Question

Expenditure Cycle" Please respond to the following: Using your own present or previous place of work as an example, propose a method for mitigating the problem of separate departments (e.g., academics, student services, information technology, etc.) ordering the same item. From the proposal above, discuss the possible issues that implementing the proposed method would cause to the organization. Suggest additional controls that you would put into place to overcome the issues. Provide specific examples to support your response.

Answer 1

Expenditure Cycle.

An expenditure cycle is a set of purchasing decisions and actions. It's the repetitive process of creating purchase orders and ordering goods and services, receiving these items, approving the invoices for these items and services, and paying the invoices. Assume that your company periodically buys office supplies. Your expenditure cycle would be creating purchase orders from various employee requests for more paper, pencils and print cartridges, and calling the office supply store to place the order using the purchase order. Once the items were delivered, accounting would approve the invoice for payment and cut the check.

The three basic activities performed in the expenditure cycle are

(1) Ordering goods, supplies, and services

(2) Receiving and storing these items

(3) Paying for these items. These activities mirror the activities in the revenue cycle

Example are.

Companies typically use three different types of transactions in their expenditure cycle, including a cash disbursement, a credit purchase and a purchase return.

Propose a method for mitigating the problem of separate departments

There are many problems in separate departments by following certain methods they are.

Processes.

Many small-business owners do not have processes and systems in place to accurately track purchases. Without a purchasing system and a clearly defined expenditure cycle, you have to personally approve every purchase, every invoice and every vendor. Alternatively, if you let employees do what they want when they want, with no oversight or input, your company's expenditures could increase significantly. For example, if every time an employee needs office supplies, she stops by an office store and buys them with the company credit card or calls in her own order, you could have many duplicate purchases.

Importance of expenditure cycle.

It is important for your company to establish a system for its expenditure cycle. Doing so reduces fraud and the potential for fraud. Putting a system in place to standardize the ordering process from when you order to who you order from and how you pay significantly reduces the opportunity for embezzlement. If vendors must be pre-approved or approved before ordering, no employee can "pay" fake or fraudulent vendors. If you control payments, no employee can write unauthorized checks. Therefore, a written expenditure cycle strengthens your company's accounting and financial infrastructure.

Expenditure Cycle Controls.

1)Transaction Authorization

The inventory control function continually monitors inventory levels. As inventory levels drop totheir predetermined reorder points, inventory control formally authorizes replenishment with apurchase requisition.Formalizing the authorization process promotes efficient inventory management and ensuresthe legitimacy of purchases transactions. Without this step, purchasing agents could purchaseinventories at their own discretion, being in a position both to authorize and to process the purchasetransactions. Unauthorized purchasing can result in excessive inventory levels for some items, while others go out of stock. Either situation is potentially damaging to the firm.

2)Cash Disbursement Subsystem

The function authorizes cash disbursement via the cash disbursement voucher. To provide effective control over the flow of cash from the firm, the cash disbursement function should not writechecks without this explicit authorization. A cash disbursements journal containing the voucher numberauthorizing each check provides an audit trail for verifying the authenticity of each check written.

3)Segregation of Duties

Segregation of Inventory control from the warehouse: Within the purchases subsystem, theprimary physical asset is inventory. Inventory control keeps the detailed records of the asset, while thewarehouse has custody. At any point, an auditor should be able to reconcile inventory records to thephysical inventory.Segregation of the General Ledger and Accounts Payable from Cash Disbursements: The assetsubject to exposure in the cash disbursement subsystem is cash. The records controlling this asset arethe AP subsidiary ledger and the cash account in the general ledger. An individual with the combinedresponsibilities of writing checks, posting to the cash account, and maintaining AP could perpetratefraud against the firm.

4)Supervision

The receiving department is the area that most benefits from supervision. Large quantities of valuable assets flow through this area on their way to the warehouse. Close supervision here reducesthe chances of two types of exposure: (1) Failure to properly inspect the assets and (2) the theft of assets.

5)Inspection of Assets

When goods arrive from the supplier, receiving clerks must inspect items for proper quantities and condition.