Chapter 10: Auditing the Expenditure Cycle PDF

IT Auditing & Assurance, 2e, Hall & Singleton  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...

IT Auditing & Assurance, 2e, Hall & Singleton  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  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  Data processing steps performed automatically: 1. Inventory file scanned for items and reorder points 2. Purchase requisition record for all items needing replenishment 3. Consolidate requisitions by vendor 4. Retrieve vendor mailing information 5. P.O. prepared and sent to vendor (EDI) 6. Open P.O. record added for each transaction 7. List of P.O. sent to purchasing department IT Auditing & Assurance, 2e, Hall & Singleton  Goods arrive at receiving department  Quantities received entered per item IT Auditing & Assurance, 2e, Hall & Singleton  Data processing steps performed automatically: 1. Quantities keyed matched to open P.O. record 2. Receiving report file record added 3. Update inventory subsidiary records 4. G.L. inventory updated 5. Record removed from open P.O. file and added to open A.P. file, due date established IT Auditing & Assurance, 2e, Hall & Singleton  Each day, due date filed of A.P. are scanned for items where payment is due IT Auditing & Assurance, 2e, Hall & Singleton  Data processing steps performed automatically: 1. Checks are printed, signed and distributed to mailroom (unless EDI/EFT) 2. Payments are recorded in check register file 3. Items paid are transferred from open A.P. to closed A.P. file 4. G.L.- A.P. and cash accounts are updated 5. Appropriate reports are transmitted to A.P. and cash disbursements departments for review IT Auditing & Assurance, 2e, Hall & Singleton  Control implications ◦ General in nature ◦ Similar to those of Chapter 9 IT Auditing & Assurance, 2e, Hall & Singleton  Improved inventory control  Better cash management  Less time lag  Better purchasing time management  Reduction of paper documents IT Auditing & Assurance, 2e, Hall & Singleton  Segregation of duties  Accounting records and access controls IT Auditing & Assurance, 2e, Hall & Singleton  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  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  Personnel  Cost accounting  Timekeeping  Data processing 1. Labor costs are distributed to accounts 2. Online labor distribution summary 3. Online payroll register 4. Employee records are updated 5. Payroll checks are prepared and signed 6. Disbursement system generates check to fund the payroll imprest account 7. G.L. updated IT Auditing & Assurance, 2e, Hall & Singleton  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  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  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  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  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  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 IT Auditing & Assurance, 2e, Hall & Singleton