#6 Internal Control:Transaction Cycles 1 - Sales and Cash

Question 1

Why do auditors emphasize transaction cycles?

Answer 1

Control risk is generally constant within a particular category of transactions as all transactions are processed the same way. So, the transaction cycle is the highest level of aggregation for which control risk may be viewed as a constant.

Question 2

List some examples of major transaction cycles.

Answer 2

1. Revenue/receipts;
2. Expenditures/disbursements;
   3 Payroll;
3. Inventory (especially for manufactured inventory);
4. Fixed Assets;
   Investing/financing

Question 3

What is meant by the term transaction cycle.

Answer 3

A group of essentially homogeneous transactions that is, transactions of the same type.

Question 4

List the 3 categories of incompatible functions associated with segregation of duties.

Answer 4

Authorization of transactions ( execution function);
Accounting (record-keeping function);
Access to assets (custody function).

Question 5

List 2 access controls applicable to the revenue/receipts (sales transactions) business process.

Answer 5

1. Computer passwords limit access

2. Cash receipts are handled by someone without access to accounts receivable record keeping.

Question 6

Identify the key accounting documents in the revenue/receipts (sales) transaction cycle, each of which should be pre-numbered.

Answer 6

1. Sales invoices;
2. Shipping documents for outbound shipments;
3. Receiving documents for inbound shipments including sales returns.

Question 7

Identify the objectives of internal control related to revenue/receipts (sales transactions).

Answer 7

1. Goods and services provided in accordance with management’s orders
2. Terms of sale are in accordance with managements orders
3. Credit terms and limits are properly established
4. Deliveries of goods and services result in accurate and timely billings
5. Sales discounts and billings are in accordance with management’s authorization.

Question 8

Describe management’s role in the execution of transactions controls in revenue/receipts (sales).

Answer 8

1. Management should review terms of sale and note approval.
2. Management should establish general approval of sales within certain limits and specifically approve sales over those limits.
3. Management should approve all adjusting journal entries.

Question 9

How should employees responsibilities be allocated to facilitate a proper segregation of duties in the revenue/receipts (sales transactions) cycle?

Answer 9

1. Independent employee should review customer statements
2. Credit to customers is granted by independent department
3. Returns are accounted for by independent clerk in shipping/receiving area.

Question 10

What comparison techniques can be used by the auditor to ensure appropriateness of transactions in the Cash Receipts business cycle?

Answer 10

1. Initial cash receipts listing (remittance listing) compared to total recorded in cash receipts journal and to bank deposit
2. Cash accounts reconciled to bank statements by independent person.

Question 11

What control mechanisms can be used to ensure the appropriate execution of transactions in the Cash Receipts business cycle?

Answer 11

1. Adjusting journal entries should be approved by management.
2. Bank reconciliations should be reviewed by management.

Question 12

List access controls that can be used in the Cash Receipts business cycle.

Answer 12

1. Employees with access to cash should be bonded.

2. Access to cash receipts should be limited to those authorized.

Question 13

List some procedures used to ensure segregation of duties in the Cash Receipts business cycle.

Answer 13

To ensure segregation of duties, the following activities should be handled separately (by separate individuals):

1. Opening mail, handling checks received, preparing remittance listing
2. Making deposit (daily)
3. Applying payments received to customer accounts
4. Preparing bank reconciliation on a timely basis

Question 14

List the internal control objectives related to the Cash Receipts business cycle.

Answer 14

1. Access to cash receipts records and accounts receivable records is limited to authorized personnel
2. Detailed cash and account balance records are reconciled with control accounts and bank statements monthly
3. All cash receipts are recorded in period received.