Contents1.0 INTRODUCTION02.0 REVENUE CYCLE12.1 The Objectives Of Revenue Cycle12.2 Revenue Cycle Flowchart22.3 Revenue CycleMajor Threats & Control32.4 Internal control and databases43.0 PURCHASE CYCLE53.1 Overview Of Purchase & Payment Cycle63.2 Classes of transactions, Accounts, Business Functions, and Related Documents and Records for the Acquisition and Payment Cycle63.3 Major Internal Control Activities73.4 Substantive Test for Account Payables94.0 INVENTORY CYCLE114.1 Related Documents And Records124. 2 Internal Controls144.3 Control Risk Assessment165.0 PAYROLL CYCLE175.1 Organization Chart Illustrating the Payroll Function175.2 Accounts in Payroll and Personnel Cycle185.3 Classes of Transactions, Accounts, Business Function and Related Documents and Records for the Payroll and Personnel Cycle195.4 Personnel and Employment205.5 Timekeeping and Payroll Preparations205.6 Payment of Payroll225.7 Payroll Process236.0 ADVANTAGES AND LIMITATIONS OF ACCOUNTING TRANSACTION CYCLES247.0 CONCLUSION268.0 REFERENCE27

1.0 INTRODUCTIONBusinesses engage in large and various financial transactions during normal operations. The reporting of each accounting transaction cycle is very important to a business when determining the profit of the company. Generally, there are four main cycle, which is, revenue cycle, purchase cycle, inventory cycle and payroll cycle.The revenue cycle is the cycle where the bulk of accounting transactions will occur. This cycle includes the transactions relating to the sales of goods and services to customers and any expenses related to those revenues. Two subsystems perform the processing steps within the revenue cycle is the sales order processing system and the cash receipts processing system.Purchase cycle or expenditure cycle is the recurring set of business and related information processing operations associated with the purchase and payment for goods and services. The cycle is begins with purchase requisition, followed by purchasing, receiving, account payable and cash disbursement.The inventory cycle for a company is composed of three phases: the ordering or administrative phase, the production phase, and the finished goods and delivery phase. The ordering phase is the amount of time it takes to order and receive raw materials. The production phase is the work in progress phase. The last phase is the time the finished goods and remain in stock and the delivery time to the customer. The inventory cycle is measured as a number of days.Payroll system is a special case purchases system because the entities purchases labour rather than raw materials or finished goods. The most important tasks performed in the Human Resource Management or payroll cycle are recruiting and hiring new employees, training, job assignment, compensation (payroll), performance evaluation and discharge of employees. (voluntarily or involuntarily)We are going to discuss more details and further about revenue cycle, purchase cycle, inventory cycle and payroll cycle in this assignment.

2.0 REVENUE CYCLEThe revenue cycle is the set of activities in a business which brings about the exchange ofGoods or services with customers for cash. Most business transactions are conducted on aCredit basis. Cash is received after goods are shipped to the customer. 2.1 The Objectives Of Revenue Cycle to recognize the fundamental tasks that must be performed in the revenue cycle regardless of the level of technology in place; to be able to identify the functional departments involved in revenue cycle activities and to trace the flow of revenue transactions through the organization; to be able to specify the documents, journals, and accounts that provide audit trails, promote the maintenance of historical records, support internal decision making, and sustain financial reporting; to understand the risks associated with the revenue cycle and to recognize the controls that reduce these risks; and to be aware of the operational and control implications of technology used to automate and reengineer the revenue cycle.

2.2 Revenue Cycle Flowchart

AIS must provide adequate controls so that the following objects are met:(1) Transactions are properly authorized.(2) Recorded transactions are valid.(3) All valid, authorized transactions are accurately recorded.(4) Assets are safeguarded from loss or theft.(5) Business activities are performed efficiently and effectively.

The following help achieve the above: Simple, easy-to-complete documents with clear instructions. Appropriate application controls Signature space for persons responsible for completion and review of documents. Pre numbering of the documents.

2.3 Revenue CycleMajor Threats & Control

(1) Sales to customers with poor credit(uncollectable sales and losses due to bad debts). Preventionindependent credit approval function and good customer accounting.

(2) Shipping errorswrong quantities, items, or address: mad customers. Preventionreconcile shipping notices and picking tickets, bar code scanners, data entry controls.

(3) Theft of inventoryloss of assets ----> inaccurate records. PreventionSecure inventory and document transfers, good accountability for picking and shipping, and frequently reconcile records with physical count.(4) Failure to bill customersloss of inventory, and erroneous data about: sales, inventory, and receivables. PreventionSeparate shipping and billing. Pre number of shipping documents and reconciliation of all sales documents.

(5) Billing errorspricing mistakes, overbilling for items not shipped or back orderedloss assets and mad customers. Preventionreconciliation of picking tickets and bills of lading with sales orders, data entry edit controls, and price lists.

(6) Theft of cashloss of assets and overstated A/R. Preventionseparation of duties: handling cash and posting to customer accounts; handling cash and authorizing credit memos & adjustments; issuing credit memos and maintaining customer accounts. Use lockboxes and EFT. Mail customer statements monthly. Use cash registers in retail. Deposit cash intact daily in the bank. Bank reconciliation done by noncash handler.

(7) A/R incorrectly postedmad customers, incorrect records, and poor decisions. Preventionreconcile sub. A/R ledgers with general ledger, monthly stmts. to customers, and edit and batch totals.

(8) Loss of dataloss of confidential info. and poor decision making. Preventionregular on-site & off-site backup, logical and physical access controls to prevent leakage to competitors.(9) Poor performanceinefficient and ineffective operations. Preventionsales and profitability analysis, A/R aging, and cash budgets to track operations.2.4 Internal control and databases Foreign key and referential integrity ensures the existence of primary key records in related tables. Effective access controls are very important in a database environment. REA diagrams highlight incompatible functions and system can be programmed to reject any attempt to perform incompatible functions by a single employee. When multiple roles are performed, auditors can check for compensating controls. Use of DBMS makes backup and disaster recovery procedures essential.

3.0 PURCHASE CYCLEAudit of Purchase and Payment Cycle

Step in purchase and payment cycle

3.1 Overview Of Purchase & Payment Cycle Objective to audit : To evaluate whether the account affected by the purchase of goods and services and the cash payment for those purchased are fairly presented in accordance with generally accepted accounting principles

Classes of transactions1.Acquisition/purchase of goods & services2.Cash disbursements3.Purchase returns and allowances and purchase discounts

3.2 Classes of transactions, Accounts, Business Functions, and Related Documents and Records for the Acquisition and Payment CycleClasses of transactionAccountsBusiness FunctionDocuments and Records

1. Acquisition Inventory Property, plant and equipmentPrepaid expenses Leasehold improvementsAccounts payableManufacturing expensesSelling expensesAdministrative expenses1. Processing purchase orders

2. receiving goods and services

3. Recognising the liability Purchase requisitionPurchase order

Receiving report

Acquisitions transaction fileAcquisitions journal or listingVendors invoiceDebit memoVoucherAccount payable master fileAccount payable trial balanceVendors statement

2. Cash Disbursements Cash in bank (from cash disbursements)Accounts payablePurchase discounts1. processing and recording cash disbursementsCheck Cash disbursements transaction fileCash Disbursements journal or listing

3.3 Major Internal Control Activities Authorization of Purchases Separation of asset custody from other functions Timely recording Independent review of transaction Authorization of payment

1. Authorization of Purchases To ensure that the goods & services purchase are for authorized company purposes To avoid the purchase of excessive or unnecessary items. E.g : Established approval authority i.e. purchase of capital assets above RM1 million may require approval from Board of Director Issued relevant documents to authorize the transaction occur i.e. After the purchase requisition have been approved, a purchase order to purchase the good must be initiated Purchase order issued should be pre numbered and should include sufficient columns and spaces to minimise the likelihood of unintentional omissions on the form when goods are ordered.

2.Separation of asset Custody from other functions Separate the receiving department, storeroom unit and accounting function To prevent theft or misuse of goods

3.Timely recording Method of recording : Upon the receipt of the goods & services OR Upon the vendors invoice is received Proper recording involves verifying goods received against relevant documents. i.e. details on the purchase order, the receiving report & vendors invoice, to determine all information are correct

4.Independent review of Transaction Independent party check on information recorded in the system is required to ensure proper procedure of record keeping

5.Authorization of payment Establish list of approval authority Different ranking of personnel responsible to approve different amount of payment Separation of responsibilities between those : Recording the transaction Preparer or the cheque Approval of the payment Proper documentation Cheque should be in sequence of number Printed on special paper that makes it difficult to alter the payee or amount Establish a special physical control over blank, voided and signed cheque

3.4 Substantive Test for Account PayablesUsing tests of details of balance Existence Completeness Accuracy Classification Cut off Obligations Presentation and disclosures

1.Account payable Existence To determine : Account Payable is the Account Payable List exist Examples of audit tests : Trace from AP List to vendors invoice and statements Confirm AP, emphasizing large and unusual amounts2.Accounts Payable Completeness To determine : Existing AP are included in the AP list Examples of audit tests : Perform out-of-period liability tests3.Accounts Payable Accuracy To determine : Account payable (AP) in the AP list are accurate Examples of audit tests : Trace from AP List to vendors invoices and statements

4.Accounts Payable Classification To determine : Account Payable (AP) in the AP list are properly classified Examples of audit tests : Review the list and master file for related parties, notes or other interest-bearing liabilities, long term liabilities and debit balances5.Account Payable Cutoff To determine : Transactions in the acquisition and payment cycle are recorded in the proper period Examples of audit test : Perform out-of-period liability tests Perform detailed tests as part of physical observation of inventory Test for inventory in transit6. Account Payable Obligations To determine : The company has an obligation to pay the liabilities included in accounts payable Examples of audit tests : Examine vendors statements and confirm accounts payable7. Account Payables Presentation & Disclosure To determine : Accounts in the acquisition and payment cycle are properly presented and disclosed Examples of audit tests : Review statements to make sure material related parties and long-term and interest-bearing liabilities are segregated.

4.0 INVENTORY CYCLE

Inventory cycles are the most important cycle among the revenue cycle, purchasing cycle and payroll cycle. It is because it has close relationship between among these cycles. Example in Illustration 1 shows the relationship between these cycles where receipts and payments in the inventory controlled by the purchasing cycle while the cost of expenses directly or indirectly in the inventory is controlled by the payment cycle. For completion and sales of goods is counted as revenue cycle. Terms cradle-to-grave in inventory started when goods are purchased and stored, and it will ends when the goods been distributed to consumers.

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4.1 Related Documents And Records1) Process Purchase Orders.a. Purchase requisitions are used to request that the purchasing department place orders for inventory items.b. Purchasing of goods estimated based on current requisition, estimated sales or marketing department.c. The related purchase orders and the controls over purchase requisitions are evaluated and tested as part of acquisition and payment cycle.

2) Receive Raw Materials.a. Records the receipt of goods received from suppliers. Receipt of orders also part of the acquisition and payment cycle.b. Materials need to be checked for quantity and quality after received it and sent it to the storeroom. The receiving documents or electronic notifications of the receipt of goods are typically sent to purchasing, storeroom and accounts receivable.c. Control and accountability are necessary for all transfers.

3) Store Raw Material.a. All of materials that received stored in the stockroom until needed for production.b. If the materials are out of stock, presentation of a properly approved materials requisition, work order or similar document or electronic notice that indicates the type and quantity materials needed.c. Updates occur automatically by computer for organisations that have integrated their inventory management and accounting system.

4) Process the Goods.a. Issue raw materials for production. The issue must properly authorize.b. A separate production control department often is responsible for the determination of the type and quantity of production.c. Within various production departments, provision must be made to account for the quantities produced, control of scrap, quality controls, and physical protection of the material in process.

d. There are two types of cost system that exist;i. Job cost systemsii. Process cost systems

5) Store Finished Goods.a. Finished goods that are completed by the production department, they are placed in the stockroom to await shipment.b. It is part of sales and collection cycle.

6) Ship Finished Goods.a. Shipment of finished goods must be authorized by a properly approved shipping document.b. An integral part of the sales and collection cycle.

Process purchase ordersReceive raw materialsStore raw materialsProcess the goodsStore finished goodsShip finished goods

Flow of inventoryReceive raw materialsPut material in storagePut material in productionPut completed goods in storageShip finished goods

Related documentation Purchase requisition Purchase order Receiving report Vendors (supplier) invoice Raw materials perpetual inventory master file Raw material requisition Cost accounting records Finished goods perpetual inventory master file Cost accounting records Shipping document Finished goods perpetual inventory master file Cost accounting records

7) Perpetual Inventory Master Filesa. Separate perpetual timely records of inventory are normally kept for raw materials and finished goods.b. Include only information about the units of inventory acquired, sold and on hand or information about unit costs.c. 4. 2 Internal ControlsInternal control objectivePossibility of errorsInternal control procedureControl tests

Validity

Completeness

Timeliness

ValuationInventory that is not exist.

Inventories are recorded but not in hands.

Inventory received but not record.

Inventory transactions are recorded in the wrong period of time.

Inventory quantities recorded inaccurate.

Inventory obsolescence.

The cost of inventory and the sale of goods are not suitable.Segregation of duties.

Use Pre-numbered Receiving Report in inventories that moved to inventory department.

Use Pre-numbered materials requisitions for inventory that moved out from the inventory department.

Physical observation test on inventory.

Receiving reports customized to suppliers invoice and included in the sales journal.All in the process of receiving reports every day by IT departments to record the receipt of inventory.

All documents processed daily deliveries to record the delivery of finished goods.

Make annual or continuous comparison with the quantity of inventory with inventory fixed records or previous records.Having individuals who have to manage the inventory obsolescence, slow-moving and excess.

Used standard costs.Evaluate the segregation of duties carried out adequately.

Check and test procedures for inventory transfer.

Check and test procedures to removing an inventory to the production department.

See and evaluate the controls on the run.

Detect acceptance of reports for each vendor invoices and vouchers.

Check and test procedures for receiving reports recording process into a permanent record.

Check and test procedures for the transfer or reduce the inventory of permanent records.

Check and test procedures for the recruitment and use of inventory.

Check and test procedures to identify obsolete inventory, slow moving and excess.

Check and test procedures used to set standard costs.

4.3 Control Risk AssessmentControl risk exists because of material misstatement that cannot be prevented, detected and corrected by the companys internal controls. Auditors can follow substantive strategy when the client companys internal controls are unreliable or inaccurate. Therefore, the auditor will not rely on control procedures contained in the inventory cycle and set a level of control risk. However, the auditor can rely on the companys internal control client to audit the inventory when the client has integrated cost-accounting or inventory management system.

There were three steps to assess internal risk controls;

Step 1; Understand and document the inventory system of internal control based on the risk appetite control. In this step, auditors should understand components of internal control. Example of components of internal control are; Control Environment. Entitys Risk Assessment Process. Information and Communication Systems. Control Procedures. Monitoring.

Step 2; Planning and performing tests of control over the inventory cycle transactions. At this stage, the auditor must identify the relevant control procedures to ensure that material errors can be prevented, detected and corrected in the client companys inventory control. Audit procedures that are used to test the clients control procedures are discussed in the internal control procedures and tests of controls inventory transactions.

Step 3; Assess and document the risk control for the inventory cycle. When internal control inventory cycle has been tested, the auditor should document the level of control risk was assessed using quantitative amount or qualitative themes.

5.0 PAYROLL CYCLEWhat is mean by payroll cycle?The payroll cycle is the period of a beginning date and an ending date of length of time.i. A weekly payroll cycle would be for any seven days.ii. A biweekly payroll cycle is for 14 days.iii. A semi-monthly payroll cycle is two equal periods each month.iv. And, a monthly payroll cycle is for 30-31 days.The payroll cycle begins with the hiring of personnel and ends with the payment to the employees for the services performed and to the government and other institutions for the withheld and accrued payroll taxes and benefits.5.1 Organization Chart Illustrating the Payroll Function

5.2 Accounts in Payroll and Personnel CycleAccrued wages, salaries, bonuses and commissions

Direct laborAccrued payroll tax expensePayment Beginning balancePayroll tax expenseEnding balancePayment for salariesPayment for payroll taxesPayment Payroll expensePaymentBeginning balanceEarned wages, salaries, etc.Ending balance

Cash in bank

Withheld income taxes and other deductions

Beginning balancePayroll withholdingEnding balance

5.3 Classes of Transactions, Accounts, Business Function and Related Documents and Records for the Payroll and Personnel CycleDocuments and recordBusiness FunctionAccounts Class of transactions

W-2 formPayroll tax returns

Preparation of payroll tax returns and payment of taxesPayroll checkPayroll bank account reconciliation

Payment of payrollTimekeeping and payroll preparationsTime cardJob time ticketPayroll transaction filePayroll journal or listingPayroll master file

Personnel and employmentPayroll

Personnel recordsDeduction authorization formRate authorization form Payroll cash All payroll expense accounts All payroll withholding accounts All payroll accrual accounts

5.4 Personnel and Employment1. Personnel RecordsRecords that include such data as the date of employment, personnel investigations, rates of pay, authorized deductions, performance evaluations, and terminations of employment are called personnel records.

2. Deduction and Contribution Authorisation FormForm authorising payroll deductions and contributions. Contributions include payment for income tax (Scheduled Tax Deduction), contribution to Employee Provident Fund (EPF) and contribution to SOCSO. Deductions include payment for various loans such as car loan and housing loan, savings, and union dues.

3. Rate Authorisation FormForm authorising the rate of pay. The source of the information is a labour contract, authorisation by management, or in the case of officers, authorisation from the board of directors.

5.5 Timekeeping and Payroll Preparations

1. Time CardTime card is a document indicating the time the employee started and stopped working each day and the number of hours the employee worked. For many employees, the time card is prepared automatically by time clocks or identification card readers. Time card usually submitted weekly.

2. Job Time TicketA document indicating jobs on which an employee worked during a given time period. This form is used only when an employee works on different jobs or in different departments. Job time tickets may be completed electronically by a time and expense reporting system.

3. Payroll Transaction FileComputer-generated file that includes all payroll transactions processed by the accounting system for a period, such as day, week, or month. It contains all information for each transaction, such as employee name, date, gross and net payments, various withholding amounts, and account classification or classifications.

4. Payroll Journal or ListingA report generated from the payroll transaction file that typically includes the employee name, date, gross or net payroll amounts, withholding amounts, and account classification or classifications for each transaction. The same transactions included in the journal or listing are also posted simultaneously to the general ledger and to the payroll master file.

5. Payroll Master FilePayroll master file is used for recording each payroll transaction for each employee and maintaining total employee wages paid for the year to date. The record for each employee includes gross pay for each payroll period, deductions from gross pay, net pay, check number and date. The master file is updated from payroll computer transaction files. The total of the individual employee earnings in the master file equals the total balance of gross payroll in various general ledger accounts.

5.6 Payment of Payroll

1. Payroll CheckA check written to the employee for services performed. The check is prepared as part of the payroll preparation function, but the authorized signature makes the check an asset. The amount of the check is the gross pay less taxes and other deductions withheld. After the check is cashed and returned to the company from the bank, it is referred to as a cancelled check. It is now common for payroll to be directly deposited into employees bank accounts.

2. Payroll Bank Account Reconciliation Important control is the independent reconciliation of the imprest payroll bank account. An imprest payroll bank account is a separate payroll account in which a small balance is maintained. The exact amount of each net payroll is transferred by check or electronic funds transfer from the general account to the imprest account immediately before distribution of the payroll. The advantages of an imprest account are that it limits the clients exposure to payroll fraud, allows the delegation of payroll check-signing duties, separates routine payroll expenditures from other expenditures, and facilitates cash management. It also simplifies the reconciliation of the payroll bank account if it is done at the low point in the payment cycle.

3. EA FormForm issued for each employee summarising the earnings record for the calendaryear. The information includes gross pay, monthly Scheduled Tax Deduction, and other contributions made. The same information is also submitted to the Internal Revenue Board. This information is prepared from the payroll master file and is normally prepared by the computer.

4. Payroll Tax ReturnTax form submitted to IRB for payment of employees monthly tax. This form is prepared from information on the payroll master file and is often prepared by the computer.5.7 Payroll Process

6.0 ADVANTAGES AND LIMITATIONS OF ACCOUNTING TRANSACTION CYCLESEvery business activity is divided and traced to specific accounting cycle. Identifying these cycle and the specific activities within them are essential to determining the effectiveness and profitability of a business. Although accounting transaction cycles are very useful and apply to the whole businesses, it has some limitations. Businesses use cycles to ensure they carry out activities consistenly according to a reasonable and predictable schedule. Each stage of the accounting cycles has a range of time in which it should occur. This allows businesses to offer guidelines to customers and third party participants that keep the cycle within reasonable time limits. These guidelines also make it easy for customers and new members of the workforce to understand.The accounting transaction cycles allow third parties to become involved in the business process. This would be impossible if there is no place to let them participate in our businesses. For example, in the case of a patient who pays for a visit to a dentist's office with an employer-provided insurance policy, the dentist collects payment from the patient in the form of a copayment at the time of service. The revenue cycle continues as the dentist receives payment for additional costs associated with the visit. If the customer is liable for additional payments, the dentist submits a new billing and waits for payment by a specified due date. Besides insurance companies, third party revenue cycle participants include credit card companies, commercial lenders and government subsidy programs.Accounting transaction cycles allow businesses to predict cash flow and track transactions at all stages. While not every transaction proceeds according to schedule, so only some transaction can be indicated. For example, in revenue and purchase cycles, this rough timeline indicates when payments will be made and how much a business can expect to take in as revenue by a given date. Every cycle stage also presents an opportunity to identify and correct errors, leading to greater overall accuracy. Therefore, transaction cycles is very important for accounting purpose.

There are some limitations of accounting transaction cycles. For companies in the manufacturing and retail sectors, for example, the usefulness of a cycle model especially revenue cycle is more limited because consumer engagement occurs almost exclusively at the point of sale, and other aspects like product assembly and inventory management are largely unrelated to direct customer involvement.

7.0 CONCLUSIONAs a conclusion, accounting transaction cycles are very important to a company especially for multinational companies that their businesses involve multiple and large amount of transactions. Performing all the cycles well can increase the company effectiveness and efficiency. This is because the companies business can carry out fluently with minimum frod. However, the companies should always update their transaction systems to increase productivity and this will easier the work of auditing. Auditing work is always laying on the companies transaction resources or documents to accumulate adequate evidence for audit purpose.

8.0 REFERENCE

Richard B. Dull.(2012).Accounting Information Systems.Canada: Nelson Education, Ltd.Alvin A. Arens.(2012).Auditing and Assurance Services in Malaysia.Selangor, Malaysia:Prentice Hallhttp://www.ehow.com/about_5374277_revenue-cycle.htmlhttp://bizfinance.about.com/od/glossaryi/g/inventory-cycle.htmhttp://www.nd.gov/vr/purchmod/docs/purchasing-life-cycle.pdfhttp://www.leoisaac.com/fin/fin024.htm