1. Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8 th Edition Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8 th 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 1.The expenditure cycle consists of all of the following activities, except: A.Purchase transactions B.Cash disbursement transactions C.Sales transactions D.Purchase adjustments C. Sales transactions

10. Study Break 2.This analytical procedure calculates the average number of days it takes to retire accounts payables. A.Current ratio B.Quick ratio C.Cost of Goods Sold to Accounts Payable 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

17. Study Break 3.This item is a written offer from the purchasing department to a vendor or supplier to purchase goods or services specified in the order. A.Purchase requisition B.Purchase order C.Receiving report D.Receiving file B. Purchase order

18. Study Break 4.This function of processing of purchase transaction includes placing vendors on an authorized vendor list and preparing purchase orders. A.Initiating purchases B.Receipt of goods and services C.Recording liabilities D.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 – Paying the Liability – Recording the Disbursement

21. Systems Flowchart – Cash Disbursement Transactions

22. Study Break 5.This record is a report of total checks issued in a batch or during a day. A.Check B.Check summary C.Cash disbursements transaction file D.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 6.This is a report prepared on the shipment of goods to vendors showing the kinds and quantities of goods shipped. A.Purchase Return Authorization B.Shipping Report C.Debit Memo D.Check Summary B. Shipping Report

30. Study Break 7.These items include all checks issued or vouchers paid after the balance sheet date. A.Purchase return cutoff tests B.Check summary C.Subsequent payments D.Confirmation of accounts payable C. Subsequent payments