Accounting Information Systems

Fifteenth Edition, Global Edition

Chapter 15
The Expenditure Cycle: Purchasing
to Cash Disbursements

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Learning Objectives (1 of 2)
• Discuss the basic business activities and related
information processing operations in the expenditure cycle,
explain the general threats to those activities, and describe
the controls that can mitigate those threats.
• Explain the process and key decisions involved in
ordering goods and services, identify the threats to
those activities, and describe the controls that can mitigate
those threats.
• Explain the process and key decisions involved in
receiving goods and services, identify the threats to
those activities, and describe the controls that can mitigate
those threats.

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Basic Expenditure Cycle Activities
• Order materials, supplies, and services
• Receive materials, supplies, and services
• Approve supplier (vendor) invoice
• Cash disbursement

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Learning Objectives (2 of 2)
• Explain the process and key decisions involved in
approving supplier invoices for goods and services,
identify the threats to those activities, and describe the
controls that can mitigate those threats.
• Explain the process and key decisions involved in making
cash disbursements to suppliers, identify the threats to
those activities, and describe the controls that can mitigate
those threats.

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Key Decisions
• What is the optimal level of inventory?
• Which suppliers provide the best quality at the best price?
• How can IT be used to improve efficiency and accuracy of
logistics?
• How can we take advantage of vendor discounts?
• How can we maximize cash flow?

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General Threats and Controls
Threats Controls
1. Inaccurate or invalid 1. a. Data processing
master data integrity controls
2. Unauthorized disclosure of b. Restriction of access to
sensitive information master data
3. Loss or destruction of data c. Review of all changes
4. Poor performance to master data
2. a. Access controls
b. Encryption
3. a. Backup and disaster
recovery procedures
4. a. Managerial reports

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Order Goods (Materials/Supplies) or
Services Processing Steps
• Identify what, when, and how much to purchase
– Source document: purchase requisition
• Choose a supplier
– Source document: purchase order

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Ordering Goods/Services (1 of 2)
Threats Controls

1. Stockouts and excess inventory 1. a. Perpetual inventory system

2. Purchasing items not needed b. Bar-coding, RFI D
3. Purchasing items at inflated prices c. Periodic physical counts
4. Purchasing goods of poor quality 2. a. Perpetual inventory systems
b. Review and approval of purchase
requisitions
c. Centralized purchasing
3. a. Price lists
b. Competitive bids
c. Review purchase orders
4. a. Use approved suppliers
b. Review and approve purchases from
new suppliers
c. Monitor product quality by supplier
d. Hold purchasing managers
responsible for rework and scrap cost
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Ordering Goods/Services (2 of 2)
Threats Controls
5. Unreliable suppliers 5. a. Monitor supplier
6. Purchasing from unauthorized performance
suppliers b. Require quality certification
7. Kickbacks 6. a. Purchase from approved
suppliers
b. Review approval from
purchases of new suppliers
c. ED I specific controls
7. a. Supplier audits
b. Prohibit gifts
c. Job rotation & mandatory
vacations
d. Required disclosure of
financial and personal
interests in suppliers
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Receiving Process
• Goods arrive
– Verify goods ordered against the purchase order (what,
how much, quality)
– Source document: receiving report

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Receiving Goods or Services
Threats Controls
1. Accepting unordered items 1. a. Authorized purchase
2. Mistakes in counting orders needed before
receiving goods
3. Verifying receipt of services
2. a. Bar codes or R FI D
4. Inventory theft
b. Receiving employees sign
receiving report
c. Do not inform receiving of
quantity ordered
3. a. Budget controls and
audits
4. a. Restrict physical access
to inventory
b. Document all inventory
transfers
c. Segregate custody vs.
receiving of2021
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Pearson Education Ltd.
Approve Supplier Invoice and Cash
Disbursements
• Match the supplier invoice to:
– Purchase order
– Receiving report
supplier invoice + purchase order + receiving report = voucher
• Approve supplier invoice for payment
• Source document:
– disbursement voucher
• Pay vendor

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Approve Supplier Invoice
Threats Controls
1. Errors in supplier invoice 1. a. Verify invoice
2. Mistakes in posting to accuracy
accounts payable b. Require detailed
receipts for p-cards
c. Restrict access to
supplier master data
2. a. Data entry edit
controls
b. Reconcile detailed
accounts payable
records to the general
ledger accounts
payable account
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Cash Disbursements
Threats Controls
1. Failure to take discounts 1. a. File invoices by due date to take
2. Pay for items not received advantage of discounts
3. Duplicate payments 2. a. Match supplier invoice to
supporting documents (purchase
4. Theft of cash
order, receiving report)
5. Check alteration
3. a. Pay only original invoices
6. Cash flow problems
b. Cancel supporting document
when payment is made
4. a. Physical security of checks
b. Separation of duties
c. Reconcile bank accounts
5. a. Check protection machines
b. Special inks / papers
6. a. Cash flow budget

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Key Terms
• Expenditure cycle • Vendor-managed inventory (VM I)
• Economic order quantity (EO Q) • Kickbacks
• Reorder point • Receiving report
• Materials requirement planning • Debit memo
(MR P) • Voucher package
• Just-in-time (J I T) inventory • Nonvoucher system
system
• Voucher system
• Purchase requisition
• Disbursement voucher
• Purchase order
• Evaluated receipt settlement
• Blanket purchase order/blanket
(E R S)
order
• Procurement card
• Imprest fund

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