appendix to bec-1.2 - additional content (w.e.f. july 2021)

Miles CPA Review BEC-1

BEC-1.2A-1

Appendix to BEC-1.2 -

Additional Content

(w.e.f. July 2021)

A-1.2) Business Processes (Operating Cycles)

BEC-1 Miles CPA Review

BEC-1.2A-2

A-1.2) Business Processes (Operating Cycles)

➢ Business Processes can be broken down into several cycles, or sets of related business

transactions. The AIS (Accounting Information System) collects and stores information about the

activities of an organization related to the following:

• Revenue to Cash Cycle - Process of taking orders, shipping products or delivering services,

billing customers, and collecting cash from sales

• Expenditure Cycle - Process of placing orders, receiving shipment of products or delivery of

services, approving invoices, and making cash payments

• Production Cycle - Process by which raw materials are converted into finished goods

• Human Resources and Payroll Cycle - Process of recruiting, interviewing, and hiring personnel,

paying employees for their work, promoting employees, and finalizing employees’ status from

retirements, firings, or voluntary terminations

• Property, Plant & Equipment (PP&E) Cycle - Process of acquiring resources (e.g., land,

buildings, and machinery) needed to enable an organization's business activities

• Financing Cycle - Process of obtaining funding, through debt or equity, to run an organizations’

activities and to purchase PPE, servicing the financing, and ultimate repayment of financial

obligations

• General ledger & reporting system - Process of recording, classifying, and categorizing an

organization's economic transactions and producing summary financial reports

➢ Note:

• Every organization divides its transactions across cycles, but not all organizations use every

cycle. E.g., a manufacturing company would likely employ all of the cycles; an advertising

agency would not likely use the production cycle, since that cycle is used to track the costs of

manufacturing a product

• Although most transactions are now typically done entirely online, manual systems are

presented in this topic to help candidates more easily envision the process

• Every cycle relates to other cycles. E.g., ✓ Revenue cycle receives finished goods from the production cycle, provides funds to the

financing cycle, and provides data to the general ledger & reporting system ✓ Expenditure cycle gets funds from the financing cycle, provides raw materials to the

production cycle, and provides data to the general ledger & reporting system ✓ Production cycle gets raw materials from the expenditure cycle, gets labor from the human

resources/payroll cycle, provides finished goods to the revenue cycle, and provides data to the general ledger & reporting system

✓ Human resources/payroll cycle gets funds from the financing cycle, provides labor to the production cycle, and provides data to the general ledger & reporting system

✓ Financing cycle gets funds from the revenue cycle, provides funds to the expenditure and human resources/payroll cycles, and provides data to the general ledger & reporting system

✓ The general ledger & reporting system get data from all of the cycles and provides information for internal and external users


BEC-1.2A-3

➢ Key considerations while understanding business processes:

• Responsibility of various functions/employees and Segregation of ARCC (Authorization, Recording, Custody and Comparison)

• Documents relevant to each cycle ✓ For effective controls, documents should be PPN (pre-numbered, pre-printed, numerical

sequence)

• Wherever cash is involved (Revenue cycle, Expenditure cycle, Payroll cycle), need strong ARCCS in place by management

• Preventive vs. Detective Controls ✓ Preventive controls - Identify misstatements as they occur and “prevent” them from further

processing (often costlier to implement). E.g., Use of security devices to safeguard inventory ✓ Detective controls - “Detect & correct” misstatements after they have occurred and already

entered the system (often cheaper to implement). E.g., Periodic physical inventory counts


BEC-1.2A-4

I) Revenue Cycle (Sales, Accounts Receivable & Cash Receipts)

➢ Flowchart for Sales/Billings (Document & Data)

Accounting Dept:

Billing & Accounts Receivable Dept: Warehouse / Shipping Dept:

Customer Purchase Order

Sales Dept:

Credit Dept:

Internal Sales Order

Internal Sales Order (APPROVED)

Bill of Lading

GOODS Sales Invoice

Sales Summary & Journal

Update General Ledger

Update A/R

master

CUSTOMER

Internal Audit Dept: Periodic Reconciliation

Summary

A

C2

A

R

R C


BEC-1.2A-5

➢ Flowchart for Cash Receipts (Document & Data)

➢ Flowchart for write-offs

Deposit Check in Bank

Accounting Dept:

Accounts Receivable Dept:

Cashier (Treasurer if no Cashier):

Customer Check & Remittance Advice (in sealed envelope)

Mailroom:

Customer Check

Check Deposit Summary

Cash receipt Summary & Journal


Update A/R master

Internal Audit Dept: Periodic Reconciliation

Remittance Advice

Deposit Slip + Check

Prelisting of checks

BANK

Accounting Dept: Accounts Receivable Dept:

Credit Dept:

Initiate Write-off (Debtor Ageing Schedule)


Update A/R

master

Treasurer:

Approve Write-off

C

C R

R

C2

A

R

A

R


BEC-1.2A-6

➢ Specific employees with separate duties to segregate incompatible functions - Note that the entity may not always have all the below employees or may use different names/designations; but what is important is to have proper Segregation of ARCC {ARCCS}

• Sales & billings: ✓ Sales manager - Generates internal sales orders based on customer orders (Authorization) ✓ Credit manager - Approves credit extension to the respective customer(s) (Authorization) ✓ Warehouse clerk - Holds custody of the inventory and releases for shipping on receipt of an

approved internal sales order (Custody) ✓ Shipping clerk - Responsible for shipping inventory to the customers (Custody) ✓ Billing clerk - Prepares sales invoices which are sent to customers (Recording) ✓ Receivables clerk - Updates sales invoices on the A/R master (Recording) ✓ General ledger bookkeeper - Records sales in the general ledger (Recording)

• Collections, sales returns & write-off of uncollectibles: ✓ Mail room clerk/receptionist - Receives mail from customers with customer checks and

remittance advice(s). Thereafter, prepares a prelisting of checks received, and forwards the documents to responsible personnel (Custody)

✓ Cashier - Receives checks from mailroom, prepares deposit slip and deposits checks at bank (Custody)

✓ Receivables clerk - Updates collections on the A/R master (Recording) ✓ General ledger bookkeeper - Records collections in the general ledger (Recording) ✓ Receiving clerk - Receives any inventory returned by customers (Custody) ✓ Treasurer - Approves credit memos for sales returns or write-offs (Authorization) ✓ Controller/Internal Auditor - Performs bank reconciliations and A/R ageing (Comparison)

➢ Documents & records frequently used in the revenue cycle:

• Customer Purchase Order - Order for goods placed by a customer

• Sales Order - Pre-numbered and prepared based on the customer purchase order (which helps track whether customer orders have been processed); generally includes customer details along with the description/quantity/price/value of the goods ordered by the customer ✓ Needs to be approved by the Credit Department before dispatch of goods to the customer

• Bill of Lading - Issued by the carrier to acknowledge goods received for shipment

• Sales Invoice - Pre-numbered record of sale sent to the customer listing description/quantity/ price/value of the goods supplied; also, often serves as a request for payment ✓ Before preparing, billing clerk should validate/compare Sales order and Bill of lading

• Sales Journal - Records all credit sale invoices ✓ Cash receipts journal is used to record all cash sales

• Subsidiary Receivables Ledger - Contains ledger account for each individual customer (with details of sales, sales returns, payments received, etc.)

• Remittance Advice - Letter often sent by customers along with their check mentioning the invoices which are paid off with that check payment

• Pre-listing of Checks - Summary of checks received (usually by the mailroom/receptionist)

• Cash Receipts Journal - Records all cash collections from credit sales (as well as cash sales)

• Deposit Slip - Form used to deposit cash/checks into a bank account; may be stamped by bank as a proof of acknowledgement

• Bank Reconciliation - Matching the bank balance per books to the balance per bank statement


BEC-1.2A-7

➢ Sample ARCCS in the Revenue Cycle • Sales/Billings:

✓ Segregate ARCC Authorizing Sales - Sales Dept., Credit Dept. Recording Sales - Billing & A/R Dept., Accounting Dept. Custody of Inventory - Warehouse/Shipping Dept. Comparisons - Internal Audit Dept.

✓ Segregate the Authorization of sales (by Sales team) from Authorization of credit to customers (by Credit department)

✓ Sales discount procedures to ensure proper Approval and Recordkeeping of discounts (such that Sales and A/R are not overstated)

• Cash Receipts: ✓ Cash receipts increase the Inherent Risk (IR) in the Revenue Cycle which necessitates strong

I/C by the entity [to reduce Control Risk (CR) and RMM] ✓ Segregate ARCC

Recording Cash Receipts - A/R Dept., Accounting Dept. Custody of Cash - Mailroom/receptionist, Cashier Comparisons - Internal Audit Dept.

✓ Recording of Cash Receipts - Accounting Dept. should match the pre-listing of checks (from Mailroom/receptionist), check deposit summary (from Cashier) and the cash receipt summary (from A/R Dept.)

✓ Custody of cash/checks Cannot go to A/R or Accounting Dept. (who do Recordkeeping) May bond employees who handle cash (such that the insurance company which bonded

the employee would cover the loss in case of employee theft) May have two individuals open the mail at the mailroom (to prevent theft) May eliminate employee access to cash by using bank lockbox services (i.e., post office

box accessed by the entity’s bank). Considered very effective I/C as customers send payments directly to the bank lockbox instead of sending payments to the entity

• Write-offs: ✓ Segregate ARCC

Authorizing write-offs - Credit Dept., Treasurer Recording write-offs - A/R Dept., Accounting Dept.

✓ Cashier (who has Custody of cash) cannot be responsible for Authorizing write-offs ✓ Proper Authorization and Recordkeeping needed; else, possible that amounts may be

subsequently collected and misappropriated by employees • Sales Returns:

✓ Segregate ARCC Authorizing credit memo for sales returns - Sales Dept., Credit Dept., Treasurer

- Need to ensure that sales returns are for a valid reason before authorizing credit Recording sales returns - A/R Dept., Accounting Dept. Custody of sales returns - By Receiving Dept. who should issue a pre-numbered receiving

report for each sales return ✓ Cashier (who has Custody of cash) cannot be responsible for Authorizing credit memos

Sales Dept = Variable pay VS. Credit Dept = Fixed pay

Otherwise bad debt = Employee

stole cash


BEC-1.2A-8

➢ Sample Controls related to Sales

• A - Sales Dept., Credit Dept.

• R - Billing / Accounts Receivable, Accounting

• C - Warehouse & Shipping

• C - Internal Audit / Controller

Department & Employees

Documents In / Out Sample Controls to be placed by Management

Sales Dept. (Sales Clerk)

In: Customer PO Out: Sales Order (internal)

- Pre-numbered sales orders - Obtain authorization from Credit Dept. for credit sales

Credit Dept. (Credit Manager)

In: Sales Order Out: Approved Sales Order

- Authorize credit to customers - Follow up on overdue accounts,

and initiate any write-offs (which are forwarded for treasurer’s approval)

Warehouse & Shipping Dept. (Warehouse Clerk, Shipping Clerk)

In: Approved Sales Order Out: Bill of Lading, Inventory Summary

- Warehouse to release goods to Shipping only after receipt of approved sales order

- Shipping to checks if goods released by warehouse conforms to approved sales orders

Billing/Accounts Receivable (Billings Clerk, Receivables Clerk)

In: Approved Sales Order, Bill of Lading Out: Sales Invoice, Updated Sales Summary, Updated A/R master

- Match sales orders and bill of lading before invoicing - Verify pricing on sales order (with master price list, customer

agreement, etc.) - Pre-numbered sales invoices - Update A/R master and tally A/R input with invoice batch totals - Tally sales summary with invoice batch totals - Mail customer statements periodically

Accounting (General ledger bookkeeper)

In: Approved Sales Order, Inventory Summary, Updated Sales Summary Out: Updated General Ledger

- Tally invoice batch totals with sales summary - Post to General Ledger - Generate General Ledger exception report and resolve the

exceptions

A | R | C | C


BEC-1.2A-9

➢ Sample Controls related to Cash Receipts

• A - n/a

• R - Accounts Receivable, Accounting

• C - Mailroom, Cashier




Mailroom (Mailroom Clerk or Receptionist)

In: Customer Check Out: Customer Check, Remittance Advice, Prelisting of Checks

- Segregate the checks & remittance advices received - Prepare a pre-listing of checks - Restrictively endorse checks (e.g., Stamp “For deposit only”) - Send checks to Cashier - Send remittance advices to A/R - Send copy of prelisting of checks to Cashier, A/R, Accounting

Cashier (Cashier)

In: Customer Check, Prelisting of Checks Out: Check deposited in Bank, Check Deposit Summary

- Prepare deposit slip for checks received, and deposit in bank. Deposit slips acknowledged by bank to be filed

- Prepare check deposit summary (send copy to A/R & Accounting) - Employees who handle cash may be bonded - May implement bank lockbox

Accounts Receivable (Receivables Clerk)

In: Remittance Advice, Prelisting of Checks, Check Deposit Summary Out: Updated Cash Receipt Summary, Updated A/R master

- Tally remittance advices with check deposit summary - Update A/R master - Generate cash receipts summary (send copy to Accounting)


In: Prelisting of Checks, Check Deposit Summary, Updated Cash Receipt Summary Out: Updated General Ledger

- Tally prelisting of checks (from Mailroom), check deposit summary (from Cashier), and cash receipts summary (from A/R)

- Post to General Ledger - Prepare bank reconciliation

A | R | C | C


BEC-1.2A-10

II) Expenditure Cycle (Purchases, A/P & Cash Disbursements)

➢ Flowchart for Purchases, A/P & Cash Disbursements (Document & Data)

Along with copy of Requisition, Purchase Order, Receiving Report & Invoice

Requisitioning Dept. / Stores:

Approved Requisition

Purchase Dept.:

Purchase Order

Receiving Dept.:

Receiving Report

Accounts Payable Dept.:

Voucher

VENDOR

GOODS Vendor Invoice

Accounting Dept.:

Treasurer:

Check Remittance Advice


Purchase Summary & Journal; Update

A/P Master

Along with copy of Requisition

Cancel the voucher package

C

R

A

A

R

C


BEC-1.2A-11

➢ Specific employees with separate duties to segregate incompatible functions {ARCC}: • Purchase manager - Based on purchase requisitions, negotiates terms with vendors and issues

purchase orders (Authorization) • Receiving clerk - Receives goods sent by vendors (Custody)

• Payables clerk - Updates purchases on A/P master, and prepares payment voucher (Recording) • General ledger bookkeeper - Records vendor purchases/payments in general ledger (Recording) • Treasurer - Signs check for vendor payment (Custody)

➢ Documents & records frequently used in the expenditure cycle: • Purchase requisition - Pre-numbered internal request/authorization by a user dept. (or stores)

for goods to be ordered by the purchase dept. • Purchase order (P.O.) - Pre-numbered document issued to vendor to request delivery of goods

(includes description/quantity/agreed price of goods). Additional copies of P.O. are sent to: ✓ Requisitioning dept. - who had requested for the purchase ✓ Receiving Dept. - who will physically receive the delivery of the goods

For better I/C, the P.O. copy sent to receiving dept. excludes quantity of goods ordered (called ‘blind copy’) to avoid any possibility of receiving clerk knowing or relying on the P.O. quantity. Therefore, the receiving clerk is forced to independently count the goods received from the vendor to prepare the receiving report

✓ Accounts Payable Dept. - who will prepare the payment voucher (after the 3-way match - i.e., matching the vendor invoice to the P.O. and receiving report)

• Receiving report - Pre-numbered internal document prepared to record the goods received by the receiving department. Copies of the receiving report are sent to: ✓ Requisitioning Dept. - who had requested for the purchase ✓ Accounts Payable Dept. - who will prepare the payment voucher (after the 3-way match -

i.e., matching the vendor invoice to the P.O. and receiving report) • Purchase (vendor) invoice - Document received from the vendor listing description/quantity/

price/value of the goods supplied; also, often serves as a request for payment by the vendor [basically, this is sales invoice in the vendor’s revenue cycle]

• Invoice register - List of purchase invoices received with date, vendor details, invoice value • Payment voucher - Pre-numbered internal document prepared by the payables clerk to request

the treasurer to process the vendor’s payment ✓ Prepared after 3-way match done by the payable clerk - i.e., matched the following:

Vendor invoice (received from vendor) Purchase order (received from Purchase Dept.) Receiving report (received from Receiving Dept.)

• Purchase journal (or voucher register) - Records all purchases made from vendors on credit • Check (for vendor payment) - Prepared by a clerk in the treasury dept. (with no signing

authority) and signed by the treasurer ✓ Before signing - Treasurer matches check $ with payment voucher & supporting documents ✓ After signing - Treasurer cancels the payment voucher package (i.e., stamps it as “paid”) to

ensure that the same voucher is not presented again for payment

Also, treasurer mails the check to the vendor along with a remittance advice (which specifies the vendor invoices being cleared by the check payment)

The cancelled/paid voucher package is sent to Accounting Dept. for posting/filing

Blind copy -

No quantity

3-way

match


BEC-1.2A-12

➢ Sample ARCCS in the Expenditure Cycle • Purchases:

✓ Segregate ARCC Authorizing Purchases - Requisitioning Dept. / Stores, Purchase Dept. Recording Purchases - A/P Dept., Accounting Dept. Custody of Inventory - Receiving Dept. Comparisons - Internal Audit Dept. (e.g., periodic inventory counts)

• Cash Disbursements: ✓ Cash disbursements increase the Inherent Risk (IR) in the Expenditure Cycle which

necessitates strong I/C by the entity [to reduce Control Risk (CR) and RMM] ✓ Segregate ARCC

Recording Cash Disbursements - A/P Dept., Accounting Dept. Custody of Cash - Treasurer Comparisons - Internal Audit Dept.

✓ Individuals who prepare payment vouchers should not have access to any unused P.O.’s • Purchase returns:

✓ Ensure that debit memo is prepared for purchase returns ✓ Segregate ARCC

Authorizing Purchase Returns - Requisitioning Dept. / Stores, Purchase Dept. Recording Purchase Returns - A/P Dept., Accounting Dept. Custody of Inventory - Warehouse/Shipping Dept. Comparisons - Internal Audit Dept.


BEC-1.2A-13

➢ Sample Controls related to Purchases

• A - Requisitioning Dept., Purchase

• R - Accounts Payable, Accounting

• C - Receiving Dept.




Requisitioning Dept. / Stores

Out: Approved Purchase Requisition

- Pre-numbered requisitions

- Send original copy of approved requisition to Purchasing

- Inspect goods and sign receiving report (RR) on receipt of goods from Receiving dept.

Purchasing (Purchase Manager, Purchase Clerk)

In: Approved Purchase Requisition

Out: Purchase Order (PO)

- Ensure requisitions are duly approved

- Issue pre-numbered purchase order (PO) to approved vendor (original copy), Receiving (blind copy), A/P

Receiving (Receiving clerk)

In: PO (blind copy), Vendor Invoice

Out: Receiving Report

- Inspect goods received from vendors, prepare receiving report (RR) and tally description of goods received with blind copy of PO; also, indicate quantity received on the blind copy of PO

- Send goods to Requisitioning dept. and obtain their sign on RR

- Distribute pre-numbered RR to A/P (original copy), Requisitioning dept., Purchasing

Accounts Payable (Payables manager, Payables Clerk)

In: PO & Remittance, Vendor Invoice, Receiving Report

Out: Voucher

- Receive invoice from vendors, RR from Receiving dept., PO & requisition from Purchasing

- 3-way match: vendor invoice, RR, PO

- Check for mathematical accuracy & approvals

- Issue pre-numbered voucher to Accounting & Treasurer

- Prepare purchase journal & purchase summary (reconcile both), update A/P master

A | R | C | C


BEC-1.2A-14

➢ Sample Controls related to Cash Payments

• A - Requisitioning Dept., Purchase

• R - Accounts Payable, Accounting

• C - Treasurer (cash)




Accounts Payable (Payables Manager, Payables Clerk)

In: PO & Remittance, Vendor Invoice, Receiving Report

Out: Voucher (also submit copy of all supporting documents to Treasurer)

- Send voucher to Treasurer on due date for payment

- Receive cancelled voucher package from Treasurer

- Receive check summary from Treasurer; update disbursements on A/P master

Treasurer In: Voucher (along with copy of all supporting documents - Remittance, PO, RR & Invoice)

Out: Check to vendor, Remittance Advice (Check Summary)

- Receive voucher package for payment from A/P; review for approvals & completeness

- Pre-numbered checks

- Sign checks and cancel voucher and supporting documents

- Prepare check summary

- Mail check to vendor

- Send cancelled voucher/ supporting documents to Accounts Payable

- Send copy of remittance advice / check summary to A/P & Accounting


In: Voucher, Remittance Advice (Check Summary)

Out: Updated General Ledger

- Receive check summary from Treasurer

- Post to General Ledger

- Tally totals of check summary with amounts in A/P master

- Perform periodic independent bank reconciliation

A | R | C | C


BEC-1.2A-15

III) Operations (Production) Cycle

➢ Operations (Production) Cycle - Varies by company and by product; however, there is a pattern of

accounting data inputs, processes & outputs that can be used when considering the production

cycle


BEC-1.2A-16

➢ Major activities in the operations cycle:

• Activity #1: Product design

✓ Incorporates cost management reports as an input into the design process in addition to

other relevant sources

✓ Cost information helps guide the design of a product in order to effectively project the cost

of the various designs

✓ Output includes the bill of materials (the product ingredients) and the operations list (the

product recipe)

• Activity #2: Planning and scheduling

✓ Uses customer orders as the input in determining whether to use manufacturing resource

planning (MRP) or lean Manufacturing

Specifically, MRP uses customer order forecasts to determine when and how much to

manufacture

Lean (just‐in‐time) manufacturing plans and schedules production based on the actual

customer orders, meaning that inventory is ordered, and production is carried out just

in time to fill customer orders

✓ The outputs from this activity include the master production schedule, production orders

(authorizations to actually start manufacturing the product), material requisitions to pull the

necessary materials from inventory, and move tickets (authorizations to move products

from one stage of the production process to the next)

• Activity #3: Production operations

✓ Utilizes the output documents from Activity #2 (Planning & Scheduling) for the process of

manufacturing the product

✓ The primary accounting function in this activity is to account for production costs and to

track relevant inventory levels

✓ Outputs from this activity are the revised and updated input documents plus the job‐time

tickets used for costing the labor used during production

• Activity #4: Cost management

✓ Includes the output documents from Activity #3 (Production operations). The process uses

the data from those documents to determine product costs using either the job order

costing or processing costing methods, depending on the nature of the items produced

✓ The final output is the cost of goods manufactured statement and any other relevant and

necessary reports that are used in financial reporting and management decision making


BEC-1.2A-17

➢ Controls for Inventories in the Production & Conversion Cycle -

• Though most of the controls for inventories are covered in the Revenue & Expenditure Cycle, special considerations may be needed for I/C for manufacturing entities where: ✓ Inventory is manufactured (not purchased as in the purchasing cycle) ✓ Only raw materials are purchased

• Specific employees with separate duties to segregate incompatible functions {ARCC}: ✓ Purchase manager - Based on purchase requisitions, negotiates terms with vendors and

issues purchase order for the raw materials (Authorization) ✓ Receiving clerk - Receives raw materials sent by vendors (Custody) ✓ Warehouse clerk - Holds custody of the verified quantity of inventory (Custody) ✓ Shipping clerk - Responsible for shipping finished goods inventory to the customers

(Custody) • Segregate ARCC for Inventory in the Production & Conversion Cycle:

✓ Authorizing purchases (for raw materials) Material requisitions should be properly authorized (use pre-numbers requisitions) Purchases should be properly authorized (by Purchase Dept.; use pre-numbered P.O.’s)

✓ Recordkeeping of Inventory Maintain perpetual records for large $ items Ensure Direct Materials, Direct Labor and Overheads are appropriately charged Implement standard costing system and calculate/allocate variances appropriately

✓ Custody of Inventory In a manufacturing entity, custody needs to maintained properly for raw materials, WIP

(work-in-process) as well as finished goods (whereas in a merchandising entity, there is only finished goods inventory)

Inventory receipts should be properly accounted for (by Receiving Dept.; use pre-numbered receiving report)

Safeguard inventory by physical controls, security devices, inventory tags, etc. ✓ Comparison

Perform timely periodic physical inventory counts Reconcile subsidiary records to inventory control accounts on a periodic basis


BEC-1.2A-18

IV) Personnel & Payroll Cycle

Production Dept. (Operations):

Approved time records

Payroll Dept.:

Payroll Checks (Unsigned)

Treasurer:

Payroll Checks (Signed)

EMPLOYEEAccounting Dept:

Accounting Dept.:


Personnel Dept.:

Pay rate authorization document

Update Employee records & Payroll

Journal

Payroll Summary

C

R

A A

R


BEC-1.2A-19

➢ Specific employees with separate duties to segregate incompatible functions {ARCC}:

• Personnel Dept. (HR Dept.) - Deals with matters relating to employees including hiring, salary/pay rates & benefits (including changes in salary/pay rates, any payroll deduction, etc.) and termination (Authorization)

• Functional Dept. Supervisor - Approves employee time-sheets (Authorization)

• Payroll Dept. - Calculates payroll $ and withholds payroll taxes as applicable (Recording) ✓ Calculates payroll based on:

Approved salary/pay rates as well as hiring/termination details received from Personnel/HR Dept.

Time sheets approved by functional supervisors

• Treasurer - Signs and distributes pay checks to employees (Custody)

• Controller - Prepares bank reconciliation (Comparison)

➢ Documents & records frequently used in the payroll cycle:

• Personnel records

• Rate authorization form

• Deduction authorization form

• Time sheets (or time cards)

• Payroll register

• Paychecks

➢ Segregate ARCC in the Personnel and Payroll Cycle • Authorizing payroll - Personnel/HR Dept., Functional Dept.

✓ Personnel/HR Dept. authorizes all hires, termination, pay rate ✓ Functional Dept. authorizes time sheets (including any over-time)

• Recording payroll - Payroll Dept. ✓ Payroll dept. cannot have signing authority on checks; and should not even have custody of

any signed checks (unless voided) • Custody of cash - Treasurer

✓ Treasurer should be responsible not only for signing but also for distribution of checks to employees

✓ Unclaimed paychecks - Treasurer should keep them in custody until these are distributed. Do NOT return to the payroll dept. (unless the checks have been voided)

✓ In case of cash payment of wages, employees should be asked to sign a receipt for $ received; and any unclaimed cash should be deposited into a special bank account

• Comparisons - Internal Audit Dept., Controller


BEC-1.2A-20

V) Investing & Financing Cycle

➢ Investing cycle - Includes

• Investments in equity/debt securities (marketable securities or investments accounted for using the cost/equity method) - Note that given the high $ value, there could be a risk of fraud (including possibility management over-ride of I/C). Need to Segregate ARCC: ✓ Authorizing - Ideally, board of directors should authorize purchase/sale of investments ✓ Recording - Maintain detailed records of the investments and related income

(dividend/interest) Also, need to have I/C regarding FV measurement, and classification of marketable

securities (trading, available-for-sale or held-to-maturity) ✓ Custody - Ideally, by an independent third-party custodian

Else, investments may be kept in a bank safe-deposit box under the joint control of two officers (e.g., treasurer and another entity officer); i.e., both officers need to be present to access the investment securities

Examine securities to ensure that securities are registered in the entity’s name ✓ Comparison -

Periodic physical inspection & reconciliation with investment subsidiary ledger (e.g., by internal auditors)

Compare current market prices with the FV of securities accounted, and validate if the securities are appropriately classified based on management’s intent (e.g., by controller)

• PP&E acquisitions, disposals and depreciation. Need to Segregate ARCC:

✓ Authorizing - Require board of directors’ approval above certain $ (with proper control via capital budgeting techniques); else, handled similar to purchase of merchandise PP&E retirements also be authorized by appropriate level of management

✓ Recording - Maintain detailed records of PP&E acquisitions & retirements, and accumulated depreciation Depreciation expense should be appropriately estimated Ensure that repair & maintenance expenses do not get capitalized as PP&E (best to have

written policies for capitalizing vs. expensing decisions) ✓ Custody - Maintain physical controls to avoid theft ✓ Comparison -

Periodic physical inspection of PP&E (e.g., by internal auditors)

Compare with budgeted $ (high variance may indicate capitalizing vs. expensing issues)


BEC-1.2A-21

➢ Financing cycle - Includes

• Debt - issuance/repayment of debt and payment of interest. Need to Segregate ARCC: ✓ Authorizing - Require board of directors’ (or management) approval ✓ Recording - Maintain detailed records of long-term debt and debt transactions, and

documentation of all financing arrangements Ensure that payment of principal/interest and premium/discount amortizations are

properly recorded ✓ Custody - For bonds issued by the entity, often an independent trustee is appointed ✓ Comparison -

Periodic reconciliation of ledger amounts with records of debt issuance Need to monitor compliance with the debt covenants

• Equity - issuance/repurchase of capital stock, and payment of dividends ✓ Authorizing - Require board of directors’ approval ✓ Recording - Maintain detailed records of stock transactions, and payments of dividend ✓ Often entities appoint an independent stock registrar and stock transfer agent which

ensures stronger I/C

Custody - Stock transfer agent carries out transfers of stock ownership

Comparison - Stock registrar ensures that stock is issued with due authorization of the board of directors and is in compliance with the articles of incorporation

✓ Alternatively, the entity can handle its own stock transactions

Custody - An officer should be responsible for maintaining the stock certificate book - Note: This officer should not have Recordkeeping responsibility

Comparison - - Periodic reconciliation of number of shares outstanding with stock certificate book - Need to ensure that stock transactions comply with the articles of incorporation


BEC-1.2A-22

VI) General Ledger & Reporting Process

➢ General Ledger & Reporting Process -

• Primary steps (as shown in the chart below):

✓ Update the general ledger - Journal entries from accounting subledgers and journals as well

as the company’s treasury department update the general ledger

✓ Post adjusting entries - Originate from the company controller’s office and are posted to

the general ledger

✓ Prepare financial statements - Prepared from the data maintained in the general ledger

✓ Produce managerial reports (such as budgets and financial performance reports) - Also

prepared with data from the general ledger


BEC-1.2A-23

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Business Processes)