Auditing in CIS Environment Mr. Edgar D. Dalumpines, Jr.

, CPA
Chapter 3 - Transaction Processing Notes

In this chapter, we aim to learn the following:

 Understand the broad objective of the three transaction cycles and the types of transactions
processed by each of them
 Understand the relationship between traditional accounting records and their digital equivalents in
computer-based accounting systems
 Be familiar with the documentation techniques used for presenting manual and computer-based
systems
 Understand the technologies used to automate and reengineer accounting information systems

Transaction Cycles

1. Expenditure cycle
2. Conversion cycle
3. Revenue cycle

Expenditure cycle

This is the cycle where expenses of the Company are being processed. Decisions in this cycle includes:

 Materials and supplies (both products and services) to be purchased - Accounts Payable system
 Cash payments made to suppliers - Cash disbursements system
 Salaries of employees - Payroll system
 Fixed assets requirement - Fixed Assets system

Conversion cycle

This is the cycle where actual products (both merchandise and services) are being produced. From the
materials purchased from the expenditure cycle, these are then processed to prepare these into
marketable state.

The subsystems for this cycle are:

 Production planning - involves capacity planning, inventory requirement based on budgeted

activity for a certain period
 Control cost accounting - controlling cost of production for efficiency measures

Revenue cycle

This is the cycle where the products of the company are sold. This cycle includes:

 Sales order processing - involves processing of customer orders

 Cash receipts - involves collection of credit sales

Accounting records (Manual and Computed-based systems)

Manual Systems

Documents
Source documents
Product documents
Turnaround documents

Journals
Special journals
General journals
Auditing in CIS Environment Mr. Edgar D. Dalumpines, Jr., CPA
Chapter 3 - Transaction Processing Notes

Registers

Ledgers
Subsidiary
General

The documents presented above creates an audit trail for tracing transactions. This trail is commonly
used by auditors in performing their procedures. Further, this audit trail is used to address the assertions
of the company under audit. (Completeness, Accuracy, Existence, Valuation, Presentation and
disclosure, and Rights and obligation)

Illustration:

Manual accounting system for Revenue cycle

Computer-based accounting Systems

File Types

Master file
Transaction file
Reference file
Archive file

The file types above are used as digital audit trail in a computer-based accounting system. Although there
are no physical documents that an auditor examines, there are ways in which an auditor may opt to use
the extracts from the accounting system. In order to protect auditors from using manipulated data, the
auditors themselves does the extraction (if access is given) or is present in the extraction of data. Further,
there are certain additional procedures applied to avoid using erroneous data.

Flowcharting

Flowcharting is a documentation technique employed by many organization in documenting their

processes. Accounting manuals (both in Manual and Computer-based accounting systems) of most
organization are documented using this technique.

For auditors, this is useful in documenting the understanding of the processes of the company being
audited. Documenting the understanding of the processes allows the auditors to point out control points
(necessary in assessing internal controls) and identify any deficiencies in the design of the process being
implemented.
Auditing in CIS Environment Mr. Edgar D. Dalumpines, Jr., CPA
Chapter 3 - Transaction Processing Notes

Flowcharting symbols
Auditing in CIS Environment Mr. Edgar D. Dalumpines, Jr., CPA
Chapter 3 - Transaction Processing Notes
Auditing in CIS Environment Mr. Edgar D. Dalumpines, Jr., CPA
Chapter 3 - Transaction Processing Notes

Illustration: Flowcharting

To demonstrate flowcharting, let's assume an auditor needs to flowchart a sales order system to evaluate
its internal control procedures. The auditor will begin interviewing individuals involved in the sales order
process to determine what they do. This information will be captured in a set of written facts similar to
those below. Keep in mind that the purpose here is to demonstrate flowcharting.

1. A clerk in the sales department receives a hard-copy customer order by mail and manually prepares
four hard copies of a sales order.
2. The clerk sends Copy 1 of the sales order to the credit department for approval. The other three
copies and the original customer order are file temporarily, pending credit approval.
3. The credit department clerk validates the customer's order against hard-copy credit records kept in
the credit department. The clerk signs Copy 1 to signify approval and returns it to the sales clerk.
4. When the sales clerk receives credit approval, he or she files Copy 1 and the customer order in the
department. The clerk sends Copy 2 to the warehouse and Copies 3 and 4 to the shipping
department.
5. The warehouse clerk picks the products from the shelves, records the transfer in the hard-copy stock
records, and sends the products and Copy 2 to the shipping department.
6. The shipping department receives Copy 2 and the goods from the warehouse, attaches Copy 2 as a
packing slip, and ships the goods to the customer. Finally, the clerk files Copies 3 and 4 in the
shipping department.

Sales Department Credit Department Warehouse Shipping Department