💡 Pro-Tip for your Exam: 1.

Finding Buyers: Locating and

encouraging people to buy the product or
If you are asked about "Internal Controls," service.
remember that the most important rule is 2. Negotiation: Working out the specific
Segregation of Duties. For example, the person terms (price, delivery dates) with the
who takes the cash (Treasury) should never be buyer.
the same person who writes off a customer's 3. Acceptance: Officially accepting the
debt (Accounting). If one person did both, they customer's order.
could steal the cash and hide it by saying the 4. Documentation: Preparing the Sales
customer just didn't pay. Order and sending copies to the
Customer, Credit, Shipping, and Billing
departments.
5. Filing: Keeping a copy of the order in an
duties are separated so no one can "cook the "unfilled order file" until it's finished.
The most important thing to remember for your 6. Monitoring: Keeping an eye on where
studies is who does what. In a healthy the order is in the process.
business, books": 7. Customer Service: Giving the customer
status updates on their order.
 The Sales/Credit departments approve
the deal.
 The Warehouse/Shipping departments
handle the physical goods. The "Why" Behind the Rules (Possible
 The Billing/Accounting departments Controls)
handle the record-keeping.
 The Mail room/Treasury departments To make sure the Sales Department doesn't
handle the actual money. make mistakes or take unnecessary risks,
businesses put "controls" (safety rules) in place:
Key takeaway: If the person who ships the
goods (Shipping) is the same person who tells  Communication Gateway: The Sales
the customer how much they owe (Billing), they department is often the only group
could easily steal inventory and hide it in the allowed to talk directly to customers
paperwork. This is why these departments must about orders. This prevents confusion or
remain separate. conflicting information from other
departments.
 Authorized Customer Lists: The
company keeps a list of "approved"
customers. This helps the business avoid
. The Sales selling to "high-risk" customers who might
not pay their bills.
Department  Set Price Ranges: Salespeople aren't
The primary goal of this department is usually allowed to just make up prices on
straightforward: to increase the entity’s sales. the fly. The company maintains a specific
They are the "front line" that connects the range of selling prices to ensure they stay
company to its customers. profitable.

Core Activities Key Takeaway for You

Think of these seven steps as the roadmap for

every single sale:
The Sales Department starts the "domino effect" Department. This prevents a salesperson
of the entire Revenue Cycle. By creating the from approving a "bad" customer just to
Sales Order, they provide the instructions that get a commission.
every other department (Shipping, Billing, and
Accounting) will follow to finish the transaction.  Authorized List: They maintain an
official list of authorized customers who
are pre-approved to buy on credit.
The Credit
Department
Moving to the Credit Department, this section The Inventory
of your handouts focuses on the company's
"financial gatekeeper." Its primary goal is to Control Department
minimize exposure to high-risk customers. In
simple terms: they make sure the company only
Think of this department as the "guardians of the
sells to people who are actually going to pay
goods." They ensure that the company actually
their bills.
has what the customer wants and authorizes
those items to be moved toward the shipping
dock.
Core Activities of the Credit Department
Core Activities
The Credit Department acts as a checkpoint
The workflow for Inventory Control follows a
before any goods actually leave the warehouse:
strict sequence once an order is confirmed as
"safe" by the Credit department:
1. Reviewing Orders: They receive and
check the Sales Order sent by the Sales
1. Review: They examine the approved
Department.
sales order coming from the Credit
2. Credit Investigation: They research the
department.
customer's financial history to see if they
2. Availability Check: They monitor
are trustworthy.
whether the specific goods ordered are
3. Approval: If the customer passes the
actually in stock.
test, they prepare a memo or stamp the
3. Issuance Authorization: They officially
Sales Order as "approved".
authorize the warehouse to release the
4. Notification: They tell the Sales
goods to the Shipping Department.
Department whether the request was
4. Handoff: They forward the approved
approved or denied.
sales order to the Shipping department to
5. Passing the Baton: Once approved,
keep the process moving.
they forward the Sales Order to Inventory
Control so the items can be picked for
shipping.
Important Controls (Safety Rules)

Because inventory is essentially "cash sitting on

Important Controls (Safety Rules)
a shelf," companies use these rules to prevent
waste or theft:
Because the Sales Department wants to sell as
much as possible, and the Credit Department
 Visibility for Sales: The department
wants to be cautious, the business must keep
provides the Sales Department with
them separate to prevent risky decisions.
access to real-time inventory levels. This
prevents salespeople from selling items
 Independence: The Credit Department
that are out of stock.
must be independent of the Sales
  Management Concepts: They apply To prevent errors or theft, the Shipping
various inventory management strategies department follows these common controls:
to provide "reasonable assurance" that
goods are available exactly when  Pre-numbered Documents: Shipping
needed, avoiding lost sales due to empty documents are pre-numbered and
shelves accounted for. This prevents "missing"
shipments or unauthorized goods leaving
the building without a record.
 Billing Reconciliation: They ensure that
related billings are made on a periodic
basis. This means they check that every
Moving to the Shipping Department, this section box that left the dock actually resulted in
of your handouts focuses on the point where the a bill sent to a customer.
product finally leaves the company's hands. Its
primary objective is to provide reasonable
assurance that all shipments are authorized.
Moving to the Billing Department, this section
Think of this department as the "final security of your handouts focuses on the final stage of
gate." They ensure that nothing leaves the the "Revenue" side of the cycle. Its primary
building unless it has been properly vetted and objective is to provide reasonable assurance
documented by the Sales, Credit, and Inventory that all shipments are billed. In short, they
departments. make sure the company actually asks for the
money it is owed.
Core Activities

The shipping process involves several critical

checks and balances:
The Billing
1. Verification: They compare the sales
order from the Sales department with the
Department
Think of this department as the "accountability
physical goods and the approved sales hub." They connect what was ordered with what
order from Inventory Control. This was actually shipped to create an accurate bill
ensures they are sending exactly what for the customer.
was ordered and approved.
2. Documentation: They complete the Core Activities
shipping documents (like a Bill of Lading)
and prepare the actual goods for The billing process relies on double-checking
transport. information from other departments to ensure
3. Handoff: They release the goods to the accuracy:
carrier (the delivery service) and obtain a
receipt as proof of the handoff. 1. Document Comparison: They compare
4. Notification: They inform the Sales three critical documents:
department that the goods have officially o The sales order from the Sales
been shipped.
department.
5. Completion: Finally, they forward the
o The approved sales order from
shipping documents and the approved
the Credit/Inventory departments.
sales order to the Billing department so
o The shipping document from the
the customer can be invoiced.
Shipping department.
2. Invoicing: Once the documents match,
they prepare the sales invoice.
3. Distribution: They send copies of the
Important Controls (Safety Rules)
invoice to:
 o The customer (often via the the cost of the products leaving the
carrier). warehouse and forward this data to
o Inventory accounting to update General Accounting.
the records.
2. General Accounting

 Recording Sales: This is the central hub

Important Controls (Safety Rules) that officially records the sale in the main
books.
To prevent errors or fraud, such as billing for  Document Management: They receive
things that weren't shipped, these controls are the sales invoice and forward it, along
used: with any related documents, to the
Accounts Receivable team.
 Pre-numbered Sales Invoices: Using
pre-numbered invoices allows the 3. Accounts Receivable
company to account for every bill and
ensures none are missing or duplicated.  Customer Records: They are
responsible for updating the subsidiary
 Proof of Shipment Required: A ledger.
shipping document MUST be present  Individual Debt Tracking: This ensures
before a sales invoice can be prepared. the company knows exactly how much
This prevents the company from each specific customer owes after a sale
accidentally (or intentionally) billing a is made.
customer for goods that never left the
warehouse.

The Accounting
Department
This discussion focuses independently on the
Receipt Cycle (Collections), which is the
Moving to the Accounting Department, this
"getting paid" half of the Revenue and Receipt
section of your handout explains how the
process. While the previous steps were about
physical movement of goods and the paperwork
selling and shipping, these departments are
from billing are finally turned into financial data.
strictly responsible for handling the actual
This is the "brain" of the cycle where all activities
money coming into the business.
are recorded in the company's permanent
records.

Summary of Functions: The Receipt Cycle

The accounting function is divided into three The primary goal here is to ensure that every
specific roles to ensure that every part of the check or payment received from a customer is
sale is tracked correctly. recorded accurately and deposited safely into
the bank.
1. Inventory Accounting
A. Mail Room or Receptionist
 Cost Tracking: They provide the actual
cost information for the goods that were This is the first point of entry for payments sent
sold. by mail. Their role is to provide an initial record
 Cost of Goods Sold (COGS): They of what arrived to prevent theft.
record transactions specifically related to
  Receives Payments: Collects the o Updates the general ledgers to
remittance advices (the payment notes) reflect the increase in the
and the actual customer checks. company's total cash.
 Creates a List: Prepares an initial "list of
receipts" so the company knows exactly
what was received before it is moved.
 Separates the Flow:
o Sends the checks and the list to
the Treasury Department (the 💡 Critical Importance: The "Separation of
money handlers). Duties"
o Sends the remittance advices and
the list to the Accounts Receivable In this cycle, it is vital to remember the
Department (the record keepers). separation between those who handle the
money and those who keep the records:
B. Treasury Department
 Treasury has the cash but cannot
The Treasury is the "custodian" of the cash. change customer accounts.
They handle the physical money and the  Accounting can change customer
relationship with the bank. accounts but never touches the physical
cash.
 Record Keeping: Updates the  Why? If one person did both, they could
company’s internal cash records. steal a check and simply "delete" the
 Banking: Prepares the deposit slips and customer's debt in the computer so no
physically deposits the collection into the one would notice the money was missing.
bank.
 Reporting: Creates "collection
summaries" and sends copies to
Accounts Receivable and General Managing Uncollected Accounts
Accounting so they can match the bank
deposit to the sales records. This process is a "safety check" to ensure the
company isn't counting money it will never
C. Accounting Department (Receipt Phase) actually receive.

This department performs the final "check and 1. Role of Accounts Receivable
balance" to ensure the money in the bank
matches the money customers say they paid. The Accounts Receivable department performs
regular "health checks" on customer debt:
 Accounts Receivable:
o Compares the remittance advice  Credit Limit Review: They periodically
(from the Mail Room) against the check individual customer accounts to
cash summaries (from Treasury). see if they have exceeded their allowed
o Updates the subsidiary ledgers to credit limits.
show that the individual customer  Reconciliation: They prepare monthly
no longer owes that money. trial balances to ensure that the sum of
o Forwards a daily summary to all individual customer debts (Subsidiary
General Accounting. Ledger) matches the total debt shown in
 General Accounting: the main company books (General
o Acts as the final reviewer by Ledger).
comparing summaries from both
Treasury and Accounts 2. Aging and Monitoring
Receivable.
To stay organized, authorized personnel who  Review: They look at the customer's
are independent of the Credit Department request to see if it’s a valid reason for a
perform these tasks: return.
 Credit Memo: If they agree, they prepare
 Aging Reports: They periodically review a credit memo. This is a document that
and "age" the accounts. tells the customer, "You no longer owe us
o Note: "Aging" means grouping for this amount."
debts by how old they are (e.g., 30  Distribution: They send the memo to the
days overdue vs. 90 days customer, Accounts Receivable (to
overdue) to see which customers lower the debt), and Inventory Control
are the biggest risks. (to expect the items back).

3. Authorizing Write-offs 2. Receiving Department (The Physical

Check)
If a customer simply cannot pay (delinquent
account), the debt may need to be "written off" This department handles the actual box coming
(removed from the books as a loss). back into the building.

 Delinquent Review: Any account that is  Receive Goods: They take the physical
severely behind must be reviewed before items from the customer or carrier.
action is taken.  Receiving Report: They write a report
 Final Approval: To prevent fraud, the confirming exactly what was received and
person authorizing a write-off must be in what condition.
independent of the recording
functions. 3. Inventory Control (The Reconciliation)
 Authority: Only the Treasurer or a
specific authorized person reporting to They act as the "middleman" to make sure the
them has the power to officially authorize paperwork matches the physical reality.
a write-off.
 Comparison: They compare the
receiving report (what came back) with
the credit memo (what the sales team
Important Concepts to Remember promised the customer).

 Independence is Key: The person who 4. Accounting Department (The Recording)

records the debt (Accounting) cannot be
the one who decides to "forgive" or write Finally, the "books" are updated to reflect that
off the debt (Treasurer/Authorized the sale has been reversed.
Personnel). This prevents someone from
hiding stolen money by just writing off a  Inventory Accounting: They update the
customer's balance. stock records based on the receiving
 SL-GL Reconciliation: Always report and tell General Accounting.
remember that the Subsidiary Ledger  Accounts Receivable: They update the
(SL) must match the General Ledger customer's individual account using the
(GL). If they don't, it means there is an credit memo so the customer isn't billed
error or a missing transaction somewhere for the returned item.
in the cycle.  General Accounting: They compare the
summaries from both Inventory and
1. Sales Department (The Approval) Receivable and then update the General
Ledger.
The process starts here because they own the
relationship with the customer.
 This is split into two phases: Expenditure
(ordering/receiving) and Disbursement (actually
paying).

 User Dept: The person who says "Hey, we

need more pens/parts!"
 Purchasing: The "shoppers" who find the
best price and place the order.
The Purchase to Pay (P2P)  Receiving: The "warehouse" people who
Cycle 
check the boxes when they arrive.
Accounting: The "record keepers" who make
sure the math matches and record the debt.
This table breaks down the Purchase to Pay (P2P)  Treasury: The "bankers" who actually sign
cycle, which is basically the "shopping and bill- the checks or send the wire transfers.
paying" process for a business.

Think of it like this: A company needs stuff to run,

they buy it from a supplier, they receive the items, 💡 Key Things to Memorize
and then they pay the bill. Here is the simplified
breakdown of what you need to know: If you are studying for an exam, focus on these
"Must-Knows":

1. Business Functions (The "What")

This is the core purpose of the cycle. It’s split into

two main actions:

 Getting Stuff: The business gets resources

(like inventory or office supplies) from
vendors. Instead of paying immediately, they
usually create an obligation to pay (a debt). 💡 Important Distinction
 Paying for Stuff: The business eventually
sends actual money (cash) to the vendors and In the Revenue Cycle, you are the Seller (getting
their own employees. cash). In the Purchase to Pay Cycle, you are the
Buyer (spending cash).
2. Accounts Affected (The "Accounting")

When these things happen, specific "folders" in the

company's accounting books are updated:

 Purchases: Tracks the cost of inventory and

supplies coming in.
 Purchase Returns/Allowances: Tracks stuff
you sent back because it was broken or
wrong.
 Payables (Account Payable): The list of
money you owe but haven't paid yet.
 Cash: The money leaving your bank account
to pay the bills.

3. Departments Involved (The "Who")

1. User Department (The "Requester")  Cost Control: Purchasing’s primary goal is least
possible cost.
This is any department in the company that realizes
they need something (e.g., the IT department needs  Authorized Vendors: A company won't buy
new laptops). from just anyone; they must be on the authorized
list.
 Primary Action: They prepare a requisition
slip. D. Accounts or Vouchers Payable
 The Flow: This slip is sent to two places: Department
Purchasing (so they know what to buy) and
Accounts Payable (so accounting knows a This department acts as the "Validator." Their
bill is coming). primary goal is to ensure the company only pays for
things that were actually ordered and received.
2. Purchasing/Procurement (The
"Shoppers")  The 3-Way Match: This is their most
important job. They compare three documents
Their main goal is to get exactly what the user needs to make sure everything matches:
for the lowest possible cost. 1. Purchase Order: What we asked for.
2. Receiving Report: What actually
arrived.
3. Vendor’s Invoice: What the seller is
charging us.
 Voucher Package: Once the math matches,
they bundle the requisition slip, purchase
order, receiving report, invoice, and
voucher together.
 Safety Check: They file these packages by
due date so the company pays on time,
C. Receiving Department (The
avoids late fees, and takes advantage of any
Gatekeeper) early-payment discounts.

Objective: To ensure that the goods arriving are E. Treasury Department (Disbursement)
exactly what was ordered.
This is the "Banker." They are the only ones who
actually move the money.

 Review: They look over the complete

voucher package sent by Accounts Payable
to make sure it's authorized.
 Payment: They prepare the check and have it
signed by authorized signatories.
 Mailing: They are responsible for forwarding
the check and the remittance (payment
details) to the vendor.

💡 Highlights to Memorize
 The "Blank PO": This is a very common exam
topic. Remember that Receiving gets a blank copy so  The 3-Way Match: Memorize this term. It is
they are forced to do an independent count of the the ultimate control to prevent paying for
goods. "phantom" goods or incorrect amounts.
  Voucher Package Components: Know
what's inside—Requisition, PO, Receiving
Report, and Invoice.
 Treasury's Unique Power: Only Treasury
should handle the actual cash/checks. This is
a "segregation of duties" to prevent fraud.
 Authorized Signatories: Checks aren't valid
unless signed by specifically designated
people, not just anyone in the office.

Summary of the "Relay Race"

1. User: Asks for the item (Requisition).

2. Purchasing: Orders the item (Purchase
Order).
3. Receiving: Counts the item (Receiving
Report).
4. Accounts Payable: Checks the math (3-Way
Match).
5. Treasury: Pays the bill
(Check/Disbursement).
 The cycle is split into two phases to ensure no one
can create "ghost employees" or steal funds.

A. Expenditure Phase (Setting up the pay)

 User Department: Any department where

the employee actually works.
 Human Resources (HR) / Personnel:
The Human Resources 
Handles hiring, firing, and salary rates.
Payroll: Calculates the math (hours worked
and Payroll Cycle 
$\times$ pay rate).
Accounting: Records the transaction in the
general ledger.

B. Disbursement and Distribution Phase

(Giving out the money)
The Human Resources and Payroll Cycle is
essentially the process of a business buying
"services" from its employees rather than physical  This involves the final movement of
goods. It is considered a sub-part of the overall cash/checks to the employees.
expenditure and disbursement cycle.

💡 Highlights to Memorize
1. Business Functions (The Purpose)
 Audit Concern: Auditors watch this cycle
 Acquiring Services: The entity receives closely because payroll includes many
work/labor from employees in exchange for different categories of benefits (short-term,
an obligation to pay them later. retirement, etc.) that significantly impact
 Paying Cash: The entity fulfills that financial statements.
obligation by paying cash to the employees.  High Resource Use: For most companies, a
"significant amount of resources" is spent on
this cycle, making it a high-risk area for
2. Accounts Affected (The "Money Trail")
errors.
 The HR vs. Payroll Split: In a good system,
When payroll is processed, these specific accounts
HR changes the pay rates, but Payroll
are updated in the books:
calculates the checks. This prevents a payroll
clerk from giving themselves a secret raise.
 Salaries and Wages Expense/Payable: The
cost of the labor and the debt owed to staff.
 Premiums Expense/Payable: Benefits and
insurance costs.
The Human Resources and Payroll Cycle is the
 Withholding Taxes Payable: Money kept
process where a company "buys" labor from its
from employee checks to be paid to the
employees and pays them for it. It is a critical area
government.
for auditors because it involves complex employee
 Cash: The actual money leaving the bank
benefits and is often a company’s largest expense.
account.
 Inventories: Used specifically for
"inventoriable" salaries and wages (labor
costs that go directly into making a product).
HR and Payroll: Key Documents and Flow
3. Departments Involved (The "Who")
 Here is the simplified flow of the Human Resource
(HR) and Payroll Cycle, based on the specific
documents you provided. This cycle covers how a
company gets services from employees and pays
them in cash.

The HR & Payroll Process Flowchart

Important Safety Checks (Internal Controls)

To prevent errors or fraud (like "ghost employees"),

the company splits duties among different
departments:

1. HR (Personnel) vs. Payroll: HR is in charge

of hiring and setting pay rates, while Payroll 💡 Highlights to Memorize
is only in charge of the math. This prevents
one person from both creating a fake To master this topic, focus on these critical "Safety
employee and issuing them a check. Checks" (Internal Controls) mentioned in your
2. User Department Approval: The documents:
department where the employee actually
works must initiate the Daily Time Record 1. Segregation of Duties (The Big One)
(DTR) to prove the work was done.
3. Treasury Oversight: The Treasury  The HR Department should be the only one
Department handles the actual payment after allowed to change pay rates or add new
reviewing the Payroll Register. employees.
4. Liability Recognition: Daily summaries are  The Payroll Department should be kept
sent to General Accounting to ensure the separate from HR and Treasury to prevent
company correctly records the debt it owes to fraud.
its employees.  Why? This prevents a single person from
creating a "ghost employee" and paying
💡 What to Remember/Memorize themselves.

 The 201 File: Remember this as the "Source 2. Document Verification

of Truth" for an employee's salary and
identity.  HR Records (201 File): This is the master
 The DTR: This is the "Evidence of Labor" file for every employee from hire to
needed to justify paying wages. termination.
 Segregation of Duties: Memorize that HR  The DTR: In modern systems, this is often
handles the people and rates, while Payroll done via biometrics (fingerprints) to ensure
handles the calculations, and Treasury the person recording the time is actually the
handles the cash. employee.
 Auditor Concern: Payroll is high-risk
because it significantly affects financial 3. Disbursement Controls
statements and consumes a "significant
amount of resources".  Separate Bank Account: Companies should
maintain a bank account used only for payroll.
 Unclaimed Checks: If an employee doesn't
pick up their check, it must be re-deposited
into the bank, not left lying around.
  The "Surprise" Distribution: Occasionally, 💡 Things to Remember/Memorize
someone independent (not from Payroll)
should hand out checks to see if any  Primary Objective: Proper valuation of
"fictitious" employees exist. inventories and allocation of costs.
 Custody Risks: Inventory is "highly
4. The "Inventoriable" Link susceptible to misappropriation" (easy to
steal), so physical counts are critical.
 If a company makes products, some payroll  The Auditor's Role:
costs are sent to Inventory Accounting to be o For Custody: The auditor observes
added to the cost of the goods being made. physical counts and checks them
against the company's records.
o For Authorization: The auditor
reviews production orders to ensure
every run was properly signed off.
o For Recording: The auditor checks
The Production or Conversion Cycle is the process
the competency of the people making
where a business turns "ingredients" (materials,
journal entries and reconciles the
labor, and overhead) into finished products ready for
general ledger.
sale. Its main goal is to ensure inventories are
 Separation of Duties: Just like in P2P or
valued correctly and that costs are allocated
Payroll, the people moving the inventory
accurately to every production run.
(Production) must be different from the
people recording it (Cost Accounting).
Here is a simplified breakdown of the cycle's key
areas and what you need to remember.

1. Key Responsibilities & Flow

The cycle relies on three main functions to keep the

process organized and secure. 1. Financing Cycle (Raising Money)

This cycle deals with how the company gets the

"fuel" to run. It involves transactions with Lenders
(Debt) and Owners (Equity).

 Key Business Functions:

o Issuing stock to owners.
o Borrowing money through loans or
2. Relationship with Other Cycles
bonds.
o Paying dividends to shareholders or
The production cycle does not exist in a vacuum. It
acts as a middleman between buying resources and interest to lenders.
selling products:  Accounts Affected:
o Cash.
o Notes/Bonds Payable (Debt).
 Input: It uses materials and labor information
from the Expenditure and Disbursement o Common Stock & Retained Earnings
Cycle. (Equity).
 Output: It provides the finished goods and
cost data to the Revenue and Receipt Cycle. 2. Investing Cycle (Using Money)

Once the company has cash, it invests it into long-

term resources to help make more money.
  Key Business Functions:
o Buying and selling Property, Plant,
and Equipment (PPE) like
machinery, buildings, or vehicles.
o Purchasing stocks or bonds of other
companies as investments.
 Accounts Affected:
o PPE (Fixed Assets).
o Accumulated Depreciation.
o Investment accounts.

💡 Things to Remember/Memorize

 The Big Difference: Remember that

Financing is about where the money comes
from (Liability/Equity), and Investing is
about where the money goes (Assets).
 Authorization is King: Unlike buying office
pens, you can't just buy a building or issue
stock whenever you want. These almost
always require Board of Directors approval.
 Internal Control (Custody): For investing,
"Custody" means keeping stock certificates or
land titles in a secure place (like a fireproof
safe) and limiting who has access.
 The Cash Link: Both cycles heavily affect
the Cash account, which is why auditors look
at these cycles to ensure cash isn't being
leaked or stolen.