This cycle can be divided into two main areas:
Financing function: where does the company get its money from? The raising of finance could take the form of issuing share capital to fund the business, or borrowing money from shareholders or a financial institution in order to get the finance needed...
Introduction
This cycle is often paid very little attention. The reason being that most of these transactions
do not happen every day. In some companies they don’t occur at all. As a result, little to no
attention is given to them from a control and process point of view. As we will see the
transactions in this cycle can have a significant impact on the results of the company and
should not just be brushed aside or dealt with when they occur.
5.2 Accounting system and control activities
This cycle can be divided into two main areas:
Financing function: where does the company get its money from? The raising of finance
could take the form of issuing share capital to fund the business, or borrowing money from
shareholders or a financial institution in order to get the finance needed to run the business
Investment function: what does the company do with its money? Normally a company will
invest in property, a premises from which to operate, or other fixed assets that are
necessary for the manufacturing of goods. If they have already done this then excess cash
might be invested in the stock market, put into the bank or they could acquire additional
businesses
The transactions that occur in this cycle are very infrequent and you might have the
situation where there have been no transactions during the financial year. As a result, the
controls over these types of transactions might be poor and in some instances non-existent
as companies tend to focus on the routine transactions over non-routine transactions.
Although the number of transactions are small the impact on the company, or size of the
transactions that occur in this cycle are very large (Adams, et al., 2019). For example,
acquiring a factory to house a vehicle assembly line.
The legal and regulatory requirements that are involved in this cycle are also a lot more that
in the revenue and receipts cycle (Adams, et al., 2019). For example, if cellphone provider A
wants to acquire cellphone provider B they cannot just purchase the shares. The acquisition
will need to be put before the Competition Commission to ensure that there won’t be any
monopolisation of the market.
Again due to the non-routine nature of the cycle you might find that there are non-routine
controls in place. There might be non-standard types of documentation that is used. For
example, if the company leases out a number of properties the leases for each property
could be very different.
, Financing function:
Unauthorised transactions:
Issuing of shares without proper approval from the board or other shareholders
Taking out debt financing without the proper consent of the board or shareholders (if
detailed in the Memorandum of Incorporation)
Providing security for a loan without proper consent
Fraud risk:
The understatement or incompleteness of debt in the annual financial statements (not
including all the loans).
Investing function:
Unauthorised transactions:
The investment of funds into one particular investment category that is outside of the
company’s investment mandate
Tying up excess funds into long term investments that could place strain on the short term
cash flow requirements of the company
Reckless actions:
Investment into another company where no due diligence has been performed
5.3 Narrative description of the finance and investment cycle
In this section we will be looking at one finance activity and on investment activity within
Tyres R Us. In making a finance or investment decision, the first step is planning. The most
critical part of the planning of a finance or investment decision is the budget. For Tyres R Us
a budget is set every year. The budget for the forthcoming year is set 2 months before the
end of the current financial year. Once the budget has been set and approved it is loaded
into Pastel Evolution and is not changed for the remainder of the year. Every month a
management forecast is prepared in order to project the year-end profit before tax.
One aspect of setting the budget is the capital expenditure the company plans to make
during the next financial year. Another critical aspect is cashflow management. For example,
what is the maximum the company would like to keep in its current account? Where are the
excess funds invested? Effective cashflow management could be the difference between the
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