Transaction Cycle Risks
Lesson:
In accounting and auditing, a transaction cycle is a group of related business activities and transactions that follow a logical sequence from start to finish.
Rather than looking at millions of random entries, auditors break a business down into these cycles because the transactions within them usually involve the same people, the same documents, and the same internal controls.
The most critical cycles to know are:
- Revenue Cycle
- Expenditure Cycle
- Inventory and Production Cycle
- Payroll Cycle
You're an auditor, explaining transaction cycles to a firm's owner.
You've been provided with the following information:
- You're examining the Inventory and Production Cycle.
What is the biggest risk for this transaction cycle?
Answer:
- The reported inventory may not be owned by the firm.
Explanation:
-
The inventory and production cycle tracks the movement and valuation of goods from raw materials through the manufacturing process to their final state as finished goods ready for sale.