Topic D3 Transaction Cycles.docx
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Topic D3 Transaction Cycles.docx
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TopicD3TransactionCycles
Itisfarbetter,andeasierinthelongrun,ifyoucanrelategeneralprinciplestoeachauditarearatherthanlearninglonglistsoftests.Thisispartlybecauselonglistsoftestarealmostimpossibletorememberclearlyandaccuratelyandpartlybecausetheexaminermightgiveyouaslightlyunusualsituationwhichwillrequiretheapproachtobemodifiedslightly.
Controlobjectivesforallsystems:
Onlyauthorizedtransactionsarepromptlyrecordedatthecorrectamountintheappropriateaccountsintheproperaccountingperiod,thataccesstoassetsisonlyinaccordancewithproperauthorizationandthatrecordedassetsarecomparedwithexistingassets.
Detailedcontrolactivitiesareoftensimilaracrosssales,purchasesandotherareasandincludeforexample:
·Sequentialnumbering
·Batchandcontroltotals
·Controlaccounts
·Authorization
REVENUECYCLE
Controlobjectives
(1)Toensurethatallsalesrevenuesareincludedintheaccountingrecords
(2)toensurethatsalesrevenuesincludedintherecordsareaccuratelystated
(3)tominimiselossesthroughbaddebtsand/orreturns
Segregationofduties
(1)Acceptingcustomerorders
(2)Despatchdepartment
(3)Invoicing
(4)Receivingandrecordingcash
Authorisationandapprovalcontrols-examples
(1)Checkordersagainstcreditlimits
(2)Ordersshouldbeauthorisedinwriting
(3)Salesinvoicesshouldbeauthorisedinwriting
(4)Writingoffbaddebtsshouldbeauthorisedinwriting.
Physicalcontrols-examples
(1)Recordordersonpre-numbereddocuments
(2)Nogoodstobedespatchedwithoutadespatchnote
(3)Goodsreturnedshouldbeusedtopreparecreditnotes.
Arithmeticalcontrols-examples
(1)Checkcalculationsoninvoices
(2)Sendstatementstocustomersregularly
(3)Identifyoverduedebtsusingageanalysis
(4)Chasecustomersforoverduedebts.
Segregationcontrols-examples
(1)Creditnotesshouldbeauthorisedbysomeoneunconnectedwithdespatchorsalesledgerfunctions
(2)Salesinvoicesandcreditnotesshouldbechecked(prices,calculationsetc)byapersonotherthantheonepreparingtheinvoice
(3)Salesledgerpersonnelshouldbeindependentofdespatchandcashreceiptfunctions.
Organisationcontrols-examples
(1)Sequencechecksonpre-numbereddocuments
(2)Reconciliationofcontrolaccount.
Itemstotest
·Customersvettedbeforecreditisgiven
·Ordersvettedagainstcreditlimits
·Goodsdespatchedonlyagainstapprovedcustomerorders
·Alldespatchesandreturnsshouldbeinvoicedandrecordedcorrectly(salesorderslinkedtodespatchnotes,linkedtosalesinvoices;returnscheckedforqualityandlogged)
·Invoices/creditnotesaccuratelypreparedformpricelists,customertradingtermsetc
·Invoicespreparedformdespatchnotesonly
·Creditnotes,baddebtsandadjustmentsbackedbyappropriatedocumentationandauthorisation
·Salestransactionspostedcompletelyandaccuratelytoledgeraccounts
·Reconciliationofcontrolaccount
·Chasingofoverduebalances
·Segregationofduties.
Analyticalreviewprocedures
·Fluctuationsinsaleslevels
·Cut-offproblems
Checkdisclosure(eg,segmentalinformation).
Notethatoneapproachtodesigningtestsofcontrolistolistthedocumentsinvolvedinthesystem,andthinkoftestsforeachdocument.Thisisillustratedbelowforasalessystem.
Testforevidenceofapproval.
Testforevidenceofasequencecheck.
Testfor:
(1)EvidencethataGRNisraisedforallsalesreturnsaccepted.
(2)Evidenceofasequencecheck.
Testfor:
(1)Serialnumbering.
(2)Evidenceofasequencecheck.
(3)Evidenceofmatchingsalesinvoicestodespatchnotesandcustomerorders.
(4)Correctaccounting.
Testfor:
(1)EvidenceofapprovalandmatchingtoGRN.
(2)Correctaccounting.
Testforevidenceofauthorisationofadjustmentstosalesledger
Testfor:
(1)Evidenceofreviewofreconciliationtosalesledger.
(2)Evidenceofauthorisationofadjustmentstosalesledgercontrolaccount.
Thepointmadeinthepreviouschapterappliesherewithequalforce:
thoughdetailed,thesedescriptionsofaccountingsystemsandcontrolsareofgreatexaminationimportance.
1.Introduction
Thischaptercoverscontrolsoverpayroll,andtheassetsofcash,inventoryandnon-currentassetswhichmustbesafeguardedandusedproperlyforcompanypurposes.
2.Payroll
·Controlobjectives
·Toensurethatpaymentsmaderepresentvaluereceivedforauthorisedwork
·toensurethatpayrollcostsarecompletelyandaccuratelyrecordedinthefinancialstatements
Segregationcontrols–examples
·Wages/salariesdepartmentshouldbeseparatefromreceiptsorpaymentsfunctions.
·Dutiesofwagesstaffshouldberotatedduringtheyear.
·Theemployeemakingupthepaypacketsshouldbedifferentfromtheemployeepreparingthepayroll.
·Periodicsurpriseattendanceatpayouts.
Physicalcontrols–examples
·Supervisionofclockcardsandtimingdevices
·Controloverunclaimedwages
Authorisationandapprovalcontrols–examples
·Writtenauthorisationtoemployordismissanyemployee,ortochangeratesofpay
·Authorisationofovertime
·Anindependentofficialshouldcheckthepayrollandsignit
·Employeesshouldsignfortheirwages
·Wageschequeshouldcarrytwosignatures.
Arithmeticalandaccountingcontrols–examples
·Asampleofcalculationsshouldbechecked
·Controlaccountsshouldbemaintained
Personnelcontrols-example
·Awagessupervisorshouldbeappointed
Managementcontrols-example
·Overallcheckstohighlightmajordiscrepancies(eg,checkagainstbudget)
Itemstotest
·timerecordsproperlymaintainedandauthorised
·starters,leaversandchangesinratesproperlyauthorisedbyadepartmentindependentofthepayrolldepartment
·overtime,bonusesandcommissionsproperlyauthorisedandchecked
·deductionsproperlycalculatedandrecorded
·changestotaxrates,allowancesproperlyauthorisedandcorrectlyimplemented
·correctamountspaidtotaxauthoritiesandotherexternalorganisations
·appropriateamountsrecoveredfromexternalorganisations
·totalpayrollauthorised
·adequatesecurityovercashtransmissions
·payrolltotalscorrectlypostedtoledgeraccounts
·segregationofduties.
3.Cashsystem
·Toensurethatallcashreceiptsareproperlycollected,recordedandbanked
·toensurethatpaymentsmadetosuppliersareinrespectofauthorisedinvoicesonly
·toensurethatamountschargedtothebandstatementareauthorised
·toensurethatreceiptsandpaymentsarerecordedaccuratelyandcompletelyintheaccountingrecords.
Controlsovercashreceiptspost.
Controlsovercashcollectedbythesalesforce.
Controlsovercashsales.
Controlsoverbanking.
Controlsoverchequepayments.
Bandreconciliations.
Controlsoverpettycash.
Itemstotest
·propercontrolsoverreceiptsintheformoftillreceipts,othercashtakings,chequesandcreditcards
·promptbandingofnotes,coins,chequesandcreditcardvouchers
·reconciliationofcashreceipts(eg,totillrolls)
·Propercontrolsoveropeningofmail,includinglogofchequesreceived
·Reconciliationoflogtobankingrecords
·Agreementofreceiptstoremittanceadvices
·Allreceiptsproperlyrecordedandpostedtocorrectledgeraccounts
·Reconciliationofreceivablescontrolaccount
·Securestorageofunusedcheques,etc
·allchequesaccuratelypreparedonthebasisofapproveddocumentationauthorisedlimitsforchequesignatories
·Banktransfersproperlyauthorisedagainstsupportingdocumentation
·directdebitsandstandingordersproperlyauthorisedandmonitored
·Allpaymentsproperlyrecordedandpostedtocorrectledgeraccounts
·reconciliationofpayablescontrolaccount
·Segregationofduties
·Regularbankreconciliations.
4.Othersystems
Inventories
Controlobjectives
·toensurethatinventoryconsumptionandinventorytransfersarecorrectlyandcompletelyrecorded
·toensurethatinventoryfiguresintheincomestatementandbalancesheetarecorrectlystated
·Toensurethatphysicalamountsofinventoryheldreconciletobookquantities
·Tominimiselossandwastageofinventory.
Itemstotest
·Inventoryrequisitionsarebasedonauthorisedreorderlevels
·sequentiallynumberedgoodsreceivednotes
·goodsinareproperlyinspected
·Goodsrejectedareproperlyrecordedandcreditnoteschased
·Allmovementsofinventoryproperlyrecorded
·Inventoryrecordsreconciledtophysicalquantities
·Issuestoworkinprogressproperlyandconsistentlyvalued
·Allinventoryissuescorrectlyauthorised
·Adequatesecurityinholdinginventoriesareas
·Segregationofduties.
Non-currentassets
Controlobjectives
·toensurethatnon-currentassetsarecorrectlyrecorded,adequatelysecuredandproperlymaintained
·Toensurethatacquisitionsanddisposalsofnon-currentassetsareproperlyauthorised
·Toensurethatacquisitionsanddisposalsofnon-currentassetsareforthemostfavourablepricepossible.
Itemstotest
·allacquisitionsproperlyauthorised
·allacquisitionsaccuratelyrecorded
·depreciationcalculationsshouldbeproperlyauthorised,consistentandappropriate
·allassetssafeguarded
·allassetsloggedinregister
·regularreconciliationofphysicalassetstoregister
·alltitledeedssecurelystored
·alldisposalsproperlyauthorised
·disposalsatarm’slengthtoensurebestprice
·alldisposalsproperlyrecorded
·segregationofduties.
Investments
Controlobjectives
·to
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