Expenditure Cycle in Accounting Information Systems

Expenditure cycle

The overall process from purchasing to cash disbursements.

Ordering goods and services

The process of identifying what, when, and how much to purchase.

Receiving goods and services

The process of accepting and verifying the delivery of purchased items.

Approving supplier invoices

The process of verifying and authorizing payment for received goods and services.

Making cash disbursements

The process of issuing payments to suppliers for goods and services received.

Optimal level of inventory

The ideal amount of stock that minimizes costs while meeting demand.

Supplier quality and price

Evaluating which suppliers provide the best quality at the best price.

IT efficiency in expenditure activities

Using information technology to improve the efficiency and accuracy of expenditure processes.

Vendor discounts

Opportunities to reduce costs through discounts offered by suppliers.

Maximizing cash flow

Strategies to ensure that cash inflows exceed cash outflows.

Access controls

Measures to restrict access to sensitive information and systems.

Managerial reports

Reports generated for management to aid in decision-making.

Encryption

The process of converting information into a code to prevent unauthorized access.

Backup and disaster recovery procedures

Plans and processes to recover data in case of loss or disaster.

Review of all changes to master data

The process of auditing changes made to critical data records.

Restriction of access to master data

Limiting who can view or modify key data to prevent unauthorized changes.

Data processing integrity controls

Measures to ensure the accuracy and reliability of data processing.

Inaccurate or invalid master data

Data that is incorrect or not properly validated, leading to errors.

Unauthorized disclosure of sensitive information

The risk of confidential information being accessed or shared without permission.

Loss or destruction of data

The risk of data being lost or irretrievably damaged.

Poor performance

Inefficiencies or failures in the expenditure cycle processes.

Source document: purchase requisition

A document that requests the purchase of goods or services.

Source document: purchase order

A document that confirms the purchase of goods or services from a supplier.

Perpetual inventory system

An inventory management system that continuously updates inventory records.

Bar-coding, RFID

Technologies used for tracking inventory and assets.

Periodic physical counts

Regularly scheduled counts of inventory to verify records.

Review and approval of purchase requisitions

The process of evaluating and authorizing requests for purchases.

Centralized purchasing

A purchasing strategy where all buying decisions are made from a single location.

Price lists

Documents that outline the prices for goods and services offered by suppliers.

Competitive bids

Proposals from multiple suppliers to provide goods or services at specified prices.

Review purchase orders

The process of evaluating purchase orders for accuracy and compliance.

Budgets

Financial plans that outline expected revenues and expenditures.

Purchasing items not needed

The risk of acquiring goods or services that are unnecessary.

Purchasing items at inflated prices

The risk of buying goods or services at prices higher than market value.

Stockouts and excess inventory

The risks associated with running out of stock or having too much inventory.

Quality certification

Verification that a supplier meets specified quality standards.

Monitor supplier performance

The process of evaluating suppliers based on their delivery and quality metrics.

Hold purchasing managers responsible for rework and scrap cost

Accountability measures for purchasing managers regarding the costs of defective items.

Monitor product quality by supplier

The practice of assessing the quality of products received from each supplier.

Review and approve purchases from new suppliers

The process of evaluating and authorizing purchases from unfamiliar suppliers.

Use approved suppliers

The practice of sourcing goods and services only from vetted suppliers.

Unreliable suppliers

Suppliers that do not consistently meet delivery or quality expectations.

Supplier audits

A process of evaluating suppliers to ensure they meet required standards.

EDI specific controls

Controls specific to Electronic Data Interchange to ensure data integrity and security.

Prohibit gifts

A control measure that prevents employees from accepting gifts from suppliers.

Job rotation & mandatory vacations

Controls that require employees to rotate jobs and take mandatory time off to reduce fraud risk.

Required disclosure of financial and personal interests in suppliers

A requirement for employees to disclose any financial or personal interests they have in suppliers.

Review approval from purchases of new suppliers

A control that requires approval before purchasing from new suppliers.

Purchase from approved suppliers

A control that mandates purchases only from suppliers that have been vetted and approved.

Verify goods ordered against the purchase order

A control that ensures the goods received match the details of the purchase order.

Source document: receiving report

A document that serves as proof of receipt of goods.

Document all inventory transfers

A control that requires all movements of inventory to be documented.

Restrict physical access to inventory

A control that limits who can physically access inventory to prevent theft.

Periodic physical inventory counts

Regular counts of inventory to ensure accuracy and prevent loss.

Budget controls and audits

Financial controls that monitor spending and ensure compliance with budgets.

Incentives

Rewards provided to employees to encourage desired behaviors.

Bar codes or RFID

Technologies used for tracking inventory and assets.

ERP: received vs ordered quantity

A system that compares the quantity of goods received to the quantity ordered.

Receiving employees sign receiving report

A control that requires employees to acknowledge receipt of goods.

Do not inform receiving of quantity ordered

A control that prevents receiving employees from knowing how much was ordered to reduce fraud.

Purchase order required for receiving goods

A control that mandates a purchase order must be presented to receive goods.

Segregate custody vs. receiving of inventory

A control that separates the responsibilities of inventory custody and receiving to prevent fraud.

Accepting unordered items

A threat that occurs when unordered items are accepted, potentially leading to fraud.

Mistakes in counting

Errors that can occur during inventory counts, leading to discrepancies.

Three way match

A process where the supplier invoice, purchase order, and receiving report are matched for accuracy.

Verification of freight charges

A control that ensures freight charges are accurate before payment.

Data entry edit controls

Controls that check the accuracy of data entered into systems.

Reconcile detailed accounts payable records to the general ledger accounts payable account

A control that ensures accounts payable records match the general ledger.

Restrict access to supplier master data

A control that limits who can access sensitive supplier information.

Require detailed receipts for p-cards

A control that mandates detailed receipts for purchases made with procurement cards.

Verify invoice accuracy

A control that checks the accuracy of supplier invoices before payment.

Errors in supplier invoice

Mistakes that can occur in supplier invoices leading to payment issues.

Mistakes in posting to accounts payable

Errors that occur when recording transactions in accounts payable.

Access controls - 2FA & dual authorizations

Security measures that require two-factor authentication and dual authorizations for access.

Separation of duties

A control that divides responsibilities among different individuals to reduce risk of fraud.

Reconcile bank accounts

A process of ensuring that bank statements match the company's records.

Positive Pay arrangements

A fraud prevention tool that matches checks presented for payment against a list of approved checks.

Cash flow budget

A financial plan that outlines expected cash inflows and outflows.

File invoices by due date to take advantage of discounts

A control that organizes invoices by their due dates to ensure discounts are utilized.

Match supplier invoice to supporting documents

A control that ensures supplier invoices are matched with purchase orders and receiving reports.

Pay only original invoices

A control that mandates payment only for original invoices to prevent fraud.

Cancel supporting document when payment is made

A control that requires marking supporting documents as canceled once payment is processed.

Physical security of checks, dual signatures

Controls that ensure checks are physically secure and require dual signatures for authorization.

Vendor-managed inventory (VMI)

A supply chain initiative where the vendor manages the inventory levels.

Kickbacks

Illegal payments made to gain favor or influence in business transactions.

Receiving report

A document that records the receipt of goods.

Debit memo

A document that reduces the amount owed to a supplier.

Voucher package

A collection of documents that supports a payment to a supplier.

Nonvoucher system

An accounts payable system that does not use vouchers.

Voucher system

An accounts payable system that uses vouchers to track payments.

Disbursement voucher

A document used to authorize payment to a supplier.

Evaluated receipt settlement (ERS)

A process that allows for payment based on receipt of goods rather than an invoice.

Procurement card

A credit card used by employees to make purchases on behalf of the company.

Imprest fund

A fixed amount of cash kept on hand for minor expenses.

Just-in-time (JIT) inventory system

An inventory management system that aims to reduce inventory holding costs by receiving goods only as they are needed.

Expenditure cycle

The process of acquiring goods and services and making payments.

Economic order quantity (EOQ)

A formula used to determine the optimal order quantity that minimizes total inventory costs.

Reorder point

The inventory level at which a new order should be placed to replenish stock before it runs out.

Materials requirement planning (MRP)

A production planning, scheduling, and inventory control system used to manage manufacturing processes.

Purchase requisition

A document that requests the purchase of goods or services.