Expenditure Cycle Lecture Notes

COSO Framework within the Expenditure Cycle

Control Environment- the tone at the top of the organization. Without clear, demonstrated commitment of upper management and opinion leaders in the organization, internal control will not be taken seriously elsewhere in the hierarchy.

Human resource policies – buying organization must conduct business with integrity
Delegation of authority – assigns levels of purchasing allowed by job description

Risk Assessment-using a taxonomy, business experience, research, and dialogue to identify the risks associated with operations.

Expensive goods – risk of theft or other loss
Violating FCPA

Control Activities- the actual internal controls implemented on the basis of the risk assessment.
See grid

Information and Communication-
• For an internal control system to function effectively, its purpose, methods, and results must be communicated throughout the organization. Employees at all levels should understand the risk exposures they face and the controls employed to mitigate those exposures.

• Information must be accurate, valid, classified correctly, and in the proper accounting period.

Monitoring- SOX mandates internal control monitoring and personal certification by the CEO and CFO of the organization. Companies’ objectives and business processes change over time, so the monitoring function in an important part of the maintaining good internal control.

Waren Company Expenditure Cycle

Nancy Ford receives an oral requisition for a purchase. She prepares a pre-numbered purchase order. The purchase order is approved and signed by Kramer. One PO is filed and the other is sent to the vendor.

Nancy Ford receives goods for the vendor. She prepares a pre-numbered receiving report which is filed.

After Jim Adams receives the vendor invoice, he pulls the