What is meant by 'transaction authorization'?

The term 'transaction authorization' refers specifically to the process of approving transactions before they are executed. This is a critical component of internal controls within an accounting system, as it ensures that all financial transactions are reviewed and sanctioned by the appropriate personnel before they are finalized. By implementing a robust transaction authorization process, organizations can significantly reduce the risk of fraud and errors, ensuring that only legitimate and authorized transactions are processed.

This process typically involves checking that the transaction aligns with established policies and procedures, verifying that adequate funds are available, and confirming that the transaction details comply with internal guidelines. Transaction authorization is vital for maintaining accuracy in financial reporting and safeguarding organizational assets.

In contrast, other options described do not fit the definition of transaction authorization. For instance, final approval of financial statements pertains to the review of overall financial performance after the period has ended, while reviewing past transactions involves looking back at completed transactions, which is more aligned with auditing rather than authorization. Lastly, auditing transactions post-execution focuses on assessing the accuracy and legality of transactions that have already occurred, rather than obtaining prior approval.