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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 willingnessof consumers to divulge the kind of information that would allow companies topersonalize the sales interaction versus concerns that such information would be misusedor sold to other parties. In addition, with the growing problem of identity theft,consumers are becoming increasingly concerned about the safety and security of theirpersonal information. Companies that wish to collect this data will most likely have todemonstrate the need for this information to the consumer and also the companys abilityto keep this information secure.

10.2 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, aninvoice delivered, and cash collected. The only thing that digitized products do is changethe way these four activities are carried out. Digitized products actually facilitate the fouractivities by incorporating electronic sales orders, shipping, billing, and cash collections.

10.3 Employees need to be trained to use the POS properly. Such training should includeunderstanding how the POS works, stressing that . In that errors on the employees partwill directly affect the inventory master file numbers. If an item does not scan, then itmust 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 orerroneous code not only creates an inventory error, but it also frustrates the customer whomay take their business elsewhere. In addition, employees should be trained to reportand/or fix errors in bar codes as they are encountered and in a timely manner.

10.4 The report already provides dollar amounts outstanding by number of days past due bycustomer and by invoice. However, the percentage of total accounts receivablecategorized by days past due would help to alert management of categories that areincreasing. This could also be reported by customer and by invoice. This way if aparticular invoice was not being paid, the company could more quickly identify theinvoice, contact the customer, and potentially resolve any problems or disputes about theparticular invoice. In addition, reporting by customer can help to identify chronic slowpaying customers so that corrective action could be taken such as offering discounts forquick payment, changes in term, and notifying the credit manager to restrict credit for thisparticular customer. Furthermore, the company may have a certain threshold for eachcategory of past due accounts either in percentages or absolute dollars. A metric could becalculated and presented that highlights the categories exceeding that threshold.

10-1 2009 Pearson Education, Inc. Publishing as Prentice Hall

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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 indynamic price setting policies. You may want to preface the discussion by relating thefollowing scenario: You have graduated from collage and started your own consultingfirm. A client has an urgent need that requires you to travel to his location. Since this isa 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 theairplane 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 hepurchased his airline ticket from a discount reseller and paid less than half of what youpaid for the same flight. How do you feel about this arrangement? Do think this type ofpricing arrangement could transfer to other products? Would the companies that sellthese other products be put at a competitive disadvantage when customers find that theyare paying different prices for the same goods or services?

10.6 The instructor can facilitate discussion of invoiceless pricing in a B2C environment byasking 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 encounterwithout a paper bill? What about billing problems and disputes. What about paymentdeadlines 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 risksassociated with the durability of the store of value to what extent can the cash berecovered if the storage media becomes defective? Another issue concerns the potentialloss of privacy, because the digital currency can be marked in a manner that enablestracing its path through the economy.

10.8 Why not indeed? Copies of the sales order can be used by inventory personnel as apicking ticket to select inventory items ship to the customer. In similar fashion, the salesorder converted into a picking ticket can also be used as a packing slip. Just make sure acopy is sent with the package and not the original so that in case there is a problem theoriginal form can be reviewed for any errors or discrepancy. If sales orders are createdelectronically, the information contained on the electronic sales order can be used tocreate paper (or electronic) picking tickets, packing slips, or invoices.


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Process/

Activity Threat

Applicable Controls

(P = Preventive, D = Detective, C =

Corrective)

Cash

collections

10. Theft of cash Segregation of cash handling and

accounts receivable functions P; use oflockboxes or EFT P; bank accountreconciliation by someone not involvedin cash receipts processing D and C;segregation of bad debt/credit memoauthorization from cash handling andaccounts receivable functions P

General 11. Loss of data

12. Poor performance

Backup procedures C; disaster recoveryplans P; physical and logical accesscontrols P

Development and periodic review ofappropriate performance metrics D andC

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/exitingthe inventory area.

3. Install motion detectors.

4. Attach security tags to inventory items and install security tag scanners at each exit of theinventory 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.


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10.3 a. Shipping personnel should be required to document (on paper or by computer) receiptof goods from the finished goods storeroom. This procedure acknowledgesresponsibility for custody of the goods transferred.

b. Either a redundant data check or closed loop verification could be used. If thetransactions are being entered in batches, redundant data such as the first fivecharacters of the customer's name could be included in each input record; afterfinding a match on customer account number, the system would also verify that thename characters match before posting the transaction. If the transactions are beingentered 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 madeprior to approval of sales orders.

d. A receiving report should be required to support the authorization of credits for salesreturns.

e. Separate the function of authorizing write-offs of uncollectible accounts from thefunction of handling of collections on account, in order to prevent any singleindividual from perpetrating this type of fraud.

f. Shipping personnel should be required to record the actual quantity shipped on theorder document and/or enter the quantity shipped into the sales order processingsystem, in order that bills can be prepared based upon the quantity shipped rather thanthe quantity ordered.

g. Supervision of mailroom operations, limitation of authority to endorse checks to thecashier only, and instructions to the bank to accept only those checks endorsed fordeposit in the company's account.

h. Cash receipts should be listed and totaled in the mailroom before the cashier receivesthe checks. A third person compares the amount deposited as shown by a validateddeposit slip to the batch total prepared in the mailroom.

i. All sales tickets should be prenumbered and accounted for. This would quickly spota missing ticket.

j. Segregate shipping and billing functions.


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k. Implement accurate inventory control and sales forecasting systems includingperiodic physical inventory counts and frequent review and revision of salesforecasts.

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 overindividual 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, andtransmitting 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 overindividual terminals, and maintaining activity logs.

q. A system of user IDs and passwords is the first line of defense followed by allowingread only access to customer data for sales staff, implement access controls overindividual terminals, and maintaining activity logs. In addition, formal non-competeagreement 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 companyhardware and software.

10.4


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Formulas:

Sales (1% Growth Rate)E5 and Row 5: =D5*101%, =E5*101%, =F5*101%,

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:


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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.

c. Scroll bar

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:


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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 willbe accepted and reviewing cell formulas for accuracy or the column totals could be cross-footed

as a check against the row totals. In addition, a validation check could be put in place for thevarious 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, Excels Data Validation tool couldbe used. The tool is invoked by clicking on Data-Validation. The following displays anexample:


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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 Xb. The number of copies and destinations will vary depending on the entity and industry. Thefollowing represents a generic wholesale entity.

Sales order (4 copies)Copy 1 - Sent to the customer as an order acknowledgementCopy 2 - Sent to Inventory Control as data input for Picking List can be preparedCopy 3 - Sent to Billing as data input for an invoiceCopy 4 - Filed for future reference

Sales invoice (3 copies)Copy 1 - Sent to the customer for paymentCopy 2 - Sent to accounts receivable to record the uncollected sale


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Copy 3 - Filed for future reference

Credit memo (2 copies)Copy 1 - Sent to Accounts Receivable to record a cancelled saleCopy 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 contentsCopy 2 - File as a record of goods shipped

Monthly statement (2 copies)Copy 1 - Sent to customer as notification of uncollected salesCopy 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.


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The following table presents a list of fields typically found on the documents listed above and which controls would be applied tothese fields.

Controls CheckDigit

FieldCheck

SignCheck

LimitCheck

RangeCheck

SizeCheck

CompletenessCheck

ValidityCheck

ReasonablenessCheck

Prompting

Pre-formatting

Closed-loopverification

Trion

DocumentFields:

AccountNumber

X X X X X X X X X X

OrderNumber

X X X X X X X X X X

ItemNumber

X X X X X X X X X X

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

DateOrdered

X X X X X X X X X

DateShipped

X X X X X X X X X

Terms X X X X X

CustomerName

X X X X X X X

Explanation of fields and control entries:


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Check digit: The check digit or redundant digit is a number computed from the other numbers in the field. The check digit is used tocontrol for data entry errors. Thus, if a data entry clerk enters an erroneous account or item number, the check digit will not checkand prevent further transaction processing until the error is corrected. The Order number could also contain a check digit if deemedcost 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 berestricted to numerical input as is also the case with quantity, unit price, and amount. Date ordered and date shipped fields should berestricted to date characters. Description, terms, and customer name are typically text oriented and can have alpha or numericcharacters 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 unitprice 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 priceof 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 tocontrol 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 accountnumber, order number, item number can all be set to be included in a certain range of numbers. The quantity, unit price, and amountshould at least have a lower limit of 0 and an appropriate upper limit for the field. Similar to limit checks, dates can have range checkslimiting 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 anyfield since every field will have some limit to the amount of data it can hold. Size checks are absolutely essential on any fields inwhich 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 canbe applied to every field.


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Validity Check: The validity check compares the data entered into a certain field with corresponding data in an appropriate masterfile. Thus, when the account number, item number, order number, and customer name are entered into their respective fields they canbe 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. Forexample in this problem, a large quantity of a very high priced item would probably not be reasonable and would require investigationand correction or special approval before the transaction processing could be completed. Also, the date shipped must be later than thedate ordered.

Prompting: Prompting reduces errors by requesting each data item and then waiting for the response. Prompting is appropriate for allinput fields.

Pre-formatting: Similar to prompting, pre-formatting reduces errors by highlighting date entry fields and then waiting for them to becompleted. 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 thatwas input into the field. The account number, order number, item number and customer name can be input and then the data linked tothose fields retrieved for visual verification that the correct account, order, and item number as well as customer name have beencorrectly input into the system.

Transaction Log: The transaction log includes a detailed record of all transaction data as well as other processing data like atransaction identifier, data and time of entry, terminal, etc. Thus, if a file is damaged or lost, the transactions can be recreated from thedata contained in the transaction log. So all fields included in any transaction would be included in the transaction log file.


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10.6

Part a.

Refer to Table 10.1 in the text for a list of threats and related controls. Students will likely createa 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 oneach 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?

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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 likelyanswers 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 orderamounts 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 ensurecomplete, accurate, and valid reports. These would include access controls, validitychecks, and completeness tests.

d. See next page.

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d. Systems flowchart of order entry and dispatching system:

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10.7 (cont.)

e.

Threat Control

Sales Order DataEntryDisplay

Sales OrderData Entry

OnlineOrder Entry

System

OrderTransactions

OrderProcessing

System

OrderTransactions

BillingSystem

CustomerInvoices

SummaryReport

CustomerMaster

File

DeliverySchedules

ShippingDocuments

CustomerMaster

File

InventoryMaster

File

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Incomplete, inaccurate, or lost customer orders Data entry edit checks

Lost orders Maintain written order logs

Credit Sales to customers with poor credit Credit approval by credit manager prior toshipment

Legitimacy of orders Phone orders should only be accepted from

approved contractors and only from authorizedpersonnel from those contractors. Theauthorized personnel should also be required toprovide an order authorization code to theorder taker.

Stock-outs Inventory control systems

Shipping errors Reconciliation of sales order with pickingticket and packing slip; bar code scanners,RFID, data entry application controls

Failure to bill customers Separation of shipping and billing functions,prenumbering all shipping documents,

reconciliation of shipping documents toinvoices, reconciliation of picking tickets andbills of lading with sales orders.

Billing errors Data entry edit controls and price lists

Posting errors in updating accounts receivable Reconciliation of subsidiary accountsreceivable ledger with general ledger. Monthlystatements to customers.

Loss of data Backup and disaster recovery procedures.Access controls both physical and logical.

Loss of communication links Backup land lines. Backup cell phonenumbers.

Poor performance Preparation and review of performance reportssuch as on-time delivery. Survey customersatisfaction related to delivery, quality ofgoods, and quality of service.

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10.8 (CMA Examination, adapted)

a. O'Brien Corporation: Internal control weaknesses and recommended improvements:

Weaknesses and Potential Problem(s) Recommendation(s) to CorrectWeaknesses

1. Orders received over the telephone arenot confirmed by customers in writing.This could result in errors or in fillingbogus orders.

Require a written customer purchase orderas confirmation of telephone orders.

2. Customer credit histories are notchecked before approving orders. This is

resulting in excessive late collections anduncollectible accounts.

Customers credit should be checked andno sales should be made to those that do

not meet credit standards.

3. Sales orders are filed by date in theMarketing Department. This leads todifficulty in handling customer questionsand complaints.

Establish customer files and file salesorders by customers.

4. Only two copies of sales orders are

prepared. This is not enough to insure aproper matching in the Billing Department.

Prepare, at a minimum, a three-part sales

order, sending one to Shipping and one toBilling. Billing should match its copy witha signed copy from Shipping beforepreparing a sales invoice.

5. Items that are out of stock are merelynoted. Inaction in these cases could causelost sales.

Establish procedures to scheduleproduction for back orders and to ship andbill the product once it is available.

6. There is no reconciliation of inventoryamounts shipped with billings. This couldresult in undetected underbilling.

Billing and shipping records should beintegrated on the computer system toprovide for reconciliation of inventoryamounts shipped and billed.

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7. The Receiving Department and theShipping Department share a computerterminal. In addition, the personnel in bothdepartments have access to the physical

inventory and can update the perpetualinventory records through the terminal.This could result in theft of inventory withno means of tracing the theft.

Each department should have its ownterminal and the terminals should be forinquiry purposes only. The physicalcustody and recordkeeping of inventory

should be separated (perpetual recordsshould be updated on the computer byPurchasing/Accounts Payable and Billing).Access to the physical inventory should belimited to Receiving; it would addincoming goods to the physical inventoryand select the goods from the warehousefor shipping.

8. The Receiving Department does not

compare incoming deliveries to purchaseorders. This may lead to the acceptance ofunordered goods.

Copies of purchase orders without quantity

information should be sent to Receiving.Receiving should match the shipment tothe purchase order and indicate the quantityreceived.

9. A complete inventory listing is printedonly once a year. Errors in the perpetualinventory records may remain undetectedfor too long a time period.

Inventory listings should be printedperiodically throughout the year, andphysical counts compared to the listing ona cycle basis.

b. How O'Brien Corporation could use its new computer system to improve controland efficiency:

Maintain an online master file for customer account and credit data in addition toinventory 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 thecustomer is on the phone at this time, inventory availability may be confirmeddirectly to the customer.

Have the system perform a credit check as order data are entered, and reject ordersfrom customers who are not credit-worthy.

Immediately following approval of a sales order, have the system (1) print ordisplay a shipping order for Shipping Department use, (2) print a packing slip andmailing label for use in shipping the goods to the customer.

Once the order has been shipped, the system should generate a customer invoice.

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Maintain order data online to facilitate response to customer inquiries re orderstatus.

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.

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10.9 (CPA Examination, November 1989, Auditing Question 5)

1. Weakness: The employees who perform services are permitted to approve creditwithout an external credit check. Threat: Sales could be made that turn out to beuncollectible. 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: Feesearned and accounts receivable might be understated because not all servicesperformed might be reported for billing. Fees earned and accounts receivable mightbe 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 shouldalso be prenumbered documents for all services and these should be periodicallyaccounted 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 baddebts expense overstated because write-offs of accounts could be approved foraccounts that are, in fact, collectible. Accounts receivable could be overstated and baddebt expense understated because write-offs may not be initiated for accounts that areuncollectible. Control: Separate the duties of approving credit and approving thewrite-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 understatedbecause of omitted or inaccurate billing. Control: Segregate the functions of cashreceipts 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 notdeposited (i.e. theft). Control: Bank reconciliation should be done by an employeewith no other cash handling responsibilities.

7. Weakness: Uncollectible accounts are not determined on the basis of establishedcriteria. Threat: Accounts can be written off to cover theft of cash. Control:Establish and use criteria for writing off accounts receivable. Write off should beauthorized by someone who does not have access to cash.

8. Weakness: Trial balances of the accounts receivable subsidiary ledger are notprepared independently of, or verified and reconciled to, the accounts receivablecontrol account in the general ledger. Threat: Any of fees earned, cash receipts, anduncollectible accounts expense could be either understated or overstated because ofundetected differences between the subsidiary ledger and the general ledger. Also,

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fees earned and cash receipts or accounts receivable could be understated because offailure to record billings, cash receipts, and write-offs accurately. Control: Periodicreconciliation of the subsidiary accounts receivable ledger to the general ledgercontrol account for accounts receivable.

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10.10 (CPA Examination, May 1988, Auditing Question 4, adapted)

Weakness Exposure Recommendation

No credit approval. Uncollectible sales. Separate credit approval

Warehouse clerk initiatesposting to inventory recordsby preparing shipping advice

Failure to prepare wouldresult in inaccurateinventory records; couldrelease goods to friendswith no invoice.

Inventory posting should bedone by sales clerk oncesales approved.

Warehouse clerk releases

merchandise prior to creditapproval.

Loss of inventory to

customers who do not pay.

Do not release goods until

notified of credit approval.

Warehouse clerk does notretain copy of shippingadvice.

Cannot easily identify lossif carrier has accident.

Use 4-copy shipping adviceand retain one copy inwarehouse.

Bookkeeper A authorizescustomer credit and preparessource documents for postingto customer accounts.

Sales to friends that exceedcredit limit.

Credit manager shouldapprove all credit.

Bookkeeper A preparesinvoices without notificationabout what was shipped andwhen.

Billing mistakes. Prepare invoice only after receive copy of shippingadvice indicating quantitiesshipped and date.

Bookkeeper A authorizeswrite-offs of customeraccounts and approves credit.

Can approve sales tofriends and later writethem off.

Someone else shouldauthorize write-off ofcustomer accounts.

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Bookkeeper B does notperiodically verify that allsales orders and shippingadvices have been invoiced.

Failure to bill customers. Periodically verify that allsales orders and shippingadvices have been invoiced.

Bookkeeper C does notreconcile subsidiary A/Rwith general ledger.

Potential imbalances dueto posting errors.

Reconcile subsidiary A/Rledger with the generalledger.

Bookkeeper C maintainsjournals and posts to ledgers.

No independent check onaccuracy of recordingprocess.

Bookkeeper B should recordin journals and BookkeeperC post to ledgers.

Collection Clerk directlyreceives and recordscustomer checks.

Theft of checks. Have all checks endorsedand listed in mail room priorto delivery to collectionclerk and send a copy of theremittance list toBookkeeping.

Collections Clerk does notdeliver postdated checks andchecks with errors to anemployee independent of thebank deposit for review anddisposition.

Possible theft of checks. Deliver all checks notdeposited to anotheremployee who has no bankdeposit/reconciliationduties.

Collection Clerk initiatesposting of receipts tosubsidiary accountsreceivable ledger and hasinitial access to cash receipts.

Theft by lapping. Have one of theBookkeepers recordcustomer checks, using acopy of the check or aremittance listing.

Cash collection clerk doesnot deposit checks promptly.

Possible loss of checks;loss of interest.

Deposit all receiptspromptly.

Cash collection clerkreconciles bank statementand has initial access to cashreceipts.

Can cover up theft byfudging the bankreconciliation.

Have bank reconciliationperformed by an employeewith no other involvementin cash receipts processing.

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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 customersas well as check inventory availability

Email notification of each department (shipping, billing, etc.) whenever another

department performs an action (e.g., billing is notified whenever shipping enters dataindicating that an order has been released)

EDI billing of customers

Establishment of electronic lockboxes with banks so that customer payments go directlyto companys 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 mayperform and which files they may access

A variety of input edit checks (limit checks, range checks, reasonableness tests, etc.) toensure completeness of data entry and accuracy

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10.11.

REVENUE CYCLE

Contact

Customer

Customer

Agrees to

Sale

Approve

Credit

Transfer

Goods

Bill

Customer

Receive

Remittance

Credit

Accounts

Receivable

Deposit

Cash

Accounting

Transaction

Sale Cash Receipt

Journal

Entry

Dr. A/RCr. Sales

Dr. CashCr. A/R

Documents Call sheet Purchaseorder fromcustomer

Sales order;picking list

Packing slip,shippingadvice

Invoice Remittanceadvice;remittance list

RemittanceAdvice

Depositslip

Data

Collected

NameAddressContact

person

All itemsneeded tocomplete theorder

Current balance

Credit limit

CarrierItems &

Qty. shipped

Amount due

NameAmount

NameInvoice*Amount

Total deposit

Department Sales Sales Credit Shipping Accounting Mail Accounting Cashier

Control

Issues

Followcompanypolicy andstrategy

Do not violatelaws orcompanypolicy

Onlyapprovedcustomers getcredit

Ship onlywhat wasordered;document allshipments

Bill for everyshipment; billaccurately

Prevent theftof checks orcash

Preventlapping;properly creditcustomeraccounts

Theft

Information

Required

* * * * * * * *

Information

Generated

* * * * * * * *

Effect of

Automation

* * * * * * * *

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*-a lot of information is potentially required and generated at each step. The key point to look for in student answers is whether theyhave identified non-financial information needs and data from external sources. Similarly, there are countless potential answers tothe effect of automation.

11-31

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10.12

1. e2. i

3. g4. k5. c6. j7. h8. f9. a10. l11. b12. d

10.13

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 recordingand bank deposit who therefore has custody of the donation and records the donation.

Weakness - Bank reconciliation performed by accountant who also makes the bankdeposit.

Control - The donations should be sent to the office manager for deposit and the donationlist sent to the accountant for recording. This corrects both weaknesses.

3. Weakness - Each employee has full access (create, read, update, delete) to theaccounting system.

Control - Only the accountant and office manager should have full access to theaccounting system.

b. The weekly back-up should be stored off-site, not in the manager's office. The files both on-site and off-site should be password protected and encrypted to guard against alteration andunauthorized disclosure. In addition, the backup files should be kept locked in a secure place.

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10.14

Product Sales ($) Division

Widgets 245000 A

Widgets 74000 B

Widgets 178944 C

Gadgets 123678 A

Gadgets 163888 B

Gadgets 201999 C

Gizmos 178000 A

Gizmos 123456 B

Gizmos 198346 C

Wingdings 158255 A

Wingdings 273050 B

Wingdings 95000 C

Dohingeys 333000 A

Dohingeys 144357 B

Dohingeys 188500 C

Thingamabobs 184750 AThingamabobs 222000 B

Thingamabobs 100000 C

Whatchamacallits 278000 A

Whatchamacallits 200000 B

Whatchamacallits 129905 C

Round2its 103000 A

b. Number ofproducts with sales

> 200,000

"=COUNTIF(B2:B23,">200000")

c. Total sales allproducts forDivision A

"=SUMIF(C2:C23,"A",B2:B23)

Division to sum

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d. Total sales allproducts in thatdivision

=IF(B28="A",SUMIF(C2:C23,"A",B2:B23),IF(B28="B",SUMIF(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 thatreferences the sales column and tests if it is less than $100,000.

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