Use Table to create a questionnaire checklist that can be used to evaluate controls for each of the basic activities in the expenditure cycle (ordering goods, receiving, approving supplier invoices, and cash disbursements).
REQUIRED
a. For each control issue, write a Yes/No question such that a “No” answer represents a control weakness. For example, one question might be “Are supporting documents, such as purchase orders and receiving reports, marked ‘paid’ when a check is issued to the vendor?”
b. For each Yes/No question, write a brief explanation of why a “No” answer represents a control weakness.
TABLE Threats and Controls in the Expenditure Cycle
Activity | Threat | Controls (first number refers to the corresponding threat)? |
General issues throughout entire expenditure cycle | 1. Inaccurate or invalid master data | 1.1 Data processing integrity controls 1.2 Restriction of access to master data 1.3 Review of all changes to master data |
| 2. Unauthorized disclosure of sensitive information | 2.1 Access controls 2.2 Encryption |
| 3. Loss or destruction of data | 3. Loss or destruction of data |
| 4. Poor performance | 4.1 Managerial reports |
Ordering | 5. Stockouts and excess inventory | 5.1 Perpetual inventory system 5.2 Bar coding or RFID tags 5.3 Periodic physical counts of inventory |
| 6. Purchasing items not needed | 6.1 Perpetual inventory system 6.2 Review and approval of purchase requisitions 6.3 Centralized purchasing function |
| 7. Purchasing at inflated prices | 7.1 Price lists 7.2 Competitive bidding 7.3 Review of purchase orders 7.4 Budgets |
| 8. Purchasing goods of inferior quality | 8.1 Purchasing only from approved suppliers 8.2 Review and approval of purchases from new suppliers 8.4 Tracking and monitoring product quality by supplier 8.3 Holding purchasing managers responsible for rework and scrap costs |
| 9. Unreliable suppliers | 9.1 Requiring suppliers to possess quality certification (e.g., ISO 9000) 9.2 Collecting and monitoring supplier delivery performance data |
| 10. Purchasing from unauthorized suppliers | 10.1 Maintaining a list of approved suppliers and configuring the system to permit purchase orders only to approved suppliers 10.2 Review and approval of purchases from new suppliers 10.3 EDI-specific controls (access, review of orders, encryption, policy) |
| 11. Kickbacks | 11.1 Prohibit acceptance of gifts from suppliers 11.2 Job rotation and mandatory vacations 11.3 Requiring purchasing agents to disclose financial and personal interests in suppliers 11.4 Supplier audits |
Receiving | 12. Accepting unordered items | 12.1 Requiring existence of approved purchase order prior to accepting any delivery |
| 13. Mistakes in counting | 13.1 Do not inform receiving employees about quantity ordered 13.2 Require receiving employees to sign receiving report 13.3 Incentives 13.4 Use of bar codes and RFID tags 13.5 Configuration of the ERP system to flag discrepancies between received and ordered quantities that exceed tolerance threshold for investigation |
| 14. Verifying receipt of services | 14.1 Budgetary controls 14.2 Audits |
| 15. Theft of inventory | 15.1 Restriction of physical access to inventory 15.2 Documentation of all transfers of inventory between receiving and inventory employees 15.3 Periodic physical counts of inventory and reconciliation to recorded quantities 15.4 Segregation of duties: custody of inventory versus receiving |
Approving supplier invoices | 16. Errors in supplier invoices | 16.1 Verification of invoice accuracy 16.2 Requiring detailed receipts for procurement card purchases 16.3 ERS 16.4 Restriction of access to supplier master data 16.5 Verification of freight bill and use of approved delivery channels |
| 17. Mistakes in posting to accounts payable | 17.1 Data entry edit controls 17.2 Reconciliation of detailed accounts payable records with the general ledger control account |
Cash disbursements | 18. Failure to take advantage of discounts for prompt payment | 18.1 Filing of invoices by due date for discounts 18.2 Cash flow budgets |
| 19. Paying for items not received | 19.2 Budgets (for services) 19.3 Requiring receipts for travel expenses 19.4 Use of corporate credit cards for travel expenses |
| 20. Duplicate payments | 20.1 Requiring a complete voucher package for all payments 20.2 Policy to pay only from original copies of supplier invoices 20.3 Cancelling all supporting documents when payment is made |
| 21. Theft of cash | 21.1 Physical security of blank checks and check-signing machine 21.2 Periodic accounting of all sequentially numbered checks by cashier 21.3 Access controls to EFT terminals 21.4 Use of dedicated computer and browser for online banking 21.5 ACH blocks on accounts not used for payments 21.6 Separation of check-writing function from accounts payable 21.7 Requiring dual signatures on checks greater than a specific amount 21.8 Regular reconciliation of bank account with recorded amounts by someone independent of cash disbursements procedures 21.9 Restriction of access to supplier master file 21.10 Limiting the number of employees with ability to create one-time suppliers and to process invoices from one-time suppliers 21.11 Running petty cash as an imprest fund 21.12 Surprise audits of petty cash fund |
| 22. Check alteration | 22.1 Check-protection machines 22.2 Use of special inks and papers 22.3 “Positive Pay” arrangements with banks |
| 23. Cash flow problems | 23.1 Cash flow budget |
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