Major Controls - Transaction Cycle

Question 1

Sales

Answer 1

1) Credit Granted by Credit Department
2) Sales Orders/invoices are Prenumbered and Controlled
3) Sales Returns are presented to receiving clerk who then prepares a receiving report which supports prenumbered sales return credit memo

Question 2

Accounts Receivable

Answer 2

1) Sub ledger reconciled to control ledger regularly
2) Review statements posted before sending to customers by someone independent of receivable area
3) Write offs approved by someone outside of record keeping (treasurer)
4) Monthly Statements sent to customers

Question 3

Cash Receipts

Answer 3

1) Cash goes to cashier for deposit & remittance goes to accounting
2) OTC cash receipts controlled (Tapes)
3) Daily cash deposits
4) Employees are bonded
5) Lockbox
6) Bank recs prepared by employees independent of cash receipts/disbursements

Question 4

Purchases

Answer 4

1) Prenumbered purchase orders
2) Purchase dept. makes purchases
3) Purchasing employees are independent of receiving and recordkeeping.
4) Suppliers’ monthly statements compared with recorded payables

Question 5

Accounts Payable

Answer 5

1) A/P employees independent of Purchasing/receiving/disbursements
2) Clerical accuracy of vendors invoice tested
3) Purchase order/Receiving report/vendors invoice are all matched

Question 6

Cash disbursements

Answer 6

1) Prenumbered checks with check protector
2) Checks signed with appropriate support
3) Physical controls of unused checks
4) Treasurer signs checks and mails them
5) voided checks mutilated/retained
6) Bank recs prepared by person independent of cash disbursements records

Question 7

What must be prepared before payment is approved?

Answer 7

Purchase order - ordered goods
receiving report - received goods
vendor’s invoice - billed for goods

Question 8

Audit test to determine whether recorded purchases represent valid business expense

Answer 8

Compare sample of recorded disbursements with properly approved

1) Purchase orders
2) Purchase requistions
3) vendor’s invoices
4) receiving reports

Question 9

Audit procedure to test whether actual purchases are recorded

Answer 9

Select sample of purchase requisitions and agree them to the purchase order and then to the purchases journal (and subsequent general ledger posting)