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Finance and investment cycle - Coggle Diagram
Finance and investment cycle
Deals with:
Raising of funds and the repayment thereof.
Obligations which arise out of the finance raised (interest/dividends).
Application of funds raised for the acquisition of assets.
A company can raise funds via:
Share issue.
Debenture issue.
Obtaining loan capital.
Characteristics of the cycle:
Relatively few transactions that occur in a company's reporting period.
Transactions within this cycle are usually material.
Transactions in this cycle are usually governed by legal and regulatory requirements.
Examples of fraud in this cycle:
Omitting long term liabilities in the financial statements.
Understating the value of long term liabilities.
Overstating of assets by including fictitious assets or assets that a company does not have.
Overstating assets by understating depreciation allowances as well as impairment.
Can be divided into 2 activities:
Investments activities.
Finance activities.
Investment activities:
Comprise of acquisitions, disposal and management (repair and maintenance) of tangible and intangible asset.
Main activities in the investment cycle:
Additions of fixed assets.
Disposals of fixed assets.
Repair and maintenance of assets.
Documents used in the investment and finance cycle:
Capital budgets.
Fixed asset requisition with quote/negotiated prices.
Minutes of Board of Directors.
Invoices.
Fixed asset register.
General ledger accounts (fixed assets, depreciation, profit and loss on disposal of asset, accumulated depreciation).
Financing activities:
Means by which a business obtains its funding for business operations and capital investments.
2 main external sources:
Owner's equity
Borrowings
Owners equity:
Issue of shares
Share buy backs
Statutory requirements
Authorisation for the issue of shares
Declaration of dividends
Borrowings:
Cash inflow from long/short term borrowings received
Subsequent repayment of capital sum
Interest charged on borrowings
Authorisation required for borrowings
Internal controls and control objectives
Internal controls:
Refer to the control actions that an organization should conduct to guarantee that it meets its goals.
E.G the organization will develop internal controls that must be followed before authorizing a bond/funding.
Control objectives
refers to the specific goals that the organization aims to achieve with each transaction.
E.G the organization will want to ensure that the financing decision is authorized. As a result, "authorisation" is the goal.
*Occurrence/Validity: All recorded assets are valid (really exist) and are supported
by proper documentation.
Authorisation: All purchases and sales are authorised according to company’s
policy
Completeness: All valid fixed assets are recorded and nothing is omitted.
Internal Control
Accuracy: All fixed assets are recorded at the correct amount and are
arithmetically correct
Recording: All transactions i.r.o. fixed assets and depreciation are correctly
recorded
Classification: All transactions i.r.o. fixed assets are correctly classified
according to its nature
Cut off: All purchases and sales of fixed assets are recorded in the period to
which it relates
General Controls: Assets are properly safeguarded against theft and physical
elements
Weaknesses and recommendations
Weaknesses are sometimes mistaken with dangers, but there is a distinction to be made between the two. When an organization's internal control environment is poor, it will be exposed to hazards (weaknesses). Between these two conceptions, there is a very thin line. As previously stated, the focus of this unit is on internal control flaws.
Electronic Funds Transfer (EFT)
It is critical that the bank account be reconciled with the cashbook on a monthly basis: the reconciliation should be performed by someone who is not related to the person who prepares the cashbook, and the reconciliation should be verified by a senior independent authority.
When making an EFT payment, two senior workers should utilize multilevel passwords. These passwords must be typed at the same time.
EFT payments should be limited to one computer at a time.
The terminal that is used to make the payment should have sufficient access controls.
After three failed tries to log in, the terminal should shut off.
All EFT transactions should be confined to a single day, such as the 25th of each month for payroll.
Tests for completeness should be carried out. For example, if you have to pay ten employees, you must make certain that ten wages were paid.
To complete the transaction, two passwords from two distinct senior workers must be submitted;
There should be an audit trail after the payments are made.
The payment should appear on the bank statement
The reconciliation should be done by someone who is not involved in the EFT transactions.
Additions of fixed assets
The following steps must be taken before an asset is acquired:
A Capex Committee must provide a formal written proposal;
Quotes and the needed source of funding must be included in the application.
Following that, the plan must be presented to the Board of Directors.
The directors' decision must be recorded in writing;
For the acquisition of assets in large organizations, multiple degrees of authorization must be secured.
Any director who has an interest in a contract for the acquisition of assets must declare that interest.
The typical issuing of purchase order/delivery note from supplier/invoice will be utilized as supporting paperwork when the acquisition of an asset is approved.
For the purchase of an asset, a formal signed contract may be necessary in some circumstances.
Disposal of fixed assets
Cash revenues or trade-in values are the most common forms of proceeds from dispositions.
Normally, businesses have less formal procedures in place when it comes to disposing of their assets, therefore precise accounting might be disregarded.
The most significant danger of disposal is that disposed assets might still be recorded as assets in the statement of financial status in order to exaggerate assets.
Repairs and maintenance of assets
The danger of inappropriately treating repair and maintenance expenditures is a key worry inside the investment cycle's repair and maintenance activity. There's a chance that things may be capitalised rather than expensed in an attempt to inflate earnings, or that an item will be wrongly expensed rather than capitalised.