Expenditure Cycle Audits: Payables, Purchases & Cash Disbursements Done Right
Overview: The expenditure cycle is essential for detecting understatements and unrecorded liabilities. This guide breaks down the flow from purchase requisition to cash disbursement, highlighting key controls and audit tests.
✅ Core Internal Controls
- Segregation of Duties:
- Authorization: Purchasing/requisitioning department.
- Recordkeeping: Accounts payable/accounting.
- Custody: Receiving department (goods) and treasurer (cash).
- Use prenumbered purchase orders and receiving reports.
- Match purchase orders, receiving reports, and vendor invoices before approving payment.
- Voucher system: All documents matched and approved before payment.
✅ Typical Cycle Steps
- Purchase Requisition: User department sends approved, numbered request to purchasing.
- Purchase Order: Purchasing requests bids, approves, and sends copies to vendor, receiving, A/P, and keeps a copy.
- Receipt: Receiving department inspects goods, prepares a receiving report (blind count helps accuracy), and forwards to A/P and requisitioner.
- A/P Processing: A/P matches PO, receiving report, and vendor invoice before recording liability.
- Cash Disbursement: Treasurer receives approved voucher packet, signs and mails checks, cancels documents, and sends copy to A/P for posting.
✅ Accounts Payable: Key Audit Tests
- Completeness: Search for unrecorded liabilities by examining post-year-end cash disbursements and unpaid vendor statements.
- Existence: Vouch selected payables to vouchers and supporting docs.
- Valuation: Foot A/P listing and tie to GL. Recompute invoices for accuracy and discounts.
- Cutoff: Compare dates on vouchers and receiving reports to ensure liabilities recorded in correct period.
- Confirmation: A/P confirmations are not required but may be used when IC is weak or there are disputes.
✅ Cash Disbursement Controls
- Payment approval and check signing must be separate.
- All supporting documents canceled to prevent reuse.
- Use prenumbered checks; reconcile cash disbursements journal to bank statements.
✅ Required Disclosures
- Payables by type and term (trade, affiliate, short/long term).
- Purchase commitments and related party transactions.
- Expenses by segment if applicable.
✅ Tips for Dual-Purpose Tests
- Test controls and substantive detail at once (e.g., match receiving reports to invoices and vouchers).
- Trace prenumbered docs for completeness and accuracy.
🔗 Helpful References
👉 Lock down your expenditure cycle — spot unrecorded liabilities and control cash outflows smartly!
