Identify six classes of physical controls employed in the expenditure cycle and give one example of each

Answer 1

1 . Transaction Authorization
a . When inventory levels drop to their predetermined reorder points, inventory control formally authorizes replenishment with a purchase requisition.
b. The AP function authorizes cash disbursements via the AP packet. To provide effective control over the flow of cash from the firm, the cash disbursement function should not write checks without this explicit authorization.

2 . Segregation of Duties
a . Segregation of inventory control from the warehouse. Inventory control keeps the detailed records of the asset, while the warehouse (stores) has asset custody.
b. Segregation of accounts payable from cash disbursements. An individual with responsibilities for establishing accounts payable and writing checks in payment of accounts payable could perpetrate a fraud.

3 . Supervision
a . Critical in the receiving department to ensure that receiving reports are completed correctly and that goods are physically counted and inspected.
b. Supervision is also important to prevent theft from the time goods are received until they are secured in the warehouse.

4 . Accounting Records
a . The control objective of accounting records is to maintain an audit trail adequate for tracing a transaction from its source document to the financial statements. The expenditure cycle employs the following accounting records: AP subsidiary ledger, check register, and general ledger.

5 . Access Controls
a . A firm must limit access to documents that control its physical assets.

6 . Independent Verification
a . The receiving department verify that goods received are correct in type and quantity and inspect them for condition. A blind PO forces clerks to physically count and inspect the goods.
b. The general ledger function provides an important independent verification in the system. It receives journal vouchers and summary reports from inventory control, AP, and cash disbursements. From these sources, the general ledger function verifies that the total obligations recorded equal the total inventories received and that the total reductions in AP equal the total disbursements of cash.