Expenditure Cycle

Description

Set of purchasing decisions and actions.

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.

Importance

Reduces fraud and the potential for fraud.

Standardizes the ordering process from:
o When you order;
o Who you order from; and
o How you pay
Significantly reduces the opportunity for embezzlement.
A written expenditure cycle strengthens your company's accounting and
financial infrastructure.

Expenditure Cycle
Identify The Need
o When to order
o What to order
o Who to order from
Use approved vendor list
Price and quality of product
Ability to deliver on time
Service after sale
Approve Requisites
o Purchase Requisition
o Proper approval
o Within budgets
Purchase Order Contract between buyer and vendor
Alternatives
Procurement cards
Custom On-line Catalogues
Control Purchasing Agents Such control ensures that the agents engage
in an arms length transactions; e.g. Bulls ticket, Weber grill
Receive Good
o Count and compare to packing slip and the PO
o Inspect quality
o Document on receiving report
Deliver Goods
o Route goods to warehouse or other departments
o End users sign for goods
Approve Payments
o Approval of the invoice by proper authority
Including the PO, Receiving Report, and the Invoice
o Record the liability
o File by due dates
Prepare and Make Disbursements
o Cashier prepares check
o Treasurer reviews supporting document before signing the check,
cancels supporting document and mails the signed check
o Record disbursement

Fraud
Fraud

Description

Prevention and Detection

Improper Purchases

Purchases inconsistent

Proper supervision

and Payments

with company policy

Internal control on the

inspection of quality and
quantity against company
standard

Unauthorized
Purchases

Improper purchasing
controls can be used for
personal use

Voucher System

Fraudulent
Purchases to
Related Parties

Invoice Kickback

Alternate price quotations for

past purchase orders

Misappropriation of
Petty Cash

Petty Cash cash in small

amounts kept to be used
to reimburse employees
for miscellaneous
business-related
expenses

Manage petty cash on an

imprest basis

Unreasonable use of
company credit cards and
expenses

Careful review of credit cards

and expense account
purchases.

Abuse of Company
Credit Cards or
Expense Accounts

Bid Rigging

Independent purchasing,
receiving, accounting, and
payment departments.

Periodic surprise audits

Careful inspection of receipts

Good control for certain

expenditures on the companys
credit card or expense
accounts
Unauthorized
Payments

Due to the lack of a

functioning voucher
system:

Theft of Company
Checks

Fictitious purchases
Payments made for
amounts larger
than indicated on
the purchase order
Altered invoices
Valid purchases but
paid to someone
other than the
actual payee

Money laundering after

the fact of robbery

Independent purchasing
department
Voucher System
Periodic audit on the voucher
packages and reconcile
authorized payments against
actual payments
Physical security over check
books, multiple signatures on
checks, imprest checking
accounts.

Physical control over checks

and outgoing mail

Fraudulent Returns

Theft of Inventory
and Other Assets

Forgery on checks

Use of checks that are difficult

to alter or forge

Issuance of fictitious
returns or for incomplete
or substituted returns

Good physical security

Theft for personal use

Good physical security

Careful monitoring and

auditing of Returns
Department
Record of custody
Proper employee supervision
Asset disposal management
Internal auditing

Payroll Fraud
o

Improper
hiring

Friends, relatives without

proper training with a pay
rate that is too high

Personnel Department for

verification of employee
background information.

Phantom employees

Approval by both management

and an independent Personnel
Department for all hired
employees.
Internal auditing to ensure
compliance with internal
control policies and
procedures.

Improper
changes to
employee
personnel
files for pay
raises

Payroll clerks giving a pay

raise to friends

Improper
work-related
reporting

Reported hours not

worked on

Approval by both management

and an independent Personnel
Department for all changes to
personnel files and wage rates.
Internal auditing to ensure
compliance with internal
control policies and
procedures.

Failure to fill out the

paperwork for leave time
Exaggerated sales reports
to increase the

Proper supervision.
Approval of time cards, leave
forms, reports and so on.
Internal auditing to ensure
compliance with internal
control policies and

commission

procedures.

Internal Controls
o
o
o
o
o
o
o
o
o
o
o
o

Pre-numbered purchase orders

Authorized personnel to initiate all purchases
Deliveries accepted on verification of purchase order
Invoices, purchase orders and receiving reports matched to verify invoice for
processing and payment
Expected refunds are followed up
Paid invoices are cancelled with a stamp paid or punch
Check signatories have limits
Authorized person responsible for petty cash fund
Accounts payable is reconciled on a regular basis
Inventory is protected and accounted for both physically and in terms of
dollar value
Reorder levels are maintained
Proper authorization procedures apply for release of goods from stores