The Expenditure Cycle Purchases and Cash Disbursements Procedures

Chapter 5
The
Expenditure
Cycle
Part 1:
Purchases and
Cash
Disbursements
Procedures
Accounting Information
Systems 9e
James A. Hall
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in
whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
Objectives for Chapter 5
• Recognize the fundamental tasks that constitute the

purchases and cash disbursement process.
• Identify functional areas involved in purchases and cash
disbursements and trace the flow of these transactions.
• Specify documents, journals, and accounts that provide audit
trails, promote the maintenance of records, and support
internal decision making and financial reporting.
• Understand risks associated with purchase and cash
disbursements activities and controls that reduce these risks.
• Be aware of operational features and control implications of
technology used in purchases and cash disbursement systems.
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 2
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Conceptual System
• Purchase processing procedures:

– Monitor inventory records, prepare purchase order. receive goods,
update inventory records, set up accounts payable.
• Vouchers payable system:
– Alternate to AP procedures that uses cash disbursement vouchers
and maintains a voucher register, providing improved control over
cash disbursements. Vouchers payable file equivalent to AP file.
– GL function posts journal voucher data.
• Cash disbursement system:

– Identify liabilities due, prepare cash disbursements, update AP
record and post to general ledger.
Physical Systems
• Basic Technology Expenditure Cycle:
– Computers tend to be independent PCs.
– Information between departments is communicated via hard-
copy documents.
– Maintaining physical files of source documents is critical to the
audit trail.
• In the following flowcharts note that, in many departments,
after an individual completes his or her assigned task,
documents are filed as evidence task was performed.
Physical Systems: Basic Purchases Processing
• Begins when inventory clerk prints purchase requisitions by
accessing the purchase requisition file.
– File created when inventory dropped to reorder point.
• Purchasing department receives the purchase requisition.
– Adds record to the digital open purchase order file.
– PO copies to vendor, inventory control, AP and receiving (blind).
• Receiving reconciles goods with packing slip and blind PO.
– Report to storeroom and purchasing department, files hard copy.
• AP reconciles invoice, purchase order and receiving report.
– Records transaction in the purchases journal.
• Gender ledger department receives journal voucher from AP
and account summary from inventory control.
Physical Systems: Basic Cash Disbursements System
• AP clerk reviews AP packet in open AP file, identifies items
due, and sends documents to cash disbursements.
• Cash disbursements reviews documents, prepares three-part
check and records pertinent data in the check register.
– Check and supporting documents sent for signature and mailing.
– AP packet and check copy returned to AP.
– Files check copy and sends summary journal voucher to GL.
• AP department removes the liability and sends AP summary
to GL department.
• GL department posts to the general ledger control accounts
and files the documents.
Physical Systems: Integrated Purchases Processing
• Departmental activity lower than basic technology system.
• Purchases computer application reads purchase requisition file
for reorders, prepares and sends PO, updates records.
• Receiving reconciles goods with packing slip and blind PO.
– Record added to receiving report file and PO closed.
– Inventory and GL control accounts automatically updated.
• AP clerk receives invoice, adds record to vendor file and files
hard-copy.
– System automatically links vendor invoice, PO and receiving report,
reconciles documents and creates virtual AP packet.
– AP clerk reviews virtual packet and if no discrepancies are found, system
automatically approves payment.
Physical Systems: Integrated Cash Disbursements
• Each day the DUE DATE fields of vendor invoices are
scanned for items due to be paid.
• Checks are automatically printed, signed, and distributed to
the mail room for mailing.
– Large checks receive additional signatures before mailing.
• Payments automatically recorded in check register file.
• Vendor invoices are closed.
• General ledger AP control and cash accounts updated.
• Reports transmitted to AP and cash disbursements
departments for management review and filing.
Expenditure Cycle Risks and Internal Controls
• Risk of unauthorized inventory purchases.
– Physical Controls: Transaction authorization
– IT Controls: Automated purchase approval
• Risk of receiving incorrect items, quantities or damaged

goods.
– Physical Controls: Independent verification and supervision
– IT Controls: Scanner technology
• Risk of inaccurately recording transactions.

– Physical controls: Transaction authorization, accounting records
and independent verification.
– IT controls: Input data edits, error messages, automated
postings, and file backups.
Expenditure Cycle Risks and Internal Controls
• Risk of misappropriation of cash and inventory.
– Physical Controls: Supervision, independent verification, segregation
of duties – inventory control from inventory warehouse and accounts
payable from cash disbursements.
– IT Controls: Automated three-way match and payment approval and
multilevel security.
• Risk of unauthorized access to accounting records and reports.
– Physical Controls: Access controls and segregation of duties.
– IT Controls: Password control and multilevel security.
Reengineering Using EDI
• Key element of success in the implementation of a trading
partner agreement to eliminate discrepancies that require
human involvement to resolve.
• Some organizations have eliminated the receiving function.
– Objective is to send goods directly to production which avoids
delays and associated handling costs.
– Accounting and auditing issues:
• How to account for inventory receipts with no receiving function and
report?
• Accounting for scrap in the production process.
• Unique risks that need to be recognized and controlled.

– Includes ensuring only valid transactions are processed and risk of
unauthorized access to accounting records.

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Chapter 5

• Recognize the fundamental tasks that constitute the

• Purchase processing procedures:

• Cash disbursement system:

• Risk of receiving incorrect items, quantities or damaged

• Risk of inaccurately recording transactions.

• Unique risks that need to be recognized and controlled.

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