Chapter 10:

Auditing the Expenditure Cycle

IT Auditing & Assurance, 2e, Hall & Singleton

PURCHASES: BATCH PROCESSING

Step 1: Data processing department inventory control
Purchasing Department

Step 2: Data processing department P.O.

Receiving Department

Step 3: Data processing department batch update of inventory

Accounts Payable

Step 4: Data processing department validates vendors

IT Auditing & Assurance, 2e, Hall & Singleton

CASH DISBURSEMENT: BATCH PROCESSING

Step 5: Data processing department scans for items due and prints checks for items received Step 6: Cash disbursements department reconciles checks, submits checks to management for signature Step 7: Accounts payable matches copies of checks with open vouchers, closes them and files documents Concludes expenditure cycle
IT Auditing & Assurance, 2e, Hall & Singleton

CASH DISBURSEMENT: REENGINEEREDFULLY AUTOMATED

Data processing steps performed automatically:
1. Inventory file scanned for items and reorder points 2. Purchase requisition record for all items needing replenishment 3. Consolidate requisitions by vendor 4. Retrieve vendor mailing information 5. P.O. prepared and sent to vendor (EDI) 6. Open P.O. record added for each transaction 7. List of P.O. sent to purchasing department
IT Auditing & Assurance, 2e, Hall & Singleton

CASH DISBURSEMENT: REENGINEERED FULLY AUTOMATED

Goods arrive at receiving department Quantities received entered per item

IT Auditing & Assurance, 2e, Hall & Singleton

CASH DISBURSEMENT: REENGINEEREDFULLY AUTOMATED

Data processing steps performed automatically:
1. Quantities keyed matched to open P.O. record 2. Receiving report file record added 3. Update inventory subsidiary records 4. G.L. inventory updated 5. Record removed from open P.O. file and added to open A.P. file, due date established
IT Auditing & Assurance, 2e, Hall & Singleton

CASH DISBURSEMENT: REENGINEEREDFULLY AUTOMATED

Each day, due date filed of A.P. are scanned for items where payment is due

IT Auditing & Assurance, 2e, Hall & Singleton

CASH DISBURSEMENT: REENGINEEREDFULLY AUTOMATED

Data processing steps performed automatically:
1. Checks are printed, signed and distributed to mailroom (unless EDI/EFT) 2. Payments are recorded in check register file 3. Items paid are transferred from open A.P. to closed A.P. file 4. G.L.- A.P. and cash accounts are updated 5. Appropriate reports are transmitted to A.P. and cash disbursements departments for review

IT Auditing & Assurance, 2e, Hall & Singleton

CASH DISBURSEMENT: REENGINEEREDFULLY AUTOMATED

Control implications
General in nature Similar to those of Chapter 9

IT Auditing & Assurance, 2e, Hall & Singleton

BATCH AUTOMATED SYSTEM VS. MANUAL BATCH

Improved inventory control Better cash management Less time lag Better purchasing time management Reduction of paper documents

IT Auditing & Assurance, 2e, Hall & Singleton

REENGINEERED SYSTEM VS. BATCH AUTOMATED SYSTEM

Segregation of duties
Accounting records and access controls

IT Auditing & Assurance, 2e, Hall & Singleton

PAYROLL PROCEDURES
Drawbacks to using regular A.P. and cash disbursements systems to do payroll
General expenditure procedures that apply to all vendors will not apply to employees Writing checks to employees requires special controls General expenditure procedures are designed to accommodate relatively smooth flow of transactions
IT Auditing & Assurance, 2e, Hall & Singleton

REENGINEERED PAYROLL SYSTEM

Often integrated with H.R. Differs from previous automate system
Operations departments transmit transactions to D.P. electronically Direct access to files are used for data storage Many processes are now performed in real time
IT Auditing & Assurance, 2e, Hall & Singleton

REENGINEERED PAYROLL SYSTEM

Personnel Cost accounting Timekeeping Data processing
1. 2. 3. 4. 5. 6. 7. Labor costs are distributed to accounts Online labor distribution summary Online payroll register Employee records are updated Payroll checks are prepared and signed Disbursement system generates check to fund the payroll imprest account G.L. updated
IT Auditing & Assurance, 2e, Hall & Singleton

EXPENDITURE CYCLE AUDIT OBJECTIVES

Input controls
Data validation controls Testing validation controls Batch controls Testing batch controls Purchases authorization controls Testing purchases authorization controls Employee authorization Testing employee authorization procedures
IT Auditing & Assurance, 2e, Hall & Singleton

EXPENDITURE CYCLE AUDIT OBJECTIVES

Process controls
File update controls
Sequence check control Liability validation control Valid vendor file Testing file update controls
Warehouse security Moving assets promptly when received Paying employees by check vs. cash Risks
Employees with access to A.P. subsidiary file Employees with access to attendance records Employees with access to both cash and A.P. records Employees with access to both inventory and inventory records

Access controls

Testing access controls

IT Auditing & Assurance, 2e, Hall & Singleton

EXPENDITURE CYCLE AUDIT OBJECTIVES

Process controls
Physical controls
Purchase system controls
Segregation of inventory control from warehouse Segregation of G.L. and A.P. from cash disbursements Supervision of receiving department
Inspection of assets Theft of assets Reconciliation of supporting documents: P.O., receiving report, suppliers invoice

Payroll System controls

Verification of timecards Supervision Paymaster Payroll imprest account

Testing of physical controls

IT Auditing & Assurance, 2e, Hall & Singleton

EXPENDITURE CYCLE AUDIT OBJECTIVES

Process controls
Output controls
A.P. change report Transaction logs Transaction listing Logs of automatic transactions Unique transaction identifiers Error listing Testing output controls
IT Auditing & Assurance, 2e, Hall & Singleton

EXPENDITURE CYCLE SUBSTANTIVE TESTS

Risks and audit concerns Understanding data
Inventory file Purchase order file Purchase order line item file Receiving report file Disbursement voucher file File preparation procedures
IT Auditing & Assurance, 2e, Hall & Singleton

EXPENDITURE CYCLE SUBSTANTIVE TESTS

Testing accuracy and completeness assertions Review disbursement vouchers for unusual trends and exceptions
Accurate invoice prices

Testing completeness, existence, rights and obligations assertions

Searching for unrecorded liabilities Searching for unauthorized disbursement vouchers Review of multiple checks to vendors Auditing payroll and related records
IT Auditing & Assurance, 2e, Hall & Singleton

Chapter 10:
Auditing the Expenditure Cycle

IT Auditing & Assurance, 2e, Hall & Singleton