Contents1.0 INTRODUCTION02.0 REVENUE CYCLE12.1 The Objectives Of
Revenue Cycle12.2 Revenue Cycle Flowchart22.3 Revenue CycleMajor
Threats & Control32.4 Internal control and databases43.0
PURCHASE CYCLE53.1 Overview Of Purchase & Payment Cycle63.2
Classes of transactions, Accounts, Business Functions, and Related
Documents and Records for the Acquisition and Payment Cycle63.3
Major Internal Control Activities73.4 Substantive Test for Account
Payables94.0 INVENTORY CYCLE114.1 Related Documents And Records124.
2 Internal Controls144.3 Control Risk Assessment165.0 PAYROLL
CYCLE175.1 Organization Chart Illustrating the Payroll
Function175.2 Accounts in Payroll and Personnel Cycle185.3 Classes
of Transactions, Accounts, Business Function and Related Documents
and Records for the Payroll and Personnel Cycle195.4 Personnel and
Employment205.5 Timekeeping and Payroll Preparations205.6 Payment
of Payroll225.7 Payroll Process236.0 ADVANTAGES AND LIMITATIONS OF
ACCOUNTING TRANSACTION CYCLES247.0 CONCLUSION268.0 REFERENCE27
1.0 INTRODUCTIONBusinesses engage in large and various financial
transactions during normal operations. The reporting of each
accounting transaction cycle is very important to a business when
determining the profit of the company. Generally, there are four
main cycle, which is, revenue cycle, purchase cycle, inventory
cycle and payroll cycle.The revenue cycle is the cycle where the
bulk of accounting transactions will occur. This cycle includes the
transactions relating to the sales of goods and services to
customers and any expenses related to those revenues. Two
subsystems perform the processing steps within the revenue cycle is
the sales order processing system and the cash receipts processing
system.Purchase cycle or expenditure cycle is the recurring set of
business and related information processing operations associated
with the purchase and payment for goods and services. The cycle is
begins with purchase requisition, followed by purchasing,
receiving, account payable and cash disbursement.The inventory
cycle for a company is composed of three phases: the ordering or
administrative phase, the production phase, and the finished goods
and delivery phase. The ordering phase is the amount of time it
takes to order and receive raw materials. The production phase is
the work in progress phase. The last phase is the time the finished
goods and remain in stock and the delivery time to the customer.
The inventory cycle is measured as a number of days.Payroll system
is a special case purchases system because the entities purchases
labour rather than raw materials or finished goods. The most
important tasks performed in the Human Resource Management or
payroll cycle are recruiting and hiring new employees, training,
job assignment, compensation (payroll), performance evaluation and
discharge of employees. (voluntarily or involuntarily)We are going
to discuss more details and further about revenue cycle, purchase
cycle, inventory cycle and payroll cycle in this assignment.
2.0 REVENUE CYCLEThe revenue cycle is the set of activities in a
business which brings about the exchange ofGoods or services with
customers for cash. Most business transactions are conducted on
aCredit basis. Cash is received after goods are shipped to the
customer. 2.1 The Objectives Of Revenue Cycle to recognize the
fundamental tasks that must be performed in the revenue cycle
regardless of the level of technology in place; to be able to
identify the functional departments involved in revenue cycle
activities and to trace the flow of revenue transactions through
the organization; to be able to specify the documents, journals,
and accounts that provide audit trails, promote the maintenance of
historical records, support internal decision making, and sustain
financial reporting; to understand the risks associated with the
revenue cycle and to recognize the controls that reduce these
risks; and to be aware of the operational and control implications
of technology used to automate and reengineer the revenue
cycle.
2.2 Revenue Cycle Flowchart
AIS must provide adequate controls so that the following objects
are met:(1) Transactions are properly authorized.(2) Recorded
transactions are valid.(3) All valid, authorized transactions are
accurately recorded.(4) Assets are safeguarded from loss or
theft.(5) Business activities are performed efficiently and
effectively.
The following help achieve the above: Simple, easy-to-complete
documents with clear instructions. Appropriate application controls
Signature space for persons responsible for completion and review
of documents. Pre numbering of the documents.
2.3 Revenue CycleMajor Threats & Control
(1) Sales to customers with poor credit(uncollectable sales and
losses due to bad debts). Preventionindependent credit approval
function and good customer accounting.
(2) Shipping errorswrong quantities, items, or address: mad
customers. Preventionreconcile shipping notices and picking
tickets, bar code scanners, data entry controls.
(3) Theft of inventoryloss of assets ----> inaccurate
records. PreventionSecure inventory and document transfers, good
accountability for picking and shipping, and frequently reconcile
records with physical count.(4) Failure to bill customersloss of
inventory, and erroneous data about: sales, inventory, and
receivables. PreventionSeparate shipping and billing. Pre number of
shipping documents and reconciliation of all sales documents.
(5) Billing errorspricing mistakes, overbilling for items not
shipped or back orderedloss assets and mad customers.
Preventionreconciliation of picking tickets and bills of lading
with sales orders, data entry edit controls, and price lists.
(6) Theft of cashloss of assets and overstated A/R.
Preventionseparation of duties: handling cash and posting to
customer accounts; handling cash and authorizing credit memos &
adjustments; issuing credit memos and maintaining customer
accounts. Use lockboxes and EFT. Mail customer statements monthly.
Use cash registers in retail. Deposit cash intact daily in the
bank. Bank reconciliation done by noncash handler.
(7) A/R incorrectly postedmad customers, incorrect records, and
poor decisions. Preventionreconcile sub. A/R ledgers with general
ledger, monthly stmts. to customers, and edit and batch totals.
(8) Loss of dataloss of confidential info. and poor decision
making. Preventionregular on-site & off-site backup, logical
and physical access controls to prevent leakage to competitors.(9)
Poor performanceinefficient and ineffective operations.
Preventionsales and profitability analysis, A/R aging, and cash
budgets to track operations.2.4 Internal control and databases
Foreign key and referential integrity ensures the existence of
primary key records in related tables. Effective access controls
are very important in a database environment. REA diagrams
highlight incompatible functions and system can be programmed to
reject any attempt to perform incompatible functions by a single
employee. When multiple roles are performed, auditors can check for
compensating controls. Use of DBMS makes backup and disaster
recovery procedures essential.
3.0 PURCHASE CYCLEAudit of Purchase and Payment Cycle
Step in purchase and payment cycle
3.1 Overview Of Purchase & Payment Cycle Objective to audit
: To evaluate whether the account affected by the purchase of goods
and services and the cash payment for those purchased are fairly
presented in accordance with generally accepted accounting
principles
Classes of transactions1.Acquisition/purchase of goods &
services2.Cash disbursements3.Purchase returns and allowances and
purchase discounts
3.2 Classes of transactions, Accounts, Business Functions, and
Related Documents and Records for the Acquisition and Payment
CycleClasses of transactionAccountsBusiness FunctionDocuments and
Records
1. Acquisition Inventory Property, plant and equipmentPrepaid
expenses Leasehold improvementsAccounts payableManufacturing
expensesSelling expensesAdministrative expenses1. Processing
purchase orders
2. receiving goods and services
3. Recognising the liability Purchase requisitionPurchase
order
Receiving report
Acquisitions transaction fileAcquisitions journal or
listingVendors invoiceDebit memoVoucherAccount payable master
fileAccount payable trial balanceVendors statement
2. Cash Disbursements Cash in bank (from cash
disbursements)Accounts payablePurchase discounts1. processing and
recording cash disbursementsCheck Cash disbursements transaction
fileCash Disbursements journal or listing
3.3 Major Internal Control Activities Authorization of Purchases
Separation of asset custody from other functions Timely recording
Independent review of transaction Authorization of payment
1. Authorization of Purchases To ensure that the goods &
services purchase are for authorized company purposes To avoid the
purchase of excessive or unnecessary items. E.g : Established
approval authority i.e. purchase of capital assets above RM1
million may require approval from Board of Director Issued relevant
documents to authorize the transaction occur i.e. After the
purchase requisition have been approved, a purchase order to
purchase the good must be initiated Purchase order issued should be
pre numbered and should include sufficient columns and spaces to
minimise the likelihood of unintentional omissions on the form when
goods are ordered.
2.Separation of asset Custody from other functions Separate the
receiving department, storeroom unit and accounting function To
prevent theft or misuse of goods
3.Timely recording Method of recording : Upon the receipt of the
goods & services OR Upon the vendors invoice is received Proper
recording involves verifying goods received against relevant
documents. i.e. details on the purchase order, the receiving report
& vendors invoice, to determine all information are correct
4.Independent review of Transaction Independent party check on
information recorded in the system is required to ensure proper
procedure of record keeping
5.Authorization of payment Establish list of approval authority
Different ranking of personnel responsible to approve different
amount of payment Separation of responsibilities between those :
Recording the transaction Preparer or the cheque Approval of the
payment Proper documentation Cheque should be in sequence of number
Printed on special paper that makes it difficult to alter the payee
or amount Establish a special physical control over blank, voided
and signed cheque
3.4 Substantive Test for Account PayablesUsing tests of details
of balance Existence Completeness Accuracy Classification Cut off
Obligations Presentation and disclosures
1.Account payable Existence To determine : Account Payable is
the Account Payable List exist Examples of audit tests : Trace from
AP List to vendors invoice and statements Confirm AP, emphasizing
large and unusual amounts2.Accounts Payable Completeness To
determine : Existing AP are included in the AP list Examples of
audit tests : Perform out-of-period liability tests3.Accounts
Payable Accuracy To determine : Account payable (AP) in the AP list
are accurate Examples of audit tests : Trace from AP List to
vendors invoices and statements
4.Accounts Payable Classification To determine : Account Payable
(AP) in the AP list are properly classified Examples of audit tests
: Review the list and master file for related parties, notes or
other interest-bearing liabilities, long term liabilities and debit
balances5.Account Payable Cutoff To determine : Transactions in the
acquisition and payment cycle are recorded in the proper period
Examples of audit test : Perform out-of-period liability tests
Perform detailed tests as part of physical observation of inventory
Test for inventory in transit6. Account Payable Obligations To
determine : The company has an obligation to pay the liabilities
included in accounts payable Examples of audit tests : Examine
vendors statements and confirm accounts payable7. Account Payables
Presentation & Disclosure To determine : Accounts in the
acquisition and payment cycle are properly presented and disclosed
Examples of audit tests : Review statements to make sure material
related parties and long-term and interest-bearing liabilities are
segregated.
4.0 INVENTORY CYCLE
Inventory cycles are the most important cycle among the revenue
cycle, purchasing cycle and payroll cycle. It is because it has
close relationship between among these cycles. Example in
Illustration 1 shows the relationship between these cycles where
receipts and payments in the inventory controlled by the purchasing
cycle while the cost of expenses directly or indirectly in the
inventory is controlled by the payment cycle. For completion and
sales of goods is counted as revenue cycle. Terms cradle-to-grave
in inventory started when goods are purchased and stored, and it
will ends when the goods been distributed to consumers.
0
4.1 Related Documents And Records1) Process Purchase Orders.a.
Purchase requisitions are used to request that the purchasing
department place orders for inventory items.b. Purchasing of goods
estimated based on current requisition, estimated sales or
marketing department.c. The related purchase orders and the
controls over purchase requisitions are evaluated and tested as
part of acquisition and payment cycle.
2) Receive Raw Materials.a. Records the receipt of goods
received from suppliers. Receipt of orders also part of the
acquisition and payment cycle.b. Materials need to be checked for
quantity and quality after received it and sent it to the
storeroom. The receiving documents or electronic notifications of
the receipt of goods are typically sent to purchasing, storeroom
and accounts receivable.c. Control and accountability are necessary
for all transfers.
3) Store Raw Material.a. All of materials that received stored
in the stockroom until needed for production.b. If the materials
are out of stock, presentation of a properly approved materials
requisition, work order or similar document or electronic notice
that indicates the type and quantity materials needed.c. Updates
occur automatically by computer for organisations that have
integrated their inventory management and accounting system.
4) Process the Goods.a. Issue raw materials for production. The
issue must properly authorize.b. A separate production control
department often is responsible for the determination of the type
and quantity of production.c. Within various production
departments, provision must be made to account for the quantities
produced, control of scrap, quality controls, and physical
protection of the material in process.
d. There are two types of cost system that exist;i. Job cost
systemsii. Process cost systems
5) Store Finished Goods.a. Finished goods that are completed by
the production department, they are placed in the stockroom to
await shipment.b. It is part of sales and collection cycle.
6) Ship Finished Goods.a. Shipment of finished goods must be
authorized by a properly approved shipping document.b. An integral
part of the sales and collection cycle.
Process purchase ordersReceive raw materialsStore raw
materialsProcess the goodsStore finished goodsShip finished
goods
Flow of inventoryReceive raw materialsPut material in storagePut
material in productionPut completed goods in storageShip finished
goods
Related documentation Purchase requisition Purchase order
Receiving report Vendors (supplier) invoice Raw materials perpetual
inventory master file Raw material requisition Cost accounting
records Finished goods perpetual inventory master file Cost
accounting records Shipping document Finished goods perpetual
inventory master file Cost accounting records
7) Perpetual Inventory Master Filesa. Separate perpetual timely
records of inventory are normally kept for raw materials and
finished goods.b. Include only information about the units of
inventory acquired, sold and on hand or information about unit
costs.c. 4. 2 Internal ControlsInternal control
objectivePossibility of errorsInternal control procedureControl
tests
Validity
Completeness
Timeliness
ValuationInventory that is not exist.
Inventories are recorded but not in hands.
Inventory received but not record.
Inventory transactions are recorded in the wrong period of
time.
Inventory quantities recorded inaccurate.
Inventory obsolescence.
The cost of inventory and the sale of goods are not
suitable.Segregation of duties.
Use Pre-numbered Receiving Report in inventories that moved to
inventory department.
Use Pre-numbered materials requisitions for inventory that moved
out from the inventory department.
Physical observation test on inventory.
Receiving reports customized to suppliers invoice and included
in the sales journal.All in the process of receiving reports every
day by IT departments to record the receipt of inventory.
All documents processed daily deliveries to record the delivery
of finished goods.
Make annual or continuous comparison with the quantity of
inventory with inventory fixed records or previous records.Having
individuals who have to manage the inventory obsolescence,
slow-moving and excess.
Used standard costs.Evaluate the segregation of duties carried
out adequately.
Check and test procedures for inventory transfer.
Check and test procedures to removing an inventory to the
production department.
See and evaluate the controls on the run.
Detect acceptance of reports for each vendor invoices and
vouchers.
Check and test procedures for receiving reports recording
process into a permanent record.
Check and test procedures for the transfer or reduce the
inventory of permanent records.
Check and test procedures for the recruitment and use of
inventory.
Check and test procedures to identify obsolete inventory, slow
moving and excess.
Check and test procedures used to set standard costs.
4.3 Control Risk AssessmentControl risk exists because of
material misstatement that cannot be prevented, detected and
corrected by the companys internal controls. Auditors can follow
substantive strategy when the client companys internal controls are
unreliable or inaccurate. Therefore, the auditor will not rely on
control procedures contained in the inventory cycle and set a level
of control risk. However, the auditor can rely on the companys
internal control client to audit the inventory when the client has
integrated cost-accounting or inventory management system.
There were three steps to assess internal risk controls;
Step 1; Understand and document the inventory system of internal
control based on the risk appetite control. In this step, auditors
should understand components of internal control. Example of
components of internal control are; Control Environment. Entitys
Risk Assessment Process. Information and Communication Systems.
Control Procedures. Monitoring.
Step 2; Planning and performing tests of control over the
inventory cycle transactions. At this stage, the auditor must
identify the relevant control procedures to ensure that material
errors can be prevented, detected and corrected in the client
companys inventory control. Audit procedures that are used to test
the clients control procedures are discussed in the internal
control procedures and tests of controls inventory
transactions.
Step 3; Assess and document the risk control for the inventory
cycle. When internal control inventory cycle has been tested, the
auditor should document the level of control risk was assessed
using quantitative amount or qualitative themes.
5.0 PAYROLL CYCLEWhat is mean by payroll cycle?The payroll cycle
is the period of a beginning date and an ending date of length of
time.i. A weekly payroll cycle would be for any seven days.ii. A
biweekly payroll cycle is for 14 days.iii. A semi-monthly payroll
cycle is two equal periods each month.iv. And, a monthly payroll
cycle is for 30-31 days.The payroll cycle begins with the hiring of
personnel and ends with the payment to the employees for the
services performed and to the government and other institutions for
the withheld and accrued payroll taxes and benefits.5.1
Organization Chart Illustrating the Payroll Function
5.2 Accounts in Payroll and Personnel CycleAccrued wages,
salaries, bonuses and commissions
Direct laborAccrued payroll tax expensePayment Beginning
balancePayroll tax expenseEnding balancePayment for salariesPayment
for payroll taxesPayment Payroll expensePaymentBeginning
balanceEarned wages, salaries, etc.Ending balance
Cash in bank
Withheld income taxes and other deductions
Beginning balancePayroll withholdingEnding balance
5.3 Classes of Transactions, Accounts, Business Function and
Related Documents and Records for the Payroll and Personnel
CycleDocuments and recordBusiness FunctionAccounts Class of
transactions
W-2 formPayroll tax returns
Preparation of payroll tax returns and payment of taxesPayroll
checkPayroll bank account reconciliation
Payment of payrollTimekeeping and payroll preparationsTime
cardJob time ticketPayroll transaction filePayroll journal or
listingPayroll master file
Personnel and employmentPayroll
Personnel recordsDeduction authorization formRate authorization
form Payroll cash All payroll expense accounts All payroll
withholding accounts All payroll accrual accounts
5.4 Personnel and Employment1. Personnel RecordsRecords that
include such data as the date of employment, personnel
investigations, rates of pay, authorized deductions, performance
evaluations, and terminations of employment are called personnel
records.
2. Deduction and Contribution Authorisation FormForm authorising
payroll deductions and contributions. Contributions include payment
for income tax (Scheduled Tax Deduction), contribution to Employee
Provident Fund (EPF) and contribution to SOCSO. Deductions include
payment for various loans such as car loan and housing loan,
savings, and union dues.
3. Rate Authorisation FormForm authorising the rate of pay. The
source of the information is a labour contract, authorisation by
management, or in the case of officers, authorisation from the
board of directors.
5.5 Timekeeping and Payroll Preparations
1. Time CardTime card is a document indicating the time the
employee started and stopped working each day and the number of
hours the employee worked. For many employees, the time card is
prepared automatically by time clocks or identification card
readers. Time card usually submitted weekly.
2. Job Time TicketA document indicating jobs on which an
employee worked during a given time period. This form is used only
when an employee works on different jobs or in different
departments. Job time tickets may be completed electronically by a
time and expense reporting system.
3. Payroll Transaction FileComputer-generated file that includes
all payroll transactions processed by the accounting system for a
period, such as day, week, or month. It contains all information
for each transaction, such as employee name, date, gross and net
payments, various withholding amounts, and account classification
or classifications.
4. Payroll Journal or ListingA report generated from the payroll
transaction file that typically includes the employee name, date,
gross or net payroll amounts, withholding amounts, and account
classification or classifications for each transaction. The same
transactions included in the journal or listing are also posted
simultaneously to the general ledger and to the payroll master
file.
5. Payroll Master FilePayroll master file is used for recording
each payroll transaction for each employee and maintaining total
employee wages paid for the year to date. The record for each
employee includes gross pay for each payroll period, deductions
from gross pay, net pay, check number and date. The master file is
updated from payroll computer transaction files. The total of the
individual employee earnings in the master file equals the total
balance of gross payroll in various general ledger accounts.
5.6 Payment of Payroll
1. Payroll CheckA check written to the employee for services
performed. The check is prepared as part of the payroll preparation
function, but the authorized signature makes the check an asset.
The amount of the check is the gross pay less taxes and other
deductions withheld. After the check is cashed and returned to the
company from the bank, it is referred to as a cancelled check. It
is now common for payroll to be directly deposited into employees
bank accounts.
2. Payroll Bank Account Reconciliation Important control is the
independent reconciliation of the imprest payroll bank account. An
imprest payroll bank account is a separate payroll account in which
a small balance is maintained. The exact amount of each net payroll
is transferred by check or electronic funds transfer from the
general account to the imprest account immediately before
distribution of the payroll. The advantages of an imprest account
are that it limits the clients exposure to payroll fraud, allows
the delegation of payroll check-signing duties, separates routine
payroll expenditures from other expenditures, and facilitates cash
management. It also simplifies the reconciliation of the payroll
bank account if it is done at the low point in the payment
cycle.
3. EA FormForm issued for each employee summarising the earnings
record for the calendaryear. The information includes gross pay,
monthly Scheduled Tax Deduction, and other contributions made. The
same information is also submitted to the Internal Revenue Board.
This information is prepared from the payroll master file and is
normally prepared by the computer.
4. Payroll Tax ReturnTax form submitted to IRB for payment of
employees monthly tax. This form is prepared from information on
the payroll master file and is often prepared by the computer.5.7
Payroll Process
6.0 ADVANTAGES AND LIMITATIONS OF ACCOUNTING TRANSACTION
CYCLESEvery business activity is divided and traced to specific
accounting cycle. Identifying these cycle and the specific
activities within them are essential to determining the
effectiveness and profitability of a business. Although accounting
transaction cycles are very useful and apply to the whole
businesses, it has some limitations. Businesses use cycles to
ensure they carry out activities consistenly according to a
reasonable and predictable schedule. Each stage of the accounting
cycles has a range of time in which it should occur. This allows
businesses to offer guidelines to customers and third party
participants that keep the cycle within reasonable time limits.
These guidelines also make it easy for customers and new members of
the workforce to understand.The accounting transaction cycles allow
third parties to become involved in the business process. This
would be impossible if there is no place to let them participate in
our businesses. For example, in the case of a patient who pays for
a visit to a dentist's office with an employer-provided insurance
policy, the dentist collects payment from the patient in the form
of a copayment at the time of service. The revenue cycle continues
as the dentist receives payment for additional costs associated
with the visit. If the customer is liable for additional payments,
the dentist submits a new billing and waits for payment by a
specified due date. Besides insurance companies, third party
revenue cycle participants include credit card companies,
commercial lenders and government subsidy programs.Accounting
transaction cycles allow businesses to predict cash flow and track
transactions at all stages. While not every transaction proceeds
according to schedule, so only some transaction can be indicated.
For example, in revenue and purchase cycles, this rough timeline
indicates when payments will be made and how much a business can
expect to take in as revenue by a given date. Every cycle stage
also presents an opportunity to identify and correct errors,
leading to greater overall accuracy. Therefore, transaction cycles
is very important for accounting purpose.
There are some limitations of accounting transaction cycles. For
companies in the manufacturing and retail sectors, for example, the
usefulness of a cycle model especially revenue cycle is more
limited because consumer engagement occurs almost exclusively at
the point of sale, and other aspects like product assembly and
inventory management are largely unrelated to direct customer
involvement.
7.0 CONCLUSIONAs a conclusion, accounting transaction cycles are
very important to a company especially for multinational companies
that their businesses involve multiple and large amount of
transactions. Performing all the cycles well can increase the
company effectiveness and efficiency. This is because the companies
business can carry out fluently with minimum frod. However, the
companies should always update their transaction systems to
increase productivity and this will easier the work of auditing.
Auditing work is always laying on the companies transaction
resources or documents to accumulate adequate evidence for audit
purpose.
8.0 REFERENCE
Richard B. Dull.(2012).Accounting Information Systems.Canada:
Nelson Education, Ltd.Alvin A. Arens.(2012).Auditing and Assurance
Services in Malaysia.Selangor, Malaysia:Prentice
Hallhttp://www.ehow.com/about_5374277_revenue-cycle.htmlhttp://bizfinance.about.com/od/glossaryi/g/inventory-cycle.htmhttp://www.nd.gov/vr/purchmod/docs/purchasing-life-cycle.pdfhttp://www.leoisaac.com/fin/fin024.htm