Auditing Theory ACC 501

College of Business & Accountancy

Revenue and expense cycle GROUP 2

O V E R V IE W :

A Brief Overview of Transaction Cycles

O V E R V IE W : A Transaction Cycle is . . .

A g ro u p o f re l te d a b u si e ss a cti ti s n vi e ( transactions ), such as : R EV EN U E E X PE N S E FI A N C E N

CYCLE

OVERVIEW :

Transaction Cycles for a Merchandising Firm

OVERVIEW :
MERCHANDISE SHIPMENT SALE OF MERCHANDISE

The Expenditure Cycle RECEIPTS CASH

PP&E, Investments

GL & Fin Rpt Cycle

Purchase of Mdse, & Labor, Etc. Merchandise Receipts

Cash Disbursements

OVERVIEW :
MERCHANDISE SHIPMENT SALE OF MERCHANDISE CASH RECEIPTS

GL & Fin Rpt Cycle

PP&E, Investments

Purchase of Mdse, & Labor, Etc. Merchandise Receipts

Cash Disbursements

The Revenue Cycle

OVERVIEW :
MERCHANDISE SHIPMENT SALE OF MERCHANDISE CASH RECEIPTS

The Finance Cycle

GL & Fin Rpt Cycle

PP&E, Investments

Purchase of Mdse, & Labor, Etc. Merchandise Receipts

Cash Disbursements

OVERVIEW :
MERCHANDISE SHIPMENT SALE OF MERCHANDISE

GL & Financial Reporting

CASH RECEIPTS

GL & Fin Rpt Cycle

PP&E, Investments

Purchase of Mdse, & Labor, Etc. Merchandise Receipts

Cash Disbursements

Background :

The Company

Banana and Potato Enterprise (Building tomorrow with piles of books)is a leading book distributor since 2008. The business mainly offers books for children and young adults.

Background :

The Company

It has also adopted the new generations method of commerce B&P enterprise promotes and takes customers order online or thru phone call. Most of the clients are bookstores and school libraries that order in bulks.

Expense Cycle : Purchasing And Cash Disbursement

xpense Cycle

Questions Addressed
What are the basic business activities and data processing operations that are performed in the expenditure cycle?

x p e n se C y cle
What to be made in the expenditure cycle , and what information is needed to make these decisions? What are the major threats in the expenditure cycle and the controls related to those threats?

Questions Addressed decisions need

x p e n se C y cle

What is EXPENSE CYCLE?

xpense Cycle

EXPENSE CYCLE

a recurring set of business activities and related information processing operations associated with the purchase of and or payment for good and

Is

xpense Cycle

OBJECTIVES

To minimize the total cost of acquiring and maintaining inventories, supplies, and the various services the organization needs to function.

x p e n se C y cle

What LEVEL of inventory supplies to carry?

KEY D E C I S I O N OPTIMAL S is the

and

Which suppliers provide the best quality and service at the BEST PRICES?

xpense Cycle

KEY D E C I S I inventories ONS Where should

and supplies be held? How can the organization consolidate purchases across units to obtain optimal prices?

xpense Cycle

How technology be used to improve both the efficiency and accuracy of the inbound logistics function?

KEY D Ecan S I O N S C I information

xpense Cycle

Is available advantage discounts offer?

KEY DECISIONS sufficient

cash to take of any suppliers to to

can payments How vendors be managed maximize cash flow?

xpense Cycle

The Expenditure Cycle Business Activities

xpense Cycle
PAYROLL/ CASH DISBURSEMENT PURCHASES

VARIOUS DEPT.

STOCKROOM

EXPENSE CYCLE
PAYROLL DEPT. ACCOUNTING DEPT. EMPLOYEES CASH DEPARTMENT RECEIVING DEPT. PURCHASING DEPT.

SUPPLIER

xpense Cycle BUSINESS ACTIVITIES 1.Order Goods 2.Receive and Store Goods 3.Pay for Goods

xpense Cycle B U S IN E S S A C T IV IT IE S

Order Goods
T h e fi rst m a j r b u si e ss o n a cti ty vi i n th e exp e n d i re tu cycl e i vo l s n ve o rd e ri g n i ve n to ry o r su p p l e s. n i

x p e n se C y cle B U S IN E S S A C T IV IT IE S

Key decisions in this process involve identifying what, when, and how much to purchase and from whom. Weaknesses in inventory control can create significant problems with this process.

PURCHASE CYCLE
STOREROOM PURCHASING DEPT. P.O. P.R. D.V. G.L. V.R. ACCOUNTING DEPT.

R.R.

SUPPLIER INVOICE

CASH DEPARTMENT

RECEIVING DEPT.

Legend: PR - Purchase Requisition PO Purchase Order DV Disbursement R R r e c e i v i n g R e pV o u c h e r ort VR Voucher Register

xpense Cycle
RECEIVE & STORE GOODS The receiving department has two major responsibilities:
Deciding whether to accept a delivery Verifying quantity and quality

xpense Cycle
PAYMENT OF GOODS The objective of accounts payable is to authorize payment only for goods and services that were ordered and actually received.

xpense Cycle

PAYROLL CYCLE

xpense Cycle

xpense Cycle

Control Objectives, Threats, and Procedures

xpense Cycle

xpense Cycle

xpense Cycle

e v e n u e C y cle

Questions Addressed
What are the basic business activities and data processing operations that are performed in the revenue cycle?

e v e n u e C y cle
What to be made in the revenue cycle , and what information is needed to make these decisions? What are the major threats in the revenue cycle and the controls related to those threats?

Questions Addressed decisions need

evenue Cycle

What is REVENUE CYCLE?

evenue Cycle

activities and related information processing operations associated with providing: 1.Goods/Services to customers; and 2.Collecting cash in payment for those sales

REVENUE C Y CsetE business L of is a recurring

evenue Cycle

The the

major purpose
revenue cycle is

REVENUE CYCLE

facilitate the exchange of products or services with customers for cash .

of to

evenue Cycle

OBJECTIVES
To determine that recorded sales are authorized and are for shipments actually made non-fictitious customers.

evenue Cycle

PROCEDURES
(1)Review the sales journal, general ledger and accounts receivable trial balance for large or unusual items

evenue Cycle (2)Trace sales journal entries to copies of sales orders, sales invoices and shipping documents (3)Trace shipping documents to entry of shipments perpetual inventory records

evenue Cycle (4) Compareprices on sales invoices with authorized price lists or properly executed contracts

evenue Cycle To determine that existing sales transactions are recorded on a timely basis

OBJECTIVES

evenue Cycle (5) Trace shipping documents to resultant sales invoices and entry into sales journal and accounts receivable master file

PROCEDURES

evenue Cycle (6) compare dates of recorded sales transactions with dates on shipping records

evenue Cycle

OBJECTIVES
To determine that recorded sales are for the amount of goods shipped and are correctly billed and recorded

evenue Cycle

PROCEDURES
on (7) Re-compute information sales invoices (8) Trace entries in sales journal to sales invoices

evenue Cycle (9) trace details on sales invoices to shipping documents, price tests and customers orders

evenue Cycle

OBJECTIVES
Determine that sales transactions are properly classified

evenue Cycle

PROCEDURES
(10) Examine supporting transactions for classification. document sales proper

evenue Cycle

ACHIEVING

CONTROL

SEGREGATION OF FUNCTIONS

Transaction authorization should be separate from transaction processing

Transaction Custody should be separate from asset Recordkeeping

The organization should be so structured that the perpetration of a fraud requires collusion between two or more individuals

PRESIDENT SALES PROMOTION CUST. SERVICE SALES ORDER CONTROLLER BUDGETING ACCT. MANAGER BILLING ACCTS. REC. GEN. LEDGER

TREASURER CREDIT CASHIER INSURANCE

WAREHOUSE PURCHASING SHIPPING RECEIVING STORES

evenue Cycle

THREATS

evenue Cycle

THREATS
1.Incomplete or inaccurate customer orders. 2.Credit sales to customers with poor credit. 3.Legitimacy of orders 4.Stockouts, carrying costs, and markdowns.

evenue Cycle

THREATS
5.Shipping Errors Wrong merchandise Wrong quantities Wrong address 6.Thefts of Inventory

evenue Cycle

THREATS
7.Failure to bill customers. 8.Billing errors. 9.Posting errors in updating accounts receivable. 10.Theft of cash

xpense Cycle