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Transaction Cycles

Transaction cycles process activities like sales, purchases, production, and payroll. There are five main categories of cycles: revenue/receipts, expenditures/disbursements, human resources/payroll, production/conversion, and financing/investing. It is the entity's responsibility to design controls for each cycle to reliably and consistently process transactions. The auditor needs to understand these cycles to effectively plan and perform the audit and determine if financial reporting and balances are fairly presented.

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1K views

Transaction Cycles

Transaction cycles process activities like sales, purchases, production, and payroll. There are five main categories of cycles: revenue/receipts, expenditures/disbursements, human resources/payroll, production/conversion, and financing/investing. It is the entity's responsibility to design controls for each cycle to reliably and consistently process transactions. The auditor needs to understand these cycles to effectively plan and perform the audit and determine if financial reporting and balances are fairly presented.

Uploaded by

Adan Nada
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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TRANSACTION CYCLES

Transaction cycles are the means through which an accounting system process 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.

Categories

To understand these transaction cycles, we explore the nature of these cycles using the following five
categories of interrelated major cycles:

Category Inclusion
Revenue and receipt  Receives order from the customer
 Examines the order for credit worthiness
 Ships goods or provides services to customer
 Issues an invoice
 Collects payment
Expenditure and disbursement  Issues a purchase order to a supplier
 Receives the goods or services
 Records the related liability
 Pays the supplier
Human resources and payroll  Acquires services from employees
 Monitors and records the time of its
employees
 Verifies hours and overtime worked
 Calculates gross pay deductions, and net pay
 Pays the employees
Production or conversion  Monitors and records the production of
entity’s product for sale
Financing and investing  Generates capital funds from outside
investors
 Invests capital funds to other profitable
activities
Entity’s responsibility

A key role of the entity, through its management and those charged with governance, is to design and
implement appropriate set of policies, procedures, forms, and integrated controls for each of these
transaction cycles to ensure that transactions are processed in as reliable and consistent manner as
possible.

Auditor’s objective

The auditor should consider and obtain an understanding of these transaction cycles sufficient to plan
the audit and develop an effective and efficient audit approach. Moreover, the auditor will give
emphasis to the following objectives.
 To determine the reliability of financial reporting of the different functions affected by each
transaction cycle.
 To determine the fairness of presentation in accordance with applicable financial reporting
framework of the account balances affected by each transaction cycle.

UNDERSTANDING THE TRANSACTION CYCLES

For a better understanding of these transaction cycles, reader should be aware of the following basic
concepts of each cycle.

General objectives

The following are general objectives of transaction cycles:

 To promote adequate segregation of incompatible duties


 To provide safeguards to the entity’s resources

Basic concepts

1. Departments involved, including its functions, objective, and possible control that may be
implemented.
2. Forms or documents initiated and processed the following are the important concepts related to
forms or documents initiated and processed.
a. The department that initiated the processing approves the form
b. The department the initiated the processing is accountable for unused forms. Also,
access to those forms shall be limited to the said department.
c. The notification of forms does not necessarily mean a hard copy shall be forwarded.
Notification can be done thru electronic mail.
d. The department that initiated, received or processed a form shall retain a copy for filing
(not necessarily a hard copy)

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