Professional Documents
Culture Documents
TRANSACTION CYCLES – the means through which an accounting system processes transactions of related activities
A. REVENUE & COLLECTION CYCLE
Activities involved: (1) Exchange of goods and services with customers; (2) collection of revenue in cash
Accounts affected: (1) Sales and related sales adjustments; (2) Cash in bank; (3) Accounts receivable and related
allowances; (4) Uncollectible accounts expense; and (5) Inventories
Documents used and Audit Significance
Documents Significance
Customer’s purchase order - Provides evidence that a customer actually ordered the goods.
- PO numbers are recorded on sales invoices to determine to which PO an
invoice relates.
Sales order - Contains the seller’s understanding of the terms.
- Numerical sequence helps ensure that shipments are made for sale orders and
all sales are billed.
Bill of Lading (Shipping Documents) - Signature of carrier provides evidence that goods have been shipped.
- Numerical sequence helps ensure that all shipments are recorded as sales.
Credit memo - Provides evidence that the seller has reduced the amount billed to a customer.
- Numerical sequence helps ensure that CMs are recorded.
Remittance Advice - Indicates date and amount of payment and the invoices paid.
Uncollectible account authorization form - Numerical sequence helps ensure that all write – offs are recorded.
Monthly statements - Reports the beginning balance and transactions that occurred during the period.
Accounting records employed: (1) Sales journal; (2) Sales returns and allowances journal; (3) Cash receipts journal; (4)
General journal; (4) accounts receivable ledgers; and (5) Accounts receivable TB
Assertion: RIGHTS AND OBLIGATIONS, sales recorded represent only sales transactions
Clerk checks sales orders and sales invoices for terms - Observe whether such procedure is being performed
Assertion: VALUATION AND ALLOCATION, sales are correctly billed and recorded
(For goods shipped) Counted and descriptions on sales - Observe whether such procedure is being performed.
order are compared with the shipping document - Examine shipping orders for signature on the shipping
documents (sample)
Customer credit is approved by a responsible official prior - Examine sales order for credit approval prior to shipment
to shipment. (sample)
Sales invoices are checked to pricing, mathematical - Inquiry on the updating of price list.
accuracy and terms - Examine copies to determine that they contain signature
that they have been checked (sample)
AR subsidiary ledger is balanced to the general ledger - Observe whether such procedure is being performed.
control account regularly.
Page 1 of 8
- Foot the subsidiary ledger and compare to the balance of
the control account.
Assertion: PRESENTATION AND DISCLOSURE, sales and accounts receivable are recorded in accordance with PFRS
Sales must be properly classified - Determine whether the invoice copy contains approval
signature for account classification used.
Page 2 of 8
Checks are restrictively endorsed immediately after - Observe whether the procedure is followed.
receipts.
Preparation of daily cash summary and reconciliation of - Inquire from responsible employees about the regularity
OTC receipts and prelisting. and consistency of the performance of this procedure.
Reconciliation of cash receipts journal to the total posted to - Observe the procedures.
AR - Inquire from employees who perform the procedures.
Assertion: RIGHTS AND OBLIGATIONS, all cash receipts are deposited in the bank account of the client
Cash receipts are deposited intact daily in the company’s - Observe whether the procedure is followed
bank account - Compare cash in the prelisting and validated deposit slip.
Assertion: VALUATION AND ALLOCATION, the DR to cash and CR to AR are valued at amount actually received
Cash receipts should be recorded at the amount indicated - Compare entries made in the cash receipts journal to
in the remittance advice remittance advices.
Assertion: PRESENTATION AND DISCLOSURE, cash receipts transactions are recorded in accordance with PFRS
An accounting supervisor approves classifications made in - Determine whether the accounting supervisor approval is
journalizing recorded.
Accounting records employed: (1) Purchase journal; (2) Cash disbursement file/journal; and (3) Accounts payable master
file/subsidiary ledger
Page 3 of 8
I. TEST OF CONTROLS FOR ACQUISITION
CONTROLS TEST OF CONTROLS
Assertion: EXISTENCE/OCCURRENCE, recorded acquisitions are for items that were acquired
Acquisitions approved by authorized personnel as - Examine the approval signature.
evidenced by signature on PO.
Preparation of voucher for the purchase of goods. - Observe the procedure.
- Examine file documents.
When vouchers are not prepared:
- Review entries in the purchase journal.
- Examine documents underlying them for authenticity and
reasonableness.
Check signer examine supporting documents and cancel - Examine cancellations on the documents.
the documents when paid.
Assertion: RIGHTS AND OBLIGATIONS, recorded acquisitions are the entity’s purchases and liabilities
5. Receiving reports are prepared by persons who have - C. Observe that the procedure is performed.
access to a blind copy of PO details.
Assertion: VALUATION AND ALLOCATION, acquisitions are recorded in the proper amounts.
3. Invoice amounts are verified by reference to the PO and - E. Examine the voucher for signature indicating
receiving report. Mathematical accuracy is also checked. performance.
Assertion: PRESENTATION AND DISCLOSURE, acquisitions are recorded in accordance with PFRS
2. Employees are required to use a chart of accounts. - A. Examine the chart of accounts and signature of
Account coding is assigned to one person and checked by employee performing the verification.
another.
ACTIVITY 2: Identify the following controls as to what assertion they pertain and match the test of control to appropriate
control.
CONTROLS TEST OF CONTROLS
1. Prenumbered receiving reports are used and accounted to a. Examine the chart of accounts and signature of
determine that a liability is recorded. employee performing the verification.
2. Employees are required to use a chart of accounts. Account b. Observe the procedure and account for the
coding is assigned to one person and checked by another. numerical sequence of the voucher.
3. Invoice amounts are verified by reference to the PO and c. Observe that the procedure is performed.
receiving report. Mathematical accuracy is also checked. d. Observe the procedure and account for the
4. Vouchers are prenumbered and accounted ad they are numerical sequence of receiving report.
entered in the voucher register. e. Examine the voucher for signature indicating
5. Receiving reports are prepared by persons who have access performance.
to a blind copy of PO details.
Page 4 of 8
d. Valuation or Allocation To determine that purchases are 11. Recompute the invoices and compare invoice
recorded for proper amounts. price to purchase order.
e. Presentation To determine purchases are 12. Check accuracy of accounts on invoices by
presented and disclosures are reference to chart of accounts
prepared in accordance with PFRS.
Assertion: RIGHTS AND OBLIGATIONS, all cash disbursements made are for obligations of the entity.
Examination of supporting documents before check signer, - Inquire about the segregation of duties.
who is independent of voucher preparation, signs check. - Observe whether separation really exists.
- Inquire about the check signer’s procedures for reviewing
documents.
Assertion: VALUATION AND ALLOCATION, amounts recorded are valued at proper amounts.
Verify amounts and calculations on vendor’s invoices. - Observe the procedure.
Employee signs voucher after this procedure. - Examine signature on paid invoices.
Assertion: PRESENTATION AND DISCLOSURE, cash disbursements are recorded in accordance with PFRS
Chart of accounts adequately describe the account to be - Observe the procedure.
used and account coding and checking is assigned to
different persons.
C. PAYROLL TRANSACTION
Activities involved: (1) acquisition of employee services; (2) compensation
Accounts affected: (1) Salaries Payable; (2) Cash in bank; and (3) Payroll expenses
Documents used and Audit Significance
Documents Significance
Time Card - Provides evidence about the validity of the hours employee is paid for working.
Page 5 of 8
Deduction authorization - Indicates that the employee authorized an amount to be withheld from a
paycheck.
Certification of Taxes withheld - Indicates that taxes withheld were reported to the various taxing authorities.
Labor ticket and labor ticket summary - Records specific activity of a laborer and the labor used in production on any
given day.
Payroll tax returns - Provides evidence that amount withheld are paid to the appropriate authorities.
Other personnel records - Numerical sequence helps ensure that all write – offs are recorded.
Accounting records employed: (1) Payroll register; (2) Employee Earnings Record; (3) Labor Distribution journal; (4) and
General journal
Assertion: RIGHTS AND OBLIGATIONS, recorded payroll transactions are for services received.
Employees are required to record the time work using a - Observe whether such procedure is being followed.
time clock - Examine signature on card.
Assertion: VALUATION AND ALLOCATION, payroll transactions recorded for proper amount.
Verification of accuracy of payroll calculations. - Examine payroll register for signature indicating
verification.
Control total of hours worked and verified independently of - Examine worksheet that documents the comparison.
payroll accounting and compared to hours for which
payment is recorded
Assertion: PRESENTATION AND DISCLOSURE, payroll transactions are recorded in accordance with PFRS
Employees use chart of accounts in assigning codes for - Examine payroll summary for the signature indicating that
labor charges. Another employee would check work of the this procedure is being followed.
employees who assigned the codes.
Accounts affected:
(1) Notes Payable (non – trade); (9) Intangible assets
(2) Bonds Payable; (10) Cash in Bank
(3) Mortgage Payable (11) Interest Expense (Payable)
(4) Long – term Liability (finance lease) (12) Share premium
(5) Share capital (13) Retained earnings
(6) Investment in securities (14) Treasury Shares
(7) Accounts Receivable (non – trade) (15) Dividends
(8) PPE and related adjustment (16) Capital Account
EXISTENCE OR OCCURRENCE & RIGHTS AND OBLIGATIONS: Financing cycle transactions actually occurred.
a. The BOD authorizes the issuance of long – term notes, bonds, and share capitals, the legal requirements and
proceeds are promptly deposited intact.
b. Authorized (BOD or management) payments of interest and dividends to proper payees.
c. Authorized execution of redemption and reacquisition of bonds and share capital transactions.
d. Notes are cancelled when they are paid to avoid double payment.
e. Recorded balances are periodically verified with bondholders and shareholders
EXISTENCE OR OCCURRENCE & RIGHTS AND OBLIGATIONS: Investing cycle transactions actually occurred.
a. The management authorizes the acquisition/sale of PPE, securities and intangible assets.
b. Interest and dividends checks are promptly deposited intact.
c. Access to PPE, securities and intangible assets are restricted to authorized personnel.
d. Recorded balances are compared with existing assets at reasonable intervals.
Page 7 of 8
VALUATION/COMPLETENESS/CLASSIFICATION: Investing cycle transactions are properly recorded.
c. Transactions and events are correctly recorded as to amount, classification, and accounting period.
d. Transactions are promptly and correctly posted to individual accounts investment.
Test of Control
1. Trace transactions for purchases and sales of PPE, securities and intangible assets through the system.
2. Review reports by internal auditor on their periodic inspections to PPE, securities and intangibles.
3. Review monthly reports by officer of client company on securities owned, purchased, and sold, and revenue earned.
4. Review significant changes in the composition of PPE and related liens and mortgages.
Page 8 of 8