CHAPTER 10 THE REVENUE CYCLE: SALES AND CASH COLLECTIONS

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1 Accounting Information Systems CHAPTER 10 THE REVENUE CYCLE: SALES AND CASH COLLECTIONS SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 10.1 This should generate a great deal of discussion. The basic issue concerns the willingness of consumers to divulge the kind of information that would allow companies to personalize the sales interaction versus concerns that such information would be misused or sold to other parties. In addition, with the growing problem of identity theft, consumers are becoming increasingly concerned about the safety and security of their personal information. Companies that wish to collect this data will most likely have to demonstrate the need for this information to the consumer and also the company s ability to keep this information secure Digitized products force little change on the four business activities of the revenue cycle. For all products, whether digitized or not, an order must be taken, the product shipped, an invoice delivered, and cash collected. The only thing that digitized products do is change the way these four activities are carried out. Digitized products actually facilitate the four activities by incorporating electronic sales orders, shipping, billing, and cash collections Employees need to be trained to use the POS properly. Such training should include understanding how the POS works, stressing that. In that errors on the employees part will directly affect the inventory master file numbers. If an item does not scan, then it must be rescanned or dealt with so that the integrity of the records is upheld. Similarly, employees should be trained not to skip sales. If an item does not scan, the employee should be trained to accurately enter in the bar code of the item. Entering a generic or erroneous code not only creates an inventory error, but it also frustrates the customer who may take their business elsewhere. In addition, employees should be trained to report and/or fix errors in bar codes as they are encountered and in a timely manner The report already provides dollar amounts outstanding by number of days past due by customer and by invoice. However, the percentage of total accounts receivable categorized by days past due would help to alert management of categories that are increasing. This could also be reported by customer and by invoice. This way if a particular invoice was not being paid, the company could more quickly identify the invoice, contact the customer, and potentially resolve any problems or disputes about the particular invoice. In addition, reporting by customer can help to identify chronic slow paying customers so that corrective action could be taken such as offering discounts for quick payment, changes in term, and notifying the credit manager to restrict credit for this particular customer. Furthermore, the company may have a certain threshold for each category of past due accounts either in percentages or absolute dollars. A metric could be calculated and presented that highlights the categories exceeding that threshold Pearson Education, Inc. Publishing as Prentice Hall

2 Ch. 10: The Revenue Cycle: Sales and Cash Collections 10.5 This is a good question to get students to explore and compare the role of technology in dynamic price setting policies. You may want to preface the discussion by relating the following scenario: You have graduated from collage and started your own consulting firm. A client has an urgent need that requires you to travel to his location. Since this is a last minute trip, you pay full price for an airline ticket. Since this client is on a fixed contract, you cannot charge the cost of the ticket back to the client. While riding on the airplane you find yourself sitting next to a college student who is majoring in accounting. During the course of the conversation with this accounting student, you find that he purchased his airline ticket from a discount reseller and paid less than half of what you paid for the same flight. How do you feel about this arrangement? Do think this type of pricing arrangement could transfer to other products? Would the companies that sell these other products be put at a competitive disadvantage when customers find that they are paying different prices for the same goods or services? 10.6 The instructor can facilitate discussion of invoiceless pricing in a B2C environment by asking students how they would feel about not receiving a phone or cable bill. What are the problems the phone or cable company and phone or cable consumers encounter without a paper bill? What about billing problems and disputes. What about payment deadlines or consumers that want to pay in person or pay in cash? 10.7 Any form of electronic or digital cash has the same audit risks as physical cash: susceptibility to theft and loss of an audit trail. In addition, digital cash also has risks associated with the durability of the store of value to what extent can the cash be recovered if the storage media becomes defective? Another issue concerns the potential loss of privacy, because the digital currency can be marked in a manner that enables tracing its path through the economy Why not indeed? Copies of the sales order can be used by inventory personnel as a picking ticket to select inventory items ship to the customer. In similar fashion, the sales order converted into a picking ticket can also be used as a packing slip. Just make sure a copy is sent with the package and not the original so that in case there is a problem the original form can be reviewed for any errors or discrepancy. If sales orders are created electronically, the information contained on the electronic sales order can be used to create paper (or electronic) picking tickets, packing slips, or invoices Pearson Education, Inc. Publishing as Prentice Hall

3 Accounting Information Systems SUGGESTED ANSWERS TO THE PROBLEMS 10.1 Types of controls used at various steps in the revenue cycle. Process/ Activity Sales order entry Shipping Billing and accounts receivable Threat 1. Incomplete or inaccurate customer orders 2. Credit sales to customers with poor credit 3. Legitimacy of order 4. Lost sales due to stockouts, excessive carrying costs, and lost revenue due to markdowns 5. Shipping errors: Wrong merchandise Wrong quantities Wrong address 6. Theft of inventory 7. Failure to bill 8. Billing errors 9. Errors in maintaining customer accounts Applicable Controls (P = Preventive, D = Detective, C = Corrective) Various data entry edit controls P Proper credit approval, prior to delivery of goods or services P; accurate, current customer data P Authorized customer purchase order P; digital signatures D Inventory control systems P; periodic physical inventory counts D; improved sales forecasts P; better supply chain management P and C Compare sales order with packing list and shipping documents D; bar coding P Physical access controls P; documentation of all inventory movements D; periodic physical inventory counts D Segregation of shipping and billing functions P; one-for-one matching of invoices (or EDI acknowledgments) against shipping documents D and C Comparison of sales orders, shipping documents, and invoices P and C; various edit checks D and C Data entry edit checks D and C; use of remittance advices P; monthly statements to customers D and C Pearson Education, Inc. Publishing as Prentice Hall

4 Ch. 10: The Revenue Cycle: Sales and Cash Collections Process/ Activity Cash collections General Applicable Controls (P = Preventive, D = Detective, C = Threat Corrective) 10. Theft of cash Segregation of cash handling and accounts receivable functions P; use of lockboxes or EFT P; bank account reconciliation by someone not involved in cash receipts processing D and C; segregation of bad debt/credit memo authorization from cash handling and accounts receivable functions P 11. Loss of data Backup procedures C; disaster recovery plans P; physical and logical access controls P 12. Poor performance Development and periodic review of appropriate performance metrics D and C 10.2 Information Technology to enhance the restriction of physical access to inventory: 1. Electronic locks on all entrances and exits to the inventory area. 2. Smart card technology where employees must scan their ID card prior to entering/exiting the inventory area. 3. Install motion detectors. 4. Attach security tags to inventory items and install security tag scanners at each exit of the inventory area. 5. Attach RFID tags to inventory items to track the movement of inventory. 6. Install and monitor surveillance cameras in the inventory area. 7. Install an infrared alarm system. 8. Build a fence around the inventory area and equip the fence with cameras and sensors Pearson Education, Inc. Publishing as Prentice Hall

5 Accounting Information Systems 10.3 a. Shipping personnel should be required to document (on paper or by computer) receipt of goods from the finished goods storeroom. This procedure acknowledges responsibility for custody of the goods transferred. b. Either a redundant data check or closed loop verification could be used. If the transactions are being entered in batches, redundant data such as the first five characters of the customer's name could be included in each input record; after finding a match on customer account number, the system would also verify that the name characters match before posting the transaction. If the transactions are being entered online, the system could respond to operator entry of the account number by retrieving and displaying the customer's name for the operator to review. c. Up-to-date credit records should be maintained, and credit checks should be made prior to approval of sales orders. d. A receiving report should be required to support the authorization of credits for sales returns. e. Separate the function of authorizing write-offs of uncollectible accounts from the function of handling of collections on account, in order to prevent any single individual from perpetrating this type of fraud. f. Shipping personnel should be required to record the actual quantity shipped on the order document and/or enter the quantity shipped into the sales order processing system, in order that bills can be prepared based upon the quantity shipped rather than the quantity ordered. g. Supervision of mailroom operations, limitation of authority to endorse checks to the cashier only, and instructions to the bank to accept only those checks endorsed for deposit in the company's account. h. Cash receipts should be listed and totaled in the mailroom before the cashier receives the checks. A third person compares the amount deposited as shown by a validated deposit slip to the batch total prepared in the mailroom. i. All sales tickets should be prenumbered and accounted for. This would quickly spot a missing ticket. j. Segregate shipping and billing functions. k. Implement accurate inventory control and sales forecasting systems including periodic physical inventory counts and frequent review and revision of sales forecasts Pearson Education, Inc. Publishing as Prentice Hall

6 Ch. 10: The Revenue Cycle: Sales and Cash Collections l. A system of user IDs and passwords is the first line of defense followed by allowing read only access to customer data for sales staff, implement access controls over individual terminals, and maintaining activity logs. m. Regular backups with copies being stored off-site. n. Backup generators as well as cold and/or warm site contracted backup facilities. o. Encrypting sensitive data prior to transmission, creating virtual private networks, and transmitting data over secure socket layer (SSL) networks. p. A system of user IDs and passwords is the first line of defense followed by allowing read only access to price lists for sales staff, implement access controls over individual terminals, and maintaining activity logs. q. A system of user IDs and passwords is the first line of defense followed by allowing read only access to customer data for sales staff, implement access controls over individual terminals, and maintaining activity logs. In addition, formal non-compete agreement could be used when hiring personnel. r. A nightly backup with copies being stored off-site. s. Periodically testing backup data for access and compatibility with current company hardware and software Formulas: Sales (1% Growth Rate) E5 and Row 5: =D5*101%, =E5*101%, =F5*101%, Pearson Education, Inc. Publishing as Prentice Hall

7 Accounting Information Systems Cash Collections: D7: =D5*40% E7: =E5*40%+D5*30% F7: =F5*40%+E5*30%+D5*20% G7: =G5*40%+F5*30%+E5*20%+D5*8% Copy and paste G7 formula to remaining cells Beginning Balance: E2: =D9 (same formula for remaining cells in Row 2) Ending Balance: D9: =D3+D7 (same formula for remaining cells in Row 9) Spinner and Scroll Bar: b. Spinner Select index key to link to the spinner Format Control, C17. Enter formula to calculate growth rate display, C13 (=C17/1000). Click View, Toolbars, Forms. Select Spinner and draw on the worksheet. Right click and select Format Control Fill in data below: Pearson Education, Inc. Publishing as Prentice Hall

8 Ch. 10: The Revenue Cycle: Sales and Cash Collections c. Scroll bar Modify formulas in Row 5, beginning E5, e.g., cell E5, =D5*(100%+$C$13). Note: to copy and paste formula to other cells, use absolute reference for C13 or $C$13. Select index key to link to the scroll bar Format Control, C16. Enter formula to calculate growth rate display, C11 (=C16*10000). Click View, Toolbars, Forms. Select scroll bar and draw on the worksheet. Right click and select Format Control Fill in data below: Pearson Education, Inc. Publishing as Prentice Hall

9 Accounting Information Systems Modify initial sales from a value to reference formula, i.e., =C11. d. Various controls could be implemented including format cells so that only numerical data will be accepted and reviewing cell formulas for accuracy or the column totals could be crossfooted as a check against the row totals. In addition, a validation check could be put in place for the various cells to make sure the appropriate data was entered into the various cells. For example, to make sure only numbers are input into the numeric cells, Excel s Data Validation tool could be used. The tool is invoked by clicking on Data-Validation. The following displays an example: Pearson Education, Inc. Publishing as Prentice Hall

10 Ch. 10: The Revenue Cycle: Sales and Cash Collections Pearson Education, Inc. Publishing as Prentice Hall

11 Pearson Education, Inc. Publishing as Prentice Hall Accounting Information Systems

12 Ch. 10: The Revenue Cycle: Sales and Cash Collections 10.5 a. Document Internally Generated Externally Generated Customer order X Sales order X Sales invoice X Credit memo X Picking list X Packing slip X Bill of lading X Monthly statement X Remittance advice X Remittance list X b. The number of copies and destinations will vary depending on the entity and industry. The following represents a generic wholesale entity. Sales order (4 copies) Copy 1 - Sent to the customer as an order acknowledgement Copy 2 - Sent to Inventory Control as data input for Picking List can be prepared Copy 3 - Sent to Billing as data input for an invoice Copy 4 - Filed for future reference Sales invoice (3 copies) Copy 1 - Sent to the customer for payment Copy 2 - Sent to accounts receivable to record the uncollected sale Pearson Education, Inc. Publishing as Prentice Hall

13 Accounting Information Systems Copy 3 - Filed for future reference Credit memo (2 copies) Copy 1 - Sent to Accounts Receivable to record a cancelled sale Copy 2 - Sent to the customer as an acknowledgement Picking list (1 copy) Copy 1 - Prepared an kept in inventory Packing slip (2 copies) Copy 1 - Sent to the customer with the shipment as notification of shipment Copy 2 - File as a record of goods shipped contents Monthly statement (2 copies) Copy 1 - Sent to customer as notification of uncollected sales Copy 2 - Filed for future reference Remittance advice (1 copy) Copy 1 - Sent to customer as a turn around document to accompany payment back to the seller. Remittance list (2 copies) Copy 1 - Sent to accounts receivable for recording payments on account Copy 2 - Sent to the cashier to document the deposit c. The following application controls would be needed if all of these documents were replaced by electronic documents: Proper form design, check digit, field check, sign check, limit check, range check, size check, completeness check, validity check, reasonableness check, prompting, pre-formatting, closed-loop verification, transaction log and review Pearson Education, Inc. Publishing as Prentice Hall

14 Ch. 10: The Revenue Cycle: Sales and Cash Collections The following table presents a list of fields typically found on the documents listed above and which controls would be applied to these fields. Controls Document Fields: Account Number Order Number Item Chec k Digit Field Chec k Sign Chec k Limit Chec k Rang e Chec k Size Chec k Complete ness Check Valid ity Chec k Reasonable ness Check Prompti ng Preformattin g Closedloop verificati on X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X Number Quantity X X X X X X X X X Description X X X X X Unit Price X X X X X X X X X Amount X X X X X X X X Date X X X X X X X X X Ordered Date X X X X X X X X X Shipped Terms X X X X X Customer Name X X X X X X X Transact ion Log 10-14

15 Accounting Information Systems Explanation of fields and control entries: Check digit: The check digit or redundant digit is a number computed from the other numbers in the field. The check digit is used to control for data entry errors. Thus, if a data entry clerk enters an erroneous account or item number, the check digit will not check and prevent further transaction processing until the error is corrected. The Order number could also contain a check digit if deemed cost effective. Field Check: A field check is used to determine whether a particular character matches the character type of a particular field; i.e., numbers with number fields, and dates with date fields. The account, order, and item numbers, are typically numbers and will be restricted to numerical input as is also the case with quantity, unit price, and amount. Date ordered and date shipped fields should be restricted to date characters. Description, terms, and customer name are typically text oriented and can have alpha or numeric characters so a field check would not be necessary. Sign Check: A sign check is used to control for the appropriate sign in a given field. For example, a negative quantity, amount or unit price would be problematic in processing orders. Limit Check: A limit check tests for amounts that exceed a predefined level or limit. In this problem, a limit check on the unit price of an item would control for entering a $100 unit price when the actual unit price is $10. Limit checks on dates can also be used to control for mistakenly entering dates too far into the future. Range Check: A range check is similar to a limit check except it has an upper and a lower bound. For this problem, the account number, order number, item number can all be set to be included in a certain range of numbers. The quantity, unit price, and amount should at least have a lower limit of 0 and an appropriate upper limit for the field. Similar to limit checks, dates can have range checks limiting the entry of dates too far in the past or too far into the future. Size Check: A size check is used to make sure that the data will fit into the assigned field. This control can generally be used on any field since every field will have some limit to the amount of data it can hold. Size checks are absolutely essential on any fields in which non-employee users enter data (e.g., on web forms) in order to prevent buffer overflow attacks. Completeness Check: A completeness check is used to make sure the required data has been entered into the field. This control can be applied to every field

16 Ch. 10: The Revenue Cycle: Sales and Cash Collections Validity Check: The validity check compares the data entered into a certain field with corresponding data in an appropriate master file. Thus, when the account number, item number, order number, and customer name are entered into their respective fields they can be compared to corresponding data in various master files. Reasonableness Check: The reasonableness check looks for the appropriateness of a logical relationship between two data items. For example in this problem, a large quantity of a very high priced item would probably not be reasonable and would require investigation and correction or special approval before the transaction processing could be completed. Also, the date shipped must be later than the date ordered. Prompting: Prompting reduces errors by requesting each data item and then waiting for the response. Prompting is appropriate for all input fields. Pre-formatting: Similar to prompting, pre-formatting reduces errors by highlighting date entry fields and then waiting for them to be completed. Pre-formatting is appropriate for all input fields. Closed-loop Verification: Closed-loop verification helps to reduce data input errors by retrieving and displaying the data item that was input into the field. The account number, order number, item number and customer name can be input and then the data linked to those fields retrieved for visual verification that the correct account, order, and item number as well as customer name have been correctly input into the system. Transaction Log: The transaction log includes a detailed record of all transaction data as well as other processing data like a transaction identifier, data and time of entry, terminal, etc. Thus, if a file is damaged or lost, the transactions can be recreated from the data contained in the transaction log. So all fields included in any transaction would be included in the transaction log file

17 10.6 Part a. Refer to Table 10.1 in the text for a list of threats and related controls. Students will likely create a variety of checklists, thus a template with a few example questions is listed below. Part b. Student explanations will vary according to their checklist. Revenue Cycle Controls Checklist No. Question Yes No 1. Are customer credit limits set and modified by a credit manager with not sales responsibility? 2. Are completeness checks included to ensure all data is recorded on each invoice? 3. Is inventory kept in a secure location? 4. Are the shipping and billing functions segregated? 5. Are validity checks performed on all customer and invoice numbers? 10-17

18 Ch. 10: The Revenue Cycle: Sales and Cash Collections 10.7 a. Criteria for approving customers for guaranteed delivery: Average size of orders. Total volume of business. Location (within a limited geographic range). b. Input Transactions: Customer orders Output Documents: (1) Shipping orders (2) Delivery schedules (3) Customer invoices c. Students should generate many potentially useful reports. Some of the more likely answers include: Accounts Receivable Aging Percentage of orders filled on time Deliveries by customer, by delivery person, by geographic area, and by product Dollar value of deliveries over time Orders by time of day Deliveries by time of day To produce these reports, proper data will need to be collected such as sales order amounts and dates; billing amounts and dates; cash collection amounts and dates; delivery dates, times, and delivery person; and estimated delivery dates and times. Each of the data groups should include the customer involved. Chapter 8 discusses the application controls that should be in place to ensure complete, accurate, and valid reports. These would include access controls, validity checks, and completeness tests. d. See next page

19 Accounting Information Systems d. Systems flowchart of order entry and dispatching system: Online Order Entry System Inventory Master File Sales Order Data Entry Order Transactions Customer Master File Order Processing System Shipping Documents Order Transactions Delivery Schedules Billing System Customer Master File Customer Invoices Summary Report 10-19

20 Ch. 10: The Revenue Cycle: Sales and Cash Collections 10.7 (cont.) e. Threat Incomplete, inaccurate, or lost customer orders Lost orders Credit Sales to customers with poor credit Legitimacy of orders Stock-outs Shipping errors Failure to bill customers Billing errors Posting errors in updating accounts receivable Loss of data Loss of communication links Poor performance Control Data entry edit checks Maintain written order logs Credit approval by credit manager prior to shipment Phone orders should only be accepted from approved contractors and only from authorized personnel from those contractors. The authorized personnel should also be required to provide an order authorization code to the order taker. Inventory control systems Reconciliation of sales order with picking ticket and packing slip; bar code scanners, RFID, data entry application controls Separation of shipping and billing functions, prenumbering all shipping documents, reconciliation of shipping documents to invoices, reconciliation of picking tickets and bills of lading with sales orders. Data entry edit controls and price lists Reconciliation of subsidiary accounts receivable ledger with general ledger. Monthly statements to customers. Backup and disaster recovery procedures. Access controls both physical and logical. Backup land lines. Backup cell phone numbers. Preparation and review of performance reports such as on-time delivery. Survey customer satisfaction related to delivery, quality of goods, and quality of service

21 Accounting Information Systems 10.8 (CMA Examination, adapted) a. O'Brien Corporation: Internal control weaknesses and recommended improvements: Weaknesses and Potential Problem(s) 1. Orders received over the telephone are not confirmed by customers in writing. This could result in errors or in filling bogus orders. Recommendation(s) to Correct Weaknesses Require a written customer purchase order as confirmation of telephone orders. 2. Customer credit histories are not checked before approving orders. This is resulting in excessive late collections and uncollectible accounts. Customers credit should be checked and no sales should be made to those that do not meet credit standards. 3. Sales orders are filed by date in the Marketing Department. This leads to difficulty in handling customer questions and complaints. Establish customer files and file sales orders by customers. 4. Only two copies of sales orders are prepared. This is not enough to insure a proper matching in the Billing Department. Prepare, at a minimum, a three-part sales order, sending one to Shipping and one to Billing. Billing should match its copy with a signed copy from Shipping before preparing a sales invoice. 5. Items that are out of stock are merely noted. Inaction in these cases could cause lost sales. Establish procedures to schedule production for back orders and to ship and bill the product once it is available. 6. There is no reconciliation of inventory Billing and shipping records should be 10-21

22 Ch. 10: The Revenue Cycle: Sales and Cash Collections amounts shipped with billings. This could result in undetected underbilling. integrated on the computer system to provide for reconciliation of inventory amounts shipped and billed

23 Accounting Information Systems 7. The Receiving Department and the Shipping Department share a computer terminal. In addition, the personnel in both departments have access to the physical inventory and can update the perpetual inventory records through the terminal. This could result in theft of inventory with no means of tracing the theft. Each department should have its own terminal and the terminals should be for inquiry purposes only. The physical custody and recordkeeping of inventory should be separated (perpetual records should be updated on the computer by Purchasing/Accounts Payable and Billing). Access to the physical inventory should be limited to Receiving; it would add incoming goods to the physical inventory and select the goods from the warehouse for shipping. 8. The Receiving Department does not compare incoming deliveries to purchase orders. This may lead to the acceptance of unordered goods. 9. A complete inventory listing is printed only once a year. Errors in the perpetual inventory records may remain undetected for too long a time period. Copies of purchase orders without quantity information should be sent to Receiving. Receiving should match the shipment to the purchase order and indicate the quantity received. Inventory listings should be printed periodically throughout the year, and physical counts compared to the listing on a cycle basis. b. How O'Brien Corporation could use its new computer system to improve control and efficiency: Maintain an online master file for customer account and credit data in addition to inventory data. Use online terminals to enter sales order data into the system as orders are received. Have the system check inventory availability as order data are entered; if the customer is on the phone at this time, inventory availability may be confirmed directly to the customer. Have the system perform a credit check as order data are entered, and reject orders from customers who are not credit-worthy. Immediately following approval of a sales order, have the system (1) print or display a shipping order for Shipping Department use, (2) print a packing slip and mailing label for use in shipping the goods to the customer. Once the order has been shipped, the system should generate a customer invoice

24 Ch. 10: The Revenue Cycle: Sales and Cash Collections Maintain order data online to facilitate response to customer inquiries re order status. Use password access controls to restrict access to the customer and inventory files, and the operations that can be performed on these files, to appropriate personnel

25 Accounting Information Systems 10.9 (CPA Examination, November 1989, Auditing Question 5) 1. Weakness: The employees who perform services are permitted to approve credit without an external credit check. Threat: Sales could be made that turn out to be uncollectible. Control: Someone other than the employees performing services should do a credit check. 2. Weakness: There is no independent verification of the billing process. Threat: Fees earned and accounts receivable might be understated because not all services performed might be reported for billing. Fees earned and accounts receivable might be either over- or under-stated because of errors in prices or service data. Control: Billing should be done by someone independent of performing services. There should also be prenumbered documents for all services and these should be periodically accounted for and reconciled to invoices. 3. Weakness: The employees who approve credit also approve the write-off of uncollectible accounts. Threat: Accounts receivable could be understated and bad debts expense overstated because write-offs of accounts could be approved for accounts that are, in fact, collectible. Accounts receivable could be overstated and bad debt expense understated because write-offs may not be initiated for accounts that are uncollectible. Control: Separate the duties of approving credit and approving the write-off of accounts receivable. 4. Weakness: Credit is not granted on the basis of established limits. Threat: Uncollectible sales. Control: Establish and use credit limits when granting credit. 5. Weakness: The employee who initially handles cash receipts also prepares billings. Threat: Fees earned and cash receipts or accounts receivable could be understated because of omitted or inaccurate billing. Control: Segregate the functions of cash receipts handling and billing. 6. Weakness: The employee who makes bank deposits also reconciles bank statements. Threat: The cash balance per books may be overstated because all cash is not deposited (i.e. theft). Control: Bank reconciliation should be done by an employee with no other cash handling responsibilities. 7. Weakness: Uncollectible accounts are not determined on the basis of established criteria. Threat: Accounts can be written off to cover theft of cash. Control: Establish and use criteria for writing off accounts receivable. Write off should be authorized by someone who does not have access to cash. 8. Weakness: Trial balances of the accounts receivable subsidiary ledger are not prepared independently of, or verified and reconciled to, the accounts receivable control account in the general ledger. Threat: Any of fees earned, cash receipts, and uncollectible accounts expense could be either understated or overstated because of 10-25

26 Ch. 10: The Revenue Cycle: Sales and Cash Collections undetected differences between the subsidiary ledger and the general ledger. Also, fees earned and cash receipts or accounts receivable could be understated because of failure to record billings, cash receipts, and write-offs accurately. Control: Periodic reconciliation of the subsidiary accounts receivable ledger to the general ledger control account for accounts receivable

27 Accounting Information Systems (CPA Examination, May 1988, Auditing Question 4, adapted) Weakness Exposure Recommendation No credit approval. Uncollectible sales. Separate credit approval Warehouse clerk initiates posting to inventory records by preparing shipping advice Warehouse clerk releases merchandise prior to credit approval. Failure to prepare would result in inaccurate inventory records; could release goods to friends with no invoice. Loss of inventory to customers who do not pay. Inventory posting should be done by sales clerk once sales approved. Do not release goods until notified of credit approval. Warehouse clerk does not retain copy of shipping advice. Cannot easily identify loss if carrier has accident. Use 4-copy shipping advice and retain one copy in warehouse. Bookkeeper A authorizes customer credit and prepares source documents for posting to customer accounts. Sales to friends that exceed credit limit. Credit manager should approve all credit. Bookkeeper A prepares invoices without notification about what was shipped and when. Billing mistakes. Prepare invoice only after receive copy of shipping advice indicating quantities shipped and date. Bookkeeper A authorizes write-offs of customer accounts and approves credit. Can approve sales to friends and later write them off. Someone else should authorize write-off of customer accounts

28 Ch. 10: The Revenue Cycle: Sales and Cash Collections Bookkeeper B does not periodically verify that all sales orders and shipping advices have been invoiced. Failure to bill customers. Periodically verify that all sales orders and shipping advices have been invoiced. Bookkeeper C does not reconcile subsidiary A/R with general ledger. Potential imbalances due to posting errors. Reconcile subsidiary A/R ledger with the general ledger. Bookkeeper C maintains journals and posts to ledgers. Collection Clerk directly receives and records customer checks. Collections Clerk does not deliver postdated checks and checks with errors to an employee independent of the bank deposit for review and disposition. No independent check on accuracy of recording process. Theft of checks. Possible theft of checks. Bookkeeper B should record in journals and Bookkeeper C post to ledgers. Have all checks endorsed and listed in mail room prior to delivery to collection clerk and send a copy of the remittance list to Bookkeeping. Deliver all checks not deposited to another employee who has no bank deposit/reconciliation duties. Collection Clerk initiates posting of receipts to subsidiary accounts receivable ledger and has initial access to cash receipts. Theft by lapping. Have one of the Bookkeepers record customer checks, using a copy of the check or a remittance listing. Cash collection clerk does not deposit checks promptly. Possible loss of checks; loss of interest. Deposit all receipts promptly. Cash collection clerk reconciles bank statement and has initial access to cash receipts. Can cover up theft by fudging the bank reconciliation. Have bank reconciliation performed by an employee with no other involvement in cash receipts processing

29 Accounting Information Systems Some ways that Newton could use IT to improve efficiency include: On-line data entry by sales staff. The system should include credit checks on customers as well as check inventory availability notification of each department (shipping, billing, etc.) whenever another department performs an action (e.g., billing is notified whenever shipping enters data indicating that an order has been released) EDI billing of customers Establishment of electronic lockboxes with banks so that customer payments go directly to company s account Controls that should be implemented in the new system include: Passwords to limit access to authorized users, and to restrict the duties each employee may perform and which files they may access A variety of input edit checks (limit checks, range checks, reasonableness tests, etc.) to ensure completeness of data entry and accuracy 10-29

30 Contact Customer Customer Agrees to Sale Accounting Transaction Journal Entry Documents Call sheet Purchase order from customer Approve Credit Sales order; picking list REVENUE CYCLE Transfer Goods Sale Packing slip, shipping advice Bill Customer Dr. A/R Cr. Sales Invoice Receive Remittance Cash Receipt Remittance advice; remittance list Credit Accounts Receivable Dr. Cash Cr. A/R Remittance Advice Deposit Cash Deposit slip Data Collected All items needed to balance deposit complete the Qty. shipped person order Department Sales Sales Credit Shipping Accounting Mail Accounting Cashier Control Issues Information Required Information Generated Effect of Automation Follow company policy and strategy Do not violate laws or company policy Only approved customers get credit Ship only what was ordered; document all shipments Bill for every shipment; bill accurately Prevent theft of checks or cash Prevent lapping; properly credit customer accounts * * * * * * * * * * * * * * * * * * * * * * * * *-a lot of information is potentially required and generated at each step. The key point to look for in student answers is whether they have identified non-financial information needs and data from external sources. Similarly, there are countless potential answers to the effect of automation. Theft

31 e 2. i 3. g 4. k 5. c 6. j 7. h 8. f 9. a 10. l 11. b 12. d a. Control Weaknesses 1. Weakness - Sarah opens all mail and prepares a list of donations (cash and checks). Control - Mail should be opened by both Sarah and the other staff member. 2. Weakness - The donations and donation list are sent to the accountant for recording and bank deposit who therefore has custody of the donation and records the donation. Weakness - Bank reconciliation performed by accountant who also makes the bank deposit. Control - The donations should be sent to the office manager for deposit and the donation list sent to the accountant for recording. This corrects both weaknesses. 3. Weakness - Each employee has full access (create, read, update, delete) to the accounting system. Control - Only the accountant and office manager should have full access to the accounting system. b. The weekly back-up should be stored off-site, not in the manager's office. The files both onsite and off-site should be password protected and encrypted to guard against alteration and unauthorized disclosure. In addition, the backup files should be kept locked in a secure place

32 Ch. 10: The Revenue Cycle: Sales and Cash Collections Product Sales ($) Division Widgets A Widgets B Widgets C Gadgets A Gadgets B Gadgets C Gizmos A Gizmos B Gizmos C Wingdings A Wingdings B Wingdings C Dohingeys A Dohingeys B Dohingeys C Thingamabobs A Thingamabobs B Thingamabobs C Whatchamacallits A Whatchamacallits B Whatchamacallits C Round2its A b. Number of products with sales > 200,000 c. Total sales all products for Division A "=COUNTIF(B2:B23,">200000") "=SUMIF(C2:C23,"A",B2:B23) 10-32

33 Accounting Information Systems Division to sum d. Total sales all products in that division =IF(B28="A",SUMIF(C2:C23,"A",B2:B23),IF(B28="B",SU MIF(C2:C23,"B",B2:B23),IF(B28="C",SUMIF(C2:C23,"C", B2:B23), 0))) e. To conditionally format a cell select Format >> Conditional Format. For the sales column use option "Cell Value is" for the other two columns use "Formula is" and input a formula that references the sales column and tests if it is less than $100,

34 SUGGESTED ANSWERS TO THE CASES Input transactions include: Enrollment forms and orders placed by new members Orders from regular members Orders for free books Member payments on account Receipts of books from publishers Transactions with advertising media Output documents include: Order form with list of current selections Order form for free book orders Member bills (invoices) Member statements of account for past due accounts Output reports include: Book inventory turnover report Accounts receivable aging schedule Advertising media effectiveness analysis 2. Answers will vary; one possible solution is as follows: Process #1: Order form preparation: 10-34

35 Accounting Information Systems Member File Preparation of Order Forms Member Order Forms Mail to Members 10-35

36 Ch. 10: The Revenue Cycle: Sales and Cash Collections Process #2: Processing of enrollment forms and orders received from new members: New Member Enrollment & Order Forms New Member Data Entry Display New Member Data Entry New Member Data Entry Process New Member Enrollment & Order Records Member File Enrollment and Order Processing Book Inventory File Orders New Member Welcome Letter To New Members 10-36

37 Accounting Information Systems Process #3: Processing of regular and free book orders: 10-37

38 Ch. 10: The Revenue Cycle: Sales and Cash Collections Regular Member Orders OCR Input Process Order Transactions Free Book Orders Sort By Member Number Order Transactions Member File Order Processing Book Inventory File Sales Orders Free Book Order Forms To Eligible Members 10-38

39 Sales Orders Edit and Process Shipments Inventory Print Picking Ticket Picking Ticket Bill of Lading 2 1 Shipments Bill of Lading Pick Books Carrier Enter Shipping Data Customer Process #4: Shipping 10-39

40 Process #5: Billing Bill of Lading Orders Shipments Billing Customer Invoice 2 1 Invoices Sales History General Ledger Customer 10-40

41 Process #6: Processing of cash receipts on account: Member Payments Payment Data Entry Display Payment Data Entry Process Payment Data Entry Payment Transactions Sort By Member Number Payment Transactions Member File Cash Receipts Processing Receivables Aging Schedule Member Statements of Account To Credit Manager To Members 10-41

42 Ch. 10: The Revenue Cycle: Sales and Cash Collections Process #7: Book inventory processing: Book Receipts Records Book Receipts Data Entry Display Book Receipts Data Entry Process Book Receipts Data Entry Book Receipts Data Sort by Book Code Number Book Receipt Data Inventory Processing Book Inventory File Inventory Turnover Report To Editors 10-42

43 Accounting Information Systems Process #8: Advertising media analysis: Advertising Transactions Advertising Transactions Data Entry Display Advertising Transaction Data Entry Process Advertising Transactions Data Entry Advertising Media Transactions Member File Retrieve Sales by Media Code Sort by Media Code Number Advertising Media Transactions Sales by Media Code Advertising Media Analysis Media Performance Analysis Advertising Media Files To Advertising Manager 10-43

44 Ch. 10: The Revenue Cycle: Sales and Cash Collections Student answers should include controls to address each threat listed in Table 10.1; choice of specific controls depends upon the assumptions made by the student in step 3. At a minimum, the following controls need to be in place: a) passwords to control access b) credit approval by credit manager for new customers c) system checks orders from existing customers against credit limit and outstanding balance d) system verifies that items shipped = items ordered e) system checks that all shipments match an invoice f) use of lockboxes for cash receipts. If must handle cash internally, prompt endorsement of all checks in the mailroom and routing of checks to cashier, remittance advices to accounting. g) periodic backup of master files and storage of second copy of backup offsite. a. 1. Customers could send their orders directly to Frontier s order entry system in a format that would eliminate the need for data entry. 2. Customers could receive invoices via EDI. 3. Send invoices faster and cheaper than by paper. 4. Process payments quicker. b. 1. Edit checks to ensure input data are accurate and complete. 2. Encrypt all data transmit over internet to prevent unauthorized modification or access. 3. Use digital signatures for all wholesale customers. 4. Acquire web security verification, such as VeriSign, to ensure security of the web transactions. 5. Install firewall to prevent hackers or unauthorized access to internal data. c. d. 1. Sales performance report by region. This report is used to evaluate sales performance in each region. 2. Customer satisfaction report. This report provides potential customer loyalty problems and quality of its products, efficiency of delivery products. 3. Aging accounts receivable report. This report is used to forecast cash flows. Frontier should consider EDI over the Internet (EDINT) to attract more customers who do not have the ability to build and maintain a fully operational EDI

45 Accounting Information Systems Frontier should also consider implementing a financial electronic data interchange (FEDI) system to facilitate and to take advantage of quicker cash collections through electronic funds transfer (ETF) in conjunction with their EDI system