Transaction Cycles Flashcards
Transaction Cycles Definition
Means through which an accounting system process transactions of related activities
Categories of Major Transaction Cycles
- Revenue and Receipt
- Expenditure and Disbursement
- Human Resources and Payroll
- Production or Conversion
- Financing and Investing
Revenue and Receipt Cycle Inclusions
- Receives order from the customer
- Examines the order for credit worthiness
- Ships goods or provides services to customer
- Issues an Invoice
- Collects the payment
Expenditure and Disbursement Cycle Inclusions
- Issues a purchaser order to supplier
- Receives the goods or services
- Records the related liability
- Pays the supplier
Human Resources and Payroll Cycle Inclusions
- Acquires services from employees
- Monitors and records the time of its employees
- Verifies hours and overtime worked
- Calculates gross pay, deduction, and net pay
- Pays the employees
Production or Conversion Cycle Inclusion
Monitors and records the production of entity’s product for sale
Financing and Investing Cycle Inclusions
- Generates capital funds from outside investors
- Invests capital funds to other profitable activities
Entity’s responsibility
Design and implement appropriate set of policies, procedures, forms and integrated controls for each of these transaction cycles to minimize the opportunities for fraudulent activities and ensure that transactions are processed in as reliable and consistent manner as possible
Auditor’s Objectives
Obtain an understanding of these transaction cycles sufficient to plan the audit and develop an effective and efficient audit approach.
General Objectives of Transaction Cycles
- To promote adequate segregation of incompatible duties
- To provide safeguards to an entity’s resources
Major Objective of the Credit Department
Minimize high risk customer by checking their credit rating
Purpose of Warehouse Department in Revenue and Receipt Recycle
Monitor Inventory Level
Departments Involved in Revenue Cycle
- Sales or Customer Order
- Credit
- Inventory or Warehousing
- Shipping
- Billing
- Accounting
Which of the following is not a common activity of the revenue/receipt cycle
a. Order Entry
b. Inventory Control
c. Receiving
d. Cash Collection
Receiving
At which point in an ordinary sales transaction of a wholesaling business is a lack of specific authorization of least concern to the auditor in the conduct of an audit
a. Granting of Credit
b. Shipment of Goods
c. Determination of Discounts
d. Selling of goods for cash
Selling of Goods for cash
To gather audit evidence about the proper credit approval of sales, the auditor would select a sample document from the population represented by the:
a. Customer Order File
b. Bill of Lading File
c. Subsidiary Customers’ account Ledger
d. Sales Invoice File
Customer Order File
The purpose of test of controls over billing is to?
Determine whether billed goods have been shipped
To achieve control when there is no billing department, the billing function should be performed by the
Accounting Department
A client’s expenditure/disbursment cycle begins with requisitions from user departments and ends with the receipt of materials and the recognition of a liability. An auditor’s primary objectives in reviewing this cycle is to
Evaluate the reliability of information generated by this cycle
Primary function of the purchasing Department Expenditure and Disbursement Cycle
Ensuring the acquisition of goods of a specified quality
Primary Function of user department in Expenditure and Disbursement Cycle
Authorizing the Acquisition of Goods
Primary Function of Receiving department in Expenditure and Disbursement Cycle
Veryfing the propriety of goods of a specified quality
Primary Function of AP department in Expenditure and Disbursement Cycle
Reducing expenditures for goods acquired
To assure that disbursements are neither improper nor inaccurate, an entity could require that all checks be
Signed by an officer after supporting documentation has been examined
