Introduction to Expenditure & Payment Cycle | Auditing Course | CPA exam AUD

In this video, we explain introduction to expenditure & payment cycle.
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Introduction to Expenditure & Payment Cycle
The expenditure and payment cycle is a fundamental process in financial management that involves the acquisition of goods and services and the subsequent payment to suppliers. It ensures that a business efficiently manages its purchasing, accounts payable, and cash disbursements while maintaining control over spending and vendor relationships.
Key Components of the Expenditure & Payment Cycle
Purchasing Process
The cycle begins with identifying the need for goods or services.
A purchase requisition is generated and approved before a purchase order (PO) is issued to the supplier.
Receiving Process
Upon delivery, goods are inspected for quality and quantity against the purchase order and supplier invoice.
A receiving report is created to confirm receipt and support the payment process.
Invoice Processing
The supplier sends an invoice that is matched with the purchase order and receiving report (three-way match).
Any discrepancies are resolved before approval for payment.
Accounts Payable Recognition
Once the invoice is verified, an accounts payable (AP) entry is recorded.
The liability is recognized in the company’s financial statements.
Payment Authorization
Payments are scheduled based on due dates and cash flow considerations.
Approval is required before processing the payment.
Cash Disbursement
Payment is made via check, electronic transfer, or other approved methods.
A payment confirmation is recorded, and the liability is cleared.
Recording and Reconciliation
Payments are posted to the general ledger and reconciled with bank statements.
Discrepancies are investigated and resolved to ensure accuracy.
Key Documents in the Cycle
Purchase Requisition: Internal request for goods or services.
Purchase Order (PO): A formal order issued to suppliers specifying terms.
Receiving Report: Confirms delivery and condition of goods received.
Supplier Invoice: Bill from the supplier requesting payment.
Payment Voucher: Authorization document for releasing payment.
Internal Controls in the Expenditure & Payment Cycle
Segregation of Duties
Different individuals should handle purchasing, invoice approval, and payment to prevent fraud.
Approval Procedures
Ensure proper authorization for purchases and payments to avoid unauthorized transactions.
Document Matching
Use a three-way match (purchase order, receiving report, and invoice) to validate transactions.
Payment Controls
Implement dual approvals for disbursements and regular reconciliation of payment records.
Vendor Verification
Assess and verify suppliers to prevent fictitious vendors and overpayments.
Common Risks in the Expenditure & Payment Cycle
Unauthorized Purchases: Employees may procure goods without proper approval.
Duplicate Payments: Errors in invoice processing may lead to duplicate disbursements.
Fraudulent Transactions: Fake suppliers or invoices may lead to financial loss.
Delayed Payments: Poor cash flow management can result in late fees and strained vendor relationships.
Incorrect Posting: Errors in recording transactions can affect financial reporting accuracy.
Efficiency Improvements in the Cycle
Automating invoice processing and approval workflows.
Implementing an enterprise resource planning (ERP) system for real-time tracking.
Regular audits and reconciliations to detect discrepancies early.
Vendor management strategies to negotiate better terms and discounts.
Conclusion
The expenditure and payment cycle is crucial for ensuring that an organization effectively manages its procurement and payment processes. Strong internal controls, accurate documentation, and efficient workflows contribute to financial accuracy, operational efficiency, and positive vendor relationships.
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