Chapter 6 The Expenditure Cycle

Overview
The expenditure cycle of Madlang Pickles Corp. is particularly relevant to the occurrence of cash outflows, which counters the inflows of cash provided by the Revenue Cycle. Its primary focus is on the acquisition of production resources which comprise raw materials, fixed assets and supplies for the company. Moreover, it also involves other activities which are prerequisite to these purchases. Secondarily, the cycle also involves the utilization and replenishment of petty cash fund and other activities relevant thereto. However, this cycle excludes payment of salaries to its employees which is a concern of the payroll cycle. These are the business activities covered in this cycle: (1) purchases of production resources, which encompass the preparation of list of suppliers, supplier selection, requisition and actual purchase of goods; (2) employment of petty cash fund system, which pertains to an imprest fund system ; (3) cash and check disbursement system, and; (4) the proper documentation of transactions in the books of accounts to reflect the different expenditure transactions in the financial statements of the company. Within this cycle are internal control procedures such as proper documentation and authorization which are placed to ensure that the system is operating the way it should be. These controls also ensure that the figures presented in the financial statements of the company are reliable and objective. Implementation of these controls aims to mitigate or even eliminate the risks of errors and irregularities that may occur in the company, operating in two levels: preventive and detective.

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Internal Control
Control Objectives
Suppliers for resources are accredited and regulated. All purchases are properly authorized. All available purchase discounts are identified so that they may be taken if economical to do so. All purchase returns and allowances are properly authorized and accurately recorded. All credit purchases and cash disbursement transactions are posted to proper suppliers accounts in the account payable ledger. All received goods are verified to determine that the quantities agree with those ordered and that they are in good condition. All vendors invoices are verified and conformed to the goods received. Segregation of duties and responsibilities is properly observed for authorization, management of files, check preparation and voucher preparation. System accounting for currently due accounts is properly established. All Cash and Check Disbursements are properly authorized, accurately recorded and supported by the necessary documents. All Cash and Checks are not misappropriated. All accounting records and company assets such as raw materials inventory, goods in process inventory, finished goods inventory, petty cash and checks are safeguarded. Procedures to ensure that cash and cash equivalents are accurately stated are performed. Imprest petty cash fund system is cautiously employed. The system is able to produce accounting records that reflects the appropriate expenditure transaction.

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Chapter 6 The Expenditure Cycle An audit trail is properly recorded in the transaction log and will be accessed anytime by the authorized personnel.

General Controls
Transaction Authorization Cash disbursements must be approved by the Disbursing Officer and Checks must be signed by the Treasurer and countersigned by the Controller and supported by adequate documents. All accredited suppliers must have their data recorded on the Vendor Master File. All purchases must be approved by general accountant if amount is below P50, 000 and by controller if P50, 000 and above and shall be subject for bidding (see bidding procedures) Transaction Execution The Disbursing Officer shall only render payment to authorized suppliers only. Payments should be recorded in a disbursement voucher/ voucher package. Payments should only be made against expenses with supporting bills and original invoices. Quality and quantity of goods should be inspected in order to ensure that they correspond with the companys standards. Agreements with supplier should be reviewed regularly. Vendor Invoice received should be referred to purchase order made.

Organizational Controls Purchasing System, Receiving System, Voucher System and Cash Disbursements System shall be performed by separate individuals. Supporting documents shall be reconciled by the General Accountant. Transaction logs/registers regarding transactions that occur shall be maintained by each system. Creditors List for long outstanding liabilities shall be reviewed regularly.

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Chapter 6 The Expenditure Cycle Regular spot checks of the petty cash fund should be made by an authorized person independent of the Petty Cash Custodian. All internal controls shall be periodically reviewed by the audit committee for compliance. If management has a suspicion regarding non-compliance with internal control directives, audit committee shall be notified. Management Practice Controls Employees must be properly oriented and trained concerning company policies especially those governing company expenditures. Managers, supervisors and their staff must be provided with the necessary user documentation concerning the expenditure system and must be constantly trained to improve operations. Managers, supervisors and their staff must be knowledgeable of the standard operating procedures in preparing and processing documents involved in the expenditure cycle. System Development and changes should undergo a clear procedure involving prior approvals, testing and sign-offs. Audits of the purchases and cash disbursement policies and procedures should be performed. Managers should review periodic analyses, control summaries, and reports concerning account activity and computer approved transactions. Unannounced inventory count is conducted in each department. Access to supplies cabinets is limited only to those who are authorized.

Authorization Contracts with suppliers are subject to full review and authorization prior to approval. Purchase Returns should be properly authorized by an officer not involved in the processing of purchases or of Accounts Payable. Fixed Asset acquisition should be properly authorized under the Investing Cycle.

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Chapter 6 The Expenditure Cycle Check disbursements must be properly authorized as well as the cash advances, the authorization of which is under the Payroll Cycle. Access Instruments of payment need to be kept in safe custody, with access limited to authorized persons. Log-in procedures must be applied whenever a user accesses the expenditure system. Valid users of the expenditure system must maintain and safeguard their respective IDs and passwords to safeguard sensitive information. An access control list that contains information defining access privileges for all valid users of the expenditure system must be maintained. Cash must be placed in a secure cash vault. Back-ups of files should be properly maintained and safeguarded from unauthorized access. Accountability The Cashier is the only person allowed to make disbursements out of the companys Petty Cash Fund. He shall be charged with any losses arising from the fund. The Inventory Clerk sees to it that goods received are in accordance with the quantity ordered. The Receiving Clerk verifies that goods received are of the quality ordered and meet the companys standard of good quality.

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Application Controls
Input Controls Pre-numbered and well designed manual and electronic documents relating to purchases, receiving, payables and cash disbursements with each documents being approved by an authorized persons should be prepared. These documents should be used in sequence and audited regularly. Authorized personnel shall periodically review source documents, application information, and inputs to ensure that unauthorized employees cannot input, validate and approve information without management oversight. Edit checks are to be done whenever data is entered into the systems. Field interrogation such as Missing data checks, Numeric-alphabetic data checks, Zerovalue checks, Limit checks, Range checks, Validity checks and Check digit are done to ensure that input are within the valid criteria. Documents with missing data such as blank spaces, incomplete payment terms, and lacking information shall be returned to the previous officer handling such document. Record Interrogation such as Reasonableness checks, Sign checks and Sequence checks should be done regularly. Processing Controls All information is verified based on relevant and updated transaction files. To ensure that pre-numbered documents are used, a sequence check must be performed by the system. A transaction log/register is maintained in the system to ensure that all transactions are documented. The payee of check for payment of invoice should be validated against vendor master file. Any record that does not match should be rejected and investigated by management.

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Chapter 6 The Expenditure Cycle Output Controls A completeness check is done by randomly reconciling computer generated files with original documents to ensure that all transactions are properly accounted for. Every transaction successfully processed by the expenditure system should be recorded on the appropriate transaction file. Each transaction processed within the expenditure system must be uniquely identified with a transaction number. This feature will aid in tracing a particular transaction through a database of thousands or even millions of records. File copies of all documents pertaining to purchase and cash disbursements by date/number.

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Narrative Procedures
Furnishing List of Valid Suppliers for Raw Materials and Supplies
Finance and Accounting Department Purchasing Clerk 1. At the beginning of each year, identify vendors/suppliers who can supply materials/supplies regularly needed in the business. If materials/supplies requested is not that usual, search for vendors/suppliers upon request from the requesting department. 2. Writes a Request for Proposal and Request for Quotation to the vendors on the list prepared. These should contain Detailed Specifications, Terms and Conditions, Selection Criteria and Submission Details. 3. Upon receipt of Proposals and Quotations from the vendors, conduct a preliminary review for each vendor. 4. Produce a list of suppliers and Preliminary Assessment Report. 5. Forward list and other documents (Vendors Proposal, Quotation and Preliminary Assessment Report) to the controller for approval. Controller 6. Receives list from the purchasing clerk together with the supporting documents. 7. Reviews documents and conducts performance analysis. 8. Choose suppliers who pass the minimum performance assessment requirement. 9. Creates a list of accredited suppliers. 10. Forwards the approved list of accredited suppliers to the purchasing clerk. Purchasing Clerk 11. Receives the approved list of accredited suppliers from the controller.

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Chapter 6 The Expenditure Cycle 12. Files the approved list of accredited suppliers according to materials supplied and in alphabetical order. 13. Keys in the appropriate details about each approved vendor and files them in the vendor master file.

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Purchasing of Raw Materials and Supplies

Finance and Accounting Department Purchasing Clerk 1. Logs in the system. 2. Receives a notification of purchase requisition from the purchasing application as indicated by the inventory master file that an item held in inventory has reached its reorder point. 3. Selects supplier that meets the price and quality standards based in the data in the purchase requisition register and the vendor master file. Computer automatically creates the purchase order and updates the purchase order register and sends the documents to the General Accountants terminal if amount is not more than P50, 000 or to the Finance Officers terminal if amount is P50, 000 or more. General Accountant/Controller 4. Logs in the system. 5. Receives a notification of a purchase order to be approved. 6. Reviews validity of the purchase order by accessing the purchase order register. If valid, clicks approve command button and digitally signs the Purchase Order. Computer automatically notifies the purchasing clerks terminal. Upon approval, the purchase order is converted into a read-only file to prevent any changes from the Purchasing Clerk prior to the printing of the document. If invalid, clicks the reject button. Computer automatically notifies the purchasing clerk, who will in turn notify the production department regarding such rejection. The computer will also cancel the disapproved purchase order from the purchase register automatically.

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Chapter 6 The Expenditure Cycle Purchasing Clerk 7. Receives notification from the General Accountant/Controller that the purchase order has been approved. 8. Prints the purchase order by accessing the purchase order register and sends purchase order to the supplier. Computer automatically notifies the General Accountants/Controllers terminal that the purchase order has been sent. 9. Follows up the supplier for the delivery of raw materials.

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Chapter 6 The Expenditure Cycle

Purchasing of Fixed Assets

Finance and Accounting Department Purchasing clerk 1. Receives approval document such as Fixed Asset Request Form (FAR) and letter of Fixed Asset Purchase Proposal (FAPP) (see The Investing Cycle) from the General Manager or Board of Directors. 2. Prepares fixed assets requisition. Input purchase data in his terminal by accessing the fixed assets requisition register. Computer automatically updates fixed assets requisition register and sends notification to the General Accountants terminal if amount is more than P50, 000 or to controllers terminal is the amount is P50, 000 or more. Forwards approval documents to warehouse supervisor who will file it chronologically. General Accountant/Controller 3. Logs into the system. 4. Receives notification that there is fixed assets requisition to be approved. 5. Verify the validity of the fixed assets requisition filed by requesting party by accessing the Fixed Assets Requisition Register If valid, click approve button in the fixed assets requisition register and sends notification to the purchasing clerk. If not, clicks reject button. Computer automatically cancels the fixed assets requisition in the requisition register. Notification is also sent to the purchasing clerk. Purchasing Clerk 6. Receives notification that fixed assets requisition has been approved and proceeds to the bidding procedures.

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Bidding procedures
Finance and Accounting Department Purchasing Clerk 1. Print fixed asset requisition for the bidding committee by assessing the Fixed Asset Requisition Register. 2. Forwards fixed asset requisition to Bidding Committee. Bidding Committee 3. Receives fixed asset requisition for the new fixed assets as a notice for upcoming bidding from the purchasing clerk and forwards it to the controller. 4. Notifies the Department Manager of the Requesting Department to prepare and send invitation to bid to suppliers. Requesting Department Department Managers 5. Receives notice from the Bidding Commitee. 6. Prepares and sends invitations to bid to suppliers. Request for bid which contain details of the bidding together with the application forms and other necessary requirements are sent to the selected supplier. It must indicate that the bidding documents should be sent to the Bidding Committee. Finance and Accounting Department Bidding Committee 7. Receives bidding documents. When choosing a supplier, the bidding committee considers factors such as price, types of goods that can be supplied, the particular needs of the requesting department, the date of delivery and the reliability, quality and experience of the supplier. 8. Chooses the supplier who is the lowest, responsive bidder and who meets the specifications and requirements.

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Chapter 6 The Expenditure Cycle 9. Notifies the chosen supplier. 10. Prepares 2 copies of the bidding report together with a copy of the chosen suppliers bidding documents and signs them. Forwards copy 1 of the bidding report together with a copy of the chosen suppliers bidding documents and the fixed asset requisition form earlier considered for the bidding to the controller. Forwards the copy 2 of the bidding report together with the original corresponding bidding documents by vendor to the purchasing Controller 11. Receives bidding report together with a copy of the chosen suppliers bidding documents (photocopy) and the corresponding approved fixed asset requisition. 12. Reconciles documents. If there is no discrepancy, proceed to the next step. If there is, settle and reconcile discrepancy with the bidding committee.

13. Reviews validity of the bidding report by assessing whether all data presented were correct or not. If valid, forwards approved fixed asset requisition and approved bidding report together with a copy of the chosen suppliers bidding documents (photocopy) to the Purchasing clerk. If not, notifies the bidding committee.

Purchasing Clerk 14. Receives copy 2 of the bidding report together with the original corresponding bidding documents by vendor and files it chronologically. After two years, these files will be subject for disposal. 15. Receives approved bidding report together with a copy of the chosen suppliers bidding documents (photocopy) and fixed asset requisition. Note: See steps 4-10 in the purchase of raw materials and supplies.

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Chapter 6 The Expenditure Cycle

Receiving system
Warehouse Department Warehouse Supervisor 1. Receives delivery receipt and suppliers invoice attached with the goods for verification. 2. Refers the goods to the receiving clerk for counting. Receiving Clerk 3. Upon the receipt of the good from the supplier/vendor, counts to check the quantity and conducts inspection if goods comply with the companys quality standards. If goods do not comply with the quantity ordered and the companys quality standard, settles discrepancy with the delivery man/supplier. 4. Prepares receiving report. 5. Forwards receiving report to warehouse supervisor. Warehouse Supervisor 6. Receives receiving report from receiving clerk. 7. Accesses purchase order register. 8. Compares receiving report with the delivery receipt, suppliers invoice attached with the goods for verification and purchase order in the purchase order register. If corresponds, orders the warehouseman to store goods in the warehouse and approves receiving report. If not, settle discrepancy with vendor and receiving clerk.

9. Forwards receiving report and suppliers invoice to the Accounts Payable Clerk. However, in case of fixed assets to the General Accountant. Files delivery receipt chronologically. 10. For supplies and fixed assets, sends notification to the requesting department.

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Chapter 6 The Expenditure Cycle Finance and Accounting Department Accounts Payable Clerk / General Accountant 11. Receives the suppliers invoice and receiving report from warehouse supervisor. 12. Accesses the purchase order register. 13. Compares suppliers invoice with receiving report and the data in the purchase order register and updates the purchase transaction file, materials inventory master file/supplies inventory master file. 14. Files receiving report and suppliers invoice by due date.

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Chapter 6 The Expenditure Cycle

Voucher System for Accounts Payable

Finance and Accounting Department Accounts Payable Clerk 1. Manually check the due date of the invoices. 2. Upon due date, enters data for the preparation of the disbursement voucher basing on the Suppliers invoice and receiving report. System updates the Voucher Register with a pending status. Notification is sent to the General Accountants terminal that a disbursement voucher waits approval. 3. Forwards suppliers invoice and receiving report to the General Accountant. General Accountant 4. Receives notification, suppliers invoice and receiving report from Accounts Payable Clerk. Files suppliers invoice and receiving report by date. 5. Verifies validity of the disbursement voucher by accessing Voucher Register and comparing it with the suppliers invoice and receiving report. If valid, approve disbursement voucher by signing it digitally. System updates the status of the disbursement voucher into approved in the Voucher Register. If not, settle discrepancy with the Accounts Payable Clerk.

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Voucher System for Various Payments

Finance and Accounting Department Accounts Payable Clerk 1. Receives requests for payments or bills for consumption of utilities, repairs, maintenance, and other payments or cash advance forms (for above P3,000) from various departments. 2. Enters data of the expenses for the disbursement voucher. System automatically updates the Voucher Register with a pending status. Notification is sent to the General Accountants terminal. 3. Forwards requests/bills/forms to the General Accountant. General Accountant 4. Receives notification and requests/bills/forms from the Accounts Payable Clerk. After which, requests/bills are filed by date while cash advance forms are forwarded to the payroll clerk. 5. Checks if the amount in the voucher corresponds with the requests/bills/forms by accessing the Voucher Register. If corresponds, signs the voucher digitally and files the requests chronologically. If not, settles discrepancy with the Accounts Payable Clerk.

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Chapter 6 The Expenditure Cycle

Check disbursement system

Finance and Accounting Department Disbursing officer 1. Receives notification for check printing for the amount due. 2. Checks the amount to be paid to be printed in the check which was referred from the approved vouchers by accessing the Voucher Register. 3. Enters relevant data on the check register for printing of checks. System automatically prints pre-numbered checks and updates check register. 4. Forwards notification in the terminal of the treasurer. 5. Forwards the checks to the treasurer. Treasurer 6. Receives checks from the disbursing officer and notifications is displayed in the screen. 7. Reconciles the documents by accessing the Voucher Register and check register. If corresponds, signs the check. If not, settles discrepancy with the Accounts Payable Clerk.

8. Approves that the voucher is to be paid. System sends notification to the controller. Upon approval, the data is converted to a read-only, file subject only to the changes to be made by the controller. 9. Forwards the check to controller. Controller 10. Receives check from the treasurer and notification is displayed on the screen. 11. Reconciles the documents by accessing the Voucher Register and check register. If corresponds, signs the check. If not, settles discrepancy with the treasurer.

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Chapter 6 The Expenditure Cycle 12. Approves that the Voucher is to be paid and countersigns the Check. System updates the status of the Voucher in the Voucher Register and Sends notification to the Disbursing Officer. Upon approval, the data is converted to a read-only file.

13. Forwards the Checks to Disbursing Officer. Disbursing Officer 14. Receives all countersigned checks and notification is displayed in his terminal. 15. Before releasing the Checks to suppliers collector, validates for proper identification and supporting documents and the records on the Check Register and Voucher Register. 16. Prints Check Register table. 17. Upon claiming of the check by the payee or authorized representative, instructs the person to sign the Check Register table. 18. Forwards the Check Register table to the Bookkeeper Bookkeeper 19. Receives signed Check Register table from the Disbursing Officer. 20. Updates the Cash Disbursement Transaction File. This will be subject for General Accountants verification. 21. Files the signed check register table chronologically.

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Chapter 6 The Expenditure Cycle

Petty Cash Fund System

Set up of Petty Cash Fund
Finance and Accounting Department Cashier 1. Prepares request for set up of companys petty cash fund amounting to P40, 000. 2. Forwards to the Controller for approval. Controller 3. Receives request from the Cashier. 4. Reviews request such as the purpose to set up the amount of the Petty Cash Fund. If valid, approves request and forwards approved request to the Accounts Payable Clerk. If not, returns request to the Cashier.

Accounts Payable Clerk 5. Receives approved request from the Controller. Proceed to Voucher System for Various Payments and Check Disbursement Procedure Cashier 6. Receives Check for Petty Cash Fund. Notifies bookkeeper of the receipt. Bookkeeper 7. Upon receipt of notice, updates Petty Cash Fund Transaction File.

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Utilization of Petty Cash Fund

Requesting Department Requesting Party 1. Fills up the Petty Cash Request Form. Each department is given a petty cash fund of P5,000. 2. Forwards the Petty Cash Request Form to the Department Manager for approval. Department Manager 3. Receives the Petty Cash Request Form from the Requesting Party. 4. Reviews the Petty Cash Request Form. If valid, affixes signature on it and forwards to Cashier. If not, returns it to the Requesting Party. Requesting Party is given two weeks to justify the request. If there is no response from the Requesting Party, request will be disregarded. Finance and Accounting Department Cashier 5. Receives the approved Petty Cash Request Form/Cash Advance Form from the Department Manager. 6. Prepares Petty Cash Voucher and cash needed from the fund. 7. Gives the Cash to the Requesting Party with a corresponding Petty Cash Voucher. For employee advances, the Petty Cash Voucher is forwarded to the Payroll Clerk. 8. Asks the Requesting Party to affix signature on the Petty Cash Voucher and gives two copies of liquidation slip acknowledging that the Requesting Party is accountable for the amount requested until Supporting Documents (Receipts) are surrendered. Requesting Party 9. Receives Petty Cash Voucher from the Cashier.

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Chapter 6 The Expenditure Cycle 10. Signs up the Petty Cash Voucher and fills up two copies of liquidation slip. Gives one copy of the liquidation slip to the Cashier and keeps another copy which will later be attached to the liquidation report. 11. Returns Petty Cash Voucher and copy 2 of the liquidation slip to the Cashier. Finance and Accounting Department Cashier 12. Receives signed Petty Cash Voucher and copy 2 of the liquidation slip. 13. Verifies completeness and accuracy of the data in the forms. If complete and accurate, releases cash to the Requesting Party and files the Petty Cash Voucher and copy 2 of the liquidation slip by department and chronologically. If incomplete, settles discrepancy with the Requesting Party.

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Replenishment of Petty Cash Fund

Requesting Party 1. Monitors the level of Petty Cash Fund. 2. If Petty Cash goes below P 2, 000, prepares 2 copies liquidation report (expenses summary report and the supporting documents) and fills up Petty Cash Request Form with the total amount of replenishment to be able to maintain the petty cash amount of P5, 000. 3. Signs the report and the Petty Cash Request Form. 4. Forwards these documents to the Department Manager. Department Manager 5. Checks the validity of the liquidation report and the Petty Cash Request Form. If valid and corresponds, signs the documents. If not, settles discrepancy with the Requesting Party.

6. Returns copy 1 of the liquidation report to the Requesting Party for filing and forwards other documents to the Cashier. Finance and Accounting Department Cashier 7. Receives documents from the Department Manager. 8. Check whether expenses incurred are valid and the Petty Cash Request Form and liquidation report corresponds. If valid and corresponds, refer to steps 5 13 in the Utilization of Petty Cash Fund. If not, settles discrepancy.

9. In case the companys petty cash fund reached its critical level of P5, 000, fills up Petty Cash Request Form and submits together with all liquidation reports pertaining to the used funds to the controller. Refer to steps 3-7 in the Set up of Petty Cash Fund.

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Purchase Returns System

Warehouse Department Receiving Clerk 1. Checks goods received. 2. If there are defective goods, logs-in to the system. Enter purchase return data such as containing the quantities, description, and vendor for each return transaction to the Purchase Register. Computer automatically updates Purchase Return Transaction File and notification is then sent to the Warehouse Supervisors terminal. 3. Forwards the defective goods to the Warehouse Supervisor for verification. Warehouse Supervisor 4. Receives notification in his terminal and accesses the Purchase Return Transaction File. 5. Physically counts the defective goods received to verify the quantity. 6. Forwards the defective goods to the Warehouse Manager for verification and notifies him for further approval. Warehouse Manager 7. Receives notification in his terminal and accesses the Purchase Return Transaction File. 8. Physically counts the defective goods received to verify the quantity. 9. Approves the Purchase Return. System automatically updates the Supplies Master File and Materials Inventory Master File. Notification is sent to the Accounts Payable Clerks terminal and the computer automatically prints Debit Memo in two copies. 10. Sends the defective items and one copy of Debit Memo to the Supplier. 11. Files another copy of Debit Memo numerically.

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Chapter 6 The Expenditure Cycle Accounts Payable Clerk 12. Receives notice of the purchase return from the Warehouse Department. 13. Adjust payment to be made to the supplier to reflect purchase return.

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