Transaction Cycles

Question 1

Transaction Cycles Definition

Answer 1

Means through which an accounting system process transactions of related activities

Question 2

Categories of Major Transaction Cycles

Answer 2

1. Revenue and Receipt
2. Expenditure and Disbursement
3. Human Resources and Payroll
4. Production or Conversion
5. Financing and Investing

Question 3

Revenue and Receipt Cycle Inclusions

Answer 3

1. Receives order from the customer
2. Examines the order for credit worthiness
3. Ships goods or provides services to customer
4. Issues an Invoice
5. Collects the payment

Question 4

Expenditure and Disbursement Cycle Inclusions

Answer 4

1. Issues a purchaser order to supplier
2. Receives the goods or services
3. Records the related liability
4. Pays the supplier

Question 5

Human Resources and Payroll Cycle Inclusions

Answer 5

1. Acquires services from employees
2. Monitors and records the time of its employees
3. Verifies hours and overtime worked
4. Calculates gross pay, deduction, and net pay
5. Pays the employees

Question 6

Production or Conversion Cycle Inclusion

Answer 6

Monitors and records the production of entity’s product for sale

Question 7

Financing and Investing Cycle Inclusions

Answer 7

1. Generates capital funds from outside investors
2. Invests capital funds to other profitable activities

Question 8

Entity’s responsibility

Answer 8

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

Question 9

Auditor’s Objectives

Answer 9

Obtain an understanding of these transaction cycles sufficient to plan the audit and develop an effective and efficient audit approach.

Question 10

General Objectives of Transaction Cycles

Answer 10

1. To promote adequate segregation of incompatible duties
2. To provide safeguards to an entity’s resources

Question 11

Major Objective of the Credit Department

Answer 11

Minimize high risk customer by checking their credit rating

Question 12

Purpose of Warehouse Department in Revenue and Receipt Recycle

Answer 12

Monitor Inventory Level

Question 13

Departments Involved in Revenue Cycle

Answer 13

1. Sales or Customer Order
2. Credit
3. Inventory or Warehousing
4. Shipping
5. Billing
6. Accounting

Question 14

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

Answer 14

Receiving

Question 15

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

Answer 15

Selling of Goods for cash

Question 16

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

Answer 16

Customer Order File

Question 17

The purpose of test of controls over billing is to?

Answer 17

Determine whether billed goods have been shipped

Question 18

To achieve control when there is no billing department, the billing function should be performed by the

Answer 18

Accounting Department

Question 19

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

Answer 19

Evaluate the reliability of information generated by this cycle

Question 20

Primary function of the purchasing Department Expenditure and Disbursement Cycle

Answer 20

Ensuring the acquisition of goods of a specified quality

Question 21

Primary Function of user department in Expenditure and Disbursement Cycle

Answer 21

Authorizing the Acquisition of Goods

Question 22

Primary Function of Receiving department in Expenditure and Disbursement Cycle

Answer 22

Veryfing the propriety of goods of a specified quality

Question 23

Primary Function of AP department in Expenditure and Disbursement Cycle

Answer 23

Reducing expenditures for goods acquired

Question 24

To assure that disbursements are neither improper nor inaccurate, an entity could require that all checks be

Answer 24

Signed by an officer after supporting documentation has been examined