Acct 4342

Chapters 4 and 5

TRANSACTION PROCESSING

Transaction processing encompasses the variety of activities an organization must undertake to support its day-to-day operations.

A business transaction can be understood as the smallest

complete activity in a business process.

Accounting Cycle

•Journalizing

•Posting

•Trial Balance

•Closing

•Adjusting Entries

•Final Close

Components of Transactions

Transaction Processing Cycles

•Revenue

•Expenditure

•Production

•Finance

Chart of Accounts

•Is used to achieve an organization’s objectives for financial reporting and control.

•The accounts in the general ledger provide a separate record for each of the company’s assets, liabilities, capital fund balances, revenues, and expenses.

Standard Journal Entries

•Pro forma or hypothetical entries that are expected to occur in the normal operation of the system.

•Properly prepared, journal entries provide a concise guide through the bookkeeping cycle.

A standard journal entry should include…..

•The accounts affected by the entry

•The source (journal, department, computer run, etc.) of the entry

•The date or period of that entry

Computer Processing

Batch Processing- Batches of transactions are posted to ledgers.

Direct Processing - Individual transactions are posted to ledgers.

The need for separate journals prior to posting to a ledger is eliminated.

Data Validation

•The process of reviewing transaction details for accuracy and completeness during the input stage of computer processing.

Codes

Chart of Accounts -> Block Coding

Chart of Accounts -> Block Coding

Suggestions for Code Design

Designing a Double Entry System

•Determine desired system outputs (financial stmts / reports)

•Design the chart of accounts

•Review with management and operations

•Finalize statements, chart of accounts, and other reports

•Prepare plan of journalizing & design necessary business papers & procedures to implement and operate the system

Transaction Processing and the Internal Control Process

•Controls are needed to reduce exposures

•Common Exposures

Definition of Internal Control…

Internal control is a process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

–Effectiveness and efficiency of operations.

–Reliability of financial reporting.

–Compliance with applicable laws and regulations.

…further defined

•A Process

•Effected by People

•Providing Reasonable Assurance

•Achievement of Objectives

This is the accepted definition for control as defined by COSO

What is COSO?

COSO is a control model used to help manage business operations. What does the acronym COSO stand for?

A. Council to Oversee Special Operations.

B. Controls to Originate Successful Organizations.

C. Committee of Sponsoring Organizations.

D. Cats of Siamese Origin.

COSO stands for “Committee of Sponsoring Organizations of the Treadway Commission”

American Institute of Certified Public Accountants
American Accounting Association
The Institute of Internal Auditors
Institute of Management Accountants
Financial Executives Institute

•COSO was charged with establishing a definition of internal control that could be used by companies to assess and improve their internal control systems

•COSO is also the term used to describe this standard definition of internal control

Why is a Common Definition of Internal Control needed?

•In the past, executives, regulators, and internal and external auditors have had different definitions of ‘internal control’, making understanding and comparison difficult

•Businesses had no standards to use when evaluating how well their internal control structure was designed or how well it was functioning

….several events lead to increased awareness of internal controls

•Watergate

•Foreign Corrupt Practices Act of 1977

•U.S. Sentencing Guidelines

•Business and Audit Failures of the 80’s

COSO HIERARCHY (COSO Pyramid)

Internal Control Components

Control Environment

Risk Assessment

Control Activities

Information and Communication

Monitoring

Control Environment

This is the foundation for all other components of internal control because it provides discipline and structure.

Official policies dictate what management wants to happen, corporate culture determines what actually happens, and which rules are obeyed, bent or ignored

What factors make up the Control Environment?

 Integrity and Ethical Values

 Commitment to Competence

 Board of Directors or Audit Committee

 Management’s Philosophy & Operating Styles

 Organizational Structure

 Assignment of Authority and Responsibility

 Human Resource Policies and Practices

Road Blocks to a Sound Control Environment:

-High decentralization where top management is unaware of actions taken at lower levels.

-A weak internal audit function, that lacks the ability to detect and report on improprieties.

-An ineffective board of directors, which does not provide objective oversight of top management.

-Penalties for improper behavior are not significant or publicized and lose their impact.

Risk Assessment

The First Step: Setting the Objectives

•Objectives should be set at both the “Entity” level and the “Activity” Level.

–Entity wide objectives should be consistent with prior practice and performance to be reasonable and achievable.

–Activity level objectives should be linked to the Entity wide objectives to ensure they are consistent with the strategy of the overall company.

Examples of Objectives at Associates:

•Entity Wide Objective:To continue to achieve consistent profitable growth regardless of economic conditions and interest rate environments by: Pursuing selective acquisitions designed to leverage operating costs, increase market share, introduce new product lines and fuel growth

•Activity Level Objective:Lending decisions will be made in accordance with applicable regulations and will provide profitable business for the company.

Second Step: Identifying Risks

Need to identify both external and internal factors that can affect objectives.

External Factors:

•Changing customerneeds

•New legislation or regulations

Internal Factors:

•Quality of personnel hired

•Accuracy of disbursements

Last Step: Risk Analysis

•Estimating the significance of a risk.

•Assessing the likelihood and frequency of the risk occurring

•Considering how the risk should be managed.

Overview of Risk Assessment

Control Activities

What are they:Activities carried out at all levels of the organization and across all functions.

Why have them:

To help ensure that necessary actions are taken to address risks, which help achieve the objectives.

Control Activity Factors

•Top Level Reviews

•Direct Functional or Activity Management

•Information Processing

•Physical Controls

•Performance Indicators

•Segregation of Duties

•Information Systems - General and Application Controls

Information and ...

Accurate, timely and complete information are needed by all levels of management for an organization to run effectively

Information concerning changes in the internal environment (growth, income, head count) as well as information about the external environment (economic, political and competitor changes) will influence management’s decisions

CommunicationMust flow in all directions in an organization.

Transaction Processing Controls – pg 198General ControlsApplication ControlsPreventative, Detective, and Corrective Controls

Analysis of Internal Control Processes – pg 210

For Next Time

•Homework Questions

–Chapter 4 – 27 a (chart of accounts) & c (standard journal entries)

–Chapter 5 - 54

•Quiz on Chapters 1, 2, 4, & 5

•Group work – can be submitted as early as 6/7 for review and comments – must use a flowcharting tool for flowcharts.