Expenditure Cycle

Which three primary GL accounts are most directly involved in the expenditure cycle?

Expense, Accounts Payable, and Cash.

What document initiates the expenditure cycle?

Purchase Requisition

What two key internal controls should management implement for purchase requisitions?

1. Pre-numbering the forms sequentially.

2. Requiring proper management approval.

Which department receives the approved purchase requisition?

The Purchasing Department

What control procedure should the purchasing department follow before issuing a purchase order?

Request competitive bids from multiple suppliers to ensure the best price is obtained.

What purchasing risk is mitigated by requiring competitive bidding among suppliers?

It prevents purchasing agents from overpaying or taking kickbacks from favored vendors.

What document is generated by the purchasing department after selecting the winning supplier bid?

Purchase Order

What key internal control feature should be applied to purchase orders?

Sequential pre-numbering

Why is the quantity omitted on the copy of the Purchase Order sent to the receiving department?

A 'blind' PO forces receiving personnel to physically count the goods upon arrival rather than assuming the listed quantity is correct.

Which segregation-of-duties role does the Receiving Department fulfill?

Custody (handling the physical assets)

What document is prepared by the receiving department after counting incoming shipments?

Receiving Report (which should also be pre-numbered)

What primary matching control is performed by the Accounts Payable department?

Matching the Vendor Invoice with the Purchase Order, Receiving Report, and Purchase Requisition.

What is the main objective of matching the vendor invoice with the PO, receiving report, and requisition?

To verify that what was invoiced matches what was requested, ordered, and physically received.

Why is an approved Purchase Order alone insufficient evidence to record an Accounts Payable liability?

An issued PO does not create a financial liability until title transfers or goods are shipped/received (e.g., items may be backordered).

When does liability for goods shipped under FOB Shipping Point terms belong to the buyer?

As soon as the goods are placed in the hands of the common carrier (e.g., FedEx).

What cover sheet document is prepared by AP to summarize matched documents and approve payment?

Voucher

Which documents comprise a complete voucher package?

1. Voucher Cover Sheet

2. Purchase Requisition

3. Purchase Order

4. Receiving Report

5. Vendor Invoice

Which department is responsible for signing and issuing payment checks?

Treasury Department

Why is the Accounts Payable department prohibited from signing or mailing check disbursements?

To maintain segregation of duties: AP handles recordkeeping, whereas cash disbursement involves custody.

At what precise point does a check legally become cash?

As soon as it is signed by an authorized signatory (the Treasurer).

What critical internal control must the Treasurer perform immediately after signing and issuing payment?

Cancel all supporting documents in the voucher package (typically by stamping 'PAID').

What major risk is mitigated by stamping 'PAID' on the voucher package?

It prevents duplicate payment of the same vendor invoice.

What action does Accounts Payable take when receiving the canceled ('PAID') voucher package back from Treasury?

Removes the recorded payable liability from the books and files the package.

How does an auditor test the completeness assertion for Accounts Payable using accounting records?

By agreeing the Accounts Payable subsidiary listing to the General Ledger (moving from a sub-record up to the master record).

What primary population is sampled when performing a search for unrecorded liabilities?

Cash disbursements made subsequent to year-end.

Why are cash disbursements made before year-end excluded from the search for unrecorded liabilities?

Because pre-year-end payments have already satisfied the underlying debt, meaning no year-end liability exists.

When inspecting post-year-end cash disbursements for unrecorded liabilities, what audit procedure is executed?

Examine invoice and receiving dates in the supporting voucher package to determine if the service or goods relate to the prior fiscal year.

If a post-year-end cash disbursement relates to goods received before year-end, what must the auditor verify?

Trace the obligation to the year-end Accounts Payable listing to verify that it was properly included as a liability.

A check cleared on January 5, Year 3 for goods received December 28, Year 2. Where should this liability appear?

It must be included on the Accounts Payable listing as of December 31, Year 2.

How is the Existence assertion tested for Accounts Payable?

Vouching entries from the Accounts Payable listing down to the underlying voucher packages (records to source documents).

Why do auditors rarely send Accounts Payable confirmations during audit engagements?

Strong external evidence (e.g., vendor invoices/statements) is readily available, and unrecorded payables naturally surface when vendors stop delivery.

When an auditor chooses to send Accounts Payable confirmations, which vendor accounts are prioritized?

Vendors with small or zero balances, as well as major active suppliers.

What operational evidence usually reveals unrecorded accounts payable outside of standard confirmation?

Unpaid vendors halting shipment of goods or utility companies threatening service disconnections.

How does an auditor test Valuation, Allocation, and Accuracy for Accounts Payable?

Footing (mathematically adding down) the AP listing and recomputing vendor invoice calculations.

How does an auditor confirm the Rights and Obligations assertion for recorded payables?

By inspecting the voucher package to confirm the entity requested, ordered, and received the billed goods.

How does an auditor test the Completeness assertion for purchase transactions?

Tracing from source documents (voucher packages) up to the purchase journal (records).

What procedure is performed to test the Cutoff assertion for purchase transactions?

Examining purchases recorded shortly before and shortly after year-end to verify proper accounting period assignment.

The audit procedure word 'recompute' automatically points to which financial statement assertion?

Valuation, Allocation, and Accuracy

In segregation of duties for the expenditure cycle, which department holds authorization power?

Requisitioning department head (for purchase requisition) and Purchasing Department (for purchase order).

In the expenditure cycle, which department performs recordkeeping for liabilities?

Accounts Payable / Accounting Department

In the expenditure cycle, which two departments maintain custody of assets?

1. Receiving Department (custody of received goods/inventory)

2. Treasury Department (custody of cash disbursements)"

Tracing from voucher packages to the purchases journal tests _____.

Completeness (source to records)

Vouching from the purchases journal down to voucher packages tests _____.

Existence or Occurrence (records to source)

What document serves as proof that goods were delivered to the buyer's premises?

Receiving Report

If an auditor notices uncanceled voucher packages in the Treasury department, what control risk arises?

Risk of duplicate payments made using the same supporting documentation.