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Investment and Finance Cycle & EFT Payment controls - Coggle Diagram
Investment and Finance Cycle & EFT Payment controls
Finance & Investment Cycle
Cycle mainly includes:
Raising of finance & the replacement therof;
Obligations which arise out of the finance raised (interest & dividends);
The application of funds rasied for the acquisition of assets
Characteristics:
Relatively few transactions;
Transactions are usually material;
Frequently governed by legal and regulatory requirements
Companies raise funds to purchase fixed assets, expand the business or replace worn out assets by:
Share or debenture issue
Obtaining loan capital
Presents opportunity for fraud, eg:
Ommitting long terms liabilities from the FS;
Understating the value of long term liabilities;
Overstating assets by including fictitious assets or assets which the company does not own;
Overstating assets by understating depreciation allowances or impairment
Investment Activities
Investment activities comprise of the acquisitions, disposal and management (repair and maintenance) of tangible and intangible assets.
Documentation:
Capital budgets;
Fixed asset requisition with quote/negotiated prices;
Minutes of the BOD (authorization of purchases and sales);
Invoices (purchases and sales);
Fixed Asset register;
GL Accounts (Fixed assets, depreciations, profit/loss on disposal, accumulated depreciation)
Activities (addition of fixed assets):
Formal written proposal by Capex committee must be completed;
Proposal supported by quotes & required source of finance;
Presented to BOD;
Decision by directors must be minuted;
Large organizations require authorization from different levels;
Interest by any director must be disclosed;
Usual issue of PO & DN from supplier/invoice as supporting docs;
Somer cases require a signed contract for the purchase of an asset
Activities (disposal of fixed assets):
Proceeds usually taken from cash receipts or trade-in values;
Less control over disposal and as a result accurate accounting can be overlooked;
Biggest risk - Assets can still be reflected as assets in the SOFP in an attempt to overstate assets
Activities (repair & maintenance):
The risk that costs incurred for repair and maintenance are incorrectly treated. The risk exists that items are capitalised instead of expensed in the attempt to overstate profits or that an item is incorrectly expensed instead of capitalised.
Financing Activities
Owner's equity (activities):
Issue of shares;
Share buy backs;
Statutory requirements;
Authorization for the issue of shares;
Declaration of dividends.
Borrowings (activities):
Cash inflow from long-term/short-term borrowings received;
Subsequent repayment of capital sum;
Interest charged on borrowings;
Authorization required for borrowings;
Documentation:
Minutes of shareholders/directors - provide approval;
Debenture trust deed - terms & obligations;
Prospectus - public she offering doc;
Share certificate - Evidence of ownership;
5.Loan/lease agreement - Terms of loan/lease;
Mortgage bond - Agreement signed over property;
Journal voucher - journal entries (cals, interest)
Control Objectives
Occurrence/Validity
Authorization
Completeness
Accuracy
Recording
Classification
Cut-off
General Controls
Internal Controls:
Occurrence/Validity - Supporting docs, Recorded assets periodically compared to physical assets
Authorization - Purchases/Sales authorized by senior management, Numerical requisition/sales docs, recorded in minutes
Completeness - Capital requisitions numerically accounted for, missing numbers followed up, FA recorded in FA register & regularly compared with fixed assets
Accuracy - Recorded at amount of invoice, Depreciations & other cals done by computer
Recording - Recorded in fixed asset ledger accounts & fixed asset register, FAR reconciled with control accounts
Classification - Classified into respective categories according to company policy, improvements capitalized as fixed assets & distinguished from maintenance
Cut-off - Recorded at the date of receipt & when sold - risk transfer
General controls - Stored in permanent form, Safe guarded, insured adequately
Test of controls:
Occurrence/Validity - Select & inspect sample of fixed asset purchase, enquire about procedures, inspect proof of comparisons
Authorization - Enquire with personnel wrt policy on authorization, inspect numerical docs, inspect that decision was recorded in minutes
Completeness - Inspect capital requisitions being numerical, inspect proof of client review, inspect asset register for proof of review
Accuracy - Enquire about procedures for recording, Inspect assets being recorded as per invoice amount, test functioning of programmed controls
Recording - Select purchases/sales & follow through to source docs, inspect reconciliation with accounting records & review by senior employee
Classification - Verify procedure followed when classifying assets, review FAR & ledger accounts for correct classification
Cut-off - Enquire procedures wrt recording & cut-off, Select purchases/sales from source docs to ledger accounts and FAR
General controls - Enquire with personnel wtt safeguarding, observe procedures wrt safeguarding
Substantive Procedures of all Assertions:
Substantive testing is an audit procedure that examines the financial statements and supporting documentation to see if they contain errors.
Substantive analytical procedures:
Comparisons of current information to prior year information or budgets and ratio analysis & comparison of financial and non-financial information derived from understanding the core of the processes and related business processes of the entity.
Detail substantive procedures:
A procedure that examines the financial statements and supporting documentation to see if they contain errors. Needed to as evidence that financial records are complete, valid and accurate
Assertions:
Existence - The inventory should physically exist at year-end
Completeness - There are no unrecorded inventory or undisclosed items at year-end
Rights & Obligations - The entity has valid title to all inventory at year-end
Accuracy and Valuation - Inventory should always be stated at the lower of cost or NRV & inventory has been determined through the allocation of raw material, labour and overhead manufacturing expenses to manufactured goods
Presentation & Disclosure - Inventory is correctly classified and presented ito relevant accounting standards
Cut-off - Inventory transactionsa re recorded in the correct period
General substantive procedures:
Agree opening balances to prior year closing balance
Agree total of the General Ledger to Trial Balance & FS
Inspect minutes of meetings for authorization of transaction
Test presentation & disclosure of transactions in FS
Test castings & calculations of the GL, docs & recons
Overall review for exceptions/unusual entries in the GL accounts
Obtain a management representation letter
Evaluate the effectiveness of internal control and the impact on the nature, timing & extent of the substantive procedures
Performs analytical procedures
Electronic Fund Transfer: EFT
Reconciliation:
It is important that the bank account should be reconciled monthly with the Cashbook:
The reconciliation should be done by a person who is Independent of the person that writes up the cashbook
The reconciliation should be reviewed by senior independent official.
EFT Payments should have the following:
Multilevel passwords should be used, from two senior employees. These password 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
All EFT transfers should be limited to a specific day
Completeness tests should be performed
To effect the payment 2 passwords of 2 different senior employees should be entered
After the payments are made there should be an:
8.1 Audit trail;
8.2 The payment should reflect on the bank statement;
8.3 A bank reconciliation should be performed.
The reconciliation should be done by a person who is independent of the EFT transactions that were made.
Weakness and risks
A company has a weakness in their internal control procedures of they do not have any asset acquisition policies in place. Without proper policies they face the risk that unnecessary/unauthorized assets could be acquired or that assets could be acquired that do not fall within the approved CAPEX budget which can place them in huge financial difficulties.