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Finance and Investment Cycle - Coggle Diagram
Finance and Investment Cycle
This cycle mainly deals with
Obligations which arise out of the finance raised (interest and dividends);
The application of funds raised for the acquisition of assets.
Raising of finance (funds) and the repayment thereof;
This cycle presents the directors of a company with a fair number of opportunities to report fraudulently as there are numerous accounts which can be manipulated. Some examples of fraud in this cycle consist of the following:
Overstating assets by understating depreciation allowances or impairment.
Overstating assets by including fictitious assets or assets which the company does not own;
Understating the value of long term liabilities (loans);
Omitting long term liabilities (loans) from the financial statements;
Investment Activities
Transaction
Disposal of assets
Purchase of assets, Capitalisation of assets
Purchase/ development of intangible assets
Revaluation
Depreciation
Documents and records
Fixed Asset requisition with quote/negotiated prices
Capital budgets
Minutes of Board of Directors (authorisation of purchases and sales)
Invoices (purchases and sales)
Fixed Asset register
General Ledger accounts:
Fixed Assets
Depreciation
Profit/Loss on disposal
Accumulated depreciation
Activities in the investment cycle
ADDITIONS OF FIXED ASSETS
DISPOSAL OF FIXED ASSETS
REPAIR AND MAINTENANCE OF ASSETS
FINANCE ACTIVITIES
OWNER’S EQUITY
BORROWINGS
Internal Controls, control objectives and test of control in the cycle
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 left out.
Accuracy: All fixed assets are recorded at the correct amount and totals are arithmetically correct.
Recording: All transactions w.r.t. fixed assets and depreciation are correctly recorded.
Classification: 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 testing
Substantive analytical procedures
Substantive analytical procedures include comparisons of current
information to prior year information or budgets and ratio analysis. It is also
the comparison of financial and non-financial information derived fromunderstanding the core of the processes and related business processes of the entity.
Detail substantive procedures
General controls
There are general substantive procedures that an auditor can perform and these are not just related to one specific cycle so these include:
Agreeing opening balances to prior year closing balances;
Agree total of the general ledger to trial balance and financial statements;
Inspect your minute of meetings for authorisation of transactions;
Test presentation and disclosure of transactions in financial statements;
Test castings and calculations of your general ledgers and documents as well as your reconciliations;
Overall review for exceptions or unusual entries in your general ledger accounts;
Obtain a management representation letter
Evaluate the effectiveness of internal controls and the impact on the nature timing and extent of substantive procedures; and
Perform analytical procedures - These are the comparisons with prior year balances orbudgets and follow up any major fluctuations
Substantive procedures
Valuation
Existence
Rights & Obligations:
Completeness:
Cut-off:
Accuracy:
Presentation & Disclosure:
DETAIL SUBSTANTIVE PROCEDURES OF ALL ASSERTIONS
Existence:
Rights and Obligation:
Valuation:
Electronic Fund Transfers (EFT)
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
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, for example, Payroll should run 25th of each month;
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:
Audit trail;
The payment should reflect on the bank statement;
A bank reconciliation should be performed.
The reconciliation should be done by a person who is independent of the EFT transactions that were made.
