The Expenditure Cycle of Sweet Grass Milling and Refinery Corporation

EXPENDITURE CYCLE

Overview

The Expenditure Cycle of Sweet Grass Milling and Refinery Corporation is a recurring set of business activities and related data processing operations associated with the purchase of and payment for goods and services. Its primary objective is to minimize the total cost of acquiring and maintaining inventories, supplies, and the various services necessary for the organization to function.

Sweet Grass Milling and Refinery Corporation practices Economic Order Quantity (EOQ) in managing its inventories. With this, the system automatically creates a purchase request for raw materials that reached their reorder point. All purchases are made at FOB Destination. Thus, Accounts Payable and Purchases are recorded only upon receipt of Materials. Items received are stored in the warehouse inside the company’s premises and are arranged according to its classification.

The company operates on a credit basis and do not pay for resources until after acquiring them. All data regarding the suppliers, including the payment terms, are captured in the Supplier Master File. These suppliers have established a mutual trust with the company, thus, purchases are made only through them.

The Expenditure cycle of the company is semi-automated. Thus, the company has established internal control procedures to ensure that the system is free from any possible fraudulent schemes and sabotages. These controls also ensure the fair presentation of the figures in the financial statements and as well as the consistency of the accounting estimates and principles applied.

INTERNAL CONTROL

        Internal control in the expenditure cycle is established in the First Farmer’s Milling Corporation to provide accountability in the custody of inventories, efficiency and effectiveness in the disbursement process, and compliance with government agencies.

CONTROL OBJECTIVES

The control objectives of the First Farmer’s Milling Corporation in the Expenditure Cycle are:

• To ensure that all expense transactions are properly authorized and validated
• To ensure that all authorized and validated expense transactions are properly recorded on a timely basis
• To ensure that all goods and services are ordered as needed
• To receive all ordered goods and verify that they are in good condition
• To ensure that invoices pertaining to goods and services are valid and correct
• To ensure that recognition of expenses are properly authorized as evidenced by the Supplier Invoice
• To ensure that releasing of stocks from the warehouse are properly authorized as evidenced by the approved Withdrawal Slip
• To ensure that the raw materials and other supplies in the warehouse are properly secured and safeguarded from loss or theft
• To ensure that all expense transactions are properly presented and disclosed
• To ensure that all payments made are supported with documents
• To ensure that the company is in compliance with all applicable laws and regulations
• All disclosures are full and fair

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GENERAL CONTROLS

Organizational Controls

• Qualified and well-trained employees are hired and regularly evaluated.
• In processing the expense transactions, the recordkeeping function is segregated from the releasing function.
• The approval of Purchase Orders and the Payment of purchases is assigned to different personnel

Documentation Controls

• All documents are pre-numbered and in their proper form. For printed documents, there must be at least one copy for file of the company.
• Documents, flowcharts, record lay-outs, and reports relating to the expenditure cycle are completed and updated.
• Manual pertaining to organizational policies and procedures on the expenditure cycle are properly documented, updated and disseminated.

Asset Accountability Controls

• Petty Cash Voucher

• Petty Cash Fund is replenished at least once a month and should be approved by the Treasurer
• Petty Cash vouchers that are cancelled are stamped as “cancelled”. A summary of cancelled Petty Cash Vouchers must be prepared weekly.
• The Petty Cash Custodian makes a summary of all purchases taken out from the petty cash and should be signed daily

• Check

• All Check Vouchers correspond s to the Purchase Orders and the Official Receipts/Supplier Invoice from the supplier
• All Checks are completely signed and authorized before payment
• Checks that are cancelled are stamped as “cancelled”. A summary of cancelled Checks is prepared weekly.

• Office Supplies and Raw Materials Inventory

• The warehouse supervisor acknowledges the acceptance of purchased materials from the suppliers by generating approved stock receiving report and releasing of materials to the requesting department by the approved Materials Withdrawal Slip.
• The warehouse control checker conducts physical count of office supplies and materials in the warehouse and the warehouse clerk matches it on the company’s record on a monthly basis.
• The warehouse is structured in a way that can ensure the security and the good physical condition of the raw materials and other supplies stored.
• Obsolete, expired, or damaged items is taken out of the warehouse and a summary of such should be prepared on a monthly basis

Management Practice Controls