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- Tracing the sequence of activities through the purchases processing and cash disbursements procedures by using the expenditure cycle conceptually.
- Technology neutral are intended in the conceptual system.
- Main focus is on what needs to be done, not how it is accomplished.

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AP department uses cash disbursement vouchers and maintains a voucher register.

Post to General Ledger
- Receives a journal voucher from the AP department and an account summary from inventory control.
- Posts the data contained to the inventory and AP control accounts where it reconciles the inventory control account with the inventory subsidiary summary.
- It is then filed in the approves journal voucher file.

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- Identifying inventory needs, placing the order, receiving the inventory and recognizing the liability are tasks involved.
- Procedures apply to both manufacturing and retailing firms.
- The two business types major difference lies between the way purchases are authorized.

Monitoring Inventory Records
- Deplete the inventories by transferring raw materials into the production process and by selling finished goods to customers.
- A purchase requisition is prepared and sent when inventories drop to a predetermined reorder point.
- It is sent to the prepare purchase order (PO) function to initiate the purchase process.

Prepare Purchase Order
- The purchase order requisition received are sorted by the vendor if necessary.
A copy of the PO is sent to the vendor and AP for filling temporarily in the AP pending file.
- A blind copy is sent to the receive goods function where it is held till the inventories arrive.
- Another last copy is filed in the open/closed purchase order file.

Receive Goods
- The copies of the PO reside in temporary files in various departments when firms encounter a time lag.
- Goods arriving from the vendor are reconciled with the blind copy of the PO where it contains no price or quantity information about the products received.
- The blind copy is important to reduce the risk of missing shipments.
- After the completion of the physical count and inspection, the receiving clerk prepares a receiving report.
- One copy is safe to the storeroom for safekeeping.
- Another copy is filed in the open/close PO file to close out the PO.
- The third copy is sent to the set up account payable to file it in the AP pending file.
- Fourth copy is sent to inventory control for updating the inventory records.
- The last copy  is placed in the receiving report file.

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EXPENDITURE CYCLE RISKS AND INTERNAL CONTROL 

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EXPENDITURE CYCLE RISKS AND INTERNAL CONTROL 

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Objective

To mitigate the risk from errors and fraud

Risks and Controls

1. Unauthorized inventory purchases

Physical Control

Transaction authorization - formal purchase requisition

IT Control

Automated purchase approval

2. Receiving wrong items, incorrect quantities, or damaged goods

Physical Control

Independent verification-Receiving department reconciles receipt with PO

Supervision in Receiving Department

IT Control

Scanner technology

3. Inaccurate record keeping

Physical Control

Transaction authorization - AP Department authorizes cash disbursements to make payment

Accounting records - audit trail documents, journals, accounts, and files

Independent verification - inventory control, AP, cash disbursements and GL

IT Control

Input data edits

Error Messages

Automated posting to accounts

File backup

4. Misappropriation of cash and inventory

Physical Control

Supervision - receiving department

Independent verification - three-way match

Segregation of duties - cash disbursement, general ledger, AP function, warehouse, inventory records

IT Control

Automated three-way match

Multilevel security to provide segregation of duties

5. Unauthorized access to accounting records and confidential reports

Physical Control

Access control - source documents, journals, ledgers

Segregation of duties - sub-ledger, GL, asset custody

IT Control

Password control

Multilevel security to prevent unauthorized access to data

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- Process the payment of obligations created in the purchases system.
- One of the objective is to ensure that valid creditors receive payment and the amounts paid are timely and correct.

Identify Liabilities Due
- Begins in AP department where the clerks review the open AP file for items due for payment.
- To ensure debts are paid, the file is organized by payment due date.
- The clerk send payment approval in the form of AP packet to the cash disbursement department.

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EDI TECHNOLOGY
->devised to expedite routine transaction processing between manufacturers, wholesalers, and retailers by connecting buyer and seller computers via a private network on the Internet.

KEY ELEMENT
->the implementation of a trading partner agreement to eliminate the discrepancies that require human involvement to resolve.

KEY FEATURES
1.       As inventory needs are detected, the system automatically sends a digital EDI purchase order to the vendor.

2.       When the goods arrive, receiving personnel perform only cursory inspection since quality and quantity are guaranteed by the trading partner agreement.

3.       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.

4.       Payment is made automatically by EFT directly to the vendor’s bank account.

EDI CONTROL ISSUES
·         EDI poses unique risks for organizations that need to be recognized and controlled.

·         One of the risk is to ensure that in the absence of explicit authorization, only valid transactions are processed.

·         Another risk is that a trading partner, or someone masquerading as a trading partner, will access the firm’s accounting records in a way that is unauthorized by the trading partner agreement.