Expenditure cycle is a repetitive process that involves actions and decisions that consists in purchasing of goods and services, receiving the products in the business premise, approval of the product’s purchase invoices and finally making payments for the invoices. Auditing the expenditure cycle is a motive aimed at reducing the risk of occurrence of elements of fraud thereby minimizing the chances of embezzlement of funds meant for the purchasing processes.
Audit Objectives Related to the Expenditure Cycle
One of the essential audit objectives of the expenditure cycle is to ensure accuracy in the purchasing system of an organization. Besides, it ensures the transactions are accurately computed per the product pricing and the right quantities. To achieve this, the auditors must always provide that the subsidiary ledgers of the AP match with the general ledger accounts and they are correctly computed as per the auditing standards. Secondly, the audit objectives of the expenditure cycle are to ascertain the assertions by the management of the existence of the goods and products that were purchased. The audit process will need to ensure that the products were and are within the organization’s premises. Moreover, the audit is aimed at determining that the amounts in the AP balance are owed by the organizations as at the financial reporting date and included in the balance sheet. Also, the wages accounts reflect a real picture of the services that were performed and within the financial period indicated by the financial statements.
Thirdly, the other audit objective is to ensure completeness in the accounts recorded in the balance sheet. To ascertain this, the auditors need to provide that the amounts owed due to the purchases of products and services as indicated in the AP and are as at the date of the statement of financial position. Moreover, all the goods and services received less the products returned should be reflected in the financial statements of the organizations. Fourthly, an audit of the expenditure cycle is conducted to determine whether the accrued payroll and the AP are the actual and legal obligations as at the date that they were recorded in the balance sheet. Besides, the audit is conducted to ensure that the AP is stated correctly and at the amounts owed by the organization. Lastly, the objective is to provide that all the expenses, accrued payrolls, and the AP recorded during the financial period described adequately and classified in the respective financial statements.
Control Issues Related to the Expenditure Cycle
There are a number of test controls related to the expenditure controls. They include validation controls, batch controls, purchase authorization controls, employee authorization, file update controls, access controls, and output controls. Validation controls are significant when detected transcription errors before the processing of data of the transactions that were carried out within the organization. It can be achieved by reviewing both error logs and listings. Batch controls, on the other hand, is significant in the management of large volumes of data within a system. Moreover, it is used in determining the accuracy and completeness of transactions within an organizations expenditure cycle. The third control is the purchase authorization controls which are mostly conducted when goods are sold to consumers of the organization’s products and services. It is done to determine the accuracy in the valuation of the goods and services
. Employee authorization controls are performed to verify the authenticity of the payroll to avoid cases of fraud. Besides, the control is significant when evidence on the accuracy, existence and rights and obligations objective is desired. File update controls are check controls put in place to ensure that proper sorting occurred within the organization’ expenditure cycle. On the other hand, access controls are conducted to determine and prevent cases of unauthorized access to the assets of the firm. The controls might be achieved through conducting regular inspections of the company assets and conducting reconciliations on the books of accounts. Output controls are conduct to ensure that the organization’s information isn’t lost or corrupted. Furthermore, it ensures that the systems of the organizations function correctly. The process might involve the review of reports.
Procedures Used in a Batch Purchase System
The batch purchasing procedures entail some processes until the final stage where the goods are received and paid for. The first procedure in the system is to monitor the records of inventory to ascertain whether the stock has dropped to a re-order point. In such an instance, a purchases requisition is written and sent to set the pace for the purchase order preparation. The second procedure involves the preparation of a purchase order. In this stage, purchase orders for each vendor are prepared, and a copy sent to the vendor and a fling is made for another copy. Ones the vendors receive the purchase orders, the goods are delivered to the organization’s premises. On arrival of goods, they are received and compared to the purchase order copy filed to ensure that the products are of the right quantity and price. A receiving report is made and copies sent to the inventory and the purchase order file.
In the fourth stage of the batch purchasing system, an update of the inventory records is made in terms of quantity of the available inventory and at the correct prices of the inventory. Moreover, in some instances, such an update might require additional financial reports from the finance department of the organization. The last procedure of the batch purchase system is setting up the accounts payable. Reconciliation is done to match the accounts payable with the received report and that of the purchase order report. In this stage, liability is always deferred until an invoice from the supplier is received after which liability is now recognized. All the transactions are posted in both purchases journal and the subsidiary ledger of AP.
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