Topic D3 Transaction Cycles

It is far better, and easier in the long run, if you can relate general principles to each audit area rather than learning long lists of tests. This is partly because long lists of test are almost impossible to remember clearly and accurately and partly because the examiner might give you a slightly unusual situation which will require the approach to be modified slightly. Control objectives for all systems:

Only authorized transactions are promptly recorded at the correct amount in the appropriate accounts in the proper accounting period, that access to assets is only in accordance with proper authorization and that recorded assets are compared with existing assets.

Detailed control activities are often similar across sales, purchases and other areas and include for example: ·Sequential numbering ·Batch and control totals ·Control accounts ·Authorization REVENUE CYCLE

Control objectives

（1）To ensure that all sales revenues are included in the accounting records （2）to ensure that sales revenues included in the records are accurately stated （3）to minimise losses through bad debts and/or returns Segregation of duties

（1）Accepting customer orders （2）Despatch department （3）Invoicing

（4）Receiving and recording cash

Authorisation and approval controls-examples （1）Check orders against credit limits （2）Orders should be authorised in writing

（3）Sales invoices should be authorised in writing （4）Writing off bad debts should be authorised in writing. Physical controls-examples

（1）Record orders on pre-numbered documents

（2）No goods to be despatched without a despatch note （3）Goods returned should be used to prepare credit notes. Arithmetical controls-examples （1）Check calculations on invoices （2）Send statements to customers regularly （3）Identify overdue debts using age analysis （4）Chase customers for overdue debts. Segregation controls-examples

（1）Credit notes should be authorised by someone unconnected with despatch or sales ledger functions

（2）Sales invoices and credit notes should be checked （prices, calculations etc） by a person other than the one preparing the invoice

（3）Sales ledger personnel should be independent of despatch and cash receipt functions. Organisation controls-examples

（1）Sequence checks on pre-numbered documents （2）Reconciliation of control account. Items to test

·Customers vetted before credit is given ·Orders vetted against credit limits

·Goods despatched only against approved customer orders

·All despatches and returns should be invoiced and recorded correctly （sales orders linked to despatch notes, linked to sales invoices; returns checked for quality and logged） ·Invoices/credit notes accurately prepared form price lists, customer trading terms etc ·Invoices prepared form despatch notes only

·Credit notes, bad debts and adjustments backed by appropriate documentation and authorisation

·Sales transactions posted completely and accurately to ledger accounts ·Reconciliation of control account

·Chasing of overdue balances ·Segregation of duties. Analytical review procedures ·Fluctuations in sales levels ·Cut-off problems

Check disclosure （eg, segmental information）.

Note that one approach to designing tests of control is to list the documents involved in the system, and think of tests for each document. This is illustrated below for a sales system.

Test for evidence of approval. Test for evidence of a sequence check. Test for:

（1）Evidence that a GRN is raised for all sales returns accepted. （2）Evidence of a sequence check. Test for:

（1）Serial numbering.

（2）Evidence of a sequence check.

（3）Evidence of matching sales invoices to despatch notes and customer orders. （4）Correct accounting. Test for:

（1）Evidence of approval and matching to GRN. （2）Correct accounting.

Test for evidence of authorisation of adjustments to sales ledger Test for:

（1）Evidence of review of reconciliation to sales ledger.

（2）Evidence of authorisation of adjustments to sales ledger control account.

The point made in the previous chapter applies here with equal force: though detailed, these descriptions of accounting systems and controls are of great examination importance.

1.Introduction

This chapter covers controls over payroll, and the assets of cash, inventory and non-current assets which must be safeguarded and used properly for company purposes. 2.Payroll

·Control objectives

·To ensure that payments made represent value received for authorised work

·to ensure that payroll costs are completely and accurately recorded in the financial statements

Segregation controls – examples

·Wages/salaries department should be separate from receipts or payments functions. ·Duties of wages staff should be rotated during the year.

·The employee making up the pay packets should be different from the employee preparing the payroll.

·Periodic surprise attendance at payouts. Physical controls – examples

·Supervision of clock cards and timing devices ·Control over unclaimed wages

Authorisation and approval controls – examples

·Written authorisation to employ or dismiss any employee, or to change rates of pay ·Authorisation of overtime

·An independent official should check the payroll and sign it ·Employees should sign for their wages ·Wages cheque should carry two signatures. Arithmetical and accounting controls – examples ·A sample of calculations should be checked ·Control accounts should be maintained Personnel controls - example

·A wages supervisor should be appointed Management controls - example

·Overall checks to highlight major discrepancies （eg, check against budget） Items to test

·time records properly maintained and authorised

·starters, leavers and changes in rates properly authorised by a department independent of the payroll department

·overtime, bonuses and commissions properly authorised and checked ·deductions properly calculated and recorded

·changes to tax rates, allowances properly authorised and correctly implemented ·correct amounts paid to tax authorities and other external organisations ·appropriate amounts recovered from external organisations ·total payroll authorised

·adequate security over cash transmissions

·payroll totals correctly posted to ledger accounts ·segregation of duties. 3.Cash system

·To ensure that all cash receipts are properly collected, recorded and banked ·to ensure that payments made to suppliers are in respect of authorised invoices only ·to ensure that amounts charged to the band statement are authorised

·to ensure that receipts and payments are recorded accurately and completely in the accounting records.

Controls over cash receipts post.

Controls over cash collected by the sales force. Controls over cash sales. Controls over banking.

Controls over cheque payments. Band reconciliations. Controls over petty cash. Items to test

·proper controls over receipts in the form of till receipts, other cash takings, cheques and credit cards

·prompt banding of notes, coins, cheques and credit card vouchers ·reconciliation of cash receipts（eg, to till rolls）

·Proper controls over opening of mail, including log of cheques received ·Reconciliation of log to banking records ·Agreement of receipts to remittance advices

·All receipts properly recorded and posted to correct ledger accounts ·Reconciliation of receivables control account ·Secure storage of unused cheques, etc

·all cheques accurately prepared on the basis of approved documentation authorised limits for cheque signatories

·Bank transfers properly authorised against supporting documentation ·direct debits and standing orders properly authorised and monitored ·All payments properly recorded and posted to correct ledger accounts ·reconciliation of payables control account ·Segregation of duties ·Regular bank reconciliations. 4.Other systems Inventories Control objectives

·to ensure that inventory consumption and inventory transfers are correctly and completely recorded

·to ensure that inventory figures in the income statement and balance sheet are correctly stated

·To ensure that physical amounts of inventory held reconcile to book quantities ·To minimise loss and wastage of inventory. Items to test

·Inventory requisitions are based on authorised reorder levels ·sequentially numbered goods received notes ·goods in are properly inspected