Albay, Jeremy James G.

BSA-3A
Assignment 2: Introduction to transaction processing

1. Discuss the flow of cash through the transaction cycles. Include in your discussion the
relevant subsystems that are involved.

There are three transaction cycles happening in a firm: (1) expenditure cycle; (2)
conversion cycle; (3) and the revenue cycle.
Expenditures incurred in exchange for resources happens through the expenditure cycle.
This is where acquisition of materials, property, and labor in exchange for cash are made. Under
this cycle, we have four different subsystems. First the purchases/accounts payable system.
When the business is in-need of inventory, such as raw materials, this system is triggered and
places an order with the vendor. This system records an increase in inventory when the goods are
received and establishes an account payable, in case of credit sales, to be paid later. Second
subsystem is the cash disbursements system where it authorizes payment to the vendor when the
obligation created in the purchases system is due and records the transaction by deducting in
cash and accounts payable accounts. Cash is also disbursed to employees who rendered the
services in the business and this is where the third subsystem comes into play which is the
payroll system. And lastly, transactions pertaining to the acquisition, maintenance, and disposal
of fixed assets such as land, buildings and furniture are processed in the fixed asset system.
The conversion cycle from the word itself, is where transactions involving converting of
raw materials into finished goods are processed. Under this we have two subsystems, the
production planning system and cost accounting system. The raw materials requirements are
determined by the production planning system. This is also where releasing of raw materials into
production is processed as well as the various stages of manufacturing processes. Cost
accounting system on the other hand, monitors the flow of cost information related to production
which is used for decision making of the management.
Profits are gained through the revenue cycle where firms sell their finished goods either
in cash or credit and the collection of said cash is also processed. Typically, sales are made on
credit and the sales order processing system of revenue cycle involves processing of orders of
customers for the goods being manufactured. The cash receipt system meanwhile captures the
actual receipt of cash from customers.

2. Should an auditor wishing to assess the adequacy of separation of functions examine a

data flow diagram or a system flowchart? Why?
 If the auditor wishes to assess the quality of separation of functions in a firm, he/she
should be examining the system flowchart rather than the data flow diagram because the system
flowchart clearly captures the separation of functions, whether for example the sales approval
process is separated physically from the billing process since in the case of data flow diagram, it
cannot show the physical system but only the logical system. The DFD is too general to be used
by the auditor for the examination while the system flowchart is more specific as it shows the
graphical representation of the physical relationships among key elements of a system,
illustrating who’s responsible for performing specific processing steps which is the aim of the
auditor in this scenario and using DFD for that would not be fruitful.