Ch. 13: The Expenditure Cycle: Purchasing and Cash Disbursements
1. Always use references to assumption cells in the formulas. For example, the cash sales row formulas should be that column’s sales times cell
D6 (e.g., in February, cash sales cell has this formula: =E19*$D$6
4. Tentative cash balance = beginning balance + cash sales that month + collections of prior month’s cash sales – current expenditures:
=D18+D20+D21-D22
5. Amount borrowed = zero if tentative balance >= desired balance, otherwise the amount of the shortfall: =IF(D23>=D24,0,(D24-D23))
7. Loan repayment is calculated as the excess of cash available over desired ending balance, but never more than the amount of the loan.
Ch 13: Expenditure Cycle
Problem 13-6 continued
f. Add appropriate data validation controls to ensure spreadsheet accuracy.
The solutions manual for chapter 10 discussed data validation controls in detail. Possible
solutions include the following:
1. Limit initial sales to the range $1,000,000 – $10,000,000
Also, include an appropriate input message:
And an appropriate error message:
Ch. 13: The Expenditure Cycle: Purchasing and Cash Disbursements
2. Limit the sales growth, the percentage of sales made for cash, the percentages collected in
subsequent months, the percentage never collected, and expenditures as a percentage of sales
to reasonable ranges. For example, sales growth may be constrained to be between 1% and
10%; expenditures may be constrained to be between 50% and 90%, etc.
Ch 13: Expenditure Cycle
13.7 For each of the following activities, identify the data that must be entered by the
employee performing that activity and list the appropriate data entry controls:
a. Purchasing agent generating a purchase order
Data that must be entered
Appropriate Data Entry Edit Controls
User ID
Validity check
Compatibility test (is user authorized to perform this task?)
Password
Validity check
Compatibility test (is user authorized to perform this task?)
Supplier name
Choose from pull-down list of approved suppliers
Delivery method
Choose from pull-down list of options
Reasonableness check (compare difference between
Item number
Field check
Field check
Reasonableness check
Notes:
1. All other fields on the sample purchase order (see Figure 13-5) can be completed by
the system.
Ch. 13: The Expenditure Cycle: Purchasing and Cash Disbursements
b. Receiving clerk completing a receiving report
Data that must be entered
Appropriate Data Entry Edit Controls
User ID
Validity check
Compatibility test (is user authorized to perform this task?)
Password
Validity check
Compatibility test (is user authorized to perform this task?)
Supplier name
Choose from pull-down list of approved suppliers
Purchase Order number
Choose from pull-down list of open purchase orders from
that supplier
Item number
Field check
Validity check
Reasonableness check – compare to quantity ordered and
tolerance limits
Remarks (quality
inspection)
Completeness check
Notes:
1. All other fields on the sample receiving report (see Figure 13-6) can be completed by
the system.
Ch 13: Expenditure Cycle
13.8 The following list identifies several important control features. For each control, (1)
describe its purpose and (2) explain how it could be best implemented in an
integrated ERP system.
a. Cancellation of the voucher package by the cashier after signing the check
b. Separation of duties of approving invoices for payment and signing checks
Item
Part I – Purpose
Part II – ERP System Control
a.
Prevent resubmission of invoices
for double payment
Control field in supplier invoice record to indicate
the document has been used
Control field in purchase order and receiving report
records to indicate the document has been used to
d.
Verify the accuracy of recorded
amounts and detect losses.
Still need to count physical inventory periodically.
e.
Prevent large disbursements for
questionable reasons.
Still need two signatures.
f.
Verifies that items received were
placed in inventory and were not
stolen.
Restrictions on who can make changes to the supplier
Receiving clerks enter that goods were transferred to
inventory.
Inventory clerks acknowledge receipt of goods via
terminals. System configured so that voucher
package requires that the receiving report include the
Ch. 13: The Expenditure Cycle: Purchasing and Cash Disbursements
13.9 For good internal control, which of the following duties can be performed by the
same individual?
1. Approve purchase orders
2. Negotiate terms with suppliers
3. Reconcile the organization’s bank account
The cells in the following table marked with an X indicate duties that can be performed by the
same individual without creating an internal control weakness:
Duty
1
2
3
4
5
6
7
8
9
1
2
X
3
4
5
6
7
X
8
9
Rationale:
1. The person who approves purchase orders should be in the purchasing function, which is also
2. The cashier should sign checks, cancel the supporting documents before returning them to
Ch 13: Expenditure Cycle
13.10 Last year the Diamond Manufacturing Company purchased over $10 million worth
of office equipment under its “special ordering” system, with individual orders
ranging from $5,000 to $30,000. Special orders are for low-volume items that have
been included in a department manager’s budget. The budget, which limits the
types and dollar amounts of office equipment a department head can requisition, is
approved at the beginning of the year by the board of directors. The special
ordering system functions as follows:
Purchasing A purchase requisition form is prepared and sent to the purchasing
department. Upon receiving a purchase requisition, one of the five purchasing
Receiving The receiving department gets a copy of each purchase order. When
equipment is received, that copy of the purchase order is stamped with the date and,
if applicable, any differences between the quantity ordered and the quantity
received are noted in red ink. The receiving clerk then forwards the stamped
purchase order and equipment to the requisitioning department head and verbally
notifies the purchasing department that the goods were received.
Treasurer Checks received daily from the accounts payable department are
sorted into two groups: those over and those under $10,000. Checks for less than
$10,000 are machine signed. The cashier maintains the check signature machine’s
key and signature plate and monitors its use. Both the cashier and the treasurer sign
all checks over $10,000.
a. Describe the weaknesses relating to purchases and payments of “special orders”
forms in place of paper documents). (CPA Examination, adapted)
Ch. 13: The Expenditure Cycle: Purchasing and Cash Disbursements
Weakness
Control
Effect of new IT
1. Buyer does not verify that
the department head’s request
is within budget.
Compare requested amounts
to total budget and YTD
expenditures.
System can automatically compare the
requested amount to the remaining
budget.
to ensure the best price is
2. No procedures established
Solicit quotes/bids for large
EDI and Internet can be used to solicit
3. Buyer does not check
Prepare a vendor performance
Vendor performance ratings can be
4. Blind counts not made by
receiving.
Black out quantities ordered
on copy of Purchase Order
sent to receiving
Provide incentives if
discrepancies between
packing slip and actual
delivery are detected.
Do not permit receiving clerks to access
quantities on purchase orders.
Request bar coding or RFID tagging of
all items and use readers to check in all
deliveries.
Still provide incentives to detect
discrepancies.
equipment receipt not sent to
equipment receipt to
via on-line terminals and routed to
5. Written notice of
Send written notice of
Receiving data and comments entered
payable
receipt.
6. Written notice of
Send written notice of
Configure system to notify accounts
7. Mathematical accuracy of
Verify mathematical accuracy
Automatic verification of mathematical
8. Invoice quantity not
compared to receiving report
quantity.
Compare/verify invoiced
quantity with quantity
received.
System verifies invoice quantity with
quantity received.
9. Notification of
acceptability of equipment
from requesting department
not obtained prior to
recording payable.
Obtain confirmation from
requisitioner of the
acceptability of equipment
ordered prior to recording
payable.
Configure system to require confirmation
of equipment acceptability prior to
approving invoice for payment.
10. Voucher package not sent
Send voucher package
Configure system to match invoices
voucher package as PAID
11. Voucher package not
Treasurer should mark
Configure system to mark supporting
Ch 13: Expenditure Cycle
12. No mention of bank
reconciliation.
Bank account should be
reconciled by someone other
than Accounts Payable or the
treasurer.
Bank account should be reconciled by
someone other than Accounts Payable or
the treasurer.
Ch. 13: The Expenditure Cycle: Purchasing and Cash Disbursements
13.11 The ABC Company performs its expenditure cycle activities using its integrated
ERP system as follows:
• Employees in any department can enter purchase requests for items they note as
being either out of stock or in small quantity.
• The company maintains a perpetual inventory system.
• Receiving department employees have read-only access to outstanding purchase
orders. Usually, they check the system to verify existence of a purchase order
prior to accepting delivery, but sometimes during rush periods they unload
trucks and place the items in a corner of the warehouse where they sit until there
is time to use the system to retrieve the relevant purchase order. In such cases, if
employee counts the quantity removed and enters that information in an online
terminal located in the storeroom.
• Occasionally, special items are ordered that are not regularly kept as part of
inventory, from a specialty supplier who will not be used for any regular
purchases. In these cases, an accounts payable clerk creates a one-time supplier
Ch 13: Expenditure Cycle
check. Checks are printed on dedicated printer located in the treasurer’s
department, using special stock paper that is stored in a locked cabinet
accessible only to the treasurer and cashier. The paper checks are sent to
accounts payable to be mailed to suppliers.
Identify weaknesses in ABC’s expenditure cycle procedures, explain the resulting
problems, and suggest how to correct those problems.
Weakness/Problem
Applicable Control
Purchase requests are not reviewed and
approved prior to submission. This can
result in ordering unnecessary items.
Purchase requisitions should be reviewed and
approved by the originating department’s
manager prior to being processed.
A formal inventory control system (EOQ,
MRP, or JIT) is not used. This is likely to
result in both shortages and excess
inventory.
A formal inventory control system should be
used to plan purchases to minimize the
combined costs of stock outs, excess
inventory, and ordering costs.
timely manner.
Any purchasing agent can add new
suppliers to the approved supplier master
file without approval. As a result, the
approved supplier master file may
contain unreliable or non-existent
suppliers.
Restrict the number of employees who can
make changes to the approved supplier list.
Periodically print a report of all changes and
review them to ensure that they have all been
approved.
Selection of suppliers is based solely on
price. As a result, inferior quality
products could be purchased, resulting in
increased costs due to warranty repairs,
scrap, or rework.
Criteria for selecting suppliers should include
information on supplier reliability and
product quality.
The system should be configured to track
actual supplier performance against promised
delivery dates.
Ch. 13: The Expenditure Cycle: Purchasing and Cash Disbursements
Receiving department employees inform
purchasing of discrepancies between
quantities received and ordered greater
than 5%. They may fail to do this during
busy periods, resulting in failure to
timely resolve problems.
Configure the system to compare quantities
received to quantities ordered. The system
should send discrepancies exceeding a
tolerable deviation directly to the purchasing
manager.
The identity of employees removing
inventory from the storeroom is not
recorded. This makes it difficult to
investigate the cause of any discrepancies
between recorded and actual counts of
inventory.
The identity of employees removing
inventory should be recorded. This can be
done either by swiping an ID badge or by
entering a user ID in an online terminal.
There is no indication that supporting
documents in the voucher package are
marked “cancelled” or “paid” after being
used to issue a check. This can result in
duplicate payments.
The system should be configured to mark
supporting documents in a voucher package
as PAID when used to generate a check or
EFT payment.
Checks are returned to accounts payable
to be mailed to suppliers. This provides
an opportunity to intercept and alter a
check.
Checks should be mailed by the cashier or the
cashier’s assistant.
sometimes unload deliveries without
verifying the existence of an approved
purchase order. This wastes time in
unloading and then subsequently
contacting the supplier to return the
unordered items.
department employees to always verify the
existence of a valid purchase order before
accepting delivery.
Publish and enforce sanctions for violating
this policy.
Schedule additional help during busy periods.
Ch 13: Expenditure Cycle
13.12 Alden, Inc. has hired you to review its internal controls for the purchase, receipt,
storage, and issuance of raw materials. You observed the following:
• Raw materials, which consist mainly of high-cost electronic components, are
kept in a locked storeroom. Storeroom personnel include a supervisor and four
clerks. All are well trained, competent, and adequately bonded. Raw materials
are removed from the storeroom only upon written or oral authorization by a
production supervisor.
a. Describe the weaknesses that exist in Alden’s expenditure cycle.
b. Suggest control procedures to overcome the weaknesses noted in part a.
Weaknesses
Recommended Improvements
1. Raw materials may be removed
from the storeroom upon oral
authorization from one of the
production foremen.
Raw materials should be removed from the storeroom only
upon written authorization from an authorized production
foreman.
Authorization forms should be prenumbered and accounted
for, list quantities and job or production number, and be
signed and dated.
materials.
Ch. 13: The Expenditure Cycle: Purchasing and Cash Disbursements
3. Raw materials are purchased at
a predetermined reorder level and
in predetermined quantities. Since
production levels may often vary
during the year, quantities ordered
may be either too small or too
great for the current production
demands.
Requests for purchases of raw materials should come from
Production department management and be based on
production schedules and quantities on hand per the
perpetual records.
5. Raw materials are always
purchased from the same vendor.
The purchasing department should obtain competitive bids
on all purchases over a specified amount.
7. There is no inspection of the
merchandise received. Since high-
cost electronic components usually
must meet certain specifications,
they should be tested for these
requirements when received.
The goods need to be inspected for quality standards
promptly upon receipt.
Ch 13: Expenditure Cycle
c. Discuss how those control procedures would be best implemented in an
integrated ERP system using the latest developments in IT.
(CPA Examination, adapted)
• The system can be configured to restrict access to only the information needed to perform
assigned functions. For example, the receiving dock employees would not be able to
create purchase orders, nor see the quantity ordered.
• The system can automatically maintain the perpetual inventory records. Periodic physical
counts of inventory will continue to be necessary, however, and any discrepancies with
recorded amounts investigated.
• The company should adopt either MRP or JIT inventory to improve the efficiency of
ordering inventory.
Ch. 13: The Expenditure Cycle: Purchasing and Cash Disbursements
SUGGESTED ANSWERS TO THE CASES
CASE 13-1 RESEARCH PROJECT: IMPACT OF IT ON EXPENDITURE
CYCLE ACTIVITIES, THREATS, AND CONTROLS
Search popular business and technology magazines (Business Week, Forbes,
Fortune, CIO, etc.) to find an article about an innovative use of IT that can be used
to improve one or more activities in the expenditure cycle. Write a report that:
a. Explains how IT can be used to change expenditure cycle activities
b. Discusses the control implications. Refer to Table 13-2 and explain how the new
procedure changes the threats and appropriate control procedures for
mitigating those threats.