AUDITINGCHAPTER 12Purchases & Cash Disbursements TransactionsBy David N. Ricchiute

GBW 8th ed., Ch. 122

TOPICSNature of expenditure/disbursement cycle Flow of informationAuditor’s assessment of control risk Audit of internal control for purchases,

cash disbursementsComputer auditing, sampling, tests of controlsAssurance, consulting services

GBW 8th ed., Ch. 123

NATURE EXPENDITURE/DISBURSEMENT CYCLE

Goods, services acquired from vendors, employees in exchange for obligations to payObligations to vendors, employees are paid

GBW 8th ed., Ch. 124

EXPENDITURE, DISBURSEMENT CYCLEFlow of information Purchase requisition received to purchase goods Purchasing department issues purchase order to

vendor for purchase of goods Receiving department creates report that

identifies information about goods received Accounts payable receives vendor’s invoice Accounts payable creates voucher to authorize

payment

GBW 8th ed., Ch. 125

DOCUMENTSPurchase requisition Request to purchase goods

Purchase order Request issued by Purchasing dept. to vendor

Receiving report Identifies information about goods received

Vendor’s invoice Formal notice amount, terms of payment

Voucher package Voucher & supporting documents

GBW 8th ed., Ch. 126

CONTROLS OVER PURCHASING

Purchase requisition must be approvedPrenumbered purchase order describes price, quantity, terms of goods orderedGoods received compared to purchase order in receiving departmentAccounts payable matches purchase order, receiving report, invoice before authorizing paymentAccounts payable prepares voucher for recording by General Accounting

GBW 8th ed., Ch. 127

CASH DISBURSEMENTSProcess Voucher package sent to Treasury

department (separate from accounts payable)

Treasury department reviews, reconciles, authorizes payment

Checks drawn for payment May require 2 signatures over a limit

GBW 8th ed., Ch. 128

INTERNAL CONTROL & RISKControls Risks

Authorization

Prenumbered receiving reportsRecording controlsRestricted access

Unauthorized purchases, vendorsGoods received not ordered, damagedReceived not recorded, used

Goods, records, forms misused

GBW 8th ed., Ch. 129

ASSESSING CONTROL RISKObtain Understanding

Review Sarbanes-Oxley Section 404 documentation for sales processDocument the client’s system Flowchart, questionnaire, narrative

Perform transaction walk-throughIdentify control activitiesTest controls to reduce control risk below maximumAssess control risk

GBW 8th ed., Ch. 1210

TEST OF CONTROLSPurchasing, DisbursementsProvide a reasonable degree assurance that employees comply with management’s proceduresPurchasing Properly authorized, executed,

recordedDisbursements Payments remitted, recorded

promptly

GBW 8th ed., Ch. 1211

CONTROL RISKPurchasing

Major risks Unauthorized purchases Non-competitive prices

GBW 8th ed., Ch. 1212

TESTING CONTROLSPurchasing

Select random sample paid voucher packages Examine for cancellation,

authorization, detailsObtain Purchasing Department’s copy of requisition, purchase order Compare to voucher package Trace to competitive bids

GBW 8th ed., Ch. 1213

CONTROL RISKReceiving

Major risks Goods received not counted,

inspected Goods received not compared to

purchase orders

GBW 8th ed., Ch. 1214

TESTING CONTROLSReceiving

Obtain Receiving Department copy of receiving report for voucher sample Compare receiving reports Review receiving reports for evidence

of count, inspection Trace receiving reports to receiving

log

GBW 8th ed., Ch. 1215

CONTROL RISKCash Disbursements, Recording

Major risks Cash payments made to unauthorized

payee Details recorded in voucher register

are recorded for proper vendor Totals agree to general ledger

GBW 8th ed., Ch. 1216

TESTING CONTROLSCash Disbursements, Recording

Obtain canceled checks for voucher package Examine for signatures, endorsements Compare detailed information about

check from voucher package to canceled check

Trace voucher packages, canceled checks to postings Review for classification, accuracy Scan voucher register for unusual items

GBW 8th ed., Ch. 1217

ASSESSING CONTROL RISK

2 Questions Are controls effective? Can controls be relied upon?If answer is yes to both Assess control risk below maximum Assess detection risk above minimum Restrict substantive tests of sales,

receivables, cash

GBW 8th ed., Ch. 1218

PRELIMINARY OPINION ON INTERNAL CONTROL

Required by Sarbanes-Oxley Auditor must form opinion on

management’s assessment of internal control over financial reporting based on Reports of internal auditors Auditor’s tests of controls Substantive audit tests

GBW 8th ed., Ch. 1219

TESTS OF CONTROLSPromotion Accrual

Review reconciliation promotion payments Test calculationReview accrualSearch for post period-end payments for evidence of unrecorded promotions

GBW 8th ed., Ch. 1220

COMPUTER AUDITING & SAMPLING

Understand the systemTests of controls Input controls

Code verification Data entry controls

Processing controls Control totals Limit tests

Assess control risk

GBW 8th ed., Ch. 1221

POTENTIAL ERRORS, FRAUDS

Cash disbursed to unauthorized partiesDuplicate payments madeAccount balances inaccurate

GBW 8th ed., Ch. 1222

ASSURANCE, CONSULTING SERVICES

Especially for government procurement contracts Competitive bids Compliance with local laws