1. Modern Auditing:
Assurance Services and the Integrity of Financial Reporting, 8th Edition
William C. Boynton
California Polytechnic State University at San Luis Obispo
Raymond N. Johnson
Portland State University
Chapter 15 – Auditing the Expenditure Cycle

2. Chapter Overview

3. The Expenditure Cycle

4. Develop Audit Objectives

5. Understanding the Entity and Environment

6. Inherent Risk, Including the Risk of Fraud
Management Misstatement of Expenditures
Understate expenses
Understate payables
Other Misstatement Factors
High volume of transactions
Unauthorized purchases
Misappropriation
Duplication of payments

7. Analytical Procedures

8. Consideration of Internal Control Components
Control Environment
Risk Assessment
Information and Communication
Monitoring

9. Study Break
The expenditure cycle consists of all of the following activities, except:
Purchase transactions
Cash disbursement transactions
Sales transactions
Purchase adjustments
C. Sales transactions

10. Study Break
This analytical procedure calculates the average number of days it takes to retire accounts payables.
Current ratio
Quick ratio
Cost of Goods Sold to Accounts Payable
Accounts Payable Turn Days
D. Accounts Payable Turn Days

11. Purchase Transactions – Documents and Records
Purchase requisition
Purchase order
Approved vendor master file
Open purchase order file
Receiving report
Receiving file
Vendor Invoice

12. Purchase Transactions – Common Documents and Records
Voucher
Exception reports
Voucher summary
Voucher register
Purchase transactions file
Accounts payable master file
Suspense files

13. Purchase Transactions – Functions and Control Activities
Initiating Purchases
Placing vendors on an authorized vendor list
Requisitioning goods and services
Preparing purchase orders
Receipt of Goods and Services
Receiving the goods
Storing goods received for inventory
Returning goods to vendor
Recording Liabilities

14. Systems Flowchart – Purchase Transaction

15. Systems Flowchart – Purchase Transaction

16. Systems Flowchart – Purchase Transaction

17. Study Break
This item is a written offer from the purchasing department to a vendor or supplier to purchase goods or services specified in the order.
Purchase requisition
Purchase order
Receiving report
Receiving file
B. Purchase order

18. Study Break
This function of processing of purchase transaction includes placing vendors on an authorized vendor list and preparing purchase orders.
Initiating purchases
Receipt of goods and services
Recording liabilities
Paying liabilities
A. Initiating purchases

19. Cash Disbursement Transactions– Common Documents and Records
Check
Check Summary
Cash Disbursements Transaction File
Cash Disbursements Journal or Check Register

20. Cash Disbursement Transactions- Function and Control Activities
Computerized System
Paying the Liability
Recording the Disbursement
Manual System

21. Systems Flowchart – Cash Disbursement Transactions

22. Study Break
This record is a report of total checks issued in a batch or during a day.
Check
Check summary
Cash disbursements transaction file
Check register
B. Check summary

23. Purchase Adjustment Transactions– Common Documents and Records
Purchase Return Authorization
Shipping Report
Debit Memo

24. Purchase Adjustment Function and Controls
Purchase Returns and Allowances
Other Controls
Tests of Controls

25. Substantive Tests of Accounts Payable Balances
Determining Detection Risk for Tests of Details
Existence and Occurrence
Completeness
Rights and Obligations
Valuation and Allocation
Presentation and Disclosure

26. Designing Substantive Tests
Initial Procedures
Analytical Procedures

27. Designing Substantive Tests
Tests of Details of Transactions
Vouch Recorded Payables to Supporting Documentation
Perform Cutoff Tests
Purchases cutoff tests
Cash disbursement cutoff tests
Purchase return cutoff tests
Perform Search for Unrecorded Payables
Subsequent payments

28. Designing Substantive Tests
Tests of Details of Balances
Accounts Payable Confirmations
Reconcile Unconfirmed Payables to Vendor Statements
Tests of Details of Disclosures

29. Study Break
This is a report prepared on the shipment of goods to vendors showing the kinds and quantities of goods shipped.
Purchase Return Authorization
Shipping Report
Debit Memo
Check Summary
B. Shipping Report

30. Study Break
These items include all checks issued or vouchers paid after the balance sheet date.
Purchase return cutoff tests
Check summary
Subsequent payments
Confirmation of accounts payable
C. Subsequent payments