ACCT20007 Chap.8 Expenditure Cycle Risks and Controls
Expenditure Cycle Risks and Controls
The expenditure cycle separates internal demand, supplier commitment, receipt, liability recognition and payment. That separation supports authorisation and segregation of duties.
This chapter builds three-way matching from independent documents, then examines supplier bank changes, cumulative tolerance abuse, service acceptance and the limits of physical security.
A requisition documents a genuine operational need and relevant specifications before the organisation commits to a supplier. Budget checks, stock review and higher approval for unusual items reduce unnecessary purchases.
The purchase order then formalises supplier, price, quantity and terms under separate authority.
Receipt evidence proves fulfilment. Receiving staff compare delivered goods with the order, record actual quantity and condition and preserve shortages or defects. For services, an informed requester confirms the milestone or deliverable.
Warehouse security protects items after arrival but cannot prove that a particular delivery happened.
Before payment, three-way matching joins purchase order, receipt and supplier invoice. Differences belong in a governed exception queue rather than silent tolerance. Small differences should be aggregated by supplier, order and period because repeated use can become material.
Independent verification also protects supplier bank changes from impersonated email requests.
Trace the accounting effect through inventory or expense, payable and cash. Then define measures for unmatched invoices, receipt-entry delay, duplicate indicators, supplier changes and reversed payments.
An independent source must support every verification: established supplier contact details and receiver evidence are stronger than information contained in the claim being tested.
Supplier approval should cover capability, quality, legitimacy and conflicts as well as price.
Review should be renewed when risk indicators change instead of treating initial approval as permanent assurance.
Duplicate invoice controls need several keys because suppliers can change format or reference. Compare supplier, amount, date, purchase order and invoice number, then investigate likely matches before payment.
Payment runs should reconcile authorised items to bank output and retain approver evidence.
A correct liability can still be paid twice or redirected if the payment file is altered after approval.
Use exception age and cause alongside count.
A new match rule may reveal more differences at first; improvement means that valid exceptions are resolved promptly and repeated root causes decline.
Open purchase orders require review because stale commitments distort available budget and can later support inappropriate invoices.
Close or amend them through authorised evidence.
For recurring services, periodically confirm continued need and performance rather than treating the original contract as permanent receipt evidence. Acceptance should reflect the current billing period.
For revision, follow need, commitment, receipt, liability and payment as separate states.
Name the independent document and responsible actor at every transition, then challenge the match with a quantity difference, service invoice or bank-detail change. Finish by tracing the error through expense or inventory, payable and cash, and by defining the exception evidence required before payment can proceed.
What this chapter covers
- 01
Purchase requisition
- 02
Supplier approval
- 03
Purchase orders
- 04
Receiving evidence
- 05
Invoice matching
- 06
Payment controls
- 07
Tolerance monitoring
Worked example · free
Add receipt evidence before payment
- 1The order proves commitment but not delivery.
- 2Missing receipt evidence permits payment for absent or short goods.
- 1Record independent receipt quantities and condition in the system.
- 2Match order, receipt and invoice, and route differences for approval.
Key terms
- Purchase Requisition
- A purchase requisition documents an internal need before supplier commitment.
- Receiving Record
- A receiving record provides independent evidence of delivered quantity and condition.
- Three-way Match
- A three-way match compares purchase order, receipt and invoice before payment.
Expenditure Cycle Risks and Controls FAQ
Why separate requisition and purchase order?
The requisition documents and approves an internal need, while the purchase order commits the organisation to supplier terms. Keeping them separate lets different roles challenge necessity, supplier selection, price and authority before the external commitment is made.
How should supplier bank changes be controlled?
Verify the request independently using established contact information, require dual approval, notify the existing contact, log old and new values and consider a temporary payment hold. The buyer or invoice processor should not be able to make and conceal the change alone.
Why can a small tolerance become material?
A permitted difference can be repeated across invoices, suppliers or periods. Aggregate tolerance use and escalate unusual concentration or cumulative value. The target need not be zero, but every material or repeated exception should have documented receipt evidence and independent approval.
Exam move
Build four evidence columns for need, order, receipt and supplier claim. For each case, state which document is missing or controlled by the wrong actor. Practise three-way matching, master-data verification and cumulative tolerance analysis, then connect the weakness to inventory, expense, payable and cash effects.
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