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AUD > 10 - III: Internal control - Transaction Cycles > Flashcards

10 - III: Internal control - Transaction Cycles Flashcards

1
Q

What is transaction cycle? Examples?

A

A group of family homogeneous transactions.

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

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

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2
Q

Why is transaction cycle important?

A

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

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3
Q

What are 5 components of internal control?

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

What are 5 control activities? (SCARE)

A 
Segregation of duties.
Controls (physical controls).
Authorization.
Review (performance review).
EDI/IT (information processing).
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5
Q

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

A

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

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6
Q

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

A
  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.
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7
Q

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

A
  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.
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8
Q

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

A

Computer passwords.

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

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9
Q

Revenue/receipts cycle: Authorization: Explain.

A

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

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10
Q

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

A

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).

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11
Q

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

A

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.

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12
Q

What is existence or occurrence assertion?

A

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

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13
Q

What is completeness assertion?

A

Whether all transactions and accounts are recorded.

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14
Q

What is rights/obligation assertion?

A

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

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15
Q

What is presentation assertion?

A

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

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16
Q

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

A
  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.
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17
Q

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

A

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.

18
Q

Revenue/receipts cycle: Cash receipts: Control.

A

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.

19
Q

Revenue/receipts cycle: Cash receipts: Authorization.

A

Bank reconciliation reviewed and approved with doc.

Adjusting entities reviewed and approved.

20
Q

Revenue/receipts cycle: Cash receipts: Review.

A

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.

21
Q

Revenue/receipts cycle: Cash receipts: EDI.

A

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.

22
Q

What are 6 steps of expenditures (purchasing)?

A
  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.
23
Q

What are 4 steps of disbursement (pmts)?

A
  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.
24
Q

Expenditures/disbursement: segregation of duties?

A

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

25
Q

Expenditures/disbursement: Controls?

A

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

26
Q

Expenditures/disbursement: Authorization?

A

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.

27
Q

Expenditures/disbursement: Review?

A

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.

28
Q

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

A

A/P: Tracks by suppliers.

V/P: Tracked by individual transactions.

29
Q

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

A

Yes. No.

30
Q

Expenditures/disbursement: EDI?

A

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.

31
Q

Payroll: Steps?

A
  1. Time cards, job sheets.
  2. Prepare payroll/record in Payroll Journal.
  3. Distribute pmts.
  4. Post month’s payroll to General Ledger
32
Q

Payroll: segregation of duties?

A

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).

33
Q

Payroll: Controls?

A

Limit access.

Employees files. To paychecks - should be bonded.

34
Q

Payroll: Authorization?

A

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

35
Q

Payroll: Review?

A

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

36
Q

Payroll: EID?

A

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

37
Q

Production/manufacturing inventory: segregation of duties?

A

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

38
Q

Production/manufacturing inventory: Controls?

A

Access to inventory and accounting doc limited.

39
Q

Production/manufacturing inventory: Authorization?

A

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

40
Q

Production/manufacturing inventory: Reviews?

A

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

41
Q

Production/manufacturing inventory: EDI?

A

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.

42
Q

Fixed assets cycle objectives? (5)

A
  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.

AUD (24 decks)

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