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EXPENDITURE CYCLE

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OBJECTIVES

  1. Describe the major activities found in a typical expenditure cycle.
  2. Describe the objectives & risks typically found in the expenditure cycle.
  3. Describe the controls designed to address expenditure cycle risks.
  4. Given a description of a typical expenditure cycle, be able to identify the system's internal control strengths and weaknesses.


MAJOR ACTIVITIES

The expenditure cycle deals with

It is the reverse of the revenue cycle. One person's sale is someone else's purchase.

Context diagram for the expenditure cycle.

Level 0 DFD for the expenditure cycle.


EXPENDITURE CYCLE OBJECTIVES & CONTROLS

Controls will be added during class.

ACTIVITY OBJECTIVES CONTROLS
1.0
Validate Requisition
All requisitions are for goods actually needed. In other words, what prevents the processing of a requisition for goods that are not needed?

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2.0
Prepare P.O.
Purchase orders are issued for all valid requisitions. In other words, what prevents a valid requisition from getting lost?

Purchase orders are issued for only valid requisitions. In other words, what can prevent someone from issuing an unauthorized purchase order?

Purchase orders are sent to vendors who will provide a suitable product & service at a fair price. In other words what prevents you from paying too much or getting goods that are of an inferior quality?

All purchase orders are processed by the vendor. In other words, how would you know if a purchase order was not processed by the vendor?

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3.0
Validate invoice.
No payables are omitted for goods ordered and received. In other words, what prevents goods from being ordered and received, but never recorded or paid for?

Payables are only recorded for invoices where the goods were actually ordered and received. In other words, what prevents recording a payable (invoice) for goods that were not ordered or received?

Disbursements are made for all valid payables.

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4.0
Prepare check.
Checks are disbursed only for goods that were ordered and received. In other words, no one steals!

Duplicate payments are not made. In other words, only pay each invoice once.

All checks are recorded in the cash disbursement journal.

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IDENTIFICATION OF WEAKNESSES.

In order to identify weaknesses, you must first understand the operation of the expenditure cycle. You should review figures 7.10 & 8.10 and the text's discussion of these activities.

See problem 7-66, page 296.

Answer will be posted after working this problem in class

See problem 8.69, page 344.

1. AP clerk should not skim documents. Invoice should be compared to PR, PO, and RR to be sure that goods requisitioned, ordered, and received. Also check clerical accuracy of vendor's invoice.

4. Journal voucher not approved before it is sent to GL department. Journal voucher should be reviewed by supervisor before it is sent to GL department.

8. Disbursement vouchers should not be filed alphabetically. They should be filed by due date.

9. No control over transfer of documents from AP to Treasury. AP should prepare batch totals. Treasury should balance DVs to this total. Another option is to prepare 4 part DVs. AP department keeps a copy of the DV and matches it to paid DVs that are later returned from Treasury.

10. Cashier should not prepare checks and sign checks. Checks should be signed by individual independent of preparation process.

10. Supporting documents are returned to AP department without cancelation. These should be cancelled so they cannot be paid twice.

16. Journal voucher not approved before being sent to the general ledger department. Journal voucher should be approved by the department supervisor.

20. Cashier prepares checks, signs checks, and completes bank reconciliation. Bank reconciliation should be done by a person independent of the cash disbursement process.

22. Journal voucher not approved. Journal voucher should be approved by department supervisor before it is sent to the general ledger department.


Finally, these problems will serve as a useful review of the expenditure cycle.

5-33 B; 5-36 D; 5-43 A.

7-24 C; 7-25 A; 7-27 A; 7-33 A; 7-34 B;

7-37 B; 7-48 B; 7-49 D; 7-51 C; 7-57 D

8-24 D; 8-27 D; 8-28 A; 8-30 A; 8-31 C;

8-34 D; 8-40 C; 8-43 A; 8-44 B; 8-49 A;

8-50 C; 8-51 C; 8-52 D; 8-53 B; 8-55 D