1. Internal Controls Related to the Expenditure Cycle

1.1. Purchases

The following three functions in a purchase transaction should be segregated:

1. Purchase requisition

2. Purchase orders

3. Receipt of goods or services

1.2. Accounts Payable

Once the accounting department obtains the receiving report, it will record the payable, approve the invoice for payment, and record the payment after it is paid by the treasurer.

1. Recording the payable

2. Approving invoice for payment and recording payment

1.3. Cash Disbursements

Ideally invoices should be paid by check. For effective internal control, the functions of approving the payment and signing the checks should be segregated.

2. Performing Specific Procedures to Obtain Evidence: The Expenditure Cycle

2.1. Auditing Accounts Payable

For accounts payable, the completeness and accuracy assertions are generally more relevant than the existence and rights and obligations assertions, because the risk of understatement is greater than the risk of overstatement.

2.2. Auditing Purchase Transactions

The following substantive tests may also be performed as tests of controls or dual-purpose tests.

• Completeness: The auditor should trace a sample of vouchers to the purchase journal. The auditor should also account for the prenumbered sequencing of purchase orders, receiving reports, and vouchers.

• Cutoff: The auditor should compare dates on a sample of vouchers with the dates the transactions were recorded in the purchase journal. The auditor should also examine purchases before and after year-end to determine if they were recorded in the proper period.

• Valuation, Allocation, and Accuracy: The auditor should recompute the mathematical accuracy of a sample of vendor invoices.

• Existence and Occurrence: The auditor should test a sample of vouchers to confirm proper authorization and the presence of the receiving report.

• Understandability of Presentation and Classification: The auditor should verify the account classification of a sample of purchases.

2.3. Auditing Presentation and Disclosure

Completeness: The auditor should ensure that all required disclosures related to accounts payable and purchases have been included in the notes to the financial statements. Required disclosures include:

• Payables by type (trade, officer/employee, affiliates) and term (short term and long term)

• Purchase contracts and purchase commitments

• Related party purchases and payables

• Expenses by segment

Valuation, Allocation, and Accuracy: The auditor should read the footnotes and other information related to accounts payable and purchases to determine whether the information is accurate and presented at the appropriate amounts. 

Rights and Obligations, and Occurrence: The auditor should compare disclosures to other audit evidence to ensure that all disclosed information related to accounts payable and purchases has occurred.

Understandability of Presentation and Classification: The auditor should read all accounts payable and purchase related disclosures to ensure that they are understandable. The auditor should determine whether material long-term payables or nontrade payables require separate disclosure.