Financial Statement Cycles

The audit process consists of five financial statement cycles to ensure that all of the financial statement components are reviewed and tested. By keeping closely related account transactions together, and separating those closely related accounts into cycles, auditors will be able to work more effectively. This is called the cycle approach and is used to tie the way transactions are recorded in the account registers and condensed in the ledger, trial balance, and financial statements.

There are five cycles:
1. Sales and collection cycle
2. Payment and acquisition cycle
3. Payroll and personnel cycle
4. Inventory and warehousing cycle
5. Repayment and capital acquisition cycle

Sales and Collection Cycle

In this cycle, auditors would want to look at the sales journal, cash receipts journal, and general journal. They will perform tests to ensure that the customer payments received from a sale is actually deposited in the bank, as well that uncollectible invoices are properly recorded from the balance sheet’s allowance account and into the income statement’s bad debt expense account.

Payment and Acquisition Cycle

The acquisitions journal, cash disbursements journal, and general journal would be the information auditors need in the payment and acquisition cycle. In this cycle, they would look and make sure that vendor bills are getting paid from the bank accounts and the expenses are recorded in the correct expense accounts.

Payroll and Personnel Cycle

Journals needed for this cycle is the payroll journal and the general journal. In this cycle, transactions such as payroll taxes are checked to make sure they are deducted and remitted to the appropriate agency, and that payroll is accrued.

Inventory and Warehousing Cycle

An inventory count would most likely need to be performed to ensure that the inventory account in the balance sheet and the cost of goods sold account in the income statement are accurate. The acquisitions journal, sales journal, and general journal are used in this cycle.

Repayment and Capital Acquisition Cycle

This cycle audits accounts such as notes payable, capital stock, retained earnings, and dividends payable from the balance sheet and interest expense from the income statement, to name a few. Journals that are included in this cycle are the acquisitions journal, cash disbursements journal, and the general journal.

Whether it is understanding what documents need to be pulled from filing or what reports an auditor want, having a small understanding of the audit process could help make an audit run smoother and complete the audit report faster.

Like What You're Reading?

TGG’s accounting and finance experts will help improve your company’s profitability. Want to see how? Schedule a free consultation today.

Written by:
Erika Marasigan
TGG Accounting
Arens, A. A., Elder, R. J., & Beasley, M. S. (2008). Auditing and Assurance Services: An Integrated Approach. (12th ed.). New Jersey: Pearson Education.

One Response to Financial Statement Cycles