TRANSACTION
CYCLE
BSA 3-1
MEMBERS
Babelonia, Joan Berlanga, Ervin Formentera, Karl Bryan
Inguito, Bea Saut, Joza
OBJECTIVES
After completing the lesson, the students are
expected to:
Describe the different categories of the
transaction cycles.
Identify the forms and documentation used
by the different departments
Identify and describe the functions of the
departments in each transaction cycles
Identify the different possible controls in each
transaction cycles,
INTRODUCTION
The Audit Transaction Cycle is an
essential concept in auditing and
accounting that helps ensure all
business transactions are properly
recorded, processed, and verified. It
provides a structured approach for
auditors to trace financial activities from
their origin to their final reporting stage.
By studying the transaction cycle,
auditors can evaluate the effectiveness
of internal controls, detect errors or
fraud, and confirm the accuracy of
financial statements.
A. TRANSACTION CYCLES
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.
1. Revenue and Receipt Cycle: involves sales of goods or service
and cash collection.
2. Expenditure and Disbursement Cycle: covers acquisition and
payment for goods and services.
3. Human Resources and Payroll Cycle: deals with employee
services and compensation.
4. Production or Conversion Cycle: focuses on the creation of
goods for sale.
5. Financing and Investing Cycle:
Generation of capital funds from outside investors
Investment of capital funds to other profitable activities
B. REVENUE & RECEIPT CYCLE
BUSINESS FUNCTION: AFFECTED ACCOUNTS:
Resources are distributed Sales
to customers in exchange Sales Return & Allowances
for promises of future Sales Discounts
payments. Account Receivables
Customers pay cash for Allowance for Bad Debts
resources distributed to Bad Debts Expense
them. Cash
DEPARTMENTS INVOLVED
Sales Department
To manage and improve the entity’s sales
ACTIVITIES: CONTROLS WITHIN:
Locate and encourages buyers. Exclusive function to
Negotiate and deals with communicate with customer
customers Maintenance of master list
Accepts customer orders of customers and list of
Prepares S.O and distributes them prices of products and
File retention copy services
Monitor the status of the order Complete documentation
Reviews and grants customer for new customers
request for returns.
Sends out credit memo to the
concerned departments.
Credit Department
To minimize exposure to high-risk
customers
ACTIVITIES: CONTROLS WITHIN:
Receives S.O. from Sales Must be independent from
Conduct Credit Investigation Sales
Approves Credit request Maintain and update of list
Notify Sales for the of approved customers
approval/denial of credit request
Forward S.O. to Warehouse
Warehouse (Inventory Control)
To control movement and monitor level
and condition of inventories
ACTIVITIES: CONTROLS WITHIN:
Review approved S.O. Monitoring of inventory
Monitor the availability of inventories levels to provide assurance
and update the Sales Dept. of its availability when
Notifies Sales Dept of the shipment needed
Release goods to the courier Report to Sales dept
Forwards documents to Billing dept. regarding inventory count
Receiving department receives
returned goods and prepares
receiving report.
Compares received goods vs. credit
memo
Shipping
To provide reasonable assurance that all
shipments are authorized
ACTIVITIES: CONTROLS WITHIN:
Compare S.O and with approved Pre-numbered shipping
inventories from Warehouse documents for proper
Completes shipping documents monitoring
(DR) and prepares for shipment Report for completed
Notify Sales dept. that goods have shipped orders
been shipped.
Forwards S.O. and D.R. to Billing
Department
Billing Department
To provide reasonable assurance that all
shipments are billed
ACTIVITIES: CONTROLS WITHIN:
Compares S.O., D.R. (Sales dept Pre-numbered Sales Invoice
and shipping dept) D.R. must be present to
Prepares Sales Invoice and send ensure that billed S.O. has
copies to customers and been shipped.
Accounting Dept.
ACCOUNTING DEPARTMENT
Inventory Accounting
ACTIVITIES:
To provide costing information of the goods sold.
Updates inventory records.
General Accounting
ACTIVITIES:
Record sale and forward S.I. to A/R dept.
Accounts Receivable
ACTIVITIES:
Updates SL related to customer accounts
COLLECTION/RECEIPT CYCLE
Mail Room
Receives the remittance advise and customer checks
from customer
Prepares summary of receipts.
Endorses the checks and remittance advise to
Treasury Department
Provides report to A/R dept.
Treasury Department
Updates cash records
Prepared deposit slips for check received
Prepares collection summary and send to AR and
Gen. Accounting
Deposit collection to the bank
The Treasurer authorize the write-off of AR
ACCOUNTING DEPARTMENTS
Accounts Receivables
Compares remittance advice (mail room) and cash
summary from Treasury, updates Customer SL and
prepare daily summary to be forwarded to General
Accounting
Review individual customer accounts
Performs aging of receivables
Recommend write-off of delinquent accounts
General Accounting
Validates report from Treasury and Accounts
Receivables and updates General Ledger.
FORMS/DOCUMENTS
FORMS DESCRIPTION INITIATED BY: GIVEN TO:
Customers
SALES ORDER Details of goods or Billing
(Order slip/customer services ordered. Sales Department
order)
Department
Shipping
DELIVERY RECEIPT Describes the goods Customer
to be shipped and Shipping Carrier
(Bill of lading/ serves as a contract Department Billing
shipping document) bet. courier and seller. Department.
Details of the Customer
SALES INVOICE good/services sold,
Billing Department Carrier
(Billing statement) amount due and
terms of payment. Billing
Document informing
PAYMENT ADVICE the seller that the Customer A/R
(Remittance Advice) goods/service sold Department
has been paid.
Summary of daily Different dept's General
DAILY SUMMARY transactions of all the involved in the Accounting
departments. A/R Department
cycle Treasury
CONTROLS:
Initiating department approves the form.
Initiating department is accountable for all the
forms in their department, such as access to the
forms and unused forms.
If approved by the management through policies,
forwarding of the form can be done also
electronically.
The initiating department must retain a copy of
the forms for filing.
DOES ANYONE
HAVE QUESTIONS?
[Link] TO PAY (P2P)
also known as the “Expense and disbursement cycle”
Resources are acquired from vendors in exchange for obligations
to pay
The entity pays cash to vendors
DEPARTMENTS INVOLVED:
Requesting Department – initiates requests using a Requisition
Slip
Purchasing Department – finds suppliers and prepares the
Purchase Order (PO)
Receiving Department – verifies goods and prepares the
Receiving Report (RR)
Accounts Payable Department – reviews documents and
prepares the AP Voucher
Treasury Department – issues checks and releases payments.
FORMS / DOCUMENTS
Requisition Slip – starts the process.
Purchase Order – authorizes purchase.
Receiving Report – confirms delivery.
Vendor’s Invoice – states the amount due.
AP Voucher – links all documents before payment.
D. HUMAN RESOUCE AND
PAYROLL CYCLE
IT IS A CONTINUATION OF THE EXPENDITURE AND
DISBURSEMENT CYCLE.
IT COVERS THE ENTITY’S ACQUISITION OF
SERVICES FROM ITS EMPLOYEES/PERSONNEL
MAIN REASONS WHY THE AUDITOR’S
CONCERN WITH THIS CYCLE:
PAYROLL INCLUDE DIFFERENT CATEGORIES OF
EMPLOYEE BENEFITS
SIGNIFICANT AMOUNT OF RESOURCES IS
INCURRED
BUSINESS ACCOUNTS
FUNCTION: AFFECTED:
Services are received Salaries and wages
from employees in expense and payable
exchange for Premiums expense
obligations to pay and payable
Entity pays cash to Withholding taxes
employees payable
Inventories (for
inventoriable salaries
and wages)
Cash
DEPARTMENTS INVOLVED:
EXPENDITURE
User (any department within the entity
HR or Personnel
Payroll
Accounting (inventory and general)
Disbursement and distribution
Treasury
Accounting (general)
USER DEPARTMENT
To ensure the time records prepared
by the employees represent the
actual hours worked
USER DEPARTMENT
Activities:
Monitor and approves daily time
records
However, due to introduction of computerized human
resources systems, time records are commonly tracked
through biometrics and access devices
USER DEPARTMENT
Possible controls:
Appropriate review activities shall be made
to ensure the validity of DTR prepared by
employees
In case of computerized systems, approval
of any exceptions shall be made by the
user department head
HR DEPARTMENT
To ensure employees included in
the payroll are rendering services to
entity
HR DEPARTMENT
Activities:
Initiates, updates, and maintains HR records
Forwards payroll related information to payroll
department
Determines terms of settlement in case of
termination of employee/s
Immediately notify payroll department of
terminated employee to avoid inclusions of
these employees in the subsequent payroll
calculations
USER DEPARTMENT
Possible controls:
Access, including initiating changes, to HR
records shall be limited only to the HR
department
Information not relevant to payroll
calculation shall not be shared to other
departments
PAYROLL DEPARTMENT
To provide reasonable assurance
that the payroll calculation in every
pay period is valid
PAYROLL DEPARTMENT
Activities:
Receives and reviews relevant payroll related
information from HR and user departments
Considers any update on employees’ pay rates
and deductions
Prepares payroll register
Updates cumulative employee earnings records
Identifies and submits to inventory accounting
capitalizable payroll in case of servicing and
manufacturing companies with inventoriable
labor costs.
PAYROLL DEPARTMENT
Possible controls:
Appropriate level of management reviews
the payroll register for accuracy and
reasonableness
To assure adequacy of segregation of
duties, payroll department should be
segregated from HR, Treasury, and some
user departments
TREASURY DEPARTMENT -
DISBURSEMENT
To provide reasonable assurance
that all payroll disbursement is
based on actual services rendered
by employees
TREASURY DEPARTMENT -
DISBURSEMENT
Activities:
Reviews payroll register received
Prepares check and have it signed by
authorized signatories
Distributes checks o employees
Prepares daily summary which is to be
forwarded to general accounting
TREASURY DEPARTMENT -
DISBURSEMENT
Possible controls:
Separate bank account should be maintained
exclusively for payroll disbursements
On a surprise basis, an employee independent
from payroll and user departments may
distribute paychecks. The purpose of this is to
identify whether or not fictitious employees exist
Unclaimed payroll checks shall be re-deposited
to the bank
ACCOUNTING DEPARTMENT
To provide reasonable assurance that
items related to payroll are
appropriately classified and recorded in
correct accounting period at
apppropriate amounts
ACCOUNTING DEPARTMENT
Inventory: Records inventoriable labor costs to
appropriate jobs or customers 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
FORMS OR DOCUMENTS RECEIVED,
INITIATED AND PROCESSED:
HR RECORDS (201 FILE)
It contains all employee information from
hiring to termination, including actions by
management and details like salary rates,
deductions, and other payroll data.
INITIATED BY: HR department
DISTRIBUTED TO:
Payroll (rates and deductions only)
FORMS OR DOCUMENTS RECEIVED,
INITIATED AND PROCESSED:
DAILY TIME RECORD
Describes the number of hours worked by an
employee during a particular day covered by a
pay period
INITIATED BY: User department
DISTRIBUTED TO: Payroll
FORMS OR DOCUMENTS RECEIVED,
INITIATED AND PROCESSED:
PAYROLL REGISTER
Shows all related payroll information (gross
pay, all deductions, and net pay) for each pay
period.
INITIATED BY: Payroll
DISTRIBUTED TO: Treasury and
General Accounting
FORMS OR DOCUMENTS RECEIVED,
INITIATED AND PROCESSED:
LABOR COST SUMMARY
Shows payroll information which is
capitalizable or can be attributed to a
particular job or customer order
INITIATED BY: Payroll
DISTRIBUTED TO: Inventory accounting
FORMS OR DOCUMENTS RECEIVED,
INITIATED AND PROCESSED:
EMPLOYEE EARNINGS RECORD
Shows the cumulative year-to-date summary
of earnings and deductions of every employee
INITIATED BY: Payroll
DISTRIBUTED TO: Accounts payable
FORMS OR DOCUMENTS RECEIVED,
INITIATED AND PROCESSED:
DAILY SUMMARIES
Summarizes transactions recorded during the
day by the different department
INITIATED BY: Payroll (for liability recognition)
Inventory (for capitalizable labor
costs)
Treasury (for payment)
DISTRIBUTED TO: General accounting
E. PRODUCTION AND CONVERSION
CYCLE
covers the production of the entity's product
for sale.
this is where materials, labor, and overhead are
converted into finished goods.
uses inputs from disbursement and
expenditure cycle and provides info to revenue
and receipt cycle.
PRIMARY OBJECTIVE
the proper valuation of inventories
(which includes proper allocation of costs to each
run made by the production departments)
FUNCTIONS OF DEPARTMENTS
A. CUSTODY
1. Production Department
- has physical custody of the materials and labor
documents
Control Procedures:
- count physical inventory against records
- if inventory is held by other parties,
request confirmation to custodians for
verification
FUNCTIONS OF DEPARTMENTS
B. AUTHORIZATION
1. Production Department
- authorizes the normal production runs
2. Board of Directors (BOD)
- authorizes the special production runs
Control Procedures:
- validate whether production runs are
properly authorized and approved.
FUNCTIONS OF DEPARTMENTS
C. RECORDING
1. Cost Accounting Department
- records daily summary of costs and forward it to
general accounting department
Control Procedures:
- make sure the accounting staff are
competent and well-trained
- match to general ledger
F. FINANCE AND INVESTMENT CYCLE
involves Three (3) Major Categories:
1. Investments
2. Long-term debts
3. Shareholders Equity
the processes involves the following:
Accounting for Investments
Accounting for Mergers
Accounting for Long-term Liabilities
Accounting for Equity Transactions
FUNCTIONS OF THE FINANCE CYCLE
A. CUSTODY
1. Corporate Secretary
- holds the unissued debt and equity certificates
Control Procedures:
- frequent inquiries to custodian
B. AUTHORIZATION
1. Board of Directors
- gives the 'go signal.'
Control Procedures:
- check minutes of the meetings to ensure
major decisions were properly approved
FUNCTIONS OF THE FINANCE CYCLE
C. RECORDING
1. General Accounting
Control Procedures:
- ensure staff is well-trained
- match records to general ledger
FUNCTIONS OF THE INVESTMENT CYCLE
A. CUSTODY
1. Brokerage
- holds stocks or bonds the company buys.
2. Company's safe or bank
- holds physical things like property deeds
Control Procedures:
- send letter to brokerage to confirm how
many shares the company owns
- if deeds are held internally, physically
inspect the safe/deposit box for the
certificates held
FUNCTIONS OF THE INVESTMENT CYCLE
B. AUTHORIZATION
1. Board of Directors
Control Procedures:
- check minutes of the meetings to ensure
major decisions were properly approved
C. RECORDING
1. General Accounting
Control Procedures:
- ensure staff is well-trained
- match records to general ledger
THANK
YOU