Investment & Finance Cycle + EFT Controls
Investment & Finance Cycle
Examples of transactions: Issuing shares; borrowing $$ from bank or other investors
Cycle is about transactions which a firm concludes to raise finance
Cycle is also about investments
Transactions in the cycle usually results in creation or alteration of an account balance
Number of transactions in this cycle are considerably smaller than everyday transactions such as purchases and sales, salaries and wages etc
Examples: PPE; making long-term loans; or investing surplus funds
Size of transactions normally material
Documentation
Transactions frequently governed by legislation and a co's MoI
Accounts affected include: land and buildings; accounts receivable; accounts payable; bank, depreciation expense
Investment cycle documentation also includes: capital budgets; fixed asset requisitions; board of directors minutes; invoices; general ledger accounts (eg fixed assets; depreciation; profit/loss on disposal)
Activities in investment cycle
Addition of fixed assets
Disposal of assets
Repair and maintenance of assets
Finance activities
Funding sources: owner's equity + borrowings
Owner's equity
Issue shares
share buy-backs
Authorisation for share issues
Dividend declarations
Borrowings
$ inflow from long/short-term borrowings
Repayment of capital sum
Interest levied on borrowings
Authorisation for borrowings
Types of transactions: issue of shares; retained income; dividends declared; share buy-backs; loans/borrowings
Accounts affected: retained income; income/expense accounts; bank; shareholders for dividends; capitalised lease assets
Key documents: Minutes of shareholder/directors' meetings; debenture trust deeds; share certificates; loan/lease contract; mortgage bond
Controls in the Finance cycle
Occurence/Validity
Authorisation
Completeness
Accuracy
Recording
Classification
All recorded assets are valid (really exist) and are supported by proper documentation
Test of control
Select a sample of fixed asset purchases and inspect that the supporting requisition and capital budget exists.
Enquire with the client's personnel about the procedures w.r.t. purchasing of fixed assets and periodic comparison of fixed assets with book assets.
All purchases and sales are authorised according to company’s policy
All valid fixed assets are recorded and nothing is left out.
All fixed assets are recorded at the correct amount and totals are arithmetically correct
All transactions w.r.t. fixed assets and depreciation are correctly recorded
All transactions w.r.t. 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
Substantive procedures for all assertions
Existence
Substantive testing is an audit procedure that examines the financial statements and supporting documentation to see if they contain errors.
Rights & Obligations:Inspect the underlying documents of title deeds/contracts/lease agreements for terms and conditions, parties involved etc
Select a sample of items from the fixed asset register, including new additions, and physically inspect the assets
Additions of fixed assets
Disposal of fixed assets
Repairs & improvements
Valuation: Revaluation of assets; Depreciation; Amortisation of intangible assets; Impairment; Accounting estimates:
Completeness: Scrutinise minutes/contracts/lease agreements/invoices to identify any material purchase transactions and follow through to entry in fixed asset register.
Presentation and disclosure: Inspect the financial statements to ensure that amounts are classified and disclosed correctly in terms of IFRS
Substantive procedures in finance cycle
Substantive analytical procedures
Detail substantive procedures
Weaknesses & recommendations
Electronic Fund Transfers (EFT)
Reconciled bank account with cashbook montly
Reconciliation done by a person who is Independent of the person that prepares cashbook
Reconciliation reviewed by senior independent official
To effect the payment 2 passwords of 2 different senior employees entered
After payments made should be an: audit trail; payment should reflect on the bank statement; bank reconciliation should be performed
Reconciliation should be done by a person who is independent of the EFT transactions that were made
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