EXPENDITURES/

DISBURSEMENT CYCLE
 EXPENDITURES/DISBURSEMENT CYCLE

 It encompasses both the acquisition of goods or services and

the payment of cash for the goods and services acquired.
 It is related to each of the other three cycle –the
revenue/receipt cycle, financing cycle and conversion cycle.
 The relationship of the three cycle:
 Uses resources and information provided by the revenue/receipt
cycle;
 Provides resources and information for the financing and conversion
cycle
 SCOPE OF THE
EXPENDITURE/DISBURSEMENT CYCLE

  Related Common Common  

  Business Functions Activities Entries Forms used
Purchase
1 Resources (goods or Purchasing Purchases Requisition
  services) are acquired Receiving Account distri- Purchase Orders
  from vendors (and Recording bution Receiving Reports
  employees) in Payment - Prepaid and Vendor's invoices
  exchange for including accrued expenses Vouchers
  obligations to pay authorization and Adjustment  
2 Obligations to vendors preparing checks Cash disbursements  
  are paid      
Flow of information
 Purchase requisition received to purchase goods
 Purchasing department issues purchase order to
vendor for purchase of goods
 Receiving department creates report that identifies
information about goods received
 Accounts payable receives vendor’s invoice
 Accounts payable creates voucher to authorize
payment
 DOCUMENTS

Purchase requisition
Request to purchase goods
Purchase order
Request issued by Purchasing dept. to
vendor
Receiving report
Identifies information about goods
received
Vendor’s invoice
Formal notice amount, terms of
payment
Voucher package
Voucher & supporting documents
 CONTROLS OVER PURCHASING

 Prenumbered purchase order describes price, quantity, terms

of goods ordered
 Purchase requisition must be approved
 Goods received compared to purchase order in receiving
department
 Accounts payable matches purchase order, receiving report,
invoice before authorizing payment
 Accounts payable prepares voucher for recording by General
Accounting
 CASH DISBURSEMENTS

 Process
 Voucher package sent to Treasury department (separate from
accounts payable)
 Treasury department reviews, reconciles, authorizes payment
 Checks drawn for payment
 May require 2 signatures over a limit
 INTERNAL CONTROL & RISK

Controls Risks
Authorization Unauthorized purchases,
vendors
Prenumbered receiving reports Goods received not
ordered, damaged
Recording controls Received not recorded, used
Restricted access
Goods, records, forms
misused
 TESTING CONTROLS

 Purchasing Department
 Select random sample paid voucher packages
 Examine for cancellation, authorization, details
 Obtain Purchasing Department’s copy of requisition, purchase order
 Compare to voucher package
 Trace to competitive bids
 FINANCIAL STATEMENTS ASSERTIONS
AND AUDIT PROCEDURES: PURCHASES
AND ACCOUNTS PAYABLE
 ASSERTIONS AUDIT PROCEDURE
 Existence OR Confirm with creditors
Occurrence
 Completeness Test for unrecorded liabilities
Perform analytical procedures.
Test cutoff.
 Rights and obligations Confirm with creditors.
Test for unrecorded liabilities.
 Valuation or allocation Verify accounts payable trial balance.
Confirm with creditors.
Test for unrecorded liabilities.
 Presentation and Compare statement presentation
disclosure and disclosure with those
required by pfrs and pas.
 EXISTENCE OR OCCURRENCE

 The existence or occurrence assertion addresses whether all

recorded payable exist at the balance sheet date and whether
all recorded purchases transactions occurred during the
period.
 COMPLETENESS

 The completeness assertion addresses whether all purchase

transactions and payables balance that should be presented
in the financial statements actually are presented-all
transactions should be recorded.
 It is tested by reviewing post-balance sheet date cash
disbursements for payments made on previously unrecorded
payables and by examining unmatched receiving report to
assure that liabilities have been recorded at the balance
sheet date.
 WINSTON COMPANY’S ACCOUNT

Winston Company’s accounts payable at December 31, 2019 totaled P1,000,000

before any necessary year-end adjustments relating to the following transactions
and information:
On December 27, 2019, Winston wrote and issued checks to creditors totaling
P 3 5 0 , 0 0 0 . T h e i s s u a n c e o f t h e c h e c k s w a s r e c o r d e d o n Ja n u a r y 3 , 2 0 2 0 .
 On December 28, 2019, Winston purchased and received goods for P150,000,
terms 2/10,n/30. Winston records purchases and accounts payable at net amounts.
The invoice was recorded and paid January 3, 2020
 G o o d s s h i p p e d F . O. B . d e s t i n a t i o n o n D e c e m b e r 2 0 , 2 0 1 9 f r o m a v e n d o r t o W i n s t o n
w e r e r e c e i v e d Ja n u a r y 2 , 2 0 2 0 . T h e i n v o i c e c o s t w a s P 6 5 , 0 0 0 . T h e p u r c h a s e w a s
recorded on January 2, 1010.
Goods costing P120,000 were purchased from NYC Trading. The goods were shipped
by NYC on December 28, 2019, F.O.B. shipping point. The goods, together with the
i n v o i c e , w e r e r e c e i v e d b y W i n s t o n o n Ja n u a r y 4 , 2 0 2 0 .
The accounts payable general ledger balance of P1,000,000 is net of P80,000 debit
balance in one supplier’s account representing deposit on goods to be delivered in
February 2020.
What amount should Winston Company report as total accounts payable at December
31, 2019? 997, 000
 AUDIT OBJECTIVES OF ACCRUED
EXPENSES
 To ensure that accrued expenses represent valid claims by
suppliers against goods delivered or services rendered to the
entity.
 To ensure that all goods and services received by the entity
have been accounted for in the books of the company on a
timely basis.
 To ensure that liability is recorded at the correct amount.
 To ensure that accounts payable was presented, classified
and disclosed in the financial statements in accordance with
the requirements of applicable financial reporting framework
and applicable International Financial Reporting Standards.
 ACCRUED EXPENSES

 Obtain or prepare a comparative summary of accrued

liabilities and other payables balances
 Trace individual balances to the general ledger
and previous audit's working papers.
  Test balances for reasonableness, fluctuations and omissions.
 Obtain or prepare an analysis of the detail of accrued
liabilities
 Trace the ending balance to the comparative summary
obtained into the general ledger and previous audit's working
papers.
 For some accounts it is necessary to further test by re-
computation.
 ACCRUED EXPENSES

 Angel Corporation must determine the December 31, 2018, year-

end accruals for advertising and rent expense. A P50,000
advertising bill was received January 10, 1019, comprising costs
of P37,500 for advertisement in December 2018 issues, and
P12,500 for advertisements in January 2019 issues of the
newspaper.
 A store lease, effective December 31, 2017, calls for fixed rent of
P120,000 per month, payable one month from the effective date
and monthly thereafter. In addition, rent equal to 5% of net
sales, over P6,000,000 per calendar year is payable on January
31 of the following year. Net sales for 2018 were P7,500,000.
What is the total accrued liabilities that should be reported by
Angel Corporation in its statement of financial position as at
December 31, 2018? 172, 500
 AUDIT OF WARRANTY PROVISION

 Audit procedures
 Review and test the process used by management to develop the
estimate.
 Review contracts or orders for the terms of the warranty to gain an
understanding of the obligation.
 Review correspondence with customers during the year to gain an
understanding of claims already in progress at th
 WARRANTIES

 Brandon Co., a machine dealer, sells a machine for P22,200

under a 1-year warranty contract that requires the company to
replace all defective parts and to provide the necessary repair
labor at no cost to the customers. With sales being made
evenly throughout the year, Brandon sells for cash 600
machines in 2018 (half of the warranty expense is incurred in
2018, half in 2019). On the basis of past experience, the 1-year
warranty costs are estimated to be P510 parts and P660 labor.
Assume that in 2018, these warranty costs are incurred exactly
as estimated.
1. What amount of warranty expense would be charged against
2018 revenue. 702, 000
2. What amount of warranty liability would appear on the
December 31, 2018, statement of financial position? 351, 000
 WARRANTIES

 A B M , I nc . , a de al er of h ou se h old a ppl ia n ce s , s e ll s wa s hi n g m a c h in e s a t a n
a ve ra ge of P8, 100 . Th e c o m pa n y a lso o ffe r s to e a c h c u st om e r a se par a te 3-
ye a r wa rr an ty con t ra ct fo r P810 th at re q u ire s th e c o m pa ny to prov ide pe r io dic
m a in te n an ce se rv ices a n d to re pl ac e de fe ct ive par ts . Du r in g 2018, A BM s ol d
300 was h in g m a chin e s a nd 270 wa rr a nty c on tr a c ts for c a sh . Th e c om pa n y
e sti m a te s t ha t th e wa r ra n ty c o st s ar e P180 for pa rts a n d P360 fo r l abo r.
 A s s um e sa le s occu rr ed on De ce m be r 31, 2018. A BM ’ s polic y is to r e c ogn iz e
in c om e fr om th e wa r ra n tie s on a str a igh t- l in e ba s is . In 2019, A BM i nc u rr e d
a c tu a l c o sts r el ati ve to 2018 wa rr a nt y s a le s of P 18, 000 fo r pa r ts a n d P 36, 000
for la bor .
1. Wh a t l ia bil ity re la tive to t he se t ra n sa c tio ns wo u ld appe a r on t h e D e c e m be r
31, 2018, s ta tem e n t o f fin a n c ia l po sit ion a n d h ow m u ch is c ur re nt a n d n on -
c ur re nt ? C U RR EN T: 72, 900 N O N CU R R E N T: 145, 800
2. Wh a t l ia bil ity re la tive to t he 2018 war ra n tie s wo u ld a ppe a r on th e De c e m be r
31, 2019, s ta tem e n t o f fin a n c ia l a n d h ow m uc h is c u rre n t a n d n on - c u rr e n t?
C U R R E N T : 72, 900 N ON C U R R EN T: 72, 900