SUBSTANTIVE TESTS OF EXPENDITURE CYCLE ACCOUNTS

This section deals with the substantive tests that an auditor may perform to achieve audit
objectives related to the expenditure cycle.

Expenditure Cycle Risks and Audit Concerns

External auditors are concerned primarily with the potential for understatement of liabilities and
related expenses. Substantive tests of expenditure cycle accounts are therefore directed toward
gathering evidence of understatement and omission of material items rather than their overstatement.

To solve these concerns, the auditor will seek evidence by performing a combination of tests of
internal controls and substantive tests. Tests of controls include testing both general controls and
application controls specifically related to the expenditure cycle. In addition to tests of controls, the
auditor must perform substantive tests to achieve audit objectives.

Understanding Data

Extracting data from accounting files for analysis is one of the substantive tests that an auditor
can do. To do this task, the auditor needs to understand the systems and controls that produced the data
as well as the physical characteristics of the files that contain them.

In understanding the extracted data, the auditor must know the file structure that contains the
data. These structures indicate the key data and logical linkages between files.

Description of each files:

1. Inventory file – contains quantity, price, supplier, and warehouse location data for each
item of product inventory.
2. Purchase-Order – contains records of purchases placed with suppliers.
3. Purchase-Order line item file – contains a record of every item ordered.
4. Receiving report file – contains information about the items received.
5. Disbursement voucher file – contains the information about the items to be paid, it
includes the due date, check number and the amount.
6. Check register file – contains the records of each payments.
7. Supplier file – contains information about the vendor/supplier.