The purpose of this chapter is to understand the operation of a typical expenditure cycle and to identify those controls that are needed in this cycle.

Read Chapter 13. However, you do not have to read the section "Expendiure Cycle Information Needs and Data Model". Once you have completed your studies you should be able to:

• Describe the general purpose of the expenditure cycle and the typical internal control problems.
  • Identify need. (Often done by users of product or service.)
    Problems:
    • Users do not have an apprpriate system in place to determine when there is a need, such as reorder point analysis.
    • Users do not have a system in place to determine what amount to order, such as "EOQ" or "MRP".
  • Approve requisition.
    Problems:
    • No approval by user department.
    • Approval by wrong person in user department (low level).
    • Purchasing does not check requisition for proper authorization and compliance with departmental budgets.
  • Select vendor.
    Problems:
    • Failure to keep approved vendor list.
    • Vendor list is kept but not checked by purchasing agent.
    • Possible problems of using wrong vendor: wrong price, wrong goods, poor quality, poor service, late delivery.
  • Create purchase order.
    Problems:
    • No P.O. means the order is not documented. Leads to confusion.
    • PO poorly designed and missing critical information.
    • POs not pre-numbered. Unable to account for usage.
    • POs for large items may require special authorization.
    • Using POs for small purchases is inefficient. Procurement cards provide an alternative. EDI is cover in a separate lecture.
  • Control activities of purchasing agents.
    Problems:
    • Purchasing agents receive kick backs. Company receives inferior goods at inflated price.
  • Receive and inspect goods.
    Problems:
    • Receiving does not compare goods received to PO and packing slip.
    • Receiving does not inspect the quality of incoming goods.
    • Receiving does not document receipts on receiving reports.
  • Deliver goods to warehouse.
    Problems:
    • Warehouse or other end users do not sign for goods upon delivery from receiving dept.
  • Approve invoices.
    Problems:
    • Invoices not compared to PO and receiving report.
    • Best control is to use receiving report that also includes receipt from end user of the goods.
    • Failure to check extensions and other math on invoices.
  • Record liability and file invoice till due date.
    Problems:
    • Discounts may be lost when not filed by due date.
    • Understate A/P when liabilities not promptly recorded.
  • Prepare disbursement.
    Problems:
    • Checks prepared by someone who also has check signing authority.
    • Poor security over unused checks.
  • Make disbursement.
    Problems:
    • Check signer does not compare PO, invoice, and receiving report with check.
    • Failure to require original documents for support of payment.
    • Checks signed in advance.
  • Cancel supporting documents.
    Problems:
    • Invoices paid 2x if not cancelled.
    • Check signer fails to deposit checks directly into mail.
  • Update ledgers as necessary: accounts payable, cash disbursements, general ledger.
    Problems:
    • Overstate cash balance.
    • Overstate accounts payable.
  • Return goods to vendors.
    Problems:
    • Purchase returns not documented on bill of lading.

  Realize that the description of the expenditure cycle given in the text is one of many possibilities. Each expenditure cycle will have its own unique characteristics. In this course, I only explain what a typical expenditure cycle might look like.

• Describe how the expenditure cycle interacts with other transaction cycles.
  • Various user departments: Those who request goods. Those who store goods.
  • Vendor
  • G.L. & Financial Reporting Cycle.

• Describe the data stores used in the expenditure cycle.
  • Budgets
  • Approved vendors
  • Purchase orders
  • Inventory
  • Accounts (vouchers) payable

• As with the revenue cycle, given a description of an expenditure cycle, you should be able to:
  • Describe the internal control weaknesses,
  • Describe the internal control strengths, and
  • Give recommendations for improving internal controls.

  Some controls usually found in the expenditure cycle:

  • Purchases based on approved requisition.
  • Purchasing agents review requisitions for proper approval and budgets.
  • Purchases made from approved vendors.
  • Compare goods received to purchase order.
  • Document receipt on receiving report.
  • Match receiving report, purchase order, and vendor invoice.
  • A/P personnel separate from receiving, purchasing, and cash disbursements.
  • Disbursements made with prenumbered checks. Use of checks is accounted for.
  • Checks signed by authorized individual.
  • Segregate check preparation from check signing.
  • Cancel supporting documents after payment.
  • Segregate reconciliation of bank statement from check preparation and signing.

  Also, see Table 13.1 in the text.

• Again, we will not cover the section Expenditure Cycle Information Needs and Data Model, text p 498+.