10 - III: Internal control - Transaction Cycles

Question 1

What is transaction cycle? Examples?

Answer 1

A group of family homogeneous transactions.

Common:
Revenues/receipts.
Expenditures/disbursements.
Payroll.

Other:
Production/manufacturing inventory.
Fixed assets (PP and E).
Financing/investing.

Question 2

Why is transaction cycle important?

Answer 2

Because it’s the highest level of aggregation for which control risk may be viewed as constant.

Question 3

What are 5 components of internal control?

Answer 3

1. Control environment.
2. Risk assessment.
3. Information and communication system.
4. Control activities.
5. Monitoring.

Question 4

What are 5 control activities? (SCARE)

Answer 4

Segregation of duties.
Controls (physical controls).
Authorization.
Review (performance review).
EDI/IT (information processing).

Question 5

Revenue/receipts cycle: What’s the first document?

Answer 5

Customer’s order form (purchase order) - external.

Question 6

Revenue/receipts cycle: What are 4 documents following customer order form?

Answer 6

1. Sales order form.
2. Shipping documents - outbound. inbound. Bill of lading.
3. Sales invoice (billing) - recorded in sales journal.
4. Customer remittance advice - match the customer pmt to the appropriate account.
   - post the month’s sales to General Ledger.

Question 7

Revenue/receipts cycle: Segregation of duties: Which department handles the 3 functions?

Answer 7

1. Authorization (execution): Sales dept. Credit dept.
2. Accounting (record keeping): A/R dept - bills customers and collect.
3. Access (custody): Shipping dept. Receiving dept.

Question 8

Revenue/receipts cycle: Controls (physical control): Explain.

Answer 8

Computer passwords.

Custody of cash (and inventory) - should be handled by people who doesn’t have record keeping function.

Question 9

Revenue/receipts cycle: Authorization: Explain.

Answer 9

Management should review/approve sales terms, invoice.
Management should set transaction limits, specifically approve those outside of limits.
Management should approve adjusting JEs.

Question 10

Revenue/receipts cycle: Reviews (performance review): Explain.

Answer 10

Recorded sales should be compared to budgets/forecasts.
Accounting documents, ex: sales inv and shipping documents, in a timely manner. Making sure they are recorded in the proper period (proper cutoff).

Question 11

Revenue/receipts cycle: EDI/IT (info processing): Explain.

Answer 11

The auditor should agree the F/S amount to the general ledger accounts.
Important accounting doc should be renumbered and numerical sequence should be accounted for.
An aging trial abalone for A/R should be agreed/reconciled to the general ledger - provide info about quality of a/R, need to follow-up audit procedures.

Question 12

What is existence or occurrence assertion?

Answer 12

Existence: whether assets exist at a given date.
Occurence: whether recorded transactions have occurred during a given period.

Question 13

What is completeness assertion?

Answer 13

Whether all transactions and accounts are recorded.

Question 14

What is rights/obligation assertion?

Answer 14

Whether asset are the rights of the entity and liabilities are the obligations of the entity at a given date.

Question 15

What is presentation assertion?

Answer 15

Whether particular components of the F/S are properly classified, described, and disclosed.

Question 16

Revenue/receipts cycle: Cash receipts: What are 4 steps involved?

Answer 16

1. Check/remittance advice rcvd.
2. Prepare remittance log (cash receipts listings).
3. Record receipts transaction in Cash Receipts.
4. Post the month’s receipts to General Ledger.

Question 17

Revenue/receipts cycle: Cash receipts: Segregation of duties.

Answer 17

Each cash receipts is listed immediately when opened and restrictively endorsed.
Different personnel should open the mail, handles accounting activities, prepare deposit, reconcile band accounts.

Question 18

Revenue/receipts cycle: Cash receipts: Control.

Answer 18

Employees access to cash should be “bonded” (a type of ins).
Limit access to cash/key documents.
Could use a lock box - bank pick up deposit directly.

Question 19

Revenue/receipts cycle: Cash receipts: Authorization.

Answer 19

Bank reconciliation reviewed and approved with doc.

Adjusting entities reviewed and approved.

Question 20

Revenue/receipts cycle: Cash receipts: Review.

Answer 20

Initial cash receipts listing should be compared to the total per cash receipts journal, traced to bank deposit.
Cash receipts should be deposited daily.
Bank reconciliation should be done in a timely basis.

Question 21

Revenue/receipts cycle: Cash receipts: EDI.

Answer 21

Key doc should be pre-numbered and the numerical sequence should be properly accounted for.
Use pre-numbered receipts and cash registers for any cash received on site.

Question 22

What are 6 steps of expenditures (purchasing)?

Answer 22

1. Purchase request received.
2. Prepare PO.
3. Receiving report.
4. Supplier’s inv (billing).
5. Record in purchase journal.
6. Post to the General Ledger.

Question 23

What are 4 steps of disbursement (pmts)?

Answer 23

1. A/P approves pmts.
2. Prepare checks/remittance advice.
3. Record pmt in the Cash Disbursement Journal.
4. Post cash pmt to General Ledger.

Question 24

Expenditures/disbursement: segregation of duties?

Answer 24

Purchase dept makes the purchase.
Receiving dept takes possession of deliveries/prepare the receiving report (receiver).
A/P dept handles accounting/approves pmts.

Question 25

Expenditures/disbursement: Controls?

Answer 25

Employees w/ access to cash should be bonded/back ground check. Limit access to cash/key doc.

Question 26

Expenditures/disbursement: Authorization?

Answer 26

Only designated personnel in purchasing dept can order goods. Dual signature requirement for cash disbursements. The dept requesting the order should indicate approval for the order. Adjusting JE reviewed and approved by management.

Question 27

Expenditures/disbursement: Review?

Answer 27

Monthly stmts from suppliers are compared to recorded A/P. PO, receivers, supplier inv should be compared before making pmt. Receipts/disbursements bank reconciliations done in a timely basis.

Question 28

What is the difference between A/P and vouchers payable?

Answer 28

A/P: Tracks by suppliers. | V/P: Tracked by individual transactions.

Question 29

Can a company with A/P system track the info for V/P system? Vice versa?

Answer 29

Yes. No.

Question 30

Expenditures/disbursement: EDI?

Answer 30

Key doc should be pre-numbered, numerical sequence should be accounted for. Detailed records should support General ledger. Supporting doc should be canceled as "PAID" immediately upon pmts.

Question 31

Payroll: Steps?

Answer 31

1. Time cards, job sheets. 2. Prepare payroll/record in Payroll Journal. 3. Distribute pmts. 4. Post month's payroll to General Ledger

Question 32

Payroll: segregation of duties?

Answer 32

Personnel sept: oversees pay rates/maintain personnel files (deductions). Treasure'r dept: issues checks (signs) / distribute. Payroll dept: actually prepare payroll each period (accounting calculations/record).

Question 33

Payroll: Controls?

Answer 33

Limit access. | Employees files. To paychecks - should be bonded.

Question 34

Payroll: Authorization?

Answer 34

Approved by management. Payroll computation should be verified by an independent employee. Over time approved.

Question 35

Payroll: Review?

Answer 35

Appropriate payroll info maintained/comparison. Paychecks should be reconciled. Job cost time sheets to clock cards reconciliation. Bank reconciliation.

Question 36

Payroll: EID?

Answer 36

Key doc should be pre-numbered, numerical sequence should be accounted for.

Question 37

Production/manufacturing inventory: segregation of duties?

Answer 37

Sales returns should be immediately counted by the receiving clerk and a receiver.

Question 38

Production/manufacturing inventory: Controls?

Answer 38

Access to inventory and accounting doc limited.

Question 39

Production/manufacturing inventory: Authorization?

Answer 39

General approval requirements. Set limits. Adjusting JE should be reviewed and approved.

Question 40

Production/manufacturing inventory: Reviews?

Answer 40

Actual inventory should be compared periodically to recorded inv. Unusual differences should be investigated.

Question 41

Production/manufacturing inventory: EDI?

Answer 41

Key doc should be pre-numbered, numerical sequence should be accounted for. Consider using perpetual inv system for items w/ high cost per unit. Adequate support for General Ledger.

Question 42

Fixed assets cycle objectives? (5)

Answer 42

1. Accurate recording, classification, based on approval. 2. Estimates used in determining depr. depletion, amortization are reasonable based on approval. 3. Reasonably secure from loss - ins in place. 4. Detailed record on hand, compared with assets on hand. 5. Adjusting JE approved by management.