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Finance & Investment Cycle - Coggle Diagram
Finance & Investment Cycle
Deals with:
Raising finance and repayment
Obligations such as interest & dividends
Application of funds for the acquisition of assets
Characteristics of Cycle
Few Transactions
Material Transactions
Transactions governed by legal & regulatory requirements can't be avoided
Look out for Fraud Opportunities in this cycle
Omitting long term liabilities
Understating vale of long term liabilities
Overstating assets
Including fictitious assets
Understating depreciation allowance/impairment
Finance & Investment Cycle has 2 components
Investment Cycle Component
Activities in this cycle:
Addition/Acquisition of fixed assets
Disposals of tangible and intangible assets
Repair & Maintenance of tangible and intangible assets
Transactions Affected
Purchase of assets & capitalisation of assets
Disposal of assets:
Purchase/Development of intangible assets
Revaluation
Depreciation
Documents Used:
Capital Budget,
Fixed Asset Requisition with Quote/Negotiated Price,
Minutes of Board of Directors,
Invoices,
Fixed Asset Register,
GL Accounts
Financing Cycle Component
Activities in this cycle:
Owners' Equity:
-Issue of Shares, - Share buy backs, - Statutory Requirements, - Authorisation required for borrowings.
Borrowings:
Cash inflow from long-term/short-term borrowings received, - Subsequent repayment of capital sum, - Interest charged on borrowings, - Authorisation required for borrowings
Transactions Affected:
Issue of Shares
Retained Income
Dividends Declared
Share Buy-Backs
Loans/Borrowings
Loans Repaid
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Documents Used:
Minutes of shareholders/directors, Debenture trust deed, Prospectus, Share Certificate, Loan/Lease Contract, Mortgage Bond, Journal Voucher
Definitions
Internal Controls
Control Activities an organisation should implement to achieve the objective
Test of Controls
The way we test where the internal controls are working as designed. You test the internal control through:
Inspection - when it is a document
Observation - when it is a process
Enquiry - about a control/process/policy
Control Objective
Objective to be achieved by organisation with each transaction
Occurrence/Validity
Authorisation
Completeness
Accuracy
Recording
Classification
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Substantive Procedures/Audit Procedures in this Cycle has 2 components:
General Substantive Analytical Procedures Include:
Comparisons of current information to prior year information/budgets and ratio analysis
Comparison of financial and non-financial information derived from understanding the core of the processes and related business processed of the entity
Detail Substantive Procedures:
Substantive testing is an audit procedure that examines the FS and Supporting Documentation to see if they contain errors. These tests are needed as evidence to support the assertion that the financial records of an entity are complete, valid and accurate.
The different Financial Statement Assertions attested to by a company’s preparer of such statements include assertions of:
Existence
Rights & Obligations
Valuation
Completeness
Presentation & Disclosure
Weaknesses vs Risks
Weaknesses:
It’s Internal Controls that the organisation has not implemented or not implemented properly.
Because of the weakness in the Control Environment, the organisation is then faced with a specific risk and there is a probability that this risk could occur.
Risk:
A risk is something that happens as a result of a weakness.
EFT Payments should have:
Multi-level passwords from 2 snr employees. Passwords must be simultaneously entered.
Access to EFT Payments should be limited to one computer
There should be proper access controls over the terminal that is used to make the payment
The terminal should shut down after 3 unsuccessful access attempts of logging in:
o All EFT transfers should be limited to a specific day, for example, Payroll should run 25th of each month
o Completeness tests should be performed e.g. if you had to pay 10 employees you have to ensure that 10 salaries were paid
To effect the payment 2 passwords of 2 different senior employees should be entered
After the payments are made there should be an:
o Audit Trail
o The payment should reflect on the bank statement
o A bank reconciliation should be performed
The reconciliation should be done by a person who is independent of the EFT Transactions that were made.
Electronic Fund Transfers (EFT)
The bank account must be reconciled monthly with the Cashbook
Reconciliation to be done by an independent person that writes up the cashbook
Reconciliation should be reviewed by senior independent official