AUDITING

CHAPTER 12
Purchases & Cash Disbursements
Transactions
By
Luis Antonio C. Bullina
(Special Thanks to)
David N. Ricchiute

TOPICS
Nature of expenditure/disbursement cycle
Purchasing and Cash Disbursement
Activities
Common forms and documents
Auditors assessment of control risk
Audit of internal control for purchases,
cash disbursements
Computer auditing, sampling, tests of controls
Assurance, consulting services

EXPENDITURE /
DISBURSEMENT CYCLE
Expenditure/Disbursement Cycle-encompasses
both the acquisition of goods and
services(expenditure) and the payment of
cash(disbursement) for the goods and services.
This cycle is directly related to other three cycles
since:
1. Uses resources information provided by the
revenue/receipt cycles
2. Provides resources and information for the
financing and conversion cycles

PURCHASING AND CASH DISBURSEMENT ACTIVITIES
PURCHASING
Accept approved purchased
requisitions from user departments
Prepare purchase order, distribute
copies and retain file copy
RECEIVING
File purchase orders until goods are
received
Upon receipt of goods, count quantities
and compare with purchase orders
Prepare receiving report
Forward goods to inventory control
Forward copies of receiving report to
Accounts payable and Purchasing; retain
file of receiving report, purchase order,
and updated receiving log
ACCOUNTS PAYABLE
Compare purchase requisition, purchase
order, receiving report and vendors
invoice
Prepare voucher and daily summary;
assemble voucher package
File voucher package due date; forward to
cash disbursements (Treasurers
Department) on due date
Forward daily summary to General
Accounting for recording; retain file copy
CASH DISBURSEMENTS (TREASURERS DEPARTMENT)
Review voucher packages received from
Accounts Payable on due date
Prepare checks and daily summary
Have checks signed by authorized
signatories
Forward checks to vendors
Forward summary to General Accounting
and Accounts Payable for recording;
retain file copy summary
Cancel and file voucher packages

FORMS/DOCUMENTS
Purchase requisition-written request to the
Purchasing Department from an employee or
department requesting that goods be purchased
Purchase Orders-written request the Purchasing
Department issues to the vendor to purchase
goods
Receiving Reports-a document containing
information about goods received from a vendor
Vendors Invoice-a document containing
information about goods received from a vendor
Vouchers Package-set of documents (purchase
requisition, purchase order, receiving report,
voucher, and invoice) relating to a purchase
transaction

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

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

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

ASSESSING CONTROL RISK
Obtain Understanding
Obtain an understanding of clients prescribed
policies and procedures through the performance
of preliminary review
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

CONTROL RISK
Purchasing
Major risks
Unauthorized purchases
Non-competitive prices
TEST OF CONTROLS
Purchasing
Randomly select a sample of paid
voucher packages
1. Review each voucher package for
appropriate cancellation (eg perforation; stamped paid)
2. Review documents in each sampled voucher
package for appropriate authorization
3. Compare details on purchase requisitions,
purchase orders, receiving reports, vendors invoices, and
voucher; and verify mathematical accuracy
For each sampled voucher package,
obtain a copy of the related purchase
order and requisition from Purchasing
Department files
1. Compare purchase orders in voucher
packages with copies of purchase orders in Purchasing
Department files
2. Trace prices on purchase orders to
competitive bids, formal price quotations, or other pricing
sources
3. Examine periodic reports by personnel
independent of the Purchasing Dept regarding prices and
vendor selection practices

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

TEST OF CONTROLS
Receiving
Receiving
For each sampled voucher package,
obtain the related copy of the receiving
report from receiving department
1. Compare receiving reports in voucher
packages with copies of receiving reports in Receiving
Department files
2. Review receiving reports for evidence that
received goods have been inspected, counted, and
compared with packing slips and purchase orders
3. Trace receiving reports to entries in the
receiving log

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

TEST OF CONTROLS Cash Disbursement and Recording
For each sampled voucher package,
obtain the cancelled check
1. Examine cancelled checks for appropriate
signatures and endorsement
2. Compare details of the voucher package with
the cancelled check: check number, date, payee and
amount
3. Trace voucher packages and cancelled
checks to postings in the accounts payable SL and to
entries in the voucher register
a. Review entries in the voucher register
for appropriate account distribution (classification)
b. Verify mathematical accuracy of the
voucher register for selected periods and trace totals to
entries in the general ledger
b. Scan the voucher register for unusual
items (eg. unfamiliar vendor names and unusually large
amounts, and investigate any items identified.

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

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

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

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

POTENTIAL ERRORS, FRAUDS
Cash disbursed to unauthorized parties
Duplicate payments made
Account balances inaccurate

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