CHAPTER
12
THE REVENUE
CYCLE: SALES AND CASH COLLECTIONS
SUGGESTED
ANSWERS TO DISCUSSION QUESTIONS
12.1 Customer relationship management systems
hold great promise, but their usefulness is determined by the amount of
personal data customers are willing to divulge. To what extent do you think
concerns about privacy-related issues affect the use of CRM systems?
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 as
well as the company’s ability to keep this information secure.
12.2 Some products, like music and software, can be digitized. How
does this affect each of the four main activities in the revenue cycle?
Digitized
products do not change the four basic business activities of the revenue
cycle. For all products, whether
digitized or not, an order must be taken, the product shipped, the customer
billed, and cash collected.
The
only thing that digitized products change is inventory management as products
do not need to be removed from a warehouse to be delivered. However, a copy of
a product must be shipped (usually electronically, but in some cases it may
need to be burned on a DVD and then shipped).
12.3 Many companies use accounts receivable aging schedules to
project future cash inflows and bad-debt expense. Review the information
typically presented in such a report (see Figure 12-8). Which specific metrics
can be calculated from those data that might be especially useful in providing
early warning about looming cash flow or bad-debt problems?
The accounts receivable aging report shows
dollar amounts outstanding by number of days past due by customer and by
invoice. The following metrics can
provide useful early warnings about looming cash flow or bad-debt problems.
·
The percentage of total accounts receivable categorized by days
past due would 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.
·
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 terms, and notifying the credit manager to
restrict credit for this particular customer.
·
The company may have a 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.
12.4 Table 12-1 suggests that restricting
physical access to inventory is one way to reduce the threat of theft. How can
information technology help accomplish that objective?
Possibilities
include:
·
Electronic
locks on all entrances and exits to the inventory area.
·
Smart
card technology where employees must scan their ID card prior to
entering/exiting the inventory area.
·
Biometric
access controls (fingerprint reader, face recognition software, etc.)
·
Attach
RFID tags to inventory items and install RFID tag scanners at each exit of the
inventory area.
·
Install
and monitor surveillance cameras in the inventory area.
12.5 Invoiceless pricing has been adopted by
some large businesses for B2B transactions. What are the barriers, if any, to
its use in B2C commerce?
Many
companies are trying to incent their customers to sign up for automatic
bill-pay. The primary barrier is consumer resistance to or fear of online bill
payment in general. However, there are also problems on the seller side –
particularly in regards to billing disputes. A related issue is the threat of
asset misappropriation – how easily can the seller attempt to recover items
sold to the consumer?
12.6 The use of some form of electronic “cash”
that would provide the same kind of anonymity for e-commerce that cash provides
for traditional physical business transactions has been discussed for a long
time. What are the advantages and disadvantages of electronic cash to
customers? To businesses? What are some of the accounting implications of using
electronic cash?
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.
Finally,
there is the question of how to provide and maintain an adequate audit trail to
prevent unscrupulous businesses from “skimming” digital cash sales and thereby
under-reporting sales for tax purposes.
SUGGESTED
ANSWERS TO THE PROBLEMS
12.1 Match the term in the left column with its
definition in the right column.
|
1. __d__ CRM system
|
a. Document used to authorize
reducing the balance in a customer account
|
|
2. __g_ Open-invoice method
|
b. Process of dividing customer
account master file into subsets and preparing invoices for one subset at a
time
|
|
3. __a__ Credit memo
|
c. System that integrates EFT and
EDI information
|
|
4. __h__ Credit limit
|
d. System that contains customer-related
data organized in a manner to facilitate customer service, sales, and
retention
|
|
5. __b__ Cycle billing
|
e. Electronic transfer of funds
|
|
6. __c___ FEDI
|
f. Method of maintaining accounts
receivable that generates one payments for all sales made the previous month
|
|
7. _n__ Remittance advice
|
g. Method of maintaining customer
accounts that generates payments for each individual sales transaction
|
|
8. _j__ Lockbox
|
h. Maximum possible account
balance for a customer
|
|
9. _k__ Back order
|
i. Electronic invoicing
|
|
10. _m__ Picking ticket
|
j. Post office box to which customers send payments
|
|
11. _l__ Bill of lading
|
k. Document used to indicate stock outs exist
|
|
|
l. Document used to establish responsibility for shipping goods via a
third party
|
|
|
m. Document that authorizes removal of merchandise from inventory
|
|
|
n. Turnaround document returned by customers with payments
|
12.2 What internal control
procedure(s) would provide protection against the following threats?
a. Theft of goods by the shipping dock
workers, who claim that the inventory shortages reflect errors in the inventory
records.
Inventory
clerks should count and document goods (on paper or by computer) as they leave
inventory storage. Shipping personnel
should be required to count and document receipt of goods from the finished
goods storeroom to acknowledge responsibility for custody of the goods
transferred.
Counting
goods when they are received and when they are sent to inventory storage as
well as when goods leave inventory storage and are sent to shipping helps
maintain control over inventory.
Reconciling the two sets of counts makes it more difficult for employees
to steal inventory as it is received and shipped.
b. Posting the sales amount to the wrong
customer account because a customer account number was incorrectly keyed into
the system.
If
the transactions are being entered online, closed loop verification could be
used. The system could respond to the operator entering
the account number by retrieving and displaying the customer's name for the
operator to review.
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.
Note
that a validity check would only tell you if a valid customer number was
entered, not if the correct valid customer number was entered. Likewise, check digit verification could tell
you if the customer number existed, but not if it was the right customer
number.
c. Making a credit sale to a customer who is
already four months behind in making payments on his account.
Up-to-date
credit records must be maintained to control this problem. During the credit approval process, the
credit manager should review the accounts receivable aging schedule to identify
customer’s with past-due balances to prevent additional sales to those
customers. Alternatively, the computer system could be programmed to determine
if the customer had any past due balances over a specified length of time (such
as 60 days). If not, the sale would be
approved. If they had a past-due
balance, a notice could be sent to the credit manager who could review the sale
and make a decision about extending additional credit.
A
credit limit check would not be sufficient, because a customer could have a
balance below the credit limit but be past due.
A computer system could be programmed to check both credit limit and
past due accounts and authorize sales.
Sales not passing either the credit limit or the past due test would be
sent to the credit manager for a decision.
d. Authorizing a credit memo for a sales
return when the goods were never actually returned.
A
receiving report should be required before a credit for sales returns is issued.
The system should be configured to block issuance of credit memos without the
required documentation that the goods have been returned.
e. Writing off a customer’s accounts
receivable balance as uncollectible to conceal the theft of subsequent cash
payments from that customer.
The
problem usually occurs because the same individual writes off accounts and
processes cash payments. Therefore, the best control procedure to prevent this
problem is to separate the function of authorizing write-offs of uncollectible
accounts from the function of handling collections on account.
f. Billing customers for the quantity ordered
when the quantity shipped was actually less due to back ordering of some items.
Shipping
personnel should be required to record the actual quantity shipped on the order
document and/or enter the quantity shipped into the accounting system, in order
that bills can be prepared based upon the quantity shipped rather than the
quantity ordered. The system should be configured to generate invoices
automatically based on the quantity shipped.
g. Theft of checks by the mailroom clerk, who
then endorsed the checks for deposit into the clerk’s personal bank account.
In
order to cover up this theft, the mailroom clerk has to be able to alter the
accounts receivable records. Otherwise, a customer who is subsequently notified
that they are past due will complain and provide proof that they sent in
payment. Therefore, the critical control is to segregate duties so that whoever
opens the mail does not have the ability to maintain customer accounts.
If
accounts receivable updates the records based on a cash receipts pre-list
instead of the actual checks, the mailroom clerk could conceivably lap
payments. To prevent this, the cash
receipts pre-list could be compared to the checks before the list is sent to
accounts receivable. The checks should
not be sent to accounts receivable as the accounts receivable clerk could
perform the lapping.
Other
deterrents used to deter theft of checks by the mailroom clerk include having
two people open the mail, using video cameras to tape the check opening
process, and utilizing a bank lockbox.
h. Theft of funds by the cashier, who cashed
several checks from customers.
In
order to cover up this theft, the cashier has to be able to alter the accounts
receivable records. Otherwise, a customer who is subsequently notified that
they are past due will complain and provide proof that they sent in payment.
Therefore, the critical control is to segregate the duties of handling cash and
making deposits from the maintenance of accounts receivable records.
One
way to control cash receipts is shown below.
The mailroom creates a cash prelist, sends a copy to a 3rd
party, and sends the checks to the cashier.
The cashier prepares duplicate deposit slips, sends the original to the
bank with the checks, and sends a copy to the 3rd party. When the checks are deposited, the bank sends
a copy of the validated deposit slip to the 3rd party, who compares
all three documents to make sure all cash is deposited.
i.
Theft
of cash by a waiter who destroyed the customer sales ticket for customers who
paid cash.
In a manual system, all sales tickets should
be prenumbered and accounted for so management can detect missing sales
tickets.
In many restaurant systems, waiters cannot
get food out of the kitchen without entering a customer order into the
system. The system creates a prenumbered
sales document that must be cleared by the waiter that day. This prevents the waiter from destroying
sales tickets and giving people free food.
These systems also are capable of some reasonableness
tests such as:
Beginning
inventory of food
·
Food
used in the sales orders that day
= Ending
inventory of food
The ending inventory of food is counted and
compared to the projected ending inventory to determine if food items are
missing. This check is most frequently
used for expensive items of food like steak, shrimp, lobster, etc.
j.
Shipping
goods to a customer but then failing to bill that customer.
To prevent this from occurring deliberately,
it is necessary to segregate the shipping and billing functions.
To prevent this from happening by accident,
the system needs to automatically bill customers for shipments. The system should also be configured to
periodically reconcile all shipments with a billing and generate reports of
unbilled shipments for management review and corrective action.
k.
Lost
sales because of stockouts of several products for which the computer records
indicated there was adequate quantity on hand.
Regular physical inventory counts need to be
made, the results compared to recorded amounts on hand, and needed adjustments
to inventory quantities made.
In this scenario, it is possible that the
judgment as to what is “adequate quantity on hand” was inaccurate. This quantity can be improved using an
accurate sales forecasting system and frequently reviewing and revising the
forecasts as needed.
l.
Unauthorized
disclosure of buying habits of several well-known customers.
Access to customer information should be
restricted using User IDs, passwords, and an access control matrix.
Employees given such access need to be
trained to follow the organization’s privacy policies.
In addition, encryption of the data would
prevent snooping by IT employees who do not have direct access to the
application system. Otherwise, such employees may be able to use their access
to the operating system to be able to view data.
m.
Loss
of all information about amounts owed by customers in New York City because the
master database for that office was destroyed in a fire.
Data: Regular
backups with copies being stored off-site.
Hardware and software: Hot or cold site arrangements for both
Recovery:
Disaster recovery plan developed, tested, and in place
n.
The
company’s Web site was unavailable for seven hours because of a power outage.
A UPS can power a system for a time, but most
are unlikely to be able to power a system for seven hours.
Two better options are
·
Backup
power generators capable of running the web site for seven hours
·
Real-time
mirroring, with the system switching over to the other site when the system
went down.
o.
Interception
and theft of customers’ credit card numbers while being sent to the company’s
Web site.
Encryption of credit card information prior
to transmitting over the Internet. Typically this involves using SSL.
p.
A
sales clerk sold a $7,000 wide-screen TV to a friend and altered the price to
$700.
- All product prices and sales discounts maintained in the system
- Use of barcodes and RFID tags to identify the product and sales price
- A system configured to give sales clerks read-only access to pricing data to prevent them from changing the price.
- Supervisor approvals for any needed changes or discounts to the listed price
- A log of all system overrides and supervisor changes to prices
q.
A
shipping clerk who was quitting to start a competing business copied the names
of the company’s 500 largest customers and offered them lower prices and better
terms if they purchased the same product from the clerk’s new company.
- Shipping clerks should not have access to customer account information.
- Access (and attempted access) to customer records should be logged and reports reviewed to verify that only authorized employees see that information.
r.
A
fire in the office next door damaged the company’s servers and all optical and
magnetic media in the server room. The company immediately implemented its
disaster recovery procedures and shifted to a backup center several miles away.
The company had made full daily backups of all files and stored a copy at the
backup center. However, none of the backup copies were readable.
Periodically practicing and testing the
backup and restoration process would verify its effectiveness.
12.3 For good internal control, which of the
following duties can be performed by the same individual?
1. Approve changes to customer credit limits
2. Sales order entry
3. Shipping merchandise
4. Billing customers
5. Depositing customer payments
6. Maintaining accounts receivable
7. Issuing credit memos
8. Reconciling the organization’s bank accounts
9. Checking inventory availability
Cells with an “X” indicate duties that can be
performed by the same individual:
|
Duty
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
|
1
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
X
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
9
|
|
X
|
|
|
|
|
|
|
|
For sound internal control, most of these
duties need to be performed by different people. There are two exceptions:
·
The same
person can take customer orders and check inventory availability because this
combination does not provide any way to commit and conceal a theft.
·
The same
person can create invoices (bill customers) and maintain accounts receivable.
Key duties to segregate include:
·
Approving changes to customer credit and
sales order entry. If both duties are performed by the same
person, they could authorize sales to friends that are subsequently not paid.
·
Shipping and billing. If
the same person performs both duties, they could ship merchandise to friends
without billing them.
·
Depositing customer payments and maintaining
accounts receivable. If the same person performs both duties, they
could commit the fraud known as lapping (stealing payments and covering it up
by adjusting the accounts so that the customer does not complain about a
missing credit).
·
Depositing customer payments and issuing
credit memos. If the same person performs both duties, they
could steal payments and create a credit memo to cover up the theft and adjust
the customer’s account so that they do not complain about a missing credit.
·
Depositing customer payments and reconciling
the bank account. If the same person did both duties, they
could steal cash and cover up the difference by listing fraudulent bank
expenses to adjust the cash balance.
·
Maintaining accounts receivable and issue
credit memos. If the same person performed both tasks, they
could write off their friends’ accounts.
·
The
remaining combinations are not desirable because they involve tasks that
require significantly different skills and knowledge, so would be unlikely to
be efficiently performed by the same person.
12.5 For each of the following activities identify the data that must be entered
by the employee performing that activity and list the appropriate data entry
controls:
a.
Sales order entry clerk
taking a customer order
|
Data that must be entered
|
Appropriate Data Entry Edit Controls
|
|
User ID
|
Validity check
Compatibility test (is
user authorized to perform this task?)
Completeness check
(cannot be null)
|
|
Password
|
Validity check
Compatibility test (is
user authorized to perform this task?)
Completeness check
(cannot be null)
|
|
Customer number
|
Select from pull-down
menu (validity check)
Closed loop verification
(system displays name that matches number selected)
Completeness check
(cannot be null)
|
|
Delivery method
|
Choose from pull-down
list of options
|
|
Desired delivery date
|
Field check (date)
Reasonableness check
(compare difference between desired date and today’s date to preset tolerance
limit)
|
|
Item number
|
Field check
Validity check
Check digit
|
|
Item quantity
|
Field check
Reasonableness check
|
Note: All other fields on
the sample sales order entry screen (see Figure 12-6) can be completed by the
system.
b.
Shipping clerk completing a bill of lading for shipment of an order to a
customer
|
Data that must be entered
|
Appropriate Data Entry Edit Controls
|
|
User ID
|
Validity check
Compatibility test (is
user authorized to perform this task?)
Completeness check
(cannot be blank)
|
|
Password
|
Validity check
Compatibility test (is
user authorized to perform this task?)
Completeness check
(cannot be blank)
|
|
Carrier name
|
Choose from pull-down
list of approved carriers
Completeness check
(cannot be blank)
|
|
Customer name (consigned
to)
|
Choose from pull-down
list of customers
Completeness check
(cannot be blank)
|
|
Number of packages
|
Field check (numeric
only)
Sign check (>0)
Completeness check
(cannot be blank)
|
|
Description
|
Completeness check
(cannot be blank)
|
|
Weight
|
Field check (numeric
only)
Completeness check
(cannot be blank)
|
|
Class or rate
|
Choose from pull-down
menu of options
Completeness check
(cannot be blank)
|
Note: All other fields on
the sample bill of lading (see Figure 12-11) can be completed by the system.
12.6 Create a questionnaire checklist that can be
used to evaluate controls for each of the four basic activities in the revenue
cycle (sales order entry, shipping, billing, and cash collections).
a. For each control
issue, write a Yes/No question such that a “No” answer represents a control
weakness. For example, one question might be “Are customer credit limits set
and modified by a credit manager with no sales responsibility?”
A wide variety of questions is possible. Below is a
sample list:
|
Question
|
Yes
|
No
|
|
1.
Is access to master data restricted?
|
|
|
|
2.
Is the master data regularly reviewed and all changes
investigated?
|
|
|
|
3.
Is sensitive data encrypted while stored in the
database?
|
|
|
|
4.
Does a backup and disaster recovery plan exist?
|
|
|
|
5.
Have backup procedures been tested within the past
year?
|
|
|
|
6.
Are appropriate data entry edit controls used?
|
|
|
|
7.
Are digital signatures required for online orders?
|
|
|
|
8.
Are physical counts of inventory taken regularly and
used to adjust the perpetual inventory records?
|
|
|
|
9.
Are the credit approval and sales order entry tasks performed
by separate individuals?
|
|
|
|
10. Are picking list
quantities compared to sales orders?
|
|
|
|
11. Is physical access to
inventory controlled?
|
|
|
|
12. Are reports of open
sales orders regularly created and reviewed?
|
|
|
|
13. Are shipping documents
reconciled with sales orders?
|
|
|
|
14. Are the shipping and
billing functions performed by different individuals?
|
|
|
|
15. Are monthly statements
mailed to customers?
|
|
|
|
16. Are the functions of
processing customer payments and maintaining accounts receivable performed by
separate individuals?
|
|
|
|
17. Is the bank account
reconciled by someone other than the person who processes customer payments?
|
|
|
|
18. Are lockbox arrangements
used?
|
|
|
|
19. Are customer credit
limits set and modified by a credit manager with no sales responsibility?
|
|
|
b. For each Yes/No question,
write a brief explanation of why a “No” answer represents a control weakness.
|
Question
|
Reason
a “No” answer represents a weakness
|
|
1
|
Unrestricted access to master files could
facilitate fraud by allowing employees to change account balances to conceal
theft
|
|
2
|
Failure to investigate all changes to
customer master data may allow fraud to occur because unauthorized changes to
credit limits may not be detected.
|
|
3
|
Failure to encrypt sensitive data can
result in unauthorized disclosure of personal information about customers
|
|
4
|
If a backup and disaster recovery plan does
not exist, the organization may suffer loss of important data.
|
|
5
|
If the backup plan is not regularly tested,
it may not work.
|
|
6
|
Without proper data entry edit controls,
errors in sales order entry may occur resulting in shipments that are not
billed, sending the wrong items, etc.
|
|
7
|
Without a digital signature, orders may be
processed and sent that the customer later refuses, resulting in increased
costs
|
|
8
|
Without periodic physical counts, the
perpetual inventory records are likely to be incorrect, creating problems in
filling customer orders on time
|
|
9
|
If the same individual approves changes in
credit and takes customer orders, they can increase credit limits for friends
which may result in sales that are not collected.
|
|
10
|
Not comparing picking lists to sales orders
can result in shipping the wrong merchandise or the wrong quantities to
customers.
|
|
11
|
If physical access to inventory is not
restricted, theft may occur.
|
|
12
|
Failure to monitor sales orders may result
in delays in filling customer orders
|
|
13
|
Failure to compare shipping documents to
sales orders may result in errors in filling customer orders
|
|
14
|
Not segregating the billing and shipping
functions increases the risk of deliberately not billing for shipments
|
|
15
|
Not mailing monthly statements to customers
increases the risk of not detecting errors or fraud in maintaining accounts
receivable
|
|
16
|
Not segregating handling of customer
payments and maintenance of accounts receivable creates the possibility of
lapping
|
|
17
|
If the bank account is reconciled by the
same person who processes customer payments, theft can occur and be covered
up by adjusting the bank balance on the bank reconciliation
|
|
18
|
Not using lockboxes, where feasible,
creates delays in receiving customer payments which could result in cash flow
problems
|
|
19
|
If credit limits are set by someone with
sales responsibility, that person may be tempted to grant credit to customers
to maximize sales (and thereby commissions or bonuses earned) without regard
to the risk of having to write off the sales as uncollectible.
|
12.7 O’Brien Corporation is a midsize, privately owned, industrial
instrument manufacturer supplying precision equipment to manufacturers in the
Midwest. The corporation is 10 years old and uses an integrated ERP system. The
administrative offices are located in a downtown building and the production,
shipping, and receiving departments are housed in a renovated warehouse a few
blocks away.
Customers place orders on the company’s website, by fax, or by
telephone. All sales are on credit, FOB destination. During the past year sales
have increased dramatically, but 15% of credit sales have had to written off as
uncollectible, including several large online orders to first-time customers
who denied ordering or receiving the merchandise.
Customer orders are picked and sent to the warehouse, where
they are placed near the loading dock in alphabetical sequence by customer
name. The loading dock is used both for outgoing shipments to customers and to
receive incoming deliveries. There are ten to twenty incoming deliveries every
day, from a variety of sources.
The increased volume of sales has resulted in a number of
errors in which customers were sent the wrong items. There have also been some
delays in shipping because items that supposedly were in stock could not be
found in the warehouse. Although a perpetual inventory is maintained, there has
not been a physical count of inventory for two years. When an item is missing,
the warehouse staff writes the information down in log book. Once a week, the
warehouse staff uses the log book to update the inventory records.
The system is configured to prepare the sales invoice only
after shipping employees enter the actual quantities sent to a customer,
thereby ensuring that customers are billed only for items actually sent and not
for anything on back order.
Identify at least three weaknesses in O’Brien Corporation’s
revenue cycle activities. Describe the problem resulting from each weakness.
Recommend control procedures that should be added to the system to correct the
weakness.
(CMA Examination, adapted)
|
Weaknesses and Potential Problem(s)
|
Recommendation(s) to Correct Weaknesses
|
|
1. Orders from new customers do not require
any form of validation, resulting in several large shipments being sent and
never paid for.
|
Require digital signatures on all online
orders from new customers.
Require a written customer purchase order
as confirmation of telephone and fax orders.
|
|
2. Customer credit histories are not
checked before approving orders, resulting in excessive uncollectible
accounts.
|
Customers’ credit should be checked and no
sales should be made to those that do not meet credit standards.
|
|
3. Outgoing shipments are placed near the
loading dock door without any physical security. The loading dock is also
used to receive incoming deliveries. This increases the risk of theft, which
may account for the unexplained shortages in inventory.
|
Separate the shipping and receiving docks.
Physically restrict access to the loading
dock area where customer orders are placed.
|
|
4. Physical counts of inventory are not
made at least annually. This probably accounts for the inaccuracies in the
perpetual inventory records and may also prevent timely detection of theft.
|
Physical counts of inventory should be made
at least once a year.
Inventory records discrepancies should be
corrected and investigated.
|
|
5. Shipments are not reconciled to sales
orders, resulting in sending customers the wrong items.
|
The system should be configured to match
shipping information to sales orders and alert the shipping employees of any
discrepancies.
|
|
6. The perpetual inventory records are only
updated weekly. This contributes to the unanticipated shortages that result
in delays in filling customer orders.
|
The warehouse staff should enter
information about shortages as soon as they are discovered.
|
12.8 Parktown
Medical Center, Inc. is a small health care provider owned by a publicly held
corporation. It employs seven salaried physicians, ten nurses, three support
staff, and three clerical workers. The clerical workers perform such tasks as
reception, correspondence, cash receipts, billing, and appointment scheduling.
All are adequately bonded.
Most patients pay for services rendered by cash or check on
the day of their visit. Sometimes, however, the physician who is to perform the
respective services approves credit based on an interview. When credit is
approved, the physician files a memo with one of the clerks to set up the
receivable using data the physician generates.
The servicing physician prepares a charge slip that is given
to one of the clerks for pricing and preparation of the patient’s bill. At the
end of the day, one of the clerks uses the bills to prepare a revenue summary
and, in cases of credit sales, to update the accounts receivable subsidiary
ledger.
The front office clerks receive cash and checks directly from
patients and give each patient a prenumbered receipt. The clerks take turns
opening the mail. The clerk who opens that day’s mail immediately stamps all
checks “for deposit only.” Each day, just before lunch, one of the clerks
prepares a list of all cash and checks to be deposited in Parktown’s bank
account. The office is closed from 12 noon until 2:00 p.m. for lunch. During
that time, the office manager takes the daily deposit to the bank. During the
lunch hour, the clerk who opened the mail that day uses the list of cash
receipts and checks to update patient accounts.
The clerks take turns preparing and mailing monthly statements
to patients with unpaid balances. One of the clerks writes off uncollectible
accounts only after the physician who performed the respective services
believes the account will not pay and communicates that belief to the office
manager. The office manager then issues a credit memo to write off the account,
which the clerk processes.
The office manager supervises the clerks, issues write-off
memos, schedules appointments for the doctors, makes bank deposits, reconciles
bank statements, and performs general correspondence duties.
Additional services are performed monthly by a local
accountant who posts summaries prepared by the clerks to the general ledger,
prepares income statements, and files the appropriate payroll forms and tax
returns.
Identify at
least three control weaknesses at Parktown. Describe the potential threat and
exposure associated with each weakness, and recommend how to best correct them. (CPA Examination, adapted)
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 physician performing
the services (probably the office manager) should do a credit check. Credit
limits should be established and used to control the amount of credit offered.
2. Weakness: The physician who approves credit
also approves 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.
3. Weakness: The employee who initially
handles cash receipts also prepares billings and maintains accounts receivable.
Threat: Theft by lapping could occur.
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/accounts receivable.
4. 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.
5. Weakness: The employee who makes bank
deposits also issues credit memos.
Threat: The office manager could steal cash and cover up the shortage by
issuing a credit memo for the amount stolen.
Control: Cash deposits should be made by an employee who does not have
authority to issue credit memos and who also does not maintain accounts
receivable.
6. 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 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.
12.9 Figure 12-18
depicts the activities performed in the revenue cycle by the Newton Hardware
Company. (CPA Examination, adapted)
a. Identify at least 7 weaknesses in Newton
Hardware’s revenue cycle. Explain the resulting threat and suggest methods to
correct the weakness.
|
Weakness
|
Threat/Problem
|
Recommendation
|
|
Credit approval by bookkeeper A has no effect on shipping.
|
Uncollectible sales.
|
Credit approval must occur prior to shipping merchandise to
customers.
|
|
Warehouse clerk (who has physical access to the inventory) initiates posting
to inventory records by preparing shipping advice.
|
Failure to prepare shipping advice would result in inaccurate
inventory records; could release goods to friends with no invoice.
|
Inventory posting should be done by the sales clerk once sales are approved.
|
|
Warehouse clerk does not retain copy of the shipping advice.
|
Cannot easily identify loss if the carrier has accident.
|
Use a 4-copy shipping advice and retain one copy in the 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 receipt of a copy of the shipping advice
indicating the quantities shipped and the 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 the write-off of customer accounts.
|
|
Bookkeeper B does not periodically verify that all sales orders and
shipping advices have been invoiced.
|
Failure to bill customers.
|
Prenumber all sales orders and shipping documents and periodically account
for them
Verify that all sales orders
and shipping advices have been invoiced.
|
|
Bookkeeper C does not reconcile the subsidiary A/R with the general
ledger.
|
Potential imbalances due to posting errors.
|
Reconcile the subsidiary A/R ledger with the general ledger.
|
|
Bookkeeper C maintains journals and posts to ledgers.
|
No independent check on accuracy of recording process.
|
Bookkeeper B should record in journals and Bookkeeper C post to
ledgers.
|
|
Collections Clerk does not deliver postdated checks and checks with
errors to an employee independent of the bank deposit for review and
disposition.
|
Possible theft of checks.
|
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.
|
Checks should be opened by someone who does not have bookkeeping or
accounting duties. That person should then send a list of cash receipts to
the collections clerk to be used to record cash receipts.
|
|
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.
|
b. Identify ways to use IT to streamline Newton’s revenue
cycle activities. Describe the control
procedures required in the new system.
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
·
Email
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
12.10 The Family Support Center is a small
charitable organization. It has only four full-time employees: two staff, an
accountant, and an office manager. The majority of its funding comes from two
campaign drives, one in the spring and one in the fall. Donors make pledges
over the telephone. Some donors pay their pledge by credit card during the
telephone campaign, but many prefer to pay in monthly installments by check. In
such cases, the donor pledges are recorded during the telephone campaign and
they are then mailed pledge cards. Donors mail their contributions directly to
the charity. Most donors send a check, but occasionally some send cash. Most
donors return their pledge card with their check or cash donation, but
occasionally the Family Support Center receives anonymous cash donations. The
procedures used to process donations are as follows:
Sarah, one
of the staff members who has worked for the Family Support Center for 12 years,
opens all mail. She sorts the donations from the other mail and prepares a list
of all donations, indicating the name of the donor (or anonymous), amount of
the donation, and the pledge number (if the donor returned the pledge card).
Sarah then sends the list, cash, and checks to the accountant.
The
accountant enters the information from the list into the computer to update the
Family Support Center’s files. The accountant then prepares a deposit slip (in
duplicate) and deposits all cash and checks into the charity’s bank account at
the end of each day. No funds are left on the premises overnight. The validated
deposit slip is then filed by date. The accountant also mails an acknowledgment
letter thanking each donor. Monthly, the accountant retrieves all deposit slips
and uses them to reconcile the Family Support Center’s bank statement. At this
time, the accountant also reviews the pledge files and sends a follow-up letter
to those people who have not yet fulfilled their pledges.
Each
employee has a computer workstation that is connected to the internal network.
Employees are permitted to surf the Web during lunch hours. Each employee has
full access to the charity’s accounting system, so that anyone can fill in for
someone else who is sick or on vacation. Each Friday, the accountant makes a
backup copy of all computer files. The backup copy is stored in the office manager’s
office.
a. Identify two major
control weaknesses in the Family Support Center’s cash receipts procedures. For
each weakness you identify, suggest a method to correct that weakness. Your
solution must be specific—identify
which specific employees should do what.
Assume that no new
employees can be hired
1. Weakness - Sarah opens all mail and prepares a
list of donations (cash and checks). Sarah could misappropriate anonymous cash
donations.
Control - Mail should be opened by both Sarah and the other staff
member. The use of lockboxes would also eliminate this problem, but would cost
the charity money to implement.
2. Weakness - The donations and donation list are
sent to the accountant for recording and to prepare the bank deposit. Therefore, the accountant has custody of the
donation and records the donation.
Weakness - Bank reconciliation is performed by the 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 the office manager should have full
access to the accounting system.
b. Describe the IT
control procedures that should exist in order to protect the Family Support
Center from loss, alteration, or unauthorized disclosure of data.
·
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 and unauthorized disclosure.
·
The
backup files should be kept locked in a secure place.
12.11 Match the threats in the first
column to the appropriate control procedures in the second column (more than
one control may address the same threat).
|
Threat
|
Applicable Control Procedures
|
|
1. _a,p__ Uncollectible sales
|
a. Restrict access to master data.
|
|
2. _g,i__ Mistakes in shipping orders to customers.
|
b. Encrypt customer information while in storage.
|
|
3. __o_ Crediting customer payments to the wrong account.
|
c. Backup and disaster recovery procedures.
|
|
4. _f,m,o__ Theft of customer payments.
|
d. Digital signatures.
|
|
5. _e,j,k__ Theft of inventory by employees.
|
e. Physical access controls on inventory
|
|
6. __l_ Excess inventory.
|
f. Segregation of duties of handling cash and maintaining accounts
receivable.
|
|
7. _a__ Reduced prices for sales to friends.
|
g. Reconciliation of packing lists with sales orders.
|
|
8. _d__ Orders later repudiated by customers who deny placing them.
|
h. Reconciliation of invoices with packing lists and sales orders.
|
|
9. _h,q__ Failure to bill customers.
|
i. Use of bar-codes or RFID tags.
|
|
10. _h__ Errors in customer invoices
|
j. Periodic physical counts of inventory
|
|
11. _m,n_ Cash flow problems
|
k. Perpetual inventory system.
|
|
12. _c__ Loss of accounts receivable data
|
l. Use of either EOQ, MRP, or JIT inventory control system.
|
|
13. __a,b_ Unauthorized disclosure of customer personal information.
|
m. Lockboxes or electronic lockboxes.
|
|
14. _g,r__ Failure to ship orders to customers.
|
n. Cash flow budget
|
|
|
o. Mail monthly statements to customers.
|
|
|
p. Credit approval by someone not involved in sales.
|
|
|
q. Segregation of duties of shipping and billing.
|
|
|
r. Periodic reconciliation of prenumbered sales orders with prenumbered
shipping documents.
|
