AUDITINGCHAPTER 12 Purchases & Cash Disbursements Transactions By David N. Ricchiute
TOPICS • Nature of expenditure/disbursement cycle • Flow of information • Auditor’s assessment of control risk • Audit of internal control for purchases, cash disbursements • Computer auditing, sampling, tests of controls • Assurance, consulting services GBW 8th ed., Ch. 12
NATURE EXPENDITURE/DISBURSEMENT CYCLE • Goods, services acquired from vendors, employees in exchange for obligations to pay • Obligations to vendors, employees are paid GBW 8th ed., Ch. 12
EXPENDITURE, DISBURSEMENT CYCLE • Flow 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. 12
DOCUMENTS • Purchase 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. 12
CONTROLS OVER PURCHASING • Purchase requisition must be approved • Prenumbered purchase order describes price, quantity, terms of goods ordered • Goods received compared to purchase order in receiving department • Accounts payable matches purchase order, receiving report, invoice before authorizing payment • Accounts payable prepares voucher for recording by General Accounting GBW 8th ed., Ch. 12
CASH DISBURSEMENTS • Process • 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. 12
INTERNAL CONTROL & RISK ControlsRisks GBW 8th ed., Ch. 12
ASSESSING CONTROL RISKObtain Understanding • Review Sarbanes-Oxley Section 404 documentation for sales process • Document the client’s system • Flowchart, questionnaire, narrative • Perform transaction walk-through • Identify control activities • Test controls to reduce control risk below maximum • Assess control risk GBW 8th ed., Ch. 12
TEST OF CONTROLSPurchasing, Disbursements • Provide a reasonable degree assurance that employees comply with management’s procedures • Purchasing • Properly authorized, executed, recorded • Disbursements • Payments remitted, recorded promptly GBW 8th ed., Ch. 12
CONTROL RISKPurchasing • Major risks • Unauthorized purchases • Non-competitive prices GBW 8th ed., Ch. 12
TESTING CONTROLSPurchasing • Select random sample paid voucher packages • Examine for cancellation, authorization, details • Obtain Purchasing Department’s copy of requisition, purchase order • Compare to voucher package • Trace to competitive bids GBW 8th ed., Ch. 12
CONTROL RISKReceiving • Major risks • Goods received not counted, inspected • Goods received not compared to purchase orders GBW 8th ed., Ch. 12
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. 12
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. 12
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. 12
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. 12
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. 12
TESTS OF CONTROLSPromotion Accrual • Review reconciliation promotion payments • Test calculation • Review accrual • Search for post period-end payments for evidence of unrecorded promotions GBW 8th ed., Ch. 12
COMPUTER AUDITING & SAMPLING • Understand the system • Tests of controls • Input controls • Code verification • Data entry controls • Processing controls • Control totals • Limit tests • Assess control risk GBW 8th ed., Ch. 12
POTENTIAL ERRORS, FRAUDS • Cash disbursed to unauthorized parties • Duplicate payments made • Account balances inaccurate GBW 8th ed., Ch. 12
ASSURANCE, CONSULTING SERVICES • Especially for government procurement contracts • Competitive bids • Compliance with local laws GBW 8th ed., Ch. 12
