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Acctg 135
Acctg 135
Transaction cycles are the means through which an accounting system processed
transactions of related activities such as sale of goods to customers, acquisition of
merchandise and payment to vendors, production of finished products for sale, and
payment to employees for services they had rendered.
A transaction is an agreement between two entities to exchange goods or services or any
other event that can be measured in economic terms by an organization.
Categories of Transaction Cycles
Category Inclusion
Revenue and receipt Sale of goods or services to
customers
Collection of cash
Expenditure and disbursement Acquisition of goods and services
Payment of goods and services
acquired
Human resources and payroll Acquisition of services from
employees
Payment for the services acquired
Production or conversion Production of entity’s product for
sale
Financing and investing Generation of capital funds from
outside investors
Investment of capital funds to
another profitable activities
D. Shipping department
Primary objective: To provide reasonable assurance that all shipments are
authorized and customers are billed
Activities Possible controls
1. Compares sales order from sales Shipping documents that are
department with goods and pre-numbered and assure that
approved sales order from related billings are made on a
inventory control periodic basis
2. Completes shipping documents
and prepares goods for
shipments
3. Release goods to carrier and
obtains receipt
4. Notifies sales department that
goods have been shipped
5. Forwards the shipping
documents and approved sales
order to Billing department
E. Billing department
Primary objective: To provide reasonable assurance that all billings are shipped.
Activities Possible controls
1. Compares the following Pre-numbered sales invoice
documents: Shipping document must be
a. Sales order from sales present before preparation of
department sales invoice
b. Approved sales order and
shipping document from
shipping department
2. Prepares sales invoice and send
copies to customers (thru the
carrier) and to inventory
accounting
3. Prepares remittance advice and
send copy to customers (thru the
carrier)
F. Accounting department
Inventory: provides cost information on the goods sold to be forwarded to
General accounting and records transactions related to the cost of goods sold.
General: records the sale and forward sales invoice and related documents to
Account receivable
Accounts receivable: updates subsidiary ledger related to customer’s
account
Functions of Departments in the Receipt Cycle
A. Mail room or Receptionist
Receives remittance advises and customer checks from customers
Prepares list of receipts
Endorses checks and list of receipts to the treasury department
Endorses remittance advices and list of receipts to the accounts receivable
department
B. Treasury department
Updates cash records
Prepares deposit slips
Prepares cash summaries, sends copy to Accounts receivable and general
accounting, and retains a copy
Deposits cash collection to the bank
C. Accounting department
Accounts receivable: compares remittance advice from mail room and cash
summaries to be forwarded from treasury, updates subsidiary ledgers and
prepares daily summaries to be forwarded to general accounting
General: compares daily summaries from treasury and accounts receivable,
then, updates general ledgers
Other Activities in The Revenue and Receipt Cycle
Uncollected accounts
1. Accounts receivable
Review individual customer accounts periodically as a check against credit
limits
Prepare monthly accounts receivable trial balances for reconciliation with the
general ledgers
2. Authorized personnel independent of credit department
Review and age accounts receivables balances periodically
3. Authorized personnel who reports to the treasure and independent of recording
functions or Treasurer to authorize the write-off
In case of delinquent account, such account should be reviewed
If judged to be uncollectible, written authorization to write off should be sent
to accounts receivable and general accounting
Sales returns and allowances
A. Sales department
Reviews customer’s request for returns and allowances
Grants sales returns and allowances and prepares credit memo which is
forwarded to customer, accounts receivable (for recording). And inventory
control (for returns)
B. Inventory control
Compares goods received through the receiving department and credit memo
C. Accounting
Inventory: updates inventory records upon receipt of goods and prepare
daily summaries to be forwarded to general accounting
Accounts receivable: update records based on the credit memo received and
prepares daily summaries to be forwarded to the general accounting
General: compares daily summaries from inventory and accounts receivable,
then, updates general ledgers
EXPENDITURE AND DISBURSEMENT CYCLE
Business functions Resources are acquired from vendors in exchange for
obligations to pay
Entity pays cash to vendors and employees
Accounts affected Purchases (e.g. inventory and supplies)
Purchase returns, allowance and discount
Payables
Cash
Departments involved Expenditure
User (any department within the entity)
Purchasing
Receiving
Accounts payable
Accounting (inventory, receivable and general)
Disbursement
Treasury
Accounting (receivable and general)
C. Receiving department
Primary objective: To provide reasonable assurance that received goods are based
on approved purchase order
Activities Possible controls
1. Files purchase orders until To ensure that the receiving
goods are received department will count and check
2. Upon receipt, counts and checks the goods received, the
the goods for appropriate purchasing department sends a
quantity and condition blank purchase order
3. Reviews and compares purchase
orders from purchasing and
shipping document from the
carrier
4. Prepares receiving reports to be
forwarded to purchasing and
accounts payable accompanied
by supporting documents
(purchase orders from
purchasing and shipping
document from the carrier)
B. HR department
Primary objective: To ensure employees included in the payroll are rendering
services to the entity
Activities Possible controls
1. Initiates, updates and maintains Access, including initiating
HR records changes, to HR records shall be
2. Forwards payroll related limited only to HR department
information to payroll Information not relevant to
department (e.g. salary and payroll calculation shall not be
wage rates, bonuses, overtime shared to other departments
pays, and payroll deductions)
3. Determines terms of settlement
(lump-sum or installment) in
case of termination of
employee/s
4. Immediately notify payroll
department of terminated
employee to avoid inclusions of
these employees in the
subsequent calculations
C. Payroll department
Primary objective: To provide reasonable assurance that the payroll calculation in
every pay period is valid
Activities Possible controls
1. Receives and reviews relevant Appropriate level of
payroll related information from management (preferably a
HR and user departments member who is not involved in
2. Considers any update on payroll preparation) reviews the
employees’ pay rates and payroll register for accuracy and
deductions reasonableness
3. Prepares payroll register To assure adequacy of
4. Updates cumulative employee segregation of duties, payroll
earnings records department should be
5. Identifies and submits to segregated from HR, Treasury
inventory accounting and some user departments
capitalizable payroll in case of
servicing and manufacturing
companies with inventoriable
labor costs
E. Accounting department
Primary objective: To provide reasonable assurance that items related to payroll are
appropriately classifies and recorded in correct accounting period at appropriate
amounts
Inventory: records inventoriable labor costs to appropriate jobs or customer
account and forward a daily summary to general accounting
General: reviews daily summaries and documents received from Payroll,
Treasury and Inventory departments. It records the recognition of payroll
related expenses and liabilities in the general journal
PRODUCTION OR CONVERSION CYCLE
Production or conversion cycle covers the production of entity’s product for sale. It is
where materials, labor and overhead are converted into finished goods.
The primary objective of this cycle is the proper valuation of inventories and cost of goods
sold. Such objective encompasses the proper allocation of costs to each run made by the
production department. In order to attain this, the production department uses inputs from
the expenditure and disbursement cycle and provides resources and information to
revenue and receipt cycle.
Control-related duties and responsibilities
Duties and Person/s assigned to Procedures performed by
responsibilities perform the function auditor
Custody Physical custody of Auditor observes physical
materials and labor count and reconciles the
documents is normally held result of such count to
by the production entity’s records.
department If held by other parties,
Since most of the assets auditor may send
here are highly susceptible confirmation requests to
to theft and the custodian (e.g.
misappropriation, adequate consignees, agents, or
physical controls must be branches)
implemented
Authorization the production department Auditor reviews production
is authorized to make orders and related
normal production runs documents supporting
however, in case of special production runs made by
runs (to meet a special the department to
order), authorization must determine whether it bears
come from the board of the necessary authorization.
directors or its authorized
representative.
Recording Transactions are recorded Auditor normally reviews
by the cost accounting. the
Daily summaries are then Competency of the
prepared and forwarded to individuals making
general accounting for journal entries
recording and posting in the Reconciliation of the
general journal and ledger, general ledger
respectively.
FINANCE AND INVESTMENT CYCLE
Finance and investment cycle generally involves three major categories of transactions:
investments, long-term debts, and shareholders’ equity. It covers complicated processes
such as accounting for investments, mergers, long-term liabilities, and equity transaction.
This cycle normally involves few but significant amounts of resources. Thus, auditor
commonly employs substantive testing to gather sufficient appropriate evidence. However,
it must be noted that prior to designing of substantive test procedures, control-related
duties and responsibilities is one of the major consideration of the auditor.
Control-related duties and responsibilities
Finance Cycle
Duties and Person/s assigned to Procedures performed by
responsibilities perform the function auditor
Custody Unissued equity and debt Auditor inquires directly to
certificates must be kept by assigned custodians
appropriate internal official If held internally, auditor
(e.g. Corporate Secretary) observes the accounting of
or independent external unissued certificates
custodian
Authorization As mentioned, transactions Auditor reviews minutes of
covered in this cycle involve the board directors
large amounts of cash or meetings
other resources. With this,
transactions shall be
approved by the board of
directors
Recording Transactions are recorded Auditor normally reviews
in the general journal by the
personnel in the general Competency of the
accounting individuals making
journal entries
Reconciliation of the
subsidiary and
general ledgers
Important notes:
1. In case of settlement of equity or debt securities previously issued, the certificate is
cancelled thru perforation (e.g. the certificate is shredded). The purpose of this is to
avoid duplicate payments. The supporting records and documents are then kept as
audit trail of the transactions.
2. In case of debt instruments, the general accounting shall appropriately monitor any
accruing interests from liabilities.
Control-related duties and responsibilities
Investment Cycle
Duties and Person/s assigned to Procedures performed by
responsibilities perform the function auditor
Custody Generally, investment Auditor inquires directly to
certificates are kept as assigned custodians thru
follows: sending of confirmation
Negotiable requests.
certificates- If held internally, the
brokerage account auditor observes the
Titles to real estate- accounting for certificates
may be kept in a safe held
with the entity or
bank safe deposit
box
Authorization As mentioned, transactions Auditor reviews minutes of
covered in this cycle involve the board of directors
large amounts of cash or meetings.
other resources. With this,
transactions shall be
approved by the board of
directors or by an
investment committee
Recording Transactions are recorded Auditor normally reviews
in the general journal by the
personnel in the general Competency of the
accounting individuals making
Moreover, most companies journal entries
monitor transactions in the Reconciliation of the
investment cycle through a subsidiary and
subsidiary ledger/s general ledgers
maintained by the treasury
department
Important Notes:
1. Regardless of the manner of safekeeping, access to these certificates is given at least
two high-ranking officers (e.g. President, Treasurer, CEO, COO, CFO, or Chairman of
the Board)/ this control is sometimes called dual control or joint custody.
2. The auditor normally requests for the conduct of securities count in the financial
institutions holding the client’s certificates.