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Audit of the Expenditure

Cycle
Tests of Controls and Substantive Tests of
Transactions - I

Nature of Expenditure Cycle


Expenditure cycle

activities associated with the acquisition and payment of goods and


services, plant assets and labor.

Major classes of transactions

1.

Trading

2.

Manufacturing

Accounts affected by the expenditure cycle:

1.

Purchases

2.

Accounts and Notes Payable

3.

Purchases returns and allowances

4.

Cash in Bank

5.

Purchase Discount

6.

Inventories

7.

Manufacturing and operating expense

Documents used in the


Expenditure cycle
1.

Purchase Requisition

2.

Purchase Order

3.

Receiving Report

4.

Vendors invoice

5.

Debit Memo

6.

Voucher

7.

Check

8.

Vendors statement

Accounting Records involved in


the Expenditure Cycle
1.

Purchase Journal

2.

Cash disbursement transaction file /journal

3.

Accounts Payable master file/ subsidiary ledger

Audit of Acquisitions and Cash


Disbursements Transactions

Transactions typically classified in the acquisition and


cash disbursements cycle flow through these
business activities:

1.

Processing Purchase orders

2.

Reserving goods and services

3.

Recognize the liability

4.

Processing and recording cash disbursement

Audit of Acquisitions and Cash


Disbursements
1.

Test of Controls

2.

Substantive Tests

Tests of Controls: Acquisitions


and Cash Disbursements
Assertions

Acquisitions

Cash
Disbursements

Existence or
Occurrence

Recorded acquisitions
are for the items that
were acquired.

Recorded cash
disbursements
occurred.

Completeness

Acquisitions that
occurred are recorded.

All cash disbursements


made are recorded.

Rights and Obligations

Recorded acquisitions
are the entitys
purchases and
liabilities.

All cash disbursements


made are for
obligations of the
entity.

Valuation or Allocation

Acquisitions are
recorded for the proper
amounts.

Debits to various
accounts and credits to
cash are valued at
proper amounts.

Presentation and
Disclosure

In accordance with
PAS/PFRS.

In accordance with
PAS/PFRS.

Tests of Controls : Acquisition


1.

Existence or Occurrence

Controls

Tests of Controls

Acquisitions
should be approved by
authorized personnel.

Examine the approval


signature

Voucher
should be prepared for
the purchase of goods

Auditor observes the


procedure and examine file
of documents.

Check signer
should examine the
supporting
documentation and
cancel the documents,
making them paid or
writing the date and
number of the check on
the document.

Auditor can examine


cancellations on the
documents.

Tests of Controls :
Acquisition
2.

Completeness

Controls

Tests of Controls

Prenumbered receiving
reports
Determine that a liability
is recorded for all goods
received.

Observe procedure
Account for numerical
sequence of the receiving
report.

Vouchers
Prenumbered and
accounted for as they are
entered in the voucher
register

Observe procedure
Account for numerical
sequence of the receiving
report.

Tests of Controls :
Acquisition
3.

Rights and Obligations

Controls

Tests of Controls

Receiving Reports
Prepared by persons
having access only to a
blind copy of purchase
order details

Auditor should observe that


the procedure is being
performed.

4.

Valuation or Allocation

Controls

Tests of Controls

Invoice Amounts
Verified by a clerk by
reference to the purchase
orders and receiving
reports.

Auditor should examine the


voucher for signature
indicating performance

Tests of Controls :
Acquisition
5.

Presentation and Disclosure

Controls

Tests of Controls

Requires employees to use a


chart of accounts

Auditor should:
Examine the chart of
accounts
Examine the signature of
employee performing the
checking or verification

Substantive tests of Transactions :


Acquisitions
Acquisitions
1.

Existence or Occurrence

. Examine
. Scan

underlying documents for authenticity and reasonableness.

voucher register for large or unusual items

. Inspect

acquired property, plant and equipment

. Trace

inventory purchased to perpetual records

. Scan

voucher register for duplicate payments

2.

Completeness

. Trace
. Test

a sequence of receiving reports to entries in the voucher register

cutoff

. Account

3.

for a sequence of entries in the voucher register

Rights and Obligations

. Trace

from invoices to perpetual inventory records

. Examine

vendors invoices to determine that goods were purchased

Substantive tests of Transactions :


Acquisitions
4.
.

5.
.

Valuation or Allocation
Recompute invoices and compare invoice price to purchase order.
Presentation and Disclosure
Check the accuracy of accounts on invoices by reference to chart of
accounts.

Tests of Controls: Cash


Disbursements
1.

Existence or Occurrence

Controls

Tests of Controls

Authorized individual signs


and mails promptly the
checks after reviewing
documentation

Inquire or Observe whether


procedures are followed.

Review should be made by a


person not responsible for
handling disbursements

Inquire
Procedure if followed
Examine
Outstanding checks list to
determine that checks are
being processed promptly.

2.

Completeness

Controls

Tests of Controls

Checks should be prenumbered


and accounted for.

Observe whether employee who


prepares the check register
accounts for the sequence of
checks.

Employee who does not handle


cash disbursements and cash
receipts prepares the bank
reconciliation
3. Rights and Obligations

Observe segregation of duties


and inspects reconciliation.

Controls

Tests of Controls

Check signer who is


independent of voucher
preparation should examine the
supporting documentation
before signing checks

Inquiring about the segregation


of duties and observing whether
separation really exist.

4.

Valuation or Allocation

Controls

Tests of Controls

Amounts and calculations on


vendors invoices are
independently verified.

Observe procedure
Examine signatures on paid
invoices

5.

Presentation and Disclosure

Controls

Tests of Controls

Chart of accounts
Account Coding

Observing the procedure


Examine signatures of
employees performing the
review account coding.

Substantive Tests of Transactions : Cash


Disbursements
1.

Existence or occurrence

Examine paid checks for appropriate endorsements.

Examine documents underlying payments.

2.

Completeness

Reconcile cash disbursements per books with cash disbursements


per bank.

Prepare or test bank reconciliation

3.
.

4.
.

5.
.

Rights and Obligations


Examine underlying documents
Valuation or Allocation
Recalculate invoices paid
Presentation and Disclosure
Check accuracy of accounts on invoices by reference to chart of

Segregation of Duties
Acquisitions
1.

Authorization

Purchasing department

Requisitioning department

2.

Recordkeeping

Accounts payable department

Accounting Department

3.
.

Custody
Receiving department

Segregation of Duties
Cash disbursements
1.

Authorization

Purchasing department

Requisitioning department

2.

Recordkeeping

Accounts payable department

Accounting Department

3.

Custody

Receiving department

Treasurer