Specific Transaction Cycles

Question 1

Define Transaction Cycle?

Answer 1

A group of fairly homogeneous transactions.

A type of transaction

Question 2

What are some examples of transaction cycles?

Answer 2

• Revenue/ Receipts
• Expenditures/disbursements
• Payroll

Other categories:

• Production/manufacturing inventory
• Fixed assets (PP&E)
• Financing/investing

Question 3

Why do auditors focus on these transaction cycles?

Answer 3

Its the highest level at which we can treat control risk at a constant.

It is efficient

Question 4

Internal control consists of 5 interrelated components, what are those 5 components?

Answer 4

1) Control environment- tone at the top
2) Risk assessment- policies and procedures to identify risks to the entity
3) Information and communication systems- gathering and processing, distributing information on a timely basis
4) Control actives- Policies and procedures that help ensure management directives are being carried out
5) Monitoring- Obtain an understanding of all of the above

Question 5

What are the components of control activities: SCARE

Answer 5

SCARE:

Separation of Duties 
Controls (Physical Controls) 
Authorization 
Review (Performance Review) 
EDP/IT (Information Processing)

Question 6

What are examples of controls (physical controls)

Answer 6

Computer passwords should be used to limit unauthorized access to accounting systems

Any inventory involved should be secured with limited authorized personnel

Question 7

What are examples of authorization?

Answer 7

Management should review the terms of sales transactions and indicate that approval on the sales invoice (billing)

Management should usually establish general approvals of transactions within specified limits and specially approved transactions outside of those prescribed limits

Management should approve the entities adjusting entries

Question 8

What are examples of reviews (performance review)

Answer 8

The entity’s recorded sales should be compared to appropriate budgets and forecasts

Related accounting documents should be compared on a timely basis- sales invoices and shipping documents should be compared to verify that sales transactions were recorded in the proper period

Question 9

What are examples of EDP/IT (Information Processing)

Answer 9

The auditor should agree that financial statement amount(s) to the applicable general ledger accounts

1) Important accounting documents should be renumbered and the numerical sequence should be accounted for
2) A trial balance for A/R should be agree to the general ledger control account