BM2008

INTERNAL CONTROL CONSIDERATION AND BUSINESS TRANSACTION CYCLES

Internal Control Consideration

The auditor should obtain an understanding of the internal control sufficient to plan the audit and develop
an effective audit approach. The auditor this understanding to identify types of potential misstatements,
consider factors that affect the risks of material misstatement, and design the nature, timing, and extent
of further audit procedures (Asuncion et al., 2018).
Internal Control
Internal control is a process, effected by those charged with governance, management, and other
personnel, designed to provide reasonable assurance regarding the achievement of objectives in the
following categories:
1. Effectiveness and efficiency of operations;
2. Reliability of financial reporting; and
3. Compliance with applicable laws and regulations.
Inherent Limitations of Internal Control
The internal control can only provide reasonable assurance because of inherent limitations that may affect
the effectiveness of internal controls. Such limitations include:
1. Management usual requirement that a control be cost-effective (cost-benefit consideration);
2. The possibility that a person responsible for exercising control could abuse that responsibility
(management overriding the control);
3. The possibility of circumvention of controls through collusion with parties outside the entity or
with employees of the entity;
4. The possibility that procedures may become inadequate due to changes in condition and
compliance with procedures may deteriorate;
5. The potential for human error due to carelessness, distraction, mistakes of judgment or the
misunderstanding of instructions; and
6. The fact that most controls tend to be directed at anticipated types (routine) of transactions and
not at unusual (non-routine) transactions.
Controls Relevant to the Audit
The auditor's risk assessment process relates to controls pertaining to the entity's objective of preparing
financial statements for external purposes and the management risk that may give rise to a material
misstatement in those financial statements.
It is a matter of professional judgment, subject to the requirements of PSA, whether a control, individually
or in combination with others, is relevant to the auditor's considerations in assessing the risks of material
misstatement. In exercising that judgment, the auditor considers the applicable component and factors
such as the following:
1. The auditor's judgment about materiality;
2. The size of the entity;
3. The nature of the entity's business, including its organization and ownership characteristics;
4. The diversity and complexity of the entity's operations;
5. Applicable legal and regulatory requirements; and
6. The nature and complexity of the systems that are part of the entity's internal control, including
the use of service organizations.

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Components of Internal Control (Philippine Standard on Auditing 315 (Redrafted), 2009)

Internal control, as discussed in PSA 315 (Redrafted), consists of the following components:
1. Control Environment
The control environment includes the governance and management functions and the attitudes,
awareness, and actions of those charged with governance and management concerning the
entity's internal control and its importance in the entity.
2. Entity's Risk Assessment Process
An entity's risk assessment process is the process of identifying and responding to business risks
and the results thereof.

For financial reporting purposes, the entity's risk assessment process includes how management
identifies risks relevant to the preparation of financial statements that are presented fairly, in all
material respects in accordance with the entity's applicable financial reporting framework,
estimates their significance, assesses the likelihood of their occurrence, and decides upon actions
to manage them.

The auditor shall obtain an understanding of whether the entity has a process for:
a. Identifying business risks relevant to financial reporting objectives
b. Assessing the significance of risks and the likelihood of their occurrence
c. Deciding how to manage those risks

3. Information and Communication Systems

An information system consists of:
a. Infrastructure (physical and hardware components);
b. Software (processes and procedures;
c. People,
d. Input or data, and
e. Output or meaningful information.

The information system relevant to financial reporting objectives, such as the financial reporting
system, consists of the procedures and records established to initiate, record, process, and report
entity transactions (as well as events and conditions) and to maintain accountability for the
related assets, liabilities, and equity.

4. Control Activities
Control activities are the policies and procedures to help ensure that management directives are
carried out. Examples of control activities include those relating to the following:
a. Authorization
b. Performance reviews (actual performance versus budget, forecasts, and prior period
performance)
c. Information processing (from initiation up to the eventual inclusion of transaction in
financial reports)
d. Physical controls (for both assets and documents)
e. Segregation of duties. To achieve optimum segregation of responsibilities, the following
functions should be performed by different employees:
i. Independent checks
ii. Custody of assets
iii. Authorization of transactions

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iv. Recording of transactions

v. Execution of transactions

5. Monitoring of Controls
Monitoring is the process of assessing the quality of internal control performance over time. It
involves assessing the design and operations of controls on a timely basis and taking necessary
corrective actions.

Monitoring can be accomplished through:

a. Ongoing monitoring activities (performed by persons within the same line function)
b. Separate evaluations (performed by internal auditors, audit committee, and/or external
auditors
c. Combination of the two.

Responses to Assessed Risks

The auditor shall design and implement overall responses to address the assessed risks of material
misstatement at the financial statement level. Moreover, the auditor shall design and perform further
audit procedures whose nature, timing, and extent are based on and are responsive to the assessed risks
of material misstatement at the assertion level. In designing the further audit procedures to be performed,
the auditor shall:

1. Consider the reasons for the assessment given to the risk of material misstatement at the assertion
level for each class of transactions, account balance, and disclosure, including:
a. The likelihood of material misstatement due to the particular characteristics of the relevant
class of transactions, account balance, or disclosure (i.e., the inherent risk); and
b. Whether the risk assessment takes account of relevant controls (i.e., the control risk), thereby
requiring the auditor to obtain audit evidence to determine whether the controls are
operating effectively i.e.,
i. the auditor intends to rely on the operating effectiveness of controls in determining
the nature, timing and extent of substantive procedures); and
ii. Obtain more persuasive audit evidence, the higher the auditor's assessment of risk.

Test of Controls
The auditor should give adequate consideration to controls relevant to the audit. The quality of the
entity's internal control can have a significant impact in determining the nature, timing and extent of the
audit procedures in gathering audit evidence related to class of transactions, account balances and
disclosures.
The auditor shall design and perform tests of controls to obtain sufficient appropriate audit evidence as
to the operating effectiveness of relevant controls when:
1. The auditor's assessment of risks of material misstatement at the assertion level includes an
expectation that the controls are operating effectively i.e., the auditor intends to rely on the
operating effectiveness of controls in determining the nature, timing and extent of substantive
procedures); or
2. Substantive procedures alone cannot provide sufficient appropriate audit evidence at the
assertion level.
Tests of controls over the design of a policy or procedure include Inquiry, Observation Inspection,
Reperformance, and Walk-through tests.

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Assessing Impact of Result of Test of Controls

Control risk at a Perform

maximum level Substantive tests
Obtain an understanding
of the internal control Make a preliminary
focusing on the design assessment of
and implementation of Control Risk Control risk at a Perform Tests of
the controls below maximum controls
level

Perform Substantive tests Control risk at maximum

level
Make a
reassessment of
Control Risk
Perform Substantive tests Control risk at below
maximum level

Figure 1. Summary of Procedures Performed in Consideration of Internal Control

Source: Applied Auditing Book 1 of 2, 2018

Effect of Reassessment of Control Risk on the Audit Approach

Reassessment of Audit Approach Effect on Substantive Test
Control Risk (CR)
CR assessment remains Reliance approach • Less effective procedures
at Less than High • Interim testing may be appropriate
• Smaller sample size
CR assessment is Switch to no reliance • More effective procedures
changed to High approach • Tests nearer or at year-end
• Larger sample size

Documentation Requirements
Control Risk Understanding of Control Risk Basis for the Control
Assessment Internal Control Assessment Risk Assessment
High Yes Yes No
Less than high Yes Yes Yes

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Overview of Business Transaction Cycles (Asuncion et al., 2018)

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
These cycles can be categorized into five interrelated major cycles:
Category Inclusion
Revenue and receipt • sale of goods or services to customers
• collection of cash
Expenditure and • acquisition of goods and services
disbursement • payment for the goods and services acquired
Human resources and • acquisition of services from employees
payroll • 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 other profitable activities resources

Revenue and Receipt Cycle

The Revenue and Receipt Cycle have the following major functions:
1. Ensure that resources are distributed to customers in exchange for promises of future payments
2. Ensure that customers pay cash for resources distributed to them
The following accounts are usually used in this cycle:
1. Sales and related sales returns, allowances and discount
2. Receivable, allowance for bad debts and Bad debts expense
3. Cash
Forms or documents received, initiated and processed
Form Description Initiated by: Distributed to:
Sales order (order Contains the details of goods Sales department • Customers
slip; customer ordered (quantity, prices and • Credit
order) payment terms) • Shipping
• Billing
Shipping document Describes the goods to be Shipping • Carrier
(bill of lading or shipped and serves as contract department • Customers
delivery receipt) between the entity and carrier • Billing
Sales invoice (billing Describes the goods sold, Billing • Customers
statement) amount due and the terms of department • Accounting
payment
Remittance advice Intended to facilitate the Billing • Customers
accounting for cash collection department
Daily summaries Summarizes transactions Receivable and • General accounting
recorded during the day by the Treasury • Treasury and
different department Mail room Receivables

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Important notes to forms or documents processed

1. The department that initiated the processing approves the form.
2. The department that initiated the processing is accountable for unused forms. Also, access to
those forms shall be limited to the said department
3. The notification of forms does not necessarily mean a hard copy shall be forwarded. Notification
can be done thru electronic mail.
4. The department that initiated, received or processed a form shall retain a copy for filing (not
necessarily a hard copy).
Summary of Functions of Departments in the Revenue and Receipt Cycle
A. Sales Department
Primary objective: To increase entity's sales
Activities Possible Controls
1. Locates and encourages buyers Common controls adopted by different entities
2. Negotiates terms with buyers in this department include:
3. Accepts customer orders • Sales department has an exclusive
4. Prepares sales order and distribute function to communicate with the
copies to customers, credit, shipping customers
and billing • Entity maintains list of authorized
5. Retains copy in unfulfilled order file customers to minimize exposure to
6. Monitors the status of the order high-risk customers
7. Updates customers as to the status of • Entity maintains range of selling prices
the order for its products
B. Credit Department
Primary objective: To minimize exposure to high-risk customers
Activities Possible Controls
1. Receives and review sales order from sales Common controls adopted by
department different entities in this department
2. Conducts credit investigation include:
3. Approves credit request by preparing a memo or • Entities establish a credit
placing an “approved” mark in the sales order department that is
4. Notifies sales department as to the independent with the sales
approval/disapproval of the credit request department
5. Forwards the approved sales order to inventory • Credit department issues list
control of authorized customers
C. Inventory Control Department
Primary objective: To control transfers of inventory in and out of storage areas, monitor inventory
levels, and report slow-moving of damaged items
Activities Possible Controls
1. Reviews approved sales order received Common controls adopted by different
from credit department entities in this department include:
2. Monitors the availability of goods • Inventory control that provides
ordered access to sales department to
3. Authorizes the issuance of goods to the inventory levels
shipping department • Different inventory management
concepts which are applied to

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4. Authorizes the issuance of goods to the provide reasonable assurance the

shipping department availability of goods when needed
5. Forwards the approved sales order to
shipping department
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 department with Common controls adopted by
goods and approved sales order from inventory control different entities in this
2. Completes shipping documents and prepares goods for department include:
shipment • Shipping documents
3. Release goods to carrier and obtains receipt that are pre-numbered
4. Notifies sales department that goods have been and assure that related
shipped billings are made on a
5. Forwards the shipping documents and approved sales periodic basis
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 documents: Common controls adopted by
a. Sales order from sales department different entities in this department
b. Approved sales order and shipping include:
document from shipping department • Pre-numbered sales invoice
2. Prepares sales invoice and send copies to customer • Shipping document must be
(thru the carrier) and to inventory accounting present before preparation
3. Prepares remittance advice and send copy to of sales invoice
customers (thru carrier)
F. Accounting Department
1. Inventory: Provides cost information on the goods sold to be forwarded to general accounting
and records transaction related to the cost of goods sold.
2. General: Records the sale and forward sales invoice and related documents to Accounts
receivable
3. Accounts Receivable: Updates subsidiary ledger related to customer's account.
Other Activities in the Revenue and Receipt Cycle
A. Uncollected accounts
1. Accounts receivable
a. Review individual customer accounts periodically as a check against credit limits
b. Prepare monthly accounts receivable trial balances for reconciliation with the general
ledgers
2. Authorized Personnel independent of Credit department
a. Review and age accounts receivable balances periodically
b. Authorized Personnel who reports to the treasurer and independent of recording
functions or Treasurer to authorize the write-off
c. In case of delinquent account, such account should be reviewed

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d. If judged to be uncollectible, written authorization to write off should be sent to

Accounts receivable and General Accounting
B. Sales returns and allowances
1. Sales department
a. Reviews customer's request for returns and allowances
b. Grants sales returns and allowances and prepares credit memo which is forwarded to
customer, accounts receivable (for recording), and inventory control (for returns)
2. Inventory control
a. Compares goods received through the receiving department and credit memo
C. Accounting
1. Inventory: updates inventory records upon receipt of goods and prepare daily summaries to
be forwarded to general accounting
a. Accounts receivable: update records based on the credit memo received and
prepares daily summaries to be forwarded to general accounting
b. General: compares daily summaries from inventory and accounts receivable, then,
updates general ledgers.
Expenditure and Disbursement Cycle
The Expenditure and Disbursement Cycle have the following major functions:
1. Ensure that resources are acquired from vendors in exchange for obligations to pay
2. Ensure that entity pays cash to vendors and employees
The following accounts are usually used in this cycle:
1. Purchases (e.g. Inventory and Supplies)
2. Purchase returns, allowances and discount
3. Payables
4. Cash
Forms or documents received, initiated and processed
Form Description Initiated by: Distributed to:
Requisition slip Contains the details of the User department • Purchasing
(purchase user department’s request
requisition)
Purchase order Describes the goods to be Purchasing • Vendor
acquired (quantity and Department • User
description) • Receiving
• Accounts
payable
Receiving Describes the goods Receiving department • Purchasing
report received (quantity, • Accounts
description and condition) payable
Shipping Describes the goods to be Vendor (thru the • Receiving
document shipped and serves as carrier) department
contract between the entity
and carrier
Vendor invoice Describes the goods sold, Vendor • Accounts
amount due and the terms payable
of payment

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Daily Summarizes transactions Accounts payable (for • General

summaries recorded during the day by purchases) Accounting
the different department Treasury (for payment)
Summary of Functions of Departments in Expenditure Cycle
A. User department
Primary objective: Prepares requisition slip to be forwarded to purchasing and accounts payable
departments
B. Purchasing (Procurement) department
Primary objective: To meet the specific needs of the user department at the least possible cost
Activities Possible Controls
1. Receives approved requisition slip from Common controls adopted by different entities
the user department in this department include:
2. Locates vendor and negotiates with • Purchasing department has an
terms exclusive function to communicate with
3. Prepares purchase orders and the vendor
distributes copies to vendor, receiving • Entity maintains list of authorized
and accounts payable vendors
4. Monitors the status of the order • Entity compares purchase price to
5. Updates customers as to the status of market prices
the order
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 goods are received Common controls adopted by
2. Upon receipt, counts and checks the goods for different entities in this
appropriate quantity and condition department include:
3. Reviews and compares purchase orders from • To ensure that the
purchasing and shipping document from the carrier receiving department will
4. Prepares receiving reports to be forwarded to count and check the goods
purchasing and accounts payable accompanied by received, the purchasing
supporting documents (purchase orders from department sends a blank
purchasing and shipping document from the carrier) purchase order
D. Accounts (vouchers) payable department
Primary objective: To provide reasonable assurance that payments will only be made to shipments
received
Activities Possible Controls
1. Reviews and compares requisition slip, Common controls adopted by different entities
purchase order, receiving report and in this department include:
vendor invoice (3-way match) • Voucher should be supported by
2. Prepares voucher purchase order, receiving report and
3. Prepares voucher package (requisition supplies sales invoice or any other
slip, purchase order, receiving report, supporting documents
vendors invoice and voucher) and daily • Accounts payable department files
summary to be forwarded to the voucher package by due date so as to

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treasury and general accounting, pay liability on time and take advantage
respectively of discounts, if any
E. Treasury Department
Activities Possible Controls
1. Reviews voucher Common controls adopted by different entities in this department
package received include:
2. Prepares check and • The person last signing the check cancels the voucher
have it signed by package by placing a mark such as “paid”, “cancelled” or
authorized check number
signatories • Entity may adopt any of the following in relation to issuance
3. Forwards checks to of checks
vendors o Check over a certain amount should have an
4. Prepares daily identified payee
summary which is o No checks shall be issued without an identified
to be forwarded to payee
general accounting o Checks should be signed by at least two authorized
persons

Human Resources and Payroll Cycle (Asuncion, Ngina, & Escala, 2018)
Human resources and payroll cycle is a continuation of the expenditure and disbursement cycle. This cycle
covers the entity's acquisition of services from its employees or personnel. The following are main reasons
why the auditor is concerned with this cycle.
1. Payroll include different categories of employee benefits (short-term; post-employment, other
long-term and retirement) that could significantly affect major elements of financial statements;
and
2. For most entities, significant amount of resources is incurred
The following accounts are usually used in this cycle:
1. Salaries and wages expense and payable
2. Premiums expense and payable
3. Withholding taxes payable
4. Inventories (for inventoriable salaries and wages)
5. Cash
Forms or documents received, initiated and processed
Form Description Initiated by: Distributed to:
HR records It contains all information related to HR department • Payroll
(Personnel entity’s employees from time they (limited to
records or are hired up to their eventual payroll
201 file) termination. It documents all actions related
taken by the employees or information
management on behalf of an only)
employee. Commonly, it also
documents salary rates, deductions,
and other payroll related information
Daily time Describes the number of hours User department • Payroll
record (DTR) worked by an employee during a

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particular day covered by a pay

period
Payroll Shows all related payroll information Payroll • Treasury
register (gross payroll, all deductions, and net • General
pay) for each pay period accounting
Labor cost Shows payroll information which is Payroll • Inventory
summary capitalizable or can be attributed to a accounting
particular job or customer order
Employee Shows the cumulative year-to-date Payroll • Accounts
earnings summary of earnings and deductions payable
record of every employee
Daily Summarizes transactions recorded Payroll (for liability • General
summaries during the day by the different recognition) accounting
department Inventory (for
inventoriable labor
costs)
Treasury (for
payment)
Summary of Functions of Departments in Human Resource and Payroll Cycle
A. User department
Primary objective: To ensure that time records prepared by employees represent actual hours worked
during a pay period
Activities Possible Controls
1. Monitors and approves daily time Common controls adopted by different entities
records in this department include:
• Appropriate review activities shall be
*Note: However, due to introduction of made to ensure the validity of daily
computerized human resources systems, time time records prepared by employees
records are commonly tracked through • In case of computerized systems,
biometrics and access devices approval of any exceptions shall be
made by the user department head
B. Human Resources (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 HR records Common controls adopted by
2. Forwards payroll related information to payroll different entities in this department
department (e.g. salary and wage rates, bonuses, include:
overtime pays, and payroll deductions) • Access, including initiating
3. Determines terms of settlement (lump-sum or changes, to HR records shall
installment) in case of termination of employee/s be limited only to the HR
4. Immediately notify payroll department of department
terminated employee to avoid inclusions of these • Information not relevant to
employees in the subsequent payroll calculations payroll calculation shall not
be shared to other
departments
C. Payroll department

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Primary objective: To provide reasonable assurance that the payroll calculation in every pay period is
valid
Activities Possible Controls
1. Receives and reviews relevant payroll Common controls adopted by different
related information from HR and user entities in this department include:
departments • Appropriate level of management
2. Considers any update on employees’ pay (preferably a member who is not
rates and deductions involved in payroll preparation)
3. Prepares payroll register reviews the payroll register for
4. Updates cumulative employee earnings accuracy and reasonableness
records • To assure adequacy of segregation
5. Identifies and submits to inventory of duties, payroll department
accounting capitalizable payroll in case of should be segregated from HR,
servicing and manufacturing companies Treasury and some user
with inventoriable labor costs departments.
D. Treasury department (Disbursement)
Primary objective: To provide reasonable assurance that all payroll cash disbursements are based
upon a recognized liability or actual services rendered by employees
Activities Possible Controls
1. Reviews payroll register received Common controls adopted by different entities in
2. Prepares check and have it signed by this department include:
authorized signatories* • Separate bank account should be
3. Distributes checks to employees maintained exclusively for payroll
4. Prepares daily summary which is to disbursements
be forwarded to general accounting • On a surprise basis, an employee
independent from payroll and user
*Note: Most companies disburse payroll departments may distribute paychecks.
through bank fund transfers from company’s The purpose of this is to identify whether
payroll fund to individual employees’ payroll or not fictitious employees exist.
account. In this case, the treasury • Unclaimed payroll checks shall be re-
department should be the one authorizing deposited to the bank.
the bank transfer.
E. Accounting department
Primary objective: To provide reasonable assurance that items related to payroll are appropriately
classified and recorded in correct accounting period at appropriate amounts
1. Inventory: Records inventoriable labor costs to appropriate jobs or customers account and
forward a daily summary to general accounting
2. 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 and 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

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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.
The following accounts are usually used in this cycle:
1. Raw Materials Inventories
2. Work-In-Progress Inventories
3. Finished Goods Inventories
4. Expenditure Cycle Related Accounts
5. Revenue Cycle Related Accounts

The focus of this discussion will be purely on controls over custody of resources involved, authorization of
activities, and recording of transactions.
Summary of control-related duties and responsibilities
Duties and Person/s assigned to perform the Procedures performed by
responsibilities function auditor
Custody Physical custody of materials and labor Auditor observes physical count
documents is normally held by the and reconciles the result of such
production department. count to entity’s records.
Since most of the assets here are highly If held by other parties, auditor
susceptible to theft and may send confirmation requests
misappropriation, adequate physical to the custodian (e.g. consignees,
control must be implemented. agents, or branches)
Authorization The production department is Auditor reviews production
authorized to make normal production orders and related documents
runs. supporting production runs made
However, in case of special runs (to by the department to determine
meet a special order), authorization whether it bears necessary
must come from the board of directors authorization.
or its authorized representative.
Recording Transactions are recorded by the cost Auditor normally reviews the:
accounting. Daily summaries are then ✓ Competency of the
prepared and forwarded to general individuals making
accounting for recoding and posting in journal entries
the general journal and ledger, ✓ Reconciliation of the
respectively. general ledger
Finance and Investment Cycle (Asuncion, Ngina, & Escala, 2018)
Finance and investment cycle generally involve 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 transactions.
This cycle normally involves few but significant amounts of resources. Thus, 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 considerations of the
auditor.
With this, similar with the production or conversion cycle, the focus of this discussion note will be on the
different controls over custody, authorization, and recording of the different transactions covered by this
cycle.

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Summary of control-related duties and responsibilities

A. Finance cycle
Duties and Person/s assigned to perform the Procedures performed by auditor
responsibilities function
Custody Unissued equity and debt certificates Auditor inquires directly to assigned
must be kept by appropriate internal custodians.
official (e.g. Corporate Secretary) or
independent external custodian. If held internally, auditor observes the
accounting of unissued certificates
Authorization As mentioned, transactions covered Auditor reviews minutes of the board of
in this cycles involve large amounts of directors meeting.
cash or other resources. With this,
transactions shall be approved by the
board of directors.
Recording Transactions are recorded in the Auditor normally reviews the:
general journal by personnel in the ✓ Competency of the individuals
general accounting. 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 the liabilities.
B. Investment cycle
Duties and Person/s assigned to perform the function Procedures performed by
responsibilities auditor
Custody Generally, investment certificates are kept as Auditor inquires directly to
follows: assigned custodians thru
• Negotiable certificates – brokerage sending of confirmation
account requests.
• Titles to real estate – may be kept in a
safe with the entity or bank safe deposit If held internally, auditor
observes the accounting for
certificates held.
Authorization As mentioned, transactions covered in this cycle Auditor reviews minutes of the
involve large amounts of cash or other resources. board of directors meeting.
With this, transactions shall be approved by the
board of directors or by an investment
committee.
Recording Transactions are recorded in the general journal Auditor normally reviews the:
by personnel in the general accounting. ✓ Competency of the
individuals making
journal entries

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Moreover, most companies monitor transactions ✓ Periodic reconciliation

in the investment cycle through a subsidiary of the subsidiary and
ledger/s maintained by the treasury department general ledgers

Important notes:
1. Regardless of the manner of safekeeping, access to these certificates is given to 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.

References
Asuncion, D. J., Ngina, M. A., & Escala, R. F. (2018). Applied Auditing Book 1 of 2. Baguio: Real Excellence
Publishing.
Philippine Standard on Auditing 315 (Redrafted). (2009). Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and its Environment.

02 Handout 1 *Property of STI

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