Control CRA/P also prepares a cash disbursements voucher and posts it in the voucher register.
A Manual Purchases System
G/L department: posts from the accounts payable journal voucher to the general ledgerreconciles the inventory amount with the account summary received from inventory control
A Manual Purchases System
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Manual Purchases Flowchart
Computer-Based Accounting Systems
CBAS technology can be viewed as a continuum with two extremes:
automation - use technology to improve efficiency and effectiveness reengineering – use technology to restructure business processes and firm organization
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Levels of Automating and Reengineering Ordering
Computer generates PRPurchases manually generates PO
Computer generates PO (no PR needed)PO not sent until manually reviewed
Computer-generated PO is automatically sent without manual reviewElectronic Data Interchange (EDI)
Computer-to-computer communication without PO
Expenditure Cycle Database
Master Filessupplier (vendor) master fileaccounts payable master filemerchandise inventory master file
Transaction and Open Document Files
purchase order fileopen purchase order file
supplier’s invoice fileopen vouchers filecash disbursements file
Other Filessupplier reference and history filebuyer fileaccounts payable detail file
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A Data Processing dept. performs routine accounting tasks.Purchasing - a computer program identifies inventory requirements The following methods are used for authorizing and ordering inventories:
the system prepares POs and sends them to Purchases for review, signing, and distributingthe system distributes POs directly to the vendors and internal users, bypassing Purchasesthe system uses electronic data interchange (EDI) and electronically places the order without POs
Computer-Based Purchases
Computer-Based Purchases
Other tasks performed automatically by the computer:
updates the inventory subsidiary file from the receiving reportcalculates batch totals for general ledger update closes the corresponding records in the open PO file to the closed PO filevalidates the voucher records against valid vendor files
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Computer-Based Cash Disbursements
Tasks performed automatically by the computer:
the system scans for vouchers currently due prints checks for these vouchers records these checks in the check registerbatch totals are prepared for the general ledger update procedure
Automated Batch Purchases
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Automated Batch Purchases
Documents Pertaining to the Expenditure CyclePurchase RequisitionPurchase OrderReceiving ReportSupplier’s (Vendor’s) InvoiceDisbursement VoucherDisbursement CheckDebit MemorandumNew Supplier FormRequest for Proposal
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Manual Cash Disbursements SystemPeriodically, A/P searches the open vouchers payable file for items with payments due:
A/P sends the voucher and supporting documents to Cash DisbursementsA/P updates the accounts payable subsidiary ledger
Manual Cash Disbursements SystemCash Disbursements:
prepares the checkrecords the information in a check register (cash disbursements journal)returns paid vouchers to accounts payable, mails the check to the suppliersends a journal voucher to G/L:
Accounts Payable DRCash CR
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G/L department receives: the journal voucher from cash disbursementsa summary of the accounts payable subsidiary ledger from A/P
The journal voucher is used to update the general ledger. The accounts payable control account is reconciled with the subsidiary summary.
Manual Cash Disbursements System
Cash Disbursements System
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Managerial Decisions Pertaining to the Expenditure Cycle - I
Inventory DecisionsWhat levels of merchandise inventory should be stocked?When should particular inventory be reordered?What quantities of particular inventory items should be reordered?When should long term purchase contracts be obtained for particular inventory items?Which suppliers should be established as long-term sources of merchandise and supplies?
Inventory Decisions (Continued)From which suppliers should particular inventory items be ordered?What procedures should be followed in receiving and storing merchandise inventory?What organizational units are to be included in the inventory management and logistics function?What logistics plans and budgets are to be established for the coming year?
Managerial Decisions Pertaining to the Expenditure Cycle - 2
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Financial DecisionsWhat policies concerning purchase terms and discounts should be established?What accounts payable records are to be maintained concerning amounts owed to suppliers?What financial plans and budgets are to be established for the coming year?What sources of funds are to be employed?
Managerial Decisions Pertaining to the Expenditure Cycle - 3
Operational Listings & Reports
Voucher RegisterCheck RegisterOpen Purchase Order ReportOpen Invoices ReportInventory Status ReportOverdue Deliveries Report
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Scheduled Managerial Reports
A Payables Aging ReportPurchase AnalysesVendor Performance ReportCash-flow StatementCritical Factors Report
Control Objectives - 1All purchases are authorized on a timely basis when needed and are based on EOQ calculationsAll received goods are verified to determine that the quantities agree with those ordered and that they are in good conditionAll services are authorized before being performed and are monitored to determine that they are properly performed
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All suppliers’ invoices are verified on a timely basis and conform with goods received or services performedAll available purchase discounts are identified, so that they may be taken if economical to do soAll purchase returns and allowances are authorized and accurately recorded and based on actual return of goods
Control Objectives - 2
All cash disbursements are recorded completely and accuratelyAll credit purchases and cash disbursements transactions are posted to proper suppliers’accounts in the accounts payable ledgerAll accounting records and merchandise inventory are safeguarded
Control Objectives - 3
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Risk Exposures Within the Expenditure Cycle - I
R is k E x p o s u re (s )
1 ) O rd e rs p la ced fo ru nn eed ed g ood s o rm o re g ood s th ann eeded
1 ) E xce ss ive in ven to ryand s to rage co s ts
R e ce ip t o f u n cod edgood s
2 ) E xce ss ive in ven to ryand s to rage co s ts
3 ) N o re ce ip t o f o rd e redgood s
3 ) Lo sse s d ue tos to ckou ts
4 ) F raud u len t p la cem en to f o rd e rs b y b u ye rs w ithsupp lie rs to w h om th e yh ave p e rso n a l o rf in an c ia l a tta chm en ts
4 ) P o ss ib ility o f in fe r io ro r o ve rp r iced g ood s o rse rv ice s
Risk Exposure(s)
5) Creation of fictitious invoicesand other purchasingdocuments
5) Overstatement of inventory;losses of cash disbursed
6) Lack of vigilance in writingdown inventory that is aged ordamaged
6) Overstatement of inventory
7) Omission of liabilities, suchas material contingencies
7) Understatement of liabilities
8) Overcharges (with respecteither to unit prices or toquantities) by suppliers forgoods delivered
8) Excessive purchasing costs
Risk Exposures Within the Expenditure Cycle - II
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R i s k E x p o s u r e ( s )
9 ) D a m a g e t o g o o d se n r o u t e t o t h e a c q u ir in gf i r m
9 ) P o s s ib i l i t y o f in f e r io rg o o d s f o r u s e o r s a le
1 0 ) E r r o r s b y s u p p l ie r sin c o m p u t in g a m o u n t so r in v o ic e s
1 0 ) P o s s ib i l i t y o fo v e r p a y m e n t f o r g o o d sr e c e iv e d
1 1 ) E r r o n e o u s o ro m it t e d p o s t in g s o fp u r c h a s e s o r p u r c h a s er e t u r n s t o s u p p l ie r ’sa c c o u n t s p a y a b ler e c o r d s
1 1 ) I n c o r r e c t b a la n c e s ina c c o u n t s p a y a b le a n dg e n e r a l le d g e r a c c o u n tr e c o r d s
1 2 ) E r r o r s in c h a r g in gt r a n s a c t io n a m o u n t s t op u r c h a s e s a n d e x p e n s ea c c o u n t s
1 2 ) I n c o r r e c t le v e ls( e i t h e r h ig h o r lo w ) f o rp u r c h a s e s a n d e x p e n s ea c c o u n t s
Risk Exposures Within the Expenditure Cycle - III
Risk Exposure(s)
13) Lost purchasediscounts due to latepayments
13) Excessive purchasingcosts
14) Duplicate payments ofinvoices from suppliers
14) Excessive purchasingcosts
15) Incorrectdisbursements of cash,either to improper orfictitious parties or forgreater amounts thanapproved
15) Loss of cash andexcessive costs for goodsand services
Risk Exposures Within the Expenditure Cycle - IV
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R i s k E x p o s u r e ( s )1 6 ) I m p r o p e rd i s b u r s e m e n t o f c a s h f o rg o o d s o r s e r v i c e s n o tr e c e iv e d
1 6 ) E x c e s s iv e c o s t s f o rg o o d s o r s e r v i c e s
1 7 ) T h e f t o f s c r a pp r o c e e d s
1 7 ) L o s s o f c a s h
1 8 ) D is b u r s e m e n t o fc h e c k s p a y a b le t oe m p lo y e e s f o ru n a u t h o r i z e d e x p e n s e so r f r a u d u le n t c l a im s
1 8 ) L o s s o f c a s h
1 9 ) F r a u d u le n t a l t e r a t i o na n d c a s h in g o f c h e c k sb y e m p lo y e e s
1 9 ) L o s s o f c a s h
2 0 ) K i t in g o f c h e c k s b ye m p lo y e e s
2 0 ) O v e r s t a t e m e n t o fb a c k b a la n c e s ; p o s s ib lelo s s e s o f d e p o s i t e d c a s h
Risk Exposures Within the Expenditure Cycle - V
R is k E x p o s u re (s )2 1 ) A cce ss in g o f su p p lie rre co rd s b y un au th o r izedp e rso n s
2 1 ) L o ss o f se cu r ity o ve rsu ch re co rd s , w ith p o ss ib led e tr im en ta l u se m ad e o fd a ta a cce ssed
2 2 ) In vo lv e m e n t o f ca sh ,m e rch an d ise in ven to ry , a n da cco u n ts p a ya b le re co rd inn a tu ra l o r h u m a n -m ad ed isa s te rs
2 2 ) L o ss o f o r d a m ag e toa sse ts , in c lu d in g p o ss ib lelo ss o f d a ta n ee d e d tom o n ito r p a ym en ts o fa m o u n ts d u e to su p p lie rsw ith in d iscou n t p e r io d s
2 3 ) In te rce p t io n o f d a tatran sm itted v ia th e W eb
2 3 ) Lo ss o f d a ta o r u n re lia b led a ta re su lt in g in in a ccu ra tep u rch a se o rd e rs
2 4 ) U n au th o r ized p u rch a sereq u is it io n s an d p u rch a seo rd e rs in it ia ted v ia th e W eb
2 4 ) E x ce ss iv e in ven to ry a nds to ra g e co s ts
Risk Exposures Within the Expenditure Cycle - VI
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Risk Exposure(s)25) Unauthorizedviewing and alteration ofa company’s purchaserecords via the Web
25) Loss of security overdata which can be usedto the detriment of thecompany
26) Breakdown of theWeb server due tounexpected events
26) Loss of data anddelay in processingpurchase orders
Risk Exposures Within the Expenditure Cycle - VII
General Controls - IOrganizational ControlsDocumentation ControlsAsset Accountability ControlsManagement Practices Controls
Training & Bonding of employeesSystems development & changes subject to prior approvals, testing, and sign-offAudits on purchases and cash disbursementsPeriodic review and analyses of account activity and computer-approved transactions
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Data Center Operations ControlsAuthorization ControlsAccess Controls
Assigned passwords required in order to access accounts payable and other supplier-related filesTerminals restricted in their functions with respect to purchases and cash disbursement transactionsLogging of all purchases and cash disbursement transactions upon their entry into the systemFrequent dumping of accounts payable and merchandise inventory master files onto magnetic tape backupPhysically protected warehousesLogs that monitor all accesses of data stored in files
General Controls - II
Application Controls Pertaining to the Expenditure Cycle: Input Controls
1) Prepare pre-numbered and well-designed documents relating to purchases, receiving, payables, and cash disbursements
2) Validate data on purchase orders and receiving reports and invoices as the data are prepared and entered for processing
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Application Controls Pertaining to the Expenditure Cycle: Input Controls (cont..)
3) Correct errors that are detected during data entry and before the data are posted to the supplier and inventory records4) Pre-compute batch control totals relating to key data on suppliers’ invoices and vouchers due for payment
Application Controls Pertaining to the Expenditure Cycle: Processing Controls
1) Issue purchase requisitions, purchase orders, disbursement vouchers, checks, and debit memoranda on the basis of valid authorizations
2) verify all data elements and computations on purchase requisitions and on purchase orders
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Application Controls Pertaining to the Expenditure Cycle: Processing Controls (cont..)
3) Vouch all data elements and computations on suppliers’ invoices4) Monitor all open transactions, such as partial deliveries and rejected goods5) issue debit memoranda only on the basis of prior approval of the purchasing or other appropriate manager
Application Controls Pertaining to the Expenditure Cycle: Processing Controls
6) Reconcile amounts in the accounts payable subsidiary ledger and expense ledgers with control accounts in the general ledger
7) Verify that total postings to the accounts payable file accounts agree with the total postings to the general ledger accounts
8) Monitor discount terms relating to payment
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Application Controls Pertaining to the Expenditure Cycle: Processing Controls (cont..)
9) review evidence supporting the validity of expenditures and the correctness of amounts prior to the signing of checks
10) use check protectors to protect the amounts on checks against alteration before the checks are presented to be signed
Application Controls Pertaining to the Expenditure Cycle: Processing Controls
11) Require that checks over a specified amount be countersigned by a second manager
12) Verify all inventories on hand by physical counts once yearly, and reconcile the counted quantities with the quantities shown in the inventory records
13) Use imprest systems for disbursing currency from petty-cash funds, with the funds being subject to surprise counts by internal auditors or a designated manager
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Application Controls Pertaining to the Expenditure Cycle: Processing Controls
14) Establish purchasing policies that require competitive bidding for large and/or non-routine purchases and that prohibit conflicts of interest
15) Correct errors that are made during processing steps, usually by reversing erroneous postings to accounts and entering correct data
Application Controls Pertaining to the Expenditure Cycle: Output Controls
1) establish clear-cut receiving and payables cut-off policies, so that inventories and accounts payable are fairly valued at the end of each accounting period
2) Establish budgetary control over purchases, with periodic reviews of actual purchase costs and such key factors as inventory turnover rates
3) Compare monthly statements from suppliers with the balances appearing in the suppliers’ accounts in accounts payable
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Application Controls Pertaining to the Expenditure Cycle: Output Controls
4) File copies of all documents pertaining to purchases and cash disbursements by number; including voided documents such as checks
5) Print transaction listings in order to provide an adequate audit trail
Programmed Edit Checks Useful in validating Transaction Data in the Expenditure Cycle
Validity checkSelf-checking digitField checkLimit checkRange checkRelationship checkSign checkCompleteness check*Echo checks*
* = applicable only to online systems
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