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Chapter 9 – Expenditure Processes and Controls – Purchases
Instructor Manual
➢ Introduction To Expenditure Processes. When a purchase occurs, the
information resulting from that purchase must flow into the purchase recording
systems, the accounts payable and cash disbursement systems, and the inventory
tracking systems. In IT accounting systems, these recording and processing
systems are called Transaction Processing Systems (TPS). Thus, there is a set of
➢ Purchase Processes. When a purchase is initiated, the appropriate purchase
requisition form should be prepared to document the need and request that the
specific items and quantities be purchased. A purchase requisition must then be
authorized by a designated member of management. A purchase order is prepared
and it is the document issued to a seller by a buyer that indicates the products,
quantities, and agreed prices for products or services that the seller will provide to
the buyer. In manual systems, purchasing department personnel record the
to show quantities and descriptions of items included in the shipment, but it does not
generally include prices. A receiving report is then prepared by the receiving clerk,
detailing the contents and condition of the receipt. A receiving log should also be
maintained as a sequential listing of all receipts. The liability and the inventory
receipt must be recorded in the same period as the physical receipt of goods. If
goods have arrived but the related invoice is still outstanding at the end of the
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➢ Controls And Risks In Purchase Processes.
o Authorization Of Transactions. The company should establish specific
procedures to ensure that POs have been properly authorized before the order is
officially placed with a vendor. No purchasing events should begin until the initial
authorization occurs. In most organizations, the approval of a purchase
requisition is the initial approval that triggers the remaining purchase processes.
A company should have established guidelines for managing vendor
relationships, including securing competitive bids for purchase requisitions,
negotiating payment terms, and maintaining current price lists.
o Segregation Of Duties. Authorization, record keeping and custody should be
segregated. The authority function includes approval of purchase transactions
o Adequate Records And Documents. Files should be maintained for purchase
requisitions, POs, receiving reports, invoices, etc. These files should be
organized either in chronological order by due date, in numerical sequence by
form number or inventory item number, or in alphabetical order by vendor name.
o Security Of Assets And Documents. Purchasing records and programs must
be protected from unauthorized access through the use of electronic controls,
such as passwords, and physical controls, such as locked storage cabinets.
➢ Purchase Return Processes. A company must have specific procedures in place
for handling its returns to a vendor. Once rejected goods are identified,
management approval must be obtained in order to formally make the decision to
return the purchase. A debit memo should then be prepared. A debit memo is the
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➢ Risks And Controls In Purchase Return Processes.
o Authorization Of Transactions. Special authorization should be required to
officially reject and return the items and initiate the preparation of a debit memo.
All debit memos must be approved by a member of management or other
designated individual before the goods are physically returned to the vendor.
o Segregation Of Duties. The employee who prepares the debit memos should
o Security Of Assets And Documents. Accounts payable records and data files
should be restricted to those who are specifically authorized to approve or record
the related purchase return. Custody of the returned goods should be controlled
and limited to those in the shipping function or others specifically designated to
handle the goods.
o Independent Checks And Reconciliations. There must be controls that check
for the possibility of unrecorded purchase returns. Physical inventory counts can
➢ Cash Disbursement Processes. The accounts payable department is generally
responsible for notification of the need to make cash disbursements. In accounts
payable, the purchase order, receiving report, and invoice must be matched to make
sure that a valid order was placed, the goods were received in good condition, and
that the vendor billed the correct quantities and prices. No payments should be
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disbursements department for preparation of the check detail. Supporting
documentation should be attached, including a copy of the PO and receiving report.
The checks usually include a check stub, or remittance advice. A cash
disbursements clerk prepares checks, the responsibility for signing the check is
reserved for members of management. Once a payment is made, the related
invoice should be canceled to indicate that it has been paid.
➢ Controls And Risks In Cash Disbursement Processes.
o Authorization Of Transactions. Only the accounts payable department should
authorize the processing of a cash disbursement transaction, based on the need
to satisfy a vendor obligation. In addition, designated members of management
specified dollar amount.
o Segregation Of Duties. Purchasing, receiving, accounts payable, and cash
disbursements functions should be segregated. Individuals within the cash
disbursements department should not have check-signing authority and should
not have access to the cash account or to the company’s accounts payable
records. In addition, information systems operations and programming related to
the cash disbursements and accounts payable departments should be separate
from those having responsibility for custody, authorization, or record keeping
within those functions
o Adequate Records And Documents. An accounts payable subsidiary ledger
o Security Of Assets And Documents. Access to cash should be limited to the
authorized check signers. Physical controls should be in place in the areas
o Independent Checks And Reconciliations. The cash disbursements journal
and accounts payable subsidiary ledger should be reconciled to the general
ledger control accounts on a regular basis. Also, someone separate from the
cash disbursements and accounts payable functions should be responsible for
reconciliation of the bank statement on a monthly basis.
o Cost/Benefit Considerations. When a company processes a large volume of
cash disbursements, it should consider the implementation of internal control
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volumes of purchase returns, or cash disbursements denominated in foreign
currencies.
➢ IT Systems Of Expenditure And Cash Disbursement Processes.
o Computer Based Matching. Automated matching is a computer software
system in which the computer software matches an invoice to its related
purchase order and receiving report. The system will not approve an invoice for
payment unless the items and quantities match with the packing slip, and the
prices match the purchase order prices. This ensures that the vendor has billed
for the correct items, quantities, and prices. During the matching process, the
o Evaluated Receipt Settlement. ERS is an invoice-less match in which a
comparison takes place by matching the purchase order to the goods received.
If the PO matches the goods, payment is made to the vendor. This eliminates
the need for the vendor to send an invoice, since payment is approved as soon
goods are received (when they match a purchase order). If there is no matching
purchase order, the goods are refused and returned to the vendor. If there is a
matching purchase order, receiving employees enter a receiving record into the
o E-Business And Electronic Data Interchange (EDI) Systems And The Risks
And Controls. Electronic exchange of transaction information is much the same
for the buyer and seller. The use of electronic links between buyer and seller
cause risks of unauthorized access and hacking or other network break-ins.
o E-Payables. The newest technologies related to invoicing and payables are
generally referred to as e-payables. However, a more specific name for these
electronic invoicing and payment systems is Electronic Invoice Presentment and
Payment or EIPP. Most EIPP systems take advantage of the connectivity of the
Internet to electronically send invoices or payments. This means that an
accounts payable process in an organization could receive invoices electronically
via the Internet, and make payment via the Internet.
o Procurement Cards. Procurement cards, often called p-cards, are credit cards
that the organization gives to certain employees to make designated purchases.
➢ Ethical Issues Related To Expenditure Processes. In expenditure processes, all
ethical problems cannot be completely eliminated, but management can reduce the
chances of expenditure fraud or ethics violations by maintaining good internal
controls and enforcing ethical conduct. Policies such as accepting only valid original
receipts of travel would have helped prevent the duplicate travel expense fraud.
➢ Corporate Governance In Expenditure Processes. The functions within
corporate governance are management oversight, internal controls and compliance,
financial stewardship, and ethical conduct. While corporate governance is
important for all business processes, it is particularly necessary in the expenditure
processes. Funds expended by an organization do not belong to managers.
Managers are stewards, or temporary managers of those funds. Corporate
governance policy and procedures must be in place to insure that funds are