GROUP 2: The Expenditure Cycle

The Expenditure Cycle: Purchases and Cash Disbursement Procedures

The objective of the expenditure cycle is to convert the organization’s cash into the
physical materials and human resources it needs to conduct business.
Most entities operate on a credit basis and do not pay for resources until after
acquiring them. The time lag between these events splits the procurement process into two
phases: (1) the physical phase, involving the acquisition of the resources, and (2) the
financial phase, involving the disbursement of cash. As a practical matter, these are
treated as independent transactions that ere processed through separate subsystem.

I. Process and System/Workflow Diagram

OVERVIEW OF PURCHASES AND CASH DISBURSEMENTS ACTIVITIES
Purchases Processing Procedures
Purchases procedures include the tasks involved in identifying inventory needs, placing the
order, receiving the inventory, and recognizing the liability. In general, these procedures
apply to both manufacturing and retailing firms.

1. Monitor Inventory Records: Firms deplete their inventories by transferring raw

materials into the production process (the conversion cycle) and by selling finished goods to
customers (revenue cycle). When inventories drop to a predetermined reorder point, a
purchase requisition is prepared and sent to the prepare purchase order function to initiate
the purchase process.
A purchase requisition is a document that authorizes a purchase transaction. A
valid vendor file is a file containing vendor mailing information.

2. Prepare Purchase Order: Once inventory records signals a need for replenishment,
purchase requisitions are prepared and sorted by the vendor. Next, a purchase order (PO)
is prepared for each vendor. The purchase order (PO) includes details like item
descriptions,
 A purchase order (PO) is a document based on a purchase requisition that
specifies items ordered from a vendor or supplier. The open/closed purchase order file
is the last copy that is filed while preparing a purchase order.
3. Receive Goods: Blind copy is a purchase order copy that contains no price or quantity
information. The receiving report is a report that lists quantity and condition of the
inventories received. The AP pending file is the file containing supporting documents
needed to set up an account payable. The receiving report file is the file in which a copy
of the receiving report (stating the quantity and condition of the inventories) is placed.

4. Update Inventory Records: Standard cost system is used in organizations that carry
their inventories at a predetermined standard value regardless of the price actually paid to
the vendor. An actual cost inventory ledger is a ledger that records inventory values
based on actual costs rather than standard costs.

5. Set up Accounts Payable: The suppliers invoice is the bill sent from the seller to the
buyer showing unit costs, taxes, freight, and other charges. An AP packet consists of
reconciled AP supporting documents (PO, receiving report, and invoice). The AP
subsidiary ledger is a set of records controlling the exposure in the cash disbursements
subsystems.
Vouchers Payable System: A vouchers payable system is a system under which
the AP department uses cash disbursement vouchers and maintains a voucher register. It
is an alternate to AP procedures.
Cash disbursement vouchers provide improved control over cash disbursements
and allow firms to consolidate several payments to the same supplier on a single voucher,
thus reducing the number of checks written. The voucher register is a register that
reflects a firms accounts payable liability. The vouchers payable file is equivalent to the
open AP file.

6. Post to General Ledger: The general ledger function receives a journal voucher from
the AP department and an account summary from inventory control. The general ledger
function posts from the journal voucher to the inventory and AP control accounts and
reconciles the inventory control account and the inventory subsidiary summary. The
approved journal vouchers are then posted to the journal voucher file. With this step, the
purchases phase of the expenditure cycle is completed.

Cash Disbursement System

The cash disbursements system processes the payment of obligations created in the
purchases system. The principal objective of this system is to ensure that only valid
creditors receive payment and that amounts paid are timely and correct. If the system
makes payments early, the firm forgoes interest income that it could have earned on the
funds. If obligations are paid late, however, the firm will lose purchase discounts or may
damage its credit standing.

1. Identify Liabilities Due: The cash disbursements process begins in the AP department
by identifying items that have come due. Each day, the AP function reviews the open AP
file (or vouchers payable file) for such items and sends payment approval in the form of a
voucher packet (the voucher and/or supporting documents) to the cash disbursements
department.
2. Prepare Cash Disbursement: The cash disbursements clerk receives the voucher
packet and reviews the documents for completeness and clerical accuracy. For each
disbursement, the clerk prepares a check and records the check number, dollar amount,
voucher number, and other pertinent data in the check register, which is also called the
cash disbursements journal.
The check register is a record of all cash disbursements. The cash
disbursements journal contains the voucher number authorizing each check and provides
an audit trail for verifying the authenticity of each check written

3. Update Accounts Payable Record: Upon receipt of the voucher packet, the AP clerk
removes the liability by debiting the AP subsidiary account or by recording the check
number and payment date in the voucher register. The voucher packet is filed in the closed
voucher file, and an account summary is prepared and sent to the general ledger function.
The closed voucher file is a record of all accounts payable that have been
discharged by making payment to the creditors.

4. Post to General Ledger: The general ledger function receives the journal voucher from
cash disbursements and the account summary from AP. T`he voucher shows the total
reductions in the firm’s obligations and cash account as a result of payments to suppliers.
These numbers are reconciled with the AP summary, and the AP control and cash
accounts in the general ledger are updated accordingly. The approved journal voucher is
then filed. This concludes the cash disbursements procedures.
COMPUTER-BASED PURCHASES AND CASH DISBURSEMENTS APPLICATION
Automating Purchases Procedures Using Batch Processing Technology
The automated batch system has many manual procedures similar to those
presented in manual system. The principal difference is that accounting (bookkeeping)
tasks are now automated. The following section describes the sequence of events as they
occur in this system.

Data Processing Department: Step 1

The purchasing process begins in the data processing department, where the
inventory control function is performed. When inventories are reduced by sales to
customers or usage in production, the system determines if the affected items in the
inventory subsidiary file have fallen to their reorder points. If so, a record is created in the
open purchase requisition file. Each record in the requisition file defines a separate
inventory item to be replenished. The record contains the inventory item number, a
description of the item, the quantity to be ordered, the standard unit price, and the vendor
number of the primary supplier. The information needed to create the requisition record is
selected from the inventory subsidiary record, which is then flagged “On Order” to prevent
the item from being ordered again before the current order arrives. Figure 5-15 shows the
record structures for the files used in this system.
At the end of the day, the system sorts the open purchase requisition file by vendor
number and consolidates multiple items from the same vendor onto a single
requisition.Next, vendor mailing information is retrieved from the valid vendor file to
produce purchase requisition documents (hard copy), which go to the purchasing
department.

Purchasing Department
Upon receipt of the purchase requisition, the purchasing department prepares a
multipart PO. Copies are sent to the vendor, AP, receiving, data processing, and the
purchasing department’s file.
The system in Figure 5-14 employs manual procedures as a control over the
ordering process. A computer program identifies inventory requirements and prepares
traditional purchase requisitions, but the purchasing agent reviews the requisitions before
placing the order. Some firms do this to reduce the risk of placing unnecessary orders with
vendors because of a computer error. Such manual intervention, however, does create a
bottleneck.
Data Processing Department: Step 2
As explained in Figure 5-14, a copy of the PO is sent to data processing and used to create
a record in the open PO file. The associated requisitions are then transferred from the open
purchase requisition file to the closed purchase requisition file.

Receiving Department
When the goods arrive from vendors, the receiving clerk prepares a receiving report and
sends copies to purchasing, AP, and data processing.

Data Processing Department: Step 3

The data processing department creates the receiving report file from data provided by the
receiving report documents. Then a batch program updates the inventory subsidiary file
from the receiving report file. The program removes the “On Order” flag from the updated
inventory records and calculates batch totals of inventory receipts, which will later be used
in the general ledger update procedure. Finally, the associated records in the open PO file
are transferred to the closed PO file.
Accounts Payable
When the AP clerk receives the supplier’s invoice, he or she reconciles it with the
supporting documents that were previously placed in the AP pending file. The clerk then
prepares a voucher, files it in the open voucher file, and sends a copy of the voucher to
data processing.

Data Processing Department: Step 4

The voucher file is created from the voucher documents. A batch program validates the
voucher records against the valid vendor file and adds them to the voucher register (open
AP subsidiary file). Finally, batch totals are prepared for subsequent posting to the AP
control account in the general ledger.

Cash Disbursements Procedures

Data Processing Department

 Each day, the system scans the DUE DATE field of the voucher register (see Figure
5-15) for items due. Checks are printed for these items, and each check is recorded in the
check register (cash disbursements journal). The check number is recorded in the voucher
register to close the voucher and transfer the items to the closed AP file. The checks,
along with a transaction listing, are sent to the cash disbursements department. Finally,
batch totals of closed AP and cash disbursements are prepared for the general ledger
update procedure.
At the end of the day, batch totals of open (unpaid) and closed (paid) AP, inventory
increases, and cash disbursements are posted to the AP control, inventory control, and
cash accounts in the general ledger. The totals of closed AP and cash disbursements
should balance.

Cash Disbursements Department

The cash disbursements clerk reconciles the checks with the transaction listing and
submits the negotiable portion of the checks to management for signing. The checks are
then mailed to the suppliers. One copy of each check is sent to AP, and the other copy is
filed in cash disbursements, along with the transaction listing.

Accounts Payable Department

Upon receipt of the check copies, the AP clerk matches them with open vouchers
and transfers these now closed items to the closed voucher file. This concludes the
expenditure cycle process.

Reengineering the Purchases/Cash Disbursements System

The automated system described in the previous section simply replicates many of
the procedures in a manual system. In particular, the AP task of reconciling supporting
documents with supplier invoices is labor-intensive and costly. The following example
shows how reengineering this activity can produce considerable savings.
The Ford Motor Company employed more than 500 clerks in its North American AP
department. Analysis of the function showed that a large part of the clerks’ time was
devoted to reconciling discrepancies among supplier invoices, receiving reports, and
purchase orders. The first step in solving the problem was to change the business
environment. Ford initiated trading partner agreements with suppliers in which they agreed
in advance to terms of trade such as price, quantities to be shipped, discounts, and lead
times. With these sources of discrepancy eliminated, Ford reengineered the work flow to
take advantage of the new environment. The flowchart in Figure 5-17 depicts the key
features of a reengineered system.

Data Processing
The following tasks are performed automatically.
1. The inventory file is searched for items that have fallen to their reorder points.
2. A record is entered in the purchase requisition file for each item to be replenished.
3. Requisitions are consolidated according to vendor number.
4. Vendor mailing information is retrieved from the valid vendor file.
5. Purchase orders are prepared and added to the open PO file.
6. A transaction listing of purchase orders is sent to the purchasing department for review.
Receiving Department
When the goods arrive, the receiving clerk accesses the open PO file in real time by
entering the PO number taken from the packing slip. The receiving screen, illustrated in
Figure 5-18, then prompts the clerk to enter the quantities received for each item on the
PO.

The following tasks are performed automatically by the system.

1. Quantities of items received are matched against the open PO record, and a Y value is
placed in a logical field to indicate the receipt of inventories.
2. A record is added to the receiving report file.
3. The inventory subsidiary records are updated to reflect the receipt of the inventory items.
4. The general ledger inventory control account is updated.
5. The record is removed from the open PO file and added to the open AP file, and a due
date for payment is established.

Each day, the DUE DATE fields of the AP records are scanned for items due to be
paid. The following procedures are performed for the selected items.
1. Checks are automatically printed, signed, and distributed to the mail room for mailing to
vendors.
2. The payments are recorded in the check register file.
3. Items paid are transferred from the open AP file to the closed AP file.
4. The general ledger AP and cash accounts are updated.
5. Reports detailing these transactions are transmitted via terminal to the AP and cash
disbursements departments for management review and filing.
Because the financial information about purchases is known in advance from the trading
partner agreement, the vendor’s invoice provides no critical information that cannot be
derived from the receiving report. By eliminating this source of potential discrepancy, Ford
was able to eliminate the task of reconciling vendor invoices with the supporting documents
for the majority of purchase transactions. As a result of its reengineering effort, Ford was
able to reduce its AP staff from 500 to 125.
II. Key Risks and Threats in Expenditure System
1. Employee Fraud
Employees may exploit loopholes in the system to carry out fraudulent activities—such as
submitting fake invoices, creating ghost suppliers, or misusing company credit cards.
The organization may suffer financial losses, reputational harm, or even legal liabilities.
Example: An accounts payable staff approves payments to a non-existent vendor they
created.
Employees can exploit weaknesses or oversight in the system to engage in fraudulent
activities. These might include submitting fake invoices, fabricating ghost suppliers, or
misusing company resources like credit cards. The consequences are far-reaching: the
organization could face significant financial losses, a tarnished reputation, and even legal
ramifications. For example, an accounts payable employee could create a fake vendor
account and approve payments for services that were never rendered. This type of
behavior could remain undetected for a long time, causing substantial damage to the
company.

2. Lack of Segregation of Duties

A single person handling purchase requests, approvals, and payments eliminates checks
and balances.
Increases the chance of fraud and undetected errors, as there is no oversight.
Example: One person in charge of both creating and paying invoices could pay themselves
without detection.
When one individual is responsible for multiple roles within the expenditure process—such
as creating purchase orders, approving payments, and making disbursements—there is a
significant risk of errors or fraudulent activity going unnoticed. Without oversight from a
second party, a person could potentially misuse their position for personal gain. A prime
example would be an employee who can create an invoice, approve it, and process the
payment to themselves, circumventing the usual approval processes.

3. Weak Approval Controls

Approvals can be bypassed, automated without review, or handled by unauthorized staff.
Risk: Leads to unapproved or wasteful spending, which can hurt the organization’s financial
health.
Example: A manager approves high-cost purchases without verifying necessity or budget
alignment.
Inadequate or bypassed approval procedures can lead to unverified and unnecessary
spending. If purchases or payments are authorized without thorough review or by
unauthorized personnel, the company may end up making purchases that don’t align with
budget constraints or actual needs. For example, a manager approving large purchases
without verifying whether they align with the organization’s budget or necessity could create
financial strain, potentially damaging the company’s bottom line.

4. Inaccurate or Incomplete Vendor Information

Errors in vendor data (such as incorrect bank details or addresses) during encoding.
Can result in over-payments, underpayments, or funds sent to the wrong entities.
Example: An outdated vendor account results in a payment being sent to a closed bank
account.
Errors in vendor data, such as incorrect addresses, bank account details, or contact
information, can result in payment mistakes. These inaccuracies can cause the company to
overpay, underpay, or even send funds to the wrong recipient. For example, if a vendor’s
bank account information is outdated and the payment is made to a closed account, it could
delay necessary deliveries or cause financial reconciliation problems, complicating
relationships with key suppliers.

5. Supplier Risks
Working with unreliable suppliers.
Low-quality products, late deliveries, or supplier bankruptcy may disrupt operations and
cause losses.
Example: A supplier fails to deliver essential goods on time, halting production.
Engaging with unreliable suppliers can lead to significant operational disruptions. Suppliers
that do not consistently meet delivery schedules, provide subpar products, or face financial
instability can negatively impact your business. For instance, a supplier who fails to deliver
vital materials on time could halt production, forcing the company to find alternative
solutions, leading to financial losses and damage to the company’s reputation.
6. Non-Compliance with Policies
Employees or departments bypass procurement policies or fail to follow standard
procedures.
May result in violations of legal regulations, wasted resources, or audit findings.
Example: A department makes a direct purchase without going through the bidding
process.
If employees or departments bypass established procurement policies, it can lead to legal
violations, wasted resources, and issues during audits. For example, a department might
bypass the competitive bidding process and make a direct purchase, which could lead to
favoritism, price inflation, or non-compliance with regulatory standards. Over time, these
actions could expose the company to legal risks or reputational damage if detected during
audits.

7. System and Data Security Threats

Hackers, malware, or internal breaches targeting the financial system.
Exposure of sensitive financial information, altered payment instructions, or system
shutdowns.
Example: A phishing attack tricks an employee into giving away system login credentials.
Cybersecurity threats, including hacking, malware, and internal data breaches, present
significant risks to the integrity of the expenditure system. Hackers may steal sensitive
information, alter payment instructions, or disrupt systems, causing operational delays and
financial losses. An example of this risk would be a phishing attack that tricks an employee
into revealing their login credentials, which could allow hackers to gain access to the
company’s financial data and manipulate it.

8. Delayed or Missed Payments

Poor tracking of invoice due dates or inefficient payment processing.
Could damage supplier relationships, incur late payment fees, and result in lost discounts.
Example: Payment is sent weeks after the due date, and the supplier suspends deliveries.
Poor invoice tracking or inefficient processing systems can result in missed or delayed
payments, damaging relationships with suppliers. This can lead to late fees, suspension of
services, and missed early payment discounts, which could directly impact the company’s
cash flow and ability to maintain reliable supplier partnerships. For instance, a company
that sends payment weeks after a due date may alienate their supplier, who could then
refuse to deliver critical materials on time.

9. Lack of Budgetary Control

Spending decisions are made without referencing the remaining budget.
Departments may overspend, leading to cash flow problems and budget deficits.
Example: A department exhausts its budget halfway through the year without realizing it.
Without proper oversight of budget utilization, departments may inadvertently overspend,
leading to budget shortfalls. If spending decisions are made without referencing the
available budget, the company may face liquidity problems or deficits. For example, if a
department exhausts its budget prematurely due to poor planning, it could impact the
financial stability of the entire organization, forcing it to delay or cut back on essential
operations.

10. Inadequate Audit Trails

Missing or incomplete records for financial transactions.
Makes it hard to detect fraud, investigate discrepancies, or pass external audits.
Example: An auditor cannot trace a high-value payment back to an approved purchase
order.
Missing or incomplete transaction records can make it difficult to trace and verify financial
activity. Without proper documentation or audit trails, the organization may struggle to
detect fraud or reconcile discrepancies, which can hinder investigations or audits. For
example, if an auditor cannot trace a high-value payment to an authorized purchase order,
it raises concerns about the legitimacy of the transaction, undermining the financial control
framework.
III. Controls and Risk Mitigation
Expenditure Cycle Controls
This section describes the primary internal controls in the expenditure cycle according to
the control procedures specified in Statement on Auditing Standards No. 78.

Transaction Authorization
Purchases Subsystem. The inventory control function continually monitors inventory
levels. As inventory levels drop to their predetermined reorder points, inventory control
formally authorizes replenishment with a purchase requisition. Formalizing the authorization
process promotes efficient inventory management and ensures the legitimacy of purchases
transactions. Without this step, purchasing agents could purchase inventories at their own
discretion, being in a position both to authorize and to process the purchase transactions.
Unauthorized purchasing can result in excessive inventory levels for some items, while
others go out of stock. Either situation is potentially damaging to the firm. Excessive
inventories tie up the organization’s cash reserves, and stock-outs cause lost sales and
manufacturing delays.
Cash Disbursements Subsystem. The AP function authorizes cash disbursements via the
cash disbursement voucher. To provide effective control over the flow of cash from the firm,
the cash disbursements function should not write checks without this explicit authorization.
A cash disbursements journal (check register) containing the voucher number authorizing
each check (see Figure 5-11) provides an audit trail for verifying the authenticity of each
check written.
TABLE 5-1
Segregation of Duties
Segregation of Inventory Control from the Warehouse. Within the purchases
subsystem, the primary physical asset is inventory. Inventory control keeps the detailed
records of the asset, while the warehouse has custody. At any point, an auditor should be
able to reconcile inventory records to the physical inventory.

Segregation of the General Ledger and Accounts Payable from Cash Disbursements.
The asset subject to exposure in the cash disbursements subsystem is cash. The records
controlling this asset are the AP subsidiary ledger and the cash account in the general
ledger. An individual with the combined responsibilities of writing checks, posting to the
cash account, and maintaining AP could perpetrate fraud against the firm. For instance, an
individual with such access could withdraw cash and then adjust the cash account
accordingly to hide the transaction. Also, he or she could establish fraudulent AP (to an
associate in a nonexistent vendor company) and then write checks to discharge the phony
obligations. By segregating these functions, we greatly reduce this type of exposure.

Supervision
In the expenditure cycle, the area that most benefits from supervision is the receiving
department. Large quantities of valuable assets flow through this area on their way to the
warehouse. Close supervision here reduces the chances of two types of exposure: (1)
failure to properly inspect the assets and (2) the theft of assets.

Inspection of Assets. When goods arrive from the supplier, receiving clerks must inspect
items for proper quantities and condition (damage, spoilage, and so on). For this reason,
the receiving clerk receives a blind copy of the original PO from purchasing. A blind PO has
all the relevant information about the goods being received except for the quantities and
prices. To obtain quantities information, which is needed for the receiving report, the
receiving personnel are forced to physically count and inspect the goods. If receiving clerks
were provided with quantity information via an open PO, they may be tempted to transfer
this information to the receiving report without performing a physical count. Inspecting and
counting the items received protects the firm from incomplete orders and damaged goods.
Supervision is critical at this point to ensure that the clerks properly carry out these
important duties. A packing slip containing quantity information that could be used to
circumvent the inspection process often accompanies incoming goods. A supervisor should
take custody of the packing slip while receiving clerks count and inspect the goods.

Theft of Assets. Receiving departments are sometimes hectic and cluttered during busy
periods. In this environment, incoming inventories are exposed to theft until they are
securely placed in the warehouse. Improper inspection procedures coupled with inadequate
supervision can create a situation that is conducive to the theft of inventories in transit.

Accounting Records
The control objective of accounting records is to maintain an audit trail adequate for tracing
a transaction from its source document to the financial statements. The expenditure cycle
employs the following accounting records: AP subsidiary ledger, voucher register, check
register, and general ledger. The auditor’s concern in the expenditure cycle is that
obligations may be materially understated on financial statements because of unrecorded
transactions. This is a normal occurrence at year-end closing simply because some
supplier invoices do not arrive in time to record the liabilities. This also happens, however,
as an attempt to intentionally misstate financial information. Hence, in addition to the routine
accounting records, expenditure cycle systems must be designed to provide supporting
information, such as the purchase requisition file, the PO file, and the receiving report file.
By reviewing these peripheral files, auditors may obtain evidence of inventory purchases
that have not been recorded as liabilities.

Access Controls
Direct Access. In the expenditure cycle, a firm must control access to physical assets such
as cash and inventory. These control concerns are essentially the same as in the revenue
cycle. Direct access controls include locks, alarms, and restricted access to areas that
contain inventories and cash.

Indirect Access. A firm must limit access to documents that control its physical assets. For
example, an individual with access to purchase requisitions, purchase orders, and receiving
reports has the ingredients to construct a fraudulent purchase transaction. With the proper
supporting documents, a fraudulent transaction can be made to look legitimate to the
system and could be paid.

Independent Verification
Independent Verification by Accounts Payable. The AP function plays a vital role in the
verification of the work others in this system have done. Copies of key source documents
flow into this department for review and comparison. Each document contains unique facts
about the purchase transaction, which the AP clerk must reconcile before the firm
recognizes an obligation. These include:
1. The PO, which shows that the purchasing agent ordered only the needed inventories
from a valid vendor.3 This document should reconcile with the purchase requisition.
2. The receiving report, which is evidence of the physical receipt of the goods, their
condition, and the quantities received. The reconciliation of this document with the PO
signifies that the organization has a legitimate obligation.
3. The supplier’s invoice, which provides the financial information needed to record the
obligation as an account payable. The AP clerk verifies that the prices on the invoice are
reasonable compared with the expected prices on the PO.

Independent Verification by the General Ledger Department. The general ledger

function provides an important independent verification in the system. It receives journal
vouchers and summary reports from inventory control, AP, and cash disbursements. From
these sources, the general ledger function verifies that the total obligations recorded equal
the total inventories received and that the total reductions in AP equal the total
disbursements of cash.
IV. Case Study
Chiaro Machinery Inc. - Expenditure Systems/Process and Control
1.0 Analysis
This case study analyses the expenditure system, processes, and controls of Chairo Inc..
The company faces challenges such as an inefficient budgeting system, lack of a budget
committee, inadequate cash budget, weak expenditure controls, and poor interdepartmental
coordination. These issues result in financial instability, reduced profitability, operational
inefficiency, and inaccurate financial reporting. The study recommends establishing a
budget committee, implementing a cash budget, enhancing budgeting software, improving
variance analysis, strengthening internal controls, promoting coordination, and providing
staff training.

2.0 Introduction
Chairo Inc. is a company located in Binalbagan, Negros Occidental, specializing in food
production. While the company has grown over 22 years, it now encounters significant
difficulties in managing its expenditures effectively.

3.0 Problem Statement

 Chairo's expenditure system is plagued by several critical issues:
 Inefficient Budgeting System: The current budgeting system is inefficient, leading to
substantial variances between actual and budgeted figures.
 Lack of Budget Committee: The absence of a budget committee hinders proper
oversight and administration of the budgeting process.
 Inadequate Cash Budget: The lack of a comprehensive cash budget results in liquidity
problems and procurement delays.
 Weak Expenditure Controls: Deficiencies in expenditure controls contribute to
overspending and financial instability.
 Poor Coordination: Ineffective coordination among departments leads to discrepancies
and budget variances.
 Lack of System Efficiency: The budgeting system lacks efficiency in planning,
coordination, and control.

4.0 Analysis
 These problems have significant repercussions for Chairo:
 Financial Instability: Poor cash flow management threatens the company's ability to
meet financial obligations.
 Reduced Profitability: Budget variances and overspending erode profitability.
 Operational Inefficiency: Coordination failures and control weaknesses disrupt
operations.
 Inaccurate Financial Reporting: Inefficient systems compromise the accuracy of
financial reports.

5.0 Recommendations
 To rectify these issues, Chairo should implement the following:
 Establish a Budget Committee: Create a committee with representatives from all
departments to manage the budgeting process.
 Implement a Cash Budget: Develop a detailed cash budget for effective cash flow
management and expenditure planning.
 Enhance Budgeting Software: Adopt or create budgeting software to minimize errors
and improve efficiency.
 Improve Variance Analysis: Implement detailed variance analysis to identify and
address the causes of budget discrepancies.
 Strengthen Internal Controls: Enhance controls to prevent overspending and ensure
financial accountability.
 Promote Coordination: Improve communication and coordination among departments.
 Provide Training: Educate staff on the importance of budgeting and proper expenditure
management.

6.0 Conclusion
Chairo Inc. faces significant challenges in its expenditure system. By implementing the
recommended improvements, the company can enhance its financial stability, operational
efficiency, and overall performance.
V. Emerging Trend and Innovations in Expenditure Systems and
Controls
 The landscape of financial management is rapidly changing, particularly in how
organizations manage and control expenditures.
Technological advancements and new tools are reshaping traditional financial
practices, focusing on increasing efficiency, transparency, and accuracy.
This presentation aims to highlight the emerging trends and innovations that are
revolutionizing how organizations track, control, and optimize their expenditures.

Automation of Expense Tracking

Manual tracking of expenses is becoming increasingly obsolete due to automation
technologies. Automated systems can now capture and process expenditure data in real
time, reducing manual intervention and human error.
Innovations:
• Automated Invoice Processing: AI-based tools scan and process invoices,
eliminating the need for human intervention. They can recognize invoice details,
match them with purchase orders, and automatically update records.
• Real-Time Expense Tracking: Many organizations are now using software that
tracks spending as it happens, providing up-to-date financial data and insights.
Examples:
• Expensify: An app that automates receipt capture, expense categorization, and
expense report creation.
• Xero: An accounting tool that automates invoicing and expense tracking.
Benefits:
• Accuracy: Minimizes human error and ensures consistent, error-free expense data.
• Efficiency: Reduces time spent on manual data entry and increases operational
efficiency
• Cost Reduction: By automating processes, organizations can lower administrative
costs.

Cloud-Based Solutions for Expenditure Management

Cloud-based solutions are providing organizations with flexible, scalable, and cost-effective
ways to manage their financial operations. These systems allow for easy integration across
different departments and enable real-time data updates and reporting.
Innovations:
• Cloud ERP Systems: These systems offer integrated financial management,
procurement, and budgeting capabilities all in one place.
• Multi-User Access: With cloud solutions, different stakeholders (finance team,
procurement, management) can access financial data in real time, regardless of their
location.
Examples:
• SAP S/4HANA Cloud: A cloud-based ERP system that integrates finance,
procurement, and expenditure management for real-time visibility and control.
• Oracle NetSuite: A cloud ERP system with comprehensive expense management
features, providing visibility into the entire expenditure process.
Benefits:
• Accessibility: Financial data is available in real time, from anywhere, enhancing
decision making capabilities.
• Collaboration: Streamlined communication across departments, improving
efficiency and reducing delays.
• Cost-Effective: Lower upfront costs, reduced IT infrastructure maintenance, and the
ability to scale according to business needs.

Artificial Intelligence (AI) in Budgeting and Forecasting

AI is being increasingly used in expenditure management to forecast future spending
patterns, optimize budgets, and adjust expenditure projections based on real-time data.
Innovations:
• Predictive Analytics: AI can analyze historical expenditure data and predict future

spending, helping businesses allocate budgets more effectively.

• Machine Learning: The system learns from past financial trends and automatically
adjusts budgets to prevent overspending or under-allocation.
Examples:
 • Adaptive Insights: A cloud-based financial planning solution using AI to predict
future expenditures, allowing businesses to plan more accurately.
• Anaplan: A planning platform that integrates AI and machine learning to optimize
financial forecasts and budgets.
Benefits:
• Accuracy: Predictive analytics lead to more accurate budget forecasts, helping
organizations avoid over-spending.
• Proactive Planning: With AI-driven insights, businesses can anticipate changes in
financial conditions and adjust expenditures accordingly.
• Efficiency: Automated forecasting reduces manual budgeting efforts and improves
strategic planning.

Blockchain for Transparency and Security

Blockchain technology offers enhanced transparency and security by providing an
immutable, decentralized ledger of transactions. In financial systems, blockchain ensures
that expenditure records are tamper-proof and transparent.
Innovations:
• Smart Contracts: Blockchain-based contracts that automatically execute payment
terms once conditions are met, reducing the need for intermediaries and speeding
up approval processes.
• Secure Transaction Records: Transactions on the blockchain are permanent and
cannot be altered, ensuring complete transparency and preventing fraud.
Examples:
• Ethereum: A decentralized platform that supports smart contracts, which can be
used for financial agreements in procurement or expenditure management.
• IBM Blockchain: IBM’s blockchain solution offers enhanced transparency and
security for financial transactions.
Benefits:
• Transparency: Every expenditure is recorded on a decentralized ledger, making it
easy to audit and verify transactions.
• Security: The blockchain’s encryption makes financial transactions more secure
and resistant to fraud.
 • Efficiency: Smart contracts automate expenditure approvals and payment
processing, reducing administrative delays.

Mobile Integration for Real-Time Expense Management

Mobile apps are becoming a crucial tool for managing and controlling expenditures on the
go. Employees can submit expenses and approve purchases directly from their mobile
devices.
Innovations:
• Mobile Expense Reporting: Employees can instantly take pictures of receipts,
categorize expenses, and submit reports in real time.
• Instant Approvals: Managers can approve or deny expenses via mobile apps,
speeding up the approval process and ensuring expenditures align with budgets.
Examples:
• Concur: A travel and expense management tool that allows employees to submit
and approve expenses from mobile devices.
• Zoho Expense: A mobile application for tracking and reporting business expenses
on the go.
Benefits:
• Convenience: Employees can manage expenses immediately after purchases,
reducing administrative delays.
• Faster Decision-Making: Managers can approve or reject expenses in real time,
keeping spending under control.
• Accuracy: Instant submission of receipts and expenses reduces the risk of lost
information.

Robotic Process Automation (RPA) for Invoice Processing

RPA is being used to automate routine tasks like invoice processing, which traditionally
require manual data entry, invoice matching, and approval.
Innovations:
• Invoice Matching: RPA systems can automatically match invoices to purchase
orders and receipt records, ensuring that expenditures align with the organization’s
purchasing policies.
 • Approval Automation: RPA can route invoices for approval based on pre-set rules,
reducing the need for human intervention.
Examples:
• UiPath: A platform that automates repetitive tasks, including invoice processing and
approval workflows.
• Blue Prism: A leading RPA tool used to automate financial transactions and
approval processes.
Benefits:
• Efficiency: RPA reduces the time spent on manual tasks like data entry and invoice
matching.
• Accuracy: Automation ensures fewer errors and more consistent processes.
• Cost Savings: By automating routine tasks, organizations can free up human
resources for more strategic work.
Data Analytics for Expenditure Optimization
Data analytics is playing a crucial role in identifying spending patterns, uncovering
inefficiencies, and optimizing expenditure allocation.
Innovations:
• Real-Time Dashboards: Analytics tools provide real-time expenditure reports,
highlighting trends and potential savings opportunities.
• Big Data Analytics: Large-scale data analysis helps organizations understand
spending behavior and identify areas for cost-saving measures.
Examples:
• Tableau: A business intelligence tool that helps organizations visualize and analyze
their financial data to uncover insights.
• Power BI: A Microsoft tool for business analytics that enables real-time tracking and
reporting of expenditures.
Benefits:
• Cost Optimization: Identifies areas where spending can be reduced or better
allocated.
• Better Decision-Making: Data-driven insights empower financial managers to make
informed decisions.
• Real-Time Monitoring: Provides up-to-date visibility into financial performance,
allowing for quick corrective actions.
Cybersecurity Innovations for Financial Systems
As financial data becomes more digitized, ensuring cybersecurity is critical. New
innovations in cybersecurity are helping protect sensitive financial information from
breaches and fraud.
Innovations:
• Encryption: Strong encryption methods ensure that expenditure-related data is
securely transmitted and stored.
• Multi-Factor Authentication (MFA): MFA ensures that only authorized users can
access financial systems.
Examples:
• Symantec: Provides comprehensive cybersecurity solutions, including data
encryption for financial systems.
• McAfee: Offers advanced threat protection for financial data and systems.
Benefits:
• Security: Enhances protection against cyber threats, data breaches, and fraud.
• Compliance: Helps organizations adhere to regulatory requirements for data
protection.
• Trust: Customers and stakeholders feel more confident in the security of financial
transactions.

Conclusion
Emerging technologies such as AI, blockchain, automation, and mobile integration are
transforming how expenditures are managed and controlled.
These innovations enhance efficiency, security, and transparency, while reducing the risk of
errors and fraud.
The continuous advancement of these technologies will shape the future of financial
management, making it more data-driven, secure, and efficient.
Sources:
https://www.cohnreznick.com/insights/procurement-purchasing-fraud-red-flags-prevention
https://en.wikipedia.org/wiki/Separation_of_duties
https://finance.syr.edu/audit/general-internal-controls/internal-controls-for-procurements-
and-expenditures/
https://procurementmag.com/articles/top-10-procurement-threats-that-call-for-caution-and-
action
https://trustpair.com/blog/the-5-key-risks-in-the-procure-to-pay-process-and-how-to-tackle-
them/
https://pathlock.com/learn/4-types-of-internal-controls-weaknesses-and-5-ways-to-fix-them/
https://planergy.com/blog/purchasing-internal-control/
• Deloitte’s Insights on Future of Financial Management (2025)
• PwC’s Annual Technology in Finance Report (2024)
• “Blockchain and its Impacts on Financial Expenditures” by Harvard Business Review
• Gartner’s Technology Innovations in Financial Management (2023)