C HAPTER 11

The Expenditure Cycle:

Purchasing and Cash
Disbursements

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 INTRODUCTION

• Questions to be addressed in this chapter

include:
– What are the basic business activities and
data processing operations that are
performed in the expenditure cycle?
– What decisions need to be made in the
expenditure cycle, and what information is
needed to make these decisions?
– What are the major threats in the expenditure
cycle and the controls related to those
threats?
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 INTRODUCTION
• The primary external exchange of information is with
suppliers (vendors).
• Information flows to the expenditure cycle from other
cycles, e.g.:
– The revenue cycle, production cycle, inventory control, and
various departments provide information about the need to
purchase goods and materials.
• Information also flows from the expenditure cycle:
– When the goods and materials arrive, the expenditure
cycle provides information about their receipt to the parties
that have requested them.
– Information is provided to the general ledger and reporting
function for internal and external financial reporting.

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 INTRODUCTION

• The primary objective of the expenditure

cycle is to minimize the total cost of acquiring
and maintaining inventory, supplies, and
services.

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 INTRODUCTION

• Decisions that must be made include:

– What level of inventory and supplies should we
carry?
– What vendors provide the best price and quality?
– Where should we store the goods?
– Can we consolidate purchases across units?
– How can IT improve inbound logistics?
– Is there enough cash to take advantage of early
payment discounts?
– How can we manage payments to maximize cash
flow?

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 INTRODUCTION

• Management also has to evaluate the

efficiency and effectiveness of expenditure
cycle processes.
– These evaluations require data about:
• Events that occur
• Resources affected
• Agents who participate
– This data needs to be accurate, reliable, and
timely.

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 INTRODUCTION

• In this chapter, we’ll look at how the three

basic AIS functions are carried out in the
expenditure cycle:
– How do we capture and process data?
– How do we store and organize the data for
decisions?
– How do we provide controls to safeguard
resources (including data)?

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 EXPENDITURE CYCLE BUSINESS
ACTIVITIES
• The three basic activities performed in the
expenditure cycle are:
– Ordering goods, supplies, and services
– Receiving and storing these items
– Paying for these items
• These activities mirror the activities in the
revenue cycle.

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 EXPENDITURE CYCLE BUSINESS
ACTIVITIES
• The three basic activities performed in the
expenditure cycle are:
– Ordering goods, supplies, and services
– Receiving and storing these items
– Paying for these items
• These activities mirror the activities in the
revenue cycle.

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• Key decisions in this process involve
identifying what, when, and how much to
purchase and from whom.
• Weaknesses in inventory control can create
significant problems with this process:
– Inaccurate records cause shortages.
• One of the key factors affecting this process
is the inventory control method to be used.

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• Alternate Inventory Control Methods
– We will consider three alternate approaches to
inventory control:
• Economic Order Quantity (EOQ)
• Just in Time Inventory (JIT)
• Materials Requirements Planning (MRP)

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• Alternate Inventory Control Methods
– We will consider three alternate approaches to
inventory control:
• Economic Order Quantity (EOQ)
• Materials Requirements Planning (MRP)
• Just in Time Inventory (JIT)

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• EOQ is the traditional approach to managing
inventory.
– Goal: Maintain enough stock so that production doesn’t
get interrupted.
– Under this approach, an optimal order size is calculated by
minimizing the sum of several costs:
• Ordering costs
• Carrying costs
• Stockout costs
– The EOQ formula is also used to calculate reorder point,
i.e., the inventory level at which a new order should be
placed.
– Other, more recent approaches try to minimize or eliminate
the amount of inventory carried.
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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• Alternate Inventory Control Methods
– We will consider three alternate approaches to
inventory control:
• Economic Order Quantity (EOQ)
• Materials Requirements Planning (MRP)
• Just in Time Inventory (JIT)

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• MRP seeks to reduce inventory levels by
improving the accuracy of forecasting
techniques and carefully scheduling
production and purchasing around that
forecast.

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• Alternate Inventory Control Methods
– We will consider three alternate approaches to
inventory control:
• Economic Order Quantity (EOQ)
• Materials Requirements Planning (MRP)
• Just in Time Inventory (JIT)

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• JIT systems attempt to minimize or eliminate
inventory by purchasing or producing only in
response to actual (as opposed to forecasted) sales.
• These systems have frequent, small deliveries of
materials, parts, and supplies directly to the location
where production will occur.
• A factory with a JIT system will have multiple
receiving docks for their various work centers.

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• Similarities and differences between MRP
and JIT:
– Scheduling production and inventory
accumulation
• MRP schedules production to meet estimated sales
and creates a stock of finished goods inventory to be
available for those sales.
• JIT schedules production in response to actual sales
and virtually eliminates finished goods inventory,
because goods are sold before they’re made.

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• Similarities and differences between MRP
and JIT:
– Scheduling production and inventory
accumulation
– Nature of products
• MRP systems are better suited for products that have
predictable demand, such as consumer staples.
• JIT systems are particularly suited for products with
relatively short life cycles (e.g., fashion items) and for
which demand is difficult to predict.

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• Similarities and differences between MRP
and JIT:
– Scheduling production and inventory
accumulation
– Nature of products
– Costs and efficiency
• Both can reduce costs and improve efficiency over
traditional EOQ approaches.

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• Similarities and differences between MRP
and JIT:
– Scheduling production and inventory
accumulation
– Nature of products
– Costs and efficiency
– Too much or too little
• In either case, you must be able to:
– Quickly accelerate production if there is unanticipated
demand
– Quickly stop production if too much inventory is
accumulating.
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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• Whatever the inventory control system, the order
processing typically begins with a purchase request
followed by the generation of a purchase order.
• A request to purchase goods or supplies is triggered
by either:
– The inventory control function; or
– An employee noticing a shortage.
• Advanced inventory control systems automatically
initiate purchase requests when quantity falls below
the reorder point.

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• The need to purchase goods typically results in the
creation of a purchase requisition. The purchase
requisition is a paper document or electronic form
that identifies:
– Who is requesting the goods
– Where they should be delivered
– When they’re needed
– Item numbers, descriptions, quantities, and prices
– Possibly a suggested supplier
– Department number and account number to be charged
• Most of the detail on the suppliers and the items
purchased can be pulled from the supplier and
inventory master files.
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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• The purchase requisition is received by a
purchasing agent (aka, buyer) in the
purchasing department, who typically
performs the purchasing activity.
– In manufacturing companies, this function usually
reports to the VP of Manufacturing.

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• A crucial decision is the selection of supplier.
• Key considerations are:
– Price
– Quality
– Dependability
• Especially important in JIT systems because late or
defective deliveries can bring the whole system to a
halt.
• Consequently, certification that suppliers meet ISO
9000 quality standards is important. This certification
recognizes that the supplier has adequate quality
control processes.

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• Once a supplier has been selected for a
product, their identity should become part of
the product inventory master file so that the
selection process does not have to be carried
out for every purchase.
– A list of potential alternates should also be
maintained.
– For products that are seldom ordered, the
selection process may be repeated every time.

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• It’s important to track and periodically
evaluate supplier performance, including data
on:
– Purchase prices
– Rework and scrap costs
– Supplier delivery performance
• The purchasing function should be evaluated
and rewarded based on how well it minimizes
total costs, not just the costs of purchasing
the goods.
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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• A purchase order is a document or
electronic form that formally requests a
supplier to sell and deliver specified products
at specified prices.
• The PO is both a contract and a promise to
pay. It includes:
– Names of supplier and purchasing agent
– Order and requested delivery dates
– Delivery location
– Shipping method
– Details of the items ordered
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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• Multiple purchase orders may be completed for one
purchase requisition if multiple vendors will fill the
request.
• The ordered quantity may also differ from the
requested quantity to take advantage of quantity
discounts.
• A blanket order is a commitment to buy specified
items at specified prices from a particular supplier
for a set time period.
– Reduces buyer’s uncertainty about reliable material
sources
– Helps supplier plan capacity and operations

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• IT can help improve efficiency and
effectiveness of purchasing function.
– The major cost driver is the number of
purchase orders processed. Time and cost
can be cut by:
• Using EDI to transmit purchase orders

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• In a vendor-managed inventory (VMI) program:
• IT can help improve
– Inventory efficiency
control and purchasing areand
outsourced to a
supplier
effectiveness of purchasing
– The supplier function.
has access to POS and inventory data and
automatically replenishes inventory
– The major cost driver is the number of
– This approach:
purchase• orders processed.
Reduces amount Time and cost
of inventory carried
• Eliminates costs of generating purchase orders
can be– cut by:
Requires good controls to ensure accuracy of inventory
• Using EDI
records
to transmit purchase orders
• Using vendor-managed inventory systems

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• IT can help improve efficiency and
effectiveness of purchasing function.
– The major cost driver is the number of
purchase orders
• Suppliers processed.
compete Time
with each other and
to meet cost at
demand
can bethecut by:price
lowest
• Best suited to commodities, rather than critical
• Using EDI to transmit purchase orders
components, where quality, vendor reliability, and
• Using vendor-managed
delivery inventory
performance are not crucialsystems
• Reverse auctions

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• IT can help improve efficiency and
effectiveness of purchasing function.
– The major cost driver is the number of
purchase orders processed. Time and cost
can•beUsed
cutforby:
large purchases that involve formal bids
• Using EDI auditor
• Internal to transmit purchase
visits each orders
potential supplier in final
cut to verify accuracy of their bid
• Using vendor-managed inventory systems
• May identify mathematical errors in bid which can
• Reverse
produceauctions
considerable savings
• Pre-award audits

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 ORDERING GOODS, SUPPLIES, AND
SERVICES
• IT can help improve efficiency and
effectiveness of purchasing function.
– The major cost driver is the number of
purchase orders processed. Time and cost
can be cut here by:
• A corporate credit card can be used with specific
• Using EDI to transmit purchase orders
suppliers for specific types of purchases
• Using vendor-managed
• Spending inventory systems
limits can be set
• Reverse
• Accountauctions
numbers on cards can be mapped to general
ledger accounts
• Pre-award audits
• Procurement cards for small purchases

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 EXPENDITURE CYCLE BUSINESS
ACTIVITIES
• The three basic activities performed in the
expenditure cycle are:
– Ordering goods, supplies, and services
– Receiving and storing these items
– Paying for these items
• These activities mirror the activities in the
revenue cycle.

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 RECEIVING AND STORING GOODS

• The receiving department accepts deliveries

from suppliers.
– Normally reports to warehouse manager, who
reports to VP of Manufacturing.
• Inventory stores typically stores the goods.
– Also reports to warehouse manager.
• The receipt of goods must be communicated
to the inventory control function to update
inventory records.

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 RECEIVING AND STORING GOODS

• The two major responsibilities of the receiving

department are:
– Deciding whether to accept delivery
– Verifying the quantity and quality of delivered
goods
• The first decision is based on whether there
is a valid purchase order.
– Accepting un-ordered goods wastes time,
handling and storage.

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 RECEIVING AND STORING GOODS
• Verifying the quantity of delivered goods is important so:
– The company only pays for goods received
– Inventory records are updated accurately
• The receiving report is the primary document used in this
process:
– It documents the date goods received, shipper, supplier, and PO
number
– Shows item number, description, unit of measure, and quantity
for each item
– Provides space for signature and comments by the person who
received and inspected
• Receipt of services is typically documented by supervisory
approval of the supplier’s invoice.

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 RECEIVING AND STORING GOODS

• When goods arrive, a receiving clerk compares the

PO number on the packing slip with the open PO file
to verify the goods were ordered.
– Then counts the goods
– Examines for damage before routing to warehouse or
factory
• Three possible exceptions in this process:
– The quantity of goods is different from the amount ordered
– The goods are damaged
– The goods are of inferior quality

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 RECEIVING AND STORING GOODS

• If one of these exceptions occurs, the purchasing

agent resolves the situation with the supplier.
– Supplier typically allows adjustment to the invoice for
quantity discrepancies.
– If goods are damaged or inferior, a debit memo is prepared
after the supplier agrees to accept a return or grant a
discount.
• One copy goes to supplier, who returns a credit memo in
acknowledgment.
• One copy to accounts payable to adjust the account payable.
• One copy to shipping to be returned to supplier with the
actual goods.

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 RECEIVING AND STORING GOODS

• IT can help improve the efficiency and

effectiveness of the receiving activity:
– Bar-coding
• Requiring suppliers to bar-code products speeds the
counting process and improves accuracy.

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 RECEIVING AND STORING GOODS

• IT can help improve the efficiency and

effectiveness of the receiving activity:
– Bar-coding
– RFID
• Passive radio frequency identification (RFID) tags
eliminate the need to scan bar codes.

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 RECEIVING AND STORING GOODS

• IT can help improve the efficiency and

effectiveness of the receiving activity:
– Bar-coding
– RFID
– EDI and satellite technology
• EDI and satellite technology make it possible to track
the exact location of incoming shipments and have
receiving staff on hand to unload trucks.
• Also enables drivers to be directed to specific loading
docks where goods will be used.

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 RECEIVING AND STORING GOODS

• IT can help improve the efficiency and

effectiveness of the receiving activity:
– Bar-coding
– RFID
– EDI and satellite technology
– Audits
• Audits can identify opportunities to cut freight costs
and can ensure that suppliers are not billing for
transportation costs they are supposed to assume.

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 EXPENDITURE CYCLE BUSINESS
ACTIVITIES
• The three basic activities performed in the
expenditure cycle are:
– Ordering goods, supplies, and services
– Receiving and storing these items
– Paying for these items
• These activities mirror the activities in the
revenue cycle.

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 PAYING FOR GOODS AND
SERVICES
• There are two basic sub-processes
involved in the payment process:
– Approval of vendor invoices
– Actual payment of the invoices

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 PAYING FOR GOODS AND
SERVICES
• There are two basic sub-processes
involved in the payment process:
– Approval of vendor invoices
– Actual payment of the invoices

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 PAYING FOR GOODS AND
SERVICES
• Approval of vendor invoices is done by
the accounts payable department,
which reports to the controller.
• The legal obligation to pay arises when
goods are received.
– But most companies pay only after
receiving and approving the invoice.
– This timing difference may necessitate
adjusting entries at the end of a fiscal
period.
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 PAYING FOR GOODS AND
SERVICES
• Objective of accounts payable:
– Authorize payment only for goods and
services that were ordered and actually
received.
• Requires information from:
– Purchasing—about existence of valid
purchase order
– Receiving—for receiving report indicating
goods were received
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 PAYING FOR GOODS AND
SERVICES
• There are two basic approaches to
processing vendor invoices:
– Non-voucher system
• Each invoice is stored in an open invoice file.
• When a check is written, the invoice is marked “paid”
and then stored in a paid invoice file.

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 PAYING FOR GOODS AND
SERVICES
• There are two basic approaches to
processing vendor invoices:
– Non-voucher system
– Voucher system
• A disbursement voucher is prepared which lists:
– Outstanding invoices for the supplier
– Net amount to be paid after discounts and allowances
• The disbursement voucher effectively shows which
accounts will be debited and credited, along with the
account numbers.

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 PAYING FOR GOODS AND
SERVICES
• There are two basic approaches to
processing vendor invoices:
– Non-voucher system
– Voucher system
• Advantages of a voucher system:
– Several invoices may be paid at once, which reduces
number of checks written
– Vouchers can be pre-numbered which simplifies the
audit trail for payables
– Invoice approval is separated from invoice payment,
which makes it easier to schedule both to maximize
efficiency

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 PAYING FOR GOODS AND
SERVICES
• There are two basic sub-processes
involved in the payment process:
– Approval of vendor invoices
– Actual payment of the invoices

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 PAYING FOR GOODS AND
SERVICES
• Payment of the invoices is done by the
cashier, who reports to the treasurer.
• The cashier receives a voucher package,
which consists of the vendor invoice and
supporting documentation, such as purchase
order and receiving report.
• This voucher package authorizes issuance of
a check or EFT to the supplier.

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 PAYING FOR GOODS AND
SERVICES
• Referred to as Evaluated Receipt Settlement.
• Processing efficiency can be improved
• Payments are issued based on what is ordered and
received.
by: • Requires that:
– Requiring suppliers
– Suppliers quote to submit
accurate pricesinvoices
when orders by
are placed.
– Receiving personnel count accurately and inspect
EDI merchandise received.
– Having
• Typically
the system automatically
incorporates match
very timely communications
about shipments and receipts.
invoices to POs and receiving reports
– Eliminating vendor invoices

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 PAYING FOR GOODS AND
SERVICES
• Processing efficiency can be improved
by:
– Requiring suppliers to submit invoices by
EDI
– Having the system automatically match
invoices to POs and receiving reports
– Eliminating vendor invoices
– Using procurement cards for non-
inventory purchases
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 PAYING FOR GOODS AND
SERVICES
• Processing efficiency can be improved by:
– Requiring suppliers to submit invoices by EDI
– Having the system automatically match invoices
to POs and receiving reports
– Eliminating vendor invoices
– Using procurement cards for non-inventory
purchases
– Using company credit cards and electronic
forms for travel expenses

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 PAYING FOR GOODS AND
SERVICES
• Processing efficiency can be improved by:
– Requiring suppliers to submit invoices by EDI
– Having the system automatically match invoices
to POs and receiving reports
– Eliminating vendor invoices
– Using procurement cards for non-inventory
purchases
– Using company credit cards and electronic forms
for travel expenses
– Preparing careful cash budgets to take
advantage of early-payment discounts

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 PAYING FOR GOODS AND
SERVICES
• Processing efficiency can be improved by:
– Requiring suppliers to submit invoices by EDI
– Having the system automatically match invoices to
POs and receiving reports
– Eliminating vendor invoices
– Using procurement cards for non-inventory
purchases
– Using company credit cards and electronic forms
for travel expenses
– Preparing careful cash budgets to take advantage
of early-payment discounts
– Using FEDI to pay suppliers
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 REVIEW OF EXPENDITURE CYCLE
ACTIVITIES
• Before we move on to discuss internal
controls in the expenditure cycle, let’s
do a brief review of the organization
chart, including:
– Who does what in the expenditure cycle
– To whom they typically report

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 PARTIAL ORGANIZATION CHART FOR UNITS
INVOLVED IN EXPENDITURE CYCLE

CEO

VP of Manufacturing CFO

Purchasing Receiving Inventory Controller Treasurer

Stores

• Selects suitable suppliers Accounts Cashier

• Issues purchase orders
Payable

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 PARTIAL ORGANIZATION CHART FOR UNITS
INVOLVED IN EXPENDITURE CYCLE

CEO

VP of Manufacturing CFO

Purchasing Receiving Inventory Controller Treasurer

Stores

• Decides whether to accept Accounts Cashier

deliveries
• Counts and inspects
Payable
deliveries

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 PARTIAL ORGANIZATION CHART FOR UNITS
INVOLVED IN EXPENDITURE CYCLE

CEO

VP of Manufacturing CFO

Purchasing Receiving Inventory Controller Treasurer

Stores

• Stores goods that Accounts Cashier

have been
delivered and Payable
accepted

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 PARTIAL ORGANIZATION CHART FOR UNITS
INVOLVED IN EXPENDITURE CYCLE

CEO

VP of Manufacturing CFO

Purchasing Receiving Inventory Controller Treasurer

Stores

• Approves invoices Accounts Cashier

for payment
Payable

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 PARTIAL ORGANIZATION CHART FOR UNITS
INVOLVED IN EXPENDITURE CYCLE

CEO

VP of Manufacturing CFO

Purchasing Receiving Inventory Controller Treasurer

Stores

Accounts Cashier
Payable
• Issues payment to
vendors
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 CONTROL: OBJECTIVES,
THREATS, AND PROCEDURES
• In the expenditure cycle (or any cycle), a well-designed
AIS should provide adequate controls to ensure that the
following objectives are met:
– All transactions are properly authorized
– All recorded transactions are valid
– All valid and authorized transactions are recorded
– All transactions are recorded accurately
– Assets are safeguarded from loss or theft
– Business activities are performed efficiently and effectively
– The company is in compliance with all applicable laws and
regulations
– All disclosures are full and fair

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 CONTROL: OBJECTIVES,
THREATS, AND PROCEDURES
• There are several actions a company can take
with respect to any cycle to reduce threats of
errors or irregularities. These include:
– Using simple, easy-to-complete documents with
clear instructions (enhances accuracy and
reliability).
– Using appropriate application controls, such as
validity checks and field checks (enhances
accuracy and reliability).
– Providing space on forms to record who completed
and who reviewed the form (encourages proper
authorizations and accountability).

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 CONTROL: OBJECTIVES,
THREATS, AND PROCEDURES
– Pre-numbering documents (encourages recording
of valid and only valid transactions).
– Restricting access to blank documents (reduces
risk of unauthorized transaction).

• In the following sections, we’ll discuss the

threats that may arise in the three major steps
of the expenditure cycle, as well as general
threats, EDI-related threats, and threats related
to purchases of services.

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 CRIME TIME

• Before we discuss specific threats, it may be

helpful to have some background on a form
of occupational fraud and abuse which is
broadly referred to as corruption.
• Corruption cases often involve arrangements
between a company’s purchasing agent and
a sales representative for one of the
company’s vendors.

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 CRIME TIME

• The vendor’s representative may try to induce the

purchasing agent to buy goods that:
– Are over-priced
– Are of inferior quality
– Aren’t even needed
– Aren’t even delivered
• In exchange, the vendor’s rep typically offers the
purchasing agent something of value. That
“something” might be money, payment of a debt, a
job offer, an expensive vacation, or anything the
purchasing agent might value.
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 CRIME TIME

• According to the Fraud Examiner’s Manual

published by the Association of Certified
Fraud Examiners, these schemes usually
take four forms:
– Bribery
• Typically involves the vendor offering a kickback
(something of value) to the buyer to buy inflated,
substandard, un-needed, or un-delivered goods, etc.
• Alternately, may involve an inducement to the buyer
to rig a competitive bidding process so that the
vendor gets the bid.

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 CRIME TIME

• According to the Fraud Examiner’s Manual

published by the Association of Certified
Fraud Examiners, these schemes usually
take four forms:
– Bribery
– Conflict of interest
• In conflict of interest cases, the purchasing agent is
usually arranging for his employer to make purchases
from a company in which he has a concealed interest.
• For example, perhaps his wife owns the vendor
company.

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 CRIME TIME

• According to the Fraud Examiner’s Manual

published by the Association of Certified
• Economic extortion
Fraud Examiners, theseisschemes
basically theusually
reverse of a bribe.
• Instead of the vendor making an offer of something of
take four forms:
value to the purchasing agent, the purchasing agent
– Bribery may tell the vendor that he must provide something of
value to the purchasing agent if he wants to continue
– Conflict to
ofdo
interest
business with his employer.
– Economic extortion

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 CRIME TIME

• According to the Fraud Examiner’s Manual

published by the Association of Certified
Fraud Examiners, these
• Illegal gratuities schemes
involve usually
gifts that are given to the
purchasing agent by a vendor after the vendor has
take four forms:
been selected.
– Bribery
• There was no intent by the vendor to influence the
– Conflict selection process; the gift was provided after the fact.
of interest
• But the problem is that the gift is too likely to impact
– Economic extortion
future decisions by the purchasing agent.
– Illegal gratuities

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 CRIME TIME

• According to the Fraud Examiner’s Manual

published by the Association of Certified
Fraud Examiners, these schemes usually
take four forms:
– Bribery
– Conflict of interest
– Economic extortion
– Illegal gratuities
• How do you think these activities relate
to the Foreign Corrupt Practices Act?
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 • You can click on any of the threats below to get
more information on:
THREATS –INTheORDERING GOODS
types of problems posed by each threat
– The controls that can mitigate the threats.

• Threats in the process of ordering goods include:

– THREAT 1: Stockouts and/or Excess Inventory
– THREAT 2: Ordering Unnecessary Items
– THREAT 3: Purchasing Goods at Inflated Prices
– THREAT 4: Purchasing Goods of Inferior Quality
– THREAT 5: Purchasing from Unauthorized
Suppliers
– THREAT 6: Kickbacks
– EDI-Related Threats
– Threats Related to Purchases of Services

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 THREATS IN RECEIVING AND
STORING GOODS
• The primary objectives of this process are to:
– Verify the receipt of ordered inventory
– Safeguard the inventory against loss or theft
• Threats in the process of receiving and storing
goods include:
– THREAT 7: Receiving unordered goods
– THREAT 8: Errors in counting received goods
– THREAT 9: Theft of inventory
• You can click on any of the threats above to get
more information on:
– The types of problems posed by each threat
– The controls that can mitigate the threats.
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 • You can click on any of the threats below to get
THREATS– IN APPROVING AND
more information on:
The types of problems posed by each threat
PAYING –VENDOR INVOICES
The controls that can mitigate the threats.

• The primary objectives of this process are to:

– Pay only for goods and services that were ordered and received
– Safeguard cash
• Threats in the process of approving and paying vendor
invoices include:
– THREAT 10: Failing to catch errors in vendor invoices
– THREAT 11: Paying for goods not received
– THREAT 12: Failing to take available purchase discounts
– THREAT 13: Paying the same invoice twice
– THREAT 14: Recording and posting errors to accounts
payable
– THREAT 15: Misappropriating cash, checks, or EFTs

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 GENERAL CONTROL ISSUES
• You can click on any of the threats below to get
more information on:
• Two general objectives
– The types ofpertain
problems to activities
posed in
by each threat
every cycle: – The controls that can mitigate the threats.
– Accurate data should be available when needed
– Activities should be performed efficiently and
effectively
• The related general threats are:
– THREAT 16: Loss, Alteration, or Unauthorized
Disclosure of Data
– THREAT 17: Poor performance

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 EXPENDITURE CYCLE
INFORMATION NEEDS
• Information is needed for the following
operational tasks in the expenditure cycle,
including:
– Deciding when and how much inventory to order
– Deciding on appropriate suppliers
– Determining if vendor invoices are accurate
– Deciding whether to take purchase discounts
– Determining whether adequate cash is available to
meet current obligations

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 EXPENDITURE CYCLE
INFORMATION NEEDS
• Information is also needed for the following
strategic decisions:
– Setting prices for products/services
– Establishing policies on returns and warranties
– Deciding on credit terms
– Determining short-term borrowing needs
– Planning new marketing campaigns

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 EXPENDITURE CYCLE
INFORMATION NEEDS
• The AIS needs to provide information to evaluate
the following:
– Purchasing efficiency and effectiveness
– Supplier performance
– Time taken to move goods from receiving to
production
– Percent of purchase discounts taken
• Both financial and operating information are
needed to manage and evaluate these activities
• Both external and internal information are
needed

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 EXPENDITURE CYCLE
INFORMATION NEEDS
• When the AIS integrates information from the
various cycles, sources, and types, the reports
that can be generated are unlimited. They
include reports on:
– Supplier performance
– Outstanding invoices
– Performance of expenditure cycle employees
– Number of POs processed by purchasing agent
– Number of invoices processed by A/P clerk
– Number of deliveries handled by receiving clerk

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 EXPENDITURE CYCLE
INFORMATION NEEDS
– Number of inventory moves by warehouse worker
– Inventory turnover
– Classification of inventory based on contribution to
profitability
• Accountants should continually refine and
improve these performance reports

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 SUMMARY

• You’ve learned about the basic business

activities and data processing operations that
are performed in the expenditure cycle,
including:
– Ordering goods, supplies, and services
– Receiving and storing them
– Approving invoices and paying for them
• You’ve learned how IT can improve the
efficiency and effectiveness of these processes

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 SUMMARY

• You’ve learned about decisions that need to be

made in the expenditure cycle and what
information is required to make these decisions
• You’ve also learned about the major threats
that present themselves in the expenditure
cycle and the controls that can mitigate those
threats

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