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Chapter 10: Auditing the Expenditure Cycle. IT Auditing & Assurance, 2e, Hall & Singleton. PURCHASES: BATCH PROCESSING. Step 1: Data processing department – inventory control Purchasing Department Step 2: Data processing department – P.O. Receiving Department

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Chapter 10: Auditing the Expenditure Cycle


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chapter 10 auditing the expenditure cycle

Chapter 10:Auditing the Expenditure Cycle

IT Auditing & Assurance, 2e, Hall & Singleton

purchases batch processing
PURCHASES: BATCH PROCESSING
  • Step 1: Data processing department – inventory control
    • Purchasing Department
  • Step 2: Data processing department – P.O.
    • Receiving Department
  • Step 3: Data processing department – batch update of inventory
    • Accounts Payable
  • Step 4: Data processing department – validates vendors

IT Auditing & Assurance, 2e, Hall & Singleton

cash disbursement batch processing
CASH DISBURSEMENT: BATCH PROCESSING
  • Step 5: Data processing department – scans for items due and prints checks for items received
  • Step 6: Cash disbursements department – reconciles checks, submits checks to management for signature
  • Step 7: Accounts payable – matches copies of checks with open vouchers, closes them and files documents
  • Concludes expenditure cycle

IT Auditing & Assurance, 2e, Hall & Singleton

cash disbursement reengineered fully automated
CASH DISBURSEMENT: REENGINEERED—FULLY AUTOMATED
  • Data processing steps performed automatically:
    • Inventory file scanned for items and reorder points
    • Purchase requisition record for all items needing replenishment
    • Consolidate requisitions by vendor
    • Retrieve vendor mailing information
    • P.O. prepared and sent to vendor (EDI)
    • Open P.O. record added for each transaction
    • List of P.O. sent to purchasing department

IT Auditing & Assurance, 2e, Hall & Singleton

cash disbursement reengineered fully automated5
CASH DISBURSEMENT: REENGINEERED– FULLY AUTOMATED
  • Goods arrive at receiving department
  • Quantities received entered per item

IT Auditing & Assurance, 2e, Hall & Singleton

cash disbursement reengineered fully automated6
CASH DISBURSEMENT: REENGINEERED—FULLY AUTOMATED
  • Data processing steps performed automatically:
    • Quantities keyed matched to open P.O. record
    • Receiving report file record added
    • Update inventory subsidiary records
    • G.L. inventory updated
    • Record removed from open P.O. file and added to open A.P. file, due date established

IT Auditing & Assurance, 2e, Hall & Singleton

cash disbursement reengineered fully automated7
CASH DISBURSEMENT:REENGINEERED—FULLY AUTOMATED
  • Each day, due date filed of A.P. are scanned for items where payment is due

IT Auditing & Assurance, 2e, Hall & Singleton

cash disbursement reengineered fully automated8
CASH DISBURSEMENT: REENGINEERED—FULLY AUTOMATED
  • Data processing steps performed automatically:
    • Checks are printed, signed and distributed to mailroom (unless EDI/EFT)
    • Payments are recorded in check register file
    • Items paid are transferred from open A.P. to closed A.P. file
    • G.L.- A.P. and cash accounts are updated
    • Appropriate reports are transmitted to A.P. and cash disbursements departments for review

IT Auditing & Assurance, 2e, Hall & Singleton

cash disbursement reengineered fully automated9
CASH DISBURSEMENT:REENGINEERED—FULLY AUTOMATED
  • Control implications
    • General in nature
    • Similar to those of Chapter 9

IT Auditing & Assurance, 2e, Hall & Singleton

batch automated system vs manual batch
BATCH AUTOMATED SYSTEM VS. MANUAL BATCH
  • Improved inventory control
  • Better cash management
  • Less time lag
  • Better purchasing time management
  • Reduction of paper documents

IT Auditing & Assurance, 2e, Hall & Singleton

reengineered system vs batch automated system
REENGINEERED SYSTEM VS.BATCH AUTOMATED SYSTEM
  • Segregation of duties
  • Accounting records and access controls

IT Auditing & Assurance, 2e, Hall & Singleton

payroll procedures
PAYROLL PROCEDURES
  • Drawbacks to using regular A.P. and cash disbursements systems to do payroll
    • General expenditure procedures that apply to all vendors will not apply to employees
    • Writing checks to employees requires special controls
    • General expenditure procedures are designed to accommodate relatively smooth flow of transactions

IT Auditing & Assurance, 2e, Hall & Singleton

reengineered payroll system
REENGINEERED PAYROLL SYSTEM
  • Often integrated with H.R.
  • Differs from previous automate system
    • Operations departments transmit transactions to D.P. electronically
    • Direct access to files are used for data storage
    • Many processes are now performed in real time

IT Auditing & Assurance, 2e, Hall & Singleton

reengineered payroll system14
REENGINEERED PAYROLL SYSTEM
  • Personnel
  • Cost accounting
  • Timekeeping
  • Data processing
    • Labor costs are distributed to accounts
    • Online labor distribution summary
    • Online payroll register
    • Employee records are updated
    • Payroll checks are prepared and signed
    • Disbursement system generates check to fund the payroll imprest account
    • G.L. updated

IT Auditing & Assurance, 2e, Hall & Singleton

expenditure cycle audit objectives
EXPENDITURE CYCLE AUDIT OBJECTIVES
  • Input controls
    • Data validation controls
    • Testing validation controls
    • Batch controls
    • Testing batch controls
    • Purchases authorization controls
    • Testing purchases authorization controls
    • Employee authorization
    • Testing employee authorization procedures

IT Auditing & Assurance, 2e, Hall & Singleton

expenditure cycle audit objectives16
EXPENDITURE CYCLE AUDIT OBJECTIVES
  • Process controls
    • File update controls
      • Sequence check control
      • Liability validation control
      • Valid vendor file
      • Testing file update controls
    • Access controls
      • Warehouse security
      • Moving assets promptly when received
      • Paying employees by check vs. cash
      • Risks
        • Employees with access to A.P. subsidiary file
        • Employees with access to attendance records
        • Employees with access to both cash and A.P. records
        • Employees with access to both inventory and inventory records
      • Testing access controls

IT Auditing & Assurance, 2e, Hall & Singleton

expenditure cycle audit objectives17
EXPENDITURE CYCLE AUDIT OBJECTIVES
  • Process controls
    • Physical controls
      • Purchase system controls
        • Segregation of inventory control from warehouse
        • Segregation of G.L. and A.P. from cash disbursements
        • Supervision of receiving department
          • Inspection of assets
          • Theft of assets
          • Reconciliation of supporting documents: P.O., receiving report, supplier’s invoice
      • Payroll System controls
        • Verification of timecards
        • Supervision
        • Paymaster
        • Payroll imprest account
      • Testing of physical controls

IT Auditing & Assurance, 2e, Hall & Singleton

expenditure cycle audit objectives18
EXPENDITURE CYCLE AUDIT OBJECTIVES
  • Process controls
    • Output controls
      • A.P. change report
      • Transaction logs
      • Transaction listing
      • Logs of automatic transactions
      • Unique transaction identifiers
      • Error listing
      • Testing output controls

IT Auditing & Assurance, 2e, Hall & Singleton

expenditure cycle substantive tests
EXPENDITURE CYCLE SUBSTANTIVE TESTS
  • Risks and audit concerns
  • Understanding data
    • Inventory file
    • Purchase order file
    • Purchase order line item file
    • Receiving report file
    • Disbursement voucher file
    • File preparation procedures

IT Auditing & Assurance, 2e, Hall & Singleton

expenditure cycle substantive tests20
EXPENDITURE CYCLE SUBSTANTIVE TESTS
  • Testing accuracy and completeness assertions
  • Review disbursement vouchers for unusual trends and exceptions
    • Accurate invoice prices
  • Testing completeness, existence, rights and obligations assertions
    • Searching for unrecorded liabilities
    • Searching for unauthorized disbursement vouchers
    • Review of multiple checks to vendors
    • Auditing payroll and related records

IT Auditing & Assurance, 2e, Hall & Singleton

chapter 10 auditing the expenditure cycle21

Chapter 10:Auditing the Expenditure Cycle

IT Auditing & Assurance, 2e, Hall & Singleton