ACCT 4300: Exam 2 Review, Part 2

(Module 5) What are the steps of the expenditure cycle?

1.) Purchase Requisition (“Soft Reserve”)

2.) Purchase Order (PO) Generation

3.) Receiving of Goods or Services (“Hard Reserve” or “Encumbrance”)

4.) Invoice Receipt and Three-Way Match

5.) Accounts Payable Entry and Scheduling

6.) Cash Disbursement

(Module 5) When does the expenditure cycle begin?

When a department identifies the need for goods or services and submits a purchase requisition to the purchasing department

(Module 5) Expenditure Cycle — Purchase Requisition

• Initiation: A requestor completes a purchase requisition form, specifying the item, quantity, and justification for the purchase

• Authorization: Department-level supervisors or budget managers review and approve the requisition based on predefined approval hierarchies

• System Validations: An AIS may enforce budget checks, ensure the item is not already in inventory, and verify that the requisition meets procurement policy criteria

(Module 5) Expenditure Cycle — Purchase Order (PO) Generation

• Vendor Selection: Buyers may consult an approved vendor list, solicit bids, or apply vendor performance data

• PO Creation: A purchase order is generated, detailing vendor information, item descriptions, quantities, agreed-upon prices, delivery terms, and payment conditions

• PO Approval and Transmission: The PO is reviewed and approved before being sent to the vendor, either electronically or in printed form

(Module 5) Expenditure Cycle — Receiving of Goods or Services

• Receiving Report: The department inspects the goods for condition and completeness and prepares a receiving report noting quantities and any discrepancies.

• Blind Receiving: Some systems support blind receiving, where quantities are omitted from the report to encourage accurate counts.

• Inventory Update: In automated systems, receiving reports trigger inventory increases and update stock availability records.

(Module 5) Expenditure Cycle — Inventory Receipt and Three-Way Match

• Three-Way Match: The system compares the PO, receiving report, and invoice for consistency in price, quantity, and terms.

• Discrepancy Resolution: If mismatches occur, the invoice is flagged for review and resolution before posting.

• Voucher Package Creation: Once verified, the invoice is combined with supporting documents to form a complete record for accounts payable processing.

(Module 5) Expenditure Cycle — Accounts Payable Entry and Scheduling

• Liability Recognition: The AIS posts the invoice to the A/P subledger and general ledger control account.

• Due Date Tracking: Payment dates are tracked based on invoice terms (e.g., Net 30), and the system may suggest early payment discounts when applicable.

• Vendor Reconciliation: The system ensures all vendor invoices are accounted for and reconciled with outstanding purchase activity.

(Module 5) Expenditure Cycle — Cash Disbursement

• Payment Authorization: Before payment is issued, the system may require approval based on amount thresholds or workflow roles.

• Payment Execution: Disbursements are made via check, ACH, wire transfer, or procurement card, and recorded in the cash disbursements journal.

• Bank Reconciliation: The payment is reconciled with bank activity, and accounts payable records are updated to reflect settlement.

(Module 5) What are the major source documents that appear in the expenditure cycle?

• Purchase Requisition

• Purchase Order (PO)

• Receiving Report

• Vendor Invoice

• Voucher Package

• Accounts Payable Subsidiary Ledger

• Cash Disbursements Journal

• Bank Reconciliation Statements

Purchase Requisition

Internal document used to request goods or services; initiates the procurement process and requires approval before a purchase order is created

Purchase Order (PO)

Formal authorization sent to a vendor to purchase goods/services under agreed terms; serves as the key document for three-way matching

Receiving Report

Document prepared by receiving that confirms what goods were actually received, including quantities and condition; supports inventory updates and invoice verification

Vendor Invoice

Bill from the supplier requesting payment; establishes the liability and must match the PO and receiving report before payment is approved (three-way match)

Voucher Package

Complete set of supporting documents (purchase requisition, PO, receiving report, and invoice) used to authorize and support payment

Accounts Payable Subsidiary Ledger

Detailed record of amounts owed to each vendor; supports the A/P control account and helps manage payment timing

Cash Disbursements Journal

Accounting record of all payments made to vendors; updates cash and accounts payable balances

Bank Reconciliation Statement

Document comparing company cash records to bank records to ensure payments and balances are accurate and complete

What are the risks tied to requisitions, approvals, and purchase orders?

• Purchasing items not needed

• Stockouts or excess inventory

• Purchasing at inflated prices

• Purchasing goods of inferior quality

• Unreliable suppliers

• Purchasing from unauthorized suppliers

• Vendor kickbacks

What are some controls for Purchasing Items Not Needed?

• Review and approval of purchase requisitions

• Perpetual inventory system and periodic physical counts

• Just-in-Time (JIT) purchasing

What are some controls for Stockouts or Excess Inventory?

• Inventory forecasting tools

• ABC inventory analysis

• Safety stock levels

• Bar codes or RFID tags

What are some controls for Purchasing at Inflated Prices?

• Centralized purchasing function

• Price lists

• Competitive bidding

• Market price benchmarks

What are some controls for Purchasing Goods of Inferior Quality?

• Tracking and monitoring product quality by supplier

• Holding purchasing managers responsible for rework and scrap costs

• Requiring suppliers to hold process quality certifications

• Approved supplier list

• Quality assurance checks

• Supplier performance monitoring

What are some controls for Unreliable Suppliers?

• Collecting and monitoring supplier delivery performance data

• Supplier vetting process

• Backup suppliers

What are some controls for Purchasing from Unauthorized Suppliers?

• Enforced supplier approval process

• Regular supplier audits

• Purchasing only from approved suppliers with additional review for new suppliers

What are some controls for Vendor Kickbacks?

• Prohibition against accepting gifts from suppliers and evaluating conflicts of interest

• Job rotation and mandatory vacations

• Code of ethics and anti-corruption policies

• Vendor review and rotation

What are the risks tied to receiving goods?

• Accepting unordered items

• Mistakes in counting

• Not verifying receipt of services

• Theft of inventory

• Delayed recording or non-recording

• Damaged goods

• Lax security

• Non-compliance with regulatory requirements

• Improper handling and storage

What are some controls for Accepting Unordered Items?

• Require approved purchase orders before accepting delivery

• Train staff to reject unmatched deliveries

• Match delivery documents to PO and receiving report

What are some controls for Mistakes in Counting?

• Barcode or RFID scanners

• Blind count process

• Dual-signature verification

What are some controls for Not Verifying Receipt of Services?

• Service completion report or managerial sign-off

• Vendor performance tracking system

• ERP integration for service contract verification

What are some controls for Theft of Inventory?

• Surveillance cameras

• Electronic keycard access

• Regular physical counts and reconciliation

What are some controls for Delayed Recording or Non-recording?

• Integrated ERP real-time inventory updates

• Time requirement for entering receiving reports

• Automated alerts for unentered goods

What are some controls for Damaged Goods?

• Inspection checklist

• Photo documentation via scanners

• Clear return procedures

What are some controls for Lax Security?

• Access controls/security personnel

• Regular security audits

• Security cameras and proper lighting

What are some controls for Non-compliance with Regulatory Requirements?

• Staff training on regulatory requirements

• Compliance verification software

• Documentation of regulatory checks

What are some controls for Improper Handling and Storage?

• Handling and storage guidelines

• Ongoing staff training

• Temperature-controlled storage with automated monitoring

What are the risks tied to receiving and approving supplier invoices?

What are some controls for Errors in Supplier Invoices?

• Automated three-way matching

• Manual invoice review

• Data entry edit checks

What are some controls for Mistakes in Posting to Accounts Payable?

• Data entry validation rules

• Segregation of duties

• Second-level review for high-value invoices

What are some controls for Delayed Entry of Invoices?

• Strict deadline for invoice entry

• Automated reminders/alerts

• Invoice scanning and processing syste

What are some controls for Lack of Timely Reconciliation?

• Monthly supplier reconciliations

• Automated reconciliation software

• Dedicated reconciliation responsibility

What are some controls for Missing or Mismatched Documentation?

• Three-way matching system

• Automated document management system

• Complete voucher package requirement

What are some controls for Not Updating Changes to Purchase Orders?

• Formal change order approval process

• Automatic ERP updates for PO changes

• Periodic reconciliation of PO amendments

What are some controls for Bypassing Approval Hierarchies?

• Strict ERP approval workflow

• Segregation of duties

• Approval limits based on job roles

What are the risks tied to cash disbursements?

• Failure to take advantage of discounts

• Paying for items not received

• Duplicate payments

• Theft of cash

• Check alterations

• Cash flow problems

• Lack of segregation of duties

What are some controls for Failure to Take Advantage of Discounts?

• Filing invoices by due date

• Payment scheduling system

• Automated notifications

• Cash flow budgets

What are some controls for Paying for Items Not Received?

• Three-way match and complete voucher package

• Goods receipt verification

• ERP flagging system

What are some controls for Duplicate Payments?

• Pay only from original invoices

• Invoice reference number tracking

• Payment approval workflow

• Cancelling/closing supporting documents

What are some controls for Theft of Cash?

• Segregation of duties

• Physical security of blank checks and signature access

• Surprise audits

What are some controls for Check Alterations?

• Positive Pay arrangements

• Dedicated computer for online banking

• Security over blank checks

• Watermarked checks

What are some controls for Cash Flow Problems?

• Payment priority system

• Line of credit

• Cash flow forecasting

What are some controls for Lack of Segregation of Duties?

• Frequent bank reconciliations

• Segregation of duties and vendor master file restriction

• Periodic role rotation and mandatory vacations

How does the custody function of the Segregation of Duties strengthen the internal controls of the expenditure cycle?

Physically handling or managing assets, including:

• Writing or issuing checks

• Handling or distributing checks once printed

• Being in charge of blank check stock

• Setting up and managing electronic funds transfer systems

How does the recording function of the Segregation of Duties strengthen the internal controls of the expenditure cycle?

Maintaining organizational records, including:

• Entering vendor invoices into the accounting system

• Posting payments to the accounts payable ledger

• Reconciling the accounts payable ledger with supplier statements

• Adjusting entries or corrections in the accounts payable system

How does the authorization function of the Segregation of Duties strengthen the internal controls of the expenditure cycle?

Approving or validating transactions, including:

• Approving new vendors into the system or modifying vendor master file details (especially bank information)

• Approving large disbursements or those outside typical expenditure patterns

• Confirming changes to established supplier payment terms