A4 M2 Expenditure Cycle

Purchase Requisition

Begins the purchasing cycle when a department sends a properly approved serially numbered requisition to purchasing without the authority to place the order

Purchase Orders

Created by purchasing after requesting supplier bids to indicate description and quantity with prenumbered copies sent to requisitioning receiving accounts payable and vendor

Receipt of Goods or Services

Serves as authorization for receiving to accept goods using a blind purchase order copy to force a physical count examination and receiving report creation

Recording the Payable

Notifies accounts payable of future cash disbursements by comparing the purchase order receiving report and vendor invoice to record inventory and payable

Approving Invoice for Payment and Recording Payment

Requires accounts payable to match vendor invoice purchase order receiving report and requisition checking for proper amounts discounts or returns before payment

Cash Disbursements

Executes payment via checks signed by treasurer using approved voucher packets before canceling supporting documents and returning paid vouchers to accounting

Segregation Summary (Expenditure Cycle)

Divides duties among Authorization (Purchasing and Requisitioning) Record Keeping (Accounts Payable and Accounting) and Custody (Receiving and Treasurer)

Testing Controls Requisitioner

Inspects requisitions for proper approval and observes prenumbering procedures

Testing Controls Purchasing

Inspects purchase orders for approved requisitions and observes prenumbering accounting procedures

Testing Controls Receiving

Inspects receiving reports and matching purchase orders observes receiving clerk procedures and traces receiving reports to purchase journal and accounts payable master file

Testing Controls Accounts Payable

Inspects vouchers for supporting documents inspects numerical sequence vouching sample vouchers to supporting documents and observes independent check reperformances

Testing Controls Accounting

Observes evidence of independent checks and reperforms general ledger and accounts payable reconciliations

Testing Controls Payables and Cash Disbursements Accounts Payable

Compares accounts payable debits to canceled vouchers traces canceled voucher packages to cash disbursement journal and vouches entries back to voucher packages

Testing Controls Treasurer

Observes independent checks accounts for check sequence inspects signatures observes voucher cancellation and inquires about check mailing procedures

Auditing Accounts Payable Primary Assertion

Focuses on completeness and accuracy as primary assertions over existence and rights due to greater risk of understatement

Auditing Accounts Payable Completeness

Agrees accounts payable listing to general ledger agrees vendor statements to vendor accounts and performs search for unrecorded liabilities

Search for Unrecorded Liabilities

Examines post-year-end cash disbursements open vouchers receiving reports and vendor invoices to identify unrecorded balance sheet date liabilities

Auditing Accounts Payable Valuation Allocation and Accuracy

Foots accounts payable listing agrees to general ledger checks vendor statements and reviews confirmation results

Auditing Accounts Payable Existence and Occurrence

Vouches selected amounts from accounts payable listing to voucher packages and optionally sends accounts payable confirmations

Accounts Payable Confirmations Requirement

Optional procedure used mainly when internal control is weak amounts are disputed or vendor statements are missing using positive blank confirmations focused on completeness

Accounts Payable Confirmations Limitation

Restricted to vendors of record meaning unrecorded liabilities may not be detected until unpaid vendors stop deliveries

Auditing Accounts Payable Rights and Obligations

Reviews voucher packages for purchase requisition purchase order receiving report and vendor invoice to verify entity obligation

Auditing Purchase Transactions Completeness

Traces sample of vouchers to purchase journal and accounts for prenumbered sequence of purchase orders receiving reports and vouchers

Auditing Purchase Transactions Cutoff

Compares voucher dates with purchase journal entry dates and inspects purchases before and after year-end for proper period recording

Auditing Purchase Transactions Valuation Allocation and Accuracy

Recomputes mathematical accuracy of sample vendor invoices

Auditing Purchase Transactions Existence and Occurrence

Tests sample of vouchers to confirm proper authorization and presence of receiving report

Auditing Purchase Transactions Understandability of Presentation and Classification

Verifies account classification for sample purchases

Auditing Presentation and Disclosure Completeness

Ensures inclusion of disclosures for payables by type and term purchase commitments related party payables and segment expenses

Auditing Presentation and Disclosure Valuation Allocation and Accuracy

Reads footnotes and related information to ensure accurate representation and proper amounts

Auditing Presentation and Disclosure Rights Obligations and Occurrence

Compares disclosures to audit evidence to ensure disclosed accounts payable and purchase transactions actually occurred

Auditing Presentation and Disclosure Understandability of Presentation and Classification

Reads disclosures to verify clarity and determines whether long-term or nontrade payables require separate disclosure