BALICAO, IRISH LOVE JOYCE M.

JULIAN, JAN MICHAELA B.

JUAN, NIŇA ANGELICA
VILLA, PAULA SHANELLE D.

Transaction cycles are the means through which an accounting system processed
transactions of related activities such as sale of goods to customers, acquisition of
merchandise and payment to vendors, production of finished products for sale, and
payment to employees for services they had rendered.
A transaction is an agreement between two entities to exchange goods or services or any
other event that can be measured in economic terms by an organization.
Categories of Transaction Cycles
Category Inclusion
Revenue and receipt  Sale of goods or services to
customers
 Collection of cash
Expenditure and disbursement  Acquisition of goods and services
 Payment of goods and services
acquired
Human resources and payroll  Acquisition of services from
employees
 Payment for the services acquired
Production or conversion  Production of entity’s product for
sale
Financing and investing  Generation of capital funds from
outside investors
 Investment of capital funds to
another profitable activities

REVENUE AND RECEIPT CYCLE

Business functions  Resources are distributed to customers in exchange
for promises of future payments
 Customers pay cash for resources distributed to them
Accounts affected  Sales and related sales return, allowances and
discount
 Receivable, allowance for bad debts and bad debts
expense
 Cash
Departments involved Revenue
 Sales or customer order
 Credit
 Inventory control or Warehouse
 Shipping
 Billing
 Accounting (inventory, receivable and general)
Receipt
 Mail room or receptionist
 Treasury
 Accounting (receivable and general)
Forms or documents received, initiated and processed
Form Description Initiated by: Distributed to:
Sales order(order Contains the details Sales department  Customers
slip; customer of goods  Credit
order) ordered(quantity,  Shipping
prices and payment  Billing
terms)
Shipping Describes the goods Shipping  Carrier
document(bill of to be shipped and department  Customers
lading or delivery serves as contract  Billing
receipt) between entity and
carrier
Sales Describes the goods Billing department  Customers
invoice(billing sold, amount due  Accounting
statement) and the terms of
payment
Remittance advice Intended to Billing department  Customers
facilitate the
accounting for cash
collection
Daily summaries Summarizes Receivable and  General
transactions treasury (for sales accounting
recorded during the and collection,  Treasury and
day by the different respectively) receivable
department Mail room (for mail
received)

Important notes to forms or documents processed

1. The department that initiated the processing approves the form.
2. The department that initiated the processing is accountable for unused forms. Also,
access to those forms shall be limited to the said department.
3. The notification of forms does not necessarily mean a hard copy shall be forwarded.
Notification can be done thru electronic mail.
4. The department that initiated, received or processed a form shall retain a copy for
filing (not necessarily hard copy).
Functions of Departments in the Revenue Cycle
A. Sales department
Primary objective: To increase entity’s sales
Activities Possible controls
1. Locates and encourages buyers  Sales department has an
2. Negotiates terms with buyers exclusive function to
3. Accepts customer orders communicate with the customer
4. Prepares sales order and  Entity maintains list of
distribute copies to customers, authorized customers to
credit, shipping and billing minimize exposure to high-risk
5. Retains copy in unfilled order customers
file  Entity maintains range of selling
6. Monitors the status of the order prices for its products
7. Updated the customers as to the
status of the order
B. Credit department
Primary objective: To minimize exposure to high-risk customers
Activities Possible controls
1. Receives and reviews sales order  Entities establish a credit
from sales department department that is independent
2. Conducts credit investigation with the sales department
3. Approves credit request by  Credit department issues list of
preparing a memo or placing authorized customers
“approved” mark in the sales
order
4. Notifies sales department as to
the approval/disapproval of the
credit request
5. Forwards the approved sales
order to inventory control

C. Inventory control department

Primary objective: To control transfers of inventory in and out of storage areas,
monitor inventory levels and report slow-moving or damaged items
Activities Possible controls
1. Reviews approved sales order  Inventory control that provides
received from the credit access to sales department to
department inventory levels
2. Monitors the availability of  Different inventory management
goods ordered concepts which are applied to
3. Authorizes the issuance of goods provide reasonable assurance to
to the shipping department the availability of goods when
4. Forwards the approved sales needed
order to shipping department

D. Shipping department
Primary objective: To provide reasonable assurance that all shipments are
authorized and customers are billed
Activities Possible controls
1. Compares sales order from sales  Shipping documents that are
department with goods and pre-numbered and assure that
approved sales order from related billings are made on a
inventory control periodic basis
2. Completes shipping documents
and prepares goods for
shipments
3. Release goods to carrier and
obtains receipt
4. Notifies sales department that
goods have been shipped
5. Forwards the shipping
documents and approved sales
order to Billing department

E. Billing department
Primary objective: To provide reasonable assurance that all billings are shipped.
 Activities Possible controls
1. Compares the following  Pre-numbered sales invoice
documents:  Shipping document must be
a. Sales order from sales present before preparation of
department sales invoice
b. Approved sales order and
shipping document from
shipping department
2. Prepares sales invoice and send
copies to customers (thru the
carrier) and to inventory
accounting
3. Prepares remittance advice and
send copy to customers (thru the
carrier)

F. Accounting department
 Inventory: provides cost information on the goods sold to be forwarded to
General accounting and records transactions related to the cost of goods sold.
 General: records the sale and forward sales invoice and related documents to
Account receivable
 Accounts receivable: updates subsidiary ledger related to customer’s
account
Functions of Departments in the Receipt Cycle
A. Mail room or Receptionist
 Receives remittance advises and customer checks from customers
 Prepares list of receipts
 Endorses checks and list of receipts to the treasury department
 Endorses remittance advices and list of receipts to the accounts receivable
department
B. Treasury department
 Updates cash records
 Prepares deposit slips
 Prepares cash summaries, sends copy to Accounts receivable and general
accounting, and retains a copy
 Deposits cash collection to the bank
C. Accounting department
 Accounts receivable: compares remittance advice from mail room and cash
summaries to be forwarded from treasury, updates subsidiary ledgers and
prepares daily summaries to be forwarded to general accounting
 General: compares daily summaries from treasury and accounts receivable,
then, updates general ledgers
Other Activities in The Revenue and Receipt Cycle
Uncollected accounts
1. Accounts receivable
 Review individual customer accounts periodically as a check against credit
limits
 Prepare monthly accounts receivable trial balances for reconciliation with the
general ledgers
2. Authorized personnel independent of credit department
 Review and age accounts receivables balances periodically
 3. Authorized personnel who reports to the treasure and independent of recording
functions or Treasurer to authorize the write-off
 In case of delinquent account, such account should be reviewed
 If judged to be uncollectible, written authorization to write off should be sent
to accounts receivable and general accounting
Sales returns and allowances
A. Sales department
 Reviews customer’s request for returns and allowances
 Grants sales returns and allowances and prepares credit memo which is
forwarded to customer, accounts receivable (for recording). And inventory
control (for returns)
B. Inventory control
 Compares goods received through the receiving department and credit memo
C. Accounting
 Inventory: updates inventory records upon receipt of goods and prepare
daily summaries to be forwarded to general accounting
 Accounts receivable: update records based on the credit memo received and
prepares daily summaries to be forwarded to the general accounting
 General: compares daily summaries from inventory and accounts receivable,
then, updates general ledgers
EXPENDITURE AND DISBURSEMENT CYCLE
Business functions  Resources are acquired from vendors in exchange for
obligations to pay
 Entity pays cash to vendors and employees
Accounts affected  Purchases (e.g. inventory and supplies)
 Purchase returns, allowance and discount
 Payables
 Cash
Departments involved Expenditure
 User (any department within the entity)
 Purchasing
 Receiving
 Accounts payable
 Accounting (inventory, receivable and general)
Disbursement
 Treasury
 Accounting (receivable and general)

Forms or documents received, initiated and processed

Form Description Initiated by: Distributed to:
Requisition slip Contains the details User department  Purchasing
(purchase of the user
requisition) department’s
request
Purchase order Describes the goods Purchasing  Vendor
to be acquired department  User
(quantity and  Receiving
description)  Accounts
payable
Receiving report Describes the goods Receiving  Purchasing
to be received department  Accounts
(quantity, payable
description and
condition)
Shipping Describes the goods Vendor (thru the  Receiving
document to be shipped and carrier) department
serves as contract
between the entity
and carrier
Vendors invoice Describes the goods Vendor  Accounts
sold, amount dues payable
and the terms of
payment
Daily summaries Summarizes Accounts payable  General
transactions (for purchases) accounting
recorded during the Treasury (for
day by the different payment)
department

Functions of Departments in Expenditure Cycle

A. User department
 Prepares requisition slip to be forwarded to purchasing and accounts payable
departments
B. Purchasing department
Primary objective: To meet the specific needs of the user department at the least
possible cost
Activities Possible controls
1. Receives approved requisition  Purchasing department has an
slip from the user department exclusive function to
2. Locates vendor and negotiates communicate with the vendor
with terms  Entity maintains list of
3. Prepares purchase orders and authorized vendors
distributes copies to vendor,  Entity compares purchase price
receiving and accounts payable to market prices
4. Monitors the status of the order
5. Updates customer as to the
status of the order

C. Receiving department
Primary objective: To provide reasonable assurance that received goods are based
on approved purchase order
Activities Possible controls
1. Files purchase orders until  To ensure that the receiving
goods are received department will count and check
2. Upon receipt, counts and checks the goods received, the
the goods for appropriate purchasing department sends a
quantity and condition blank purchase order
3. Reviews and compares purchase
orders from purchasing and
shipping document from the
carrier
4. Prepares receiving reports to be
forwarded to purchasing and
accounts payable accompanied
by supporting documents
(purchase orders from
purchasing and shipping
document from the carrier)

D. Accounts payable department

Primary objective: To provide reasonable assurance that payments will only be
made to shipments received
Activities
1. Reviews and compares
requisition slip, purchase order,
receiving report and vendors
invoice (3-way match)
2. Prepares voucher
3. Prepares voucher package
(requisition slip, purchase order,
receiving report, vendors invoice
and voucher) and daily summary
to be forwarded to the treasury
and general accounting,
Possible controls
 Voucher should be supported by
purchase order, receiving report
and supplier’s sales invoice or
any other supporting document
 Accounts payable department
files voucher package by due
date so as to pay liability on time
and take advantage of discounts,
if any
 respectively
E. Treasury department (Disbursement)
Activities
1. Reviews voucher package
received
2. Prepares check and have it
signed by authorized signatories
3. Forwards checks to vendors
4. Prepares daily summary which
is to be forwarder to general
accounting
Possible controls
 The person last signing the check
cancels the voucher package by
placing a mark such as “paid”,
“cancelled” or check number
 Entity may adopt any of the
following in relation to issuance
of checks
- Check over a certain amount
should have an identified
payee
- No checks shall be issued
without an identified payee
- Checks should be signed by
at least two authorized
persons
HUMAN RESOURCES AND PAYROLL CYCLE
Human resources and payroll cycle is a continuation of the expenditure and disbursement
cycle. This cycle covers the entity’s acquisition of services from its employees or personnel.
The following are main reasons why the auditor is concern with this cycle.
a. Payroll include different categories of employee benefits (short-term; post-
employment, other long-term and retirement) that could significantly affect major
elements of financial statements; and
b. For most entities, significant amount of resources is incurred
Business functions  Services are received from employees in exchange for
obligation to pay
 Entity pays cash to employees
Accounts affected  Salaries and wages expense and payable
 Premiums expense and payable
 Withholding taxes payable
 Inventories (for inventoriable salaries and wages)
 Cash
Departments involved Expenditure
 User (any department within the entity)
 Human resources (HR) or Personnel
 Payroll
 Accounting (inventory, receivable and general)
Disbursement and distribution
 Treasury
 Accounting (general)

Forms or documents received, initiated and processed

Form Description Initiated by: Distributed to:
HR records It contains all HR department  Payroll
(Personnel records information related (limited to
or 201 file) to entity’s payroll
employees from the related
time they are hired information
up to their eventual only
termination. It
documents all
actions taken by the
employees or
management on
behalf of an
employee.
Commonly, it also
documents salary
rate, deductions and
other payroll related
information
Daily Time Record Describes the User department  Payroll
(DTR) number of hours
worked by an
employee during a
particular day
covered by a pay
period
Payroll register Shows all related Payroll  Treasury
payroll information  General
(gross pay, all accounting
deductions and net
pay) for each pay
period
Labor cost Shows payroll Payroll  Inventory
summary information which accounting
is capitalizable or
can be attributed to
a particular job or
customer order
Employee earnings Shows the Payroll  Accounts
record cumulative, year-to- payable
date summary of
earnings and
deductions of every
employee
Daily summaries Summarizes Payroll (for liability  General
transactions recognition) accounting
recorded during the Inventory (for
day by the different inventoriable labor
department costs)
Treasury (for
payment)

Functions of Departments in Human Resources and Payroll Cycle

A. User department
Primary objective: To ensure that the time records prepared by employees represent
the actual hours worked during a pay period
Activities Possible controls
1. Monitors and approves daily  Appropriate review activities
time records shall be made to ensure the
*Note: However, due to introduction validity of daily time records
of computerized human resources prepared by employees
systems, time records are  In case of computerized systems,
commonly tracked through approval of any exceptions shall
biometrics and access devices be made by the user department
head

B. HR department
Primary objective: To ensure employees included in the payroll are rendering
services to the entity
Activities Possible controls
1. Initiates, updates and maintains  Access, including initiating
HR records changes, to HR records shall be
2. Forwards payroll related limited only to HR department
information to payroll  Information not relevant to
department (e.g. salary and payroll calculation shall not be
wage rates, bonuses, overtime shared to other departments
pays, and payroll deductions)
3. Determines terms of settlement
(lump-sum or installment) in
 case of termination of
employee/s
4. Immediately notify payroll
department of terminated
employee to avoid inclusions of
these employees in the
subsequent calculations

C. Payroll department
Primary objective: To provide reasonable assurance that the payroll calculation in
every pay period is valid
Activities Possible controls
1. Receives and reviews relevant  Appropriate level of
payroll related information from management (preferably a
HR and user departments member who is not involved in
2. Considers any update on payroll preparation) reviews the
employees’ pay rates and payroll register for accuracy and
deductions reasonableness
3. Prepares payroll register  To assure adequacy of
4. Updates cumulative employee segregation of duties, payroll
earnings records department should be
5. Identifies and submits to segregated from HR, Treasury
inventory accounting and some user departments
capitalizable payroll in case of
servicing and manufacturing
companies with inventoriable
labor costs

D. Treasury department (Disbursement)

Primary objective: To provide reasonable assurance that all payroll cash
disbursements are based upon a recognized liability or actual services rendered by
employees
Activities Possible controls
1. Reviews payroll register  Separate bank account should be
received maintained exclusively for
2. Prepares checks and have it payroll disbursements
signed by authorized  On a surprise basis, an employee
signatories* independent from payroll and
3. Distributes checks to employees user departments may
4. Prepared daily summary which distribute paychecks. The
is to be forwarded to general purpose of this is to identify
accounting whether or not fictitious
employees exists
*Note: Most companies disburse  Unclaimed payroll checks shall
payroll through bank fund transfers be re-deposited to the bank
from company’s payroll fund to
individual employees’ payroll
account. In this case, the treasury
department should be the one
authorizing the bank transfer

E. Accounting department
Primary objective: To provide reasonable assurance that items related to payroll are
appropriately classifies and recorded in correct accounting period at appropriate
amounts
 Inventory: records inventoriable labor costs to appropriate jobs or customer
account and forward a daily summary to general accounting
 General: reviews daily summaries and documents received from Payroll,
Treasury and Inventory departments. It records the recognition of payroll
related expenses and liabilities in the general journal
PRODUCTION OR CONVERSION CYCLE
Production or conversion cycle covers the production of entity’s product for sale. It is
where materials, labor and overhead are converted into finished goods.
The primary objective of this cycle is the proper valuation of inventories and cost of goods
sold. Such objective encompasses the proper allocation of costs to each run made by the
production department. In order to attain this, the production department uses inputs from
the expenditure and disbursement cycle and provides resources and information to
revenue and receipt cycle.
Control-related duties and responsibilities
Duties and Person/s assigned to Procedures performed by
responsibilities perform the function auditor
Custody Physical custody of Auditor observes physical
materials and labor count and reconciles the
documents is normally held result of such count to
by the production entity’s records.
department If held by other parties,
Since most of the assets auditor may send
here are highly susceptible confirmation requests to
to theft and the custodian (e.g.
misappropriation, adequate consignees, agents, or
physical controls must be branches)
implemented
Authorization the production department Auditor reviews production
is authorized to make orders and related
normal production runs documents supporting
however, in case of special production runs made by
runs (to meet a special the department to
order), authorization must determine whether it bears
come from the board of the necessary authorization.
directors or its authorized
representative.
Recording Transactions are recorded Auditor normally reviews
by the cost accounting. the
Daily summaries are then  Competency of the
prepared and forwarded to individuals making
general accounting for journal entries
recording and posting in the  Reconciliation of the
general journal and ledger, general ledger
respectively.
FINANCE AND INVESTMENT CYCLE
Finance and investment cycle generally involves three major categories of transactions:
investments, long-term debts, and shareholders’ equity. It covers complicated processes
such as accounting for investments, mergers, long-term liabilities, and equity transaction.
This cycle normally involves few but significant amounts of resources. Thus, auditor
commonly employs substantive testing to gather sufficient appropriate evidence. However,
it must be noted that prior to designing of substantive test procedures, control-related
duties and responsibilities is one of the major consideration of the auditor.
Control-related duties and responsibilities
Finance Cycle
Duties and Person/s assigned to Procedures performed by
responsibilities perform the function auditor
Custody Unissued equity and debt Auditor inquires directly to
certificates must be kept by assigned custodians
appropriate internal official If held internally, auditor
(e.g. Corporate Secretary) observes the accounting of
or independent external unissued certificates
custodian
Authorization As mentioned, transactions Auditor reviews minutes of
covered in this cycle involve the board directors
large amounts of cash or meetings
other resources. With this,
transactions shall be
approved by the board of
directors
Recording Transactions are recorded Auditor normally reviews
in the general journal by the
personnel in the general  Competency of the
accounting individuals making
journal entries
 Reconciliation of the
subsidiary and
general ledgers

Important notes:
1. In case of settlement of equity or debt securities previously issued, the certificate is
cancelled thru perforation (e.g. the certificate is shredded). The purpose of this is to
avoid duplicate payments. The supporting records and documents are then kept as
audit trail of the transactions.
2. In case of debt instruments, the general accounting shall appropriately monitor any
accruing interests from liabilities.
Control-related duties and responsibilities
Investment Cycle
Duties and Person/s assigned to Procedures performed by
responsibilities perform the function auditor
Custody Generally, investment Auditor inquires directly to
certificates are kept as assigned custodians thru
follows: sending of confirmation
  Negotiable requests.
certificates- If held internally, the
brokerage account auditor observes the
 Titles to real estate- accounting for certificates
may be kept in a safe held
with the entity or
bank safe deposit
box
Authorization As mentioned, transactions Auditor reviews minutes of
covered in this cycle involve the board of directors
large amounts of cash or meetings.
other resources. With this,
transactions shall be
approved by the board of
directors or by an
investment committee
Recording Transactions are recorded Auditor normally reviews
in the general journal by the
personnel in the general  Competency of the
accounting individuals making
Moreover, most companies journal entries
monitor transactions in the  Reconciliation of the
investment cycle through a subsidiary and
subsidiary ledger/s general ledgers
maintained by the treasury
department

Important Notes:
1. Regardless of the manner of safekeeping, access to these certificates is given at least
two high-ranking officers (e.g. President, Treasurer, CEO, COO, CFO, or Chairman of
the Board)/ this control is sometimes called dual control or joint custody.
2. The auditor normally requests for the conduct of securities count in the financial
institutions holding the client’s certificates.