CHAPTER 12



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.

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, 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.

10.3 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.

10.4 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.

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.

10.8 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.

SUGGESTED ANSWERS TO THE PROBLEMS

10.1 Types of controls used at various steps in the revenue cycle.

| | |Applicable Controls |

| | |(P = Preventive, D = Detective, C = Corrective) |

|Process/ |Threat | |

|Activity | | |

|Sales order entry |1. Incomplete or inaccurate customer orders |Various data entry edit controls P |

| | | |

| |2. Credit sales to customers with poor credit | |

| | |Proper credit approval, prior to delivery of goods or |

| | |services P; accurate, current customer data P |

| |3. Legitimacy of order | |

| | |Authorized customer purchase order P; digital signatures D |

| | | |

| |4. Lost sales due to stockouts, excessive carrying|Inventory control systems P; periodic physical inventory |

| |costs, and lost revenue due to markdowns |counts D; improved sales forecasts P; better supply chain |

| | |management P and C |

|Shipping |5. Shipping errors: | |

| |• Wrong merchandise |Compare sales order with packing list and shipping |

| |• Wrong quantities |documents D; bar coding P |

| |• Wrong address | |

| | | |

| |6. Theft of inventory |Physical access controls P; documentation of all inventory |

| | |movements D; periodic physical inventory counts D |

|Billing and accounts |7. Failure to bill |Segregation of shipping and billing functions P; |

|receivable | |one-for-one matching of invoices (or EDI acknowledgments) |

| | |against shipping documents D and C |

| | | |

| | |Comparison of sales orders, shipping documents, and |

| |8. Billing errors |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 |

| |9. Errors in maintaining customer accounts | |

| | |Applicable Controls |

|Process/ | |(P = Preventive, D = Detective, C = Corrective) |

|Activity |Threat | |

|Cash collections |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 |

|General |11. Loss of data |Backup procedures C; disaster recovery plans P; physical |

| | |and logical access controls P |

| | | |

| | |Development and periodic review of appropriate performance |

| |12. Poor 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.

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.

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.

10.4

[pic]

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:

[pic]

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:

[pic]

• 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:

[pic]

• 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 cross-footed 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:

[pic]

[pic]

[pic]

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

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 contents

Copy 2 - File as a record of goods shipped

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.

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|Check Digit |Field |Sign |

| | |Check |Check |

|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? | | |

10.7 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.

d. Systems flowchart of order entry and dispatching system:

10.7 (cont.)

e.

|Threat |Control |

|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 to shipment |

|Legitimacy of orders |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. |

|Stock-outs |Inventory control systems |

|Shipping errors |Reconciliation of sales order with picking ticket 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 to invoices, |

| |reconciliation of picking tickets and bills of lading with sales |

| |orders. |

|Billing errors |Data entry edit controls and price lists |

|Posting errors in updating accounts receivable |Reconciliation of subsidiary accounts receivable ledger with general |

| |ledger. Monthly statements 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 phone numbers. |

|Poor performance |Preparation and review of performance reports such as on-time |

| |delivery. Survey customer satisfaction related to delivery, quality |

| |of goods, and quality of service. |

10.8 (CMA Examination, adapted)

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

| | |

|Weaknesses and Potential Problem(s) |Recommendation(s) to Correct Weaknesses |

|1. Orders received over the telephone are not confirmed by |Require a written customer purchase order as confirmation of |

|customers in writing. This could result in errors or in filling |telephone orders. |

|bogus orders. | |

|2. Customer credit histories are not checked before approving |Customers’ credit should be checked and no sales should be made |

|orders. This is resulting in excessive late collections and |to those that do not meet credit standards. |

|uncollectible accounts. | |

|3. Sales orders are filed by date in the Marketing Department. |Establish customer files and file sales orders by customers. |

|This leads to difficulty in handling customer questions and | |

|complaints. | |

|4. Only two copies of sales orders are prepared. This is not |Prepare, at a minimum, a three-part sales order, sending one to |

|enough to insure a proper matching in the Billing Department. |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 |Establish procedures to schedule production for back orders and |

|these cases could cause lost sales. |to ship and bill the product once it is available. |

| | |

|6. There is no reconciliation of inventory amounts shipped with |Billing and shipping records should be integrated on the computer|

|billings. This could result in undetected underbilling. |system to provide for reconciliation of inventory amounts shipped|

| |and billed. |

|7. The Receiving Department and the Shipping Department share a |Each department should have its own terminal and the terminals |

|computer terminal. In addition, the personnel in both |should be for inquiry purposes only. The physical custody and |

|departments have access to the physical inventory and can update |recordkeeping of inventory should be separated (perpetual records|

|the perpetual inventory records through the terminal. This could |should be updated on the computer by Purchasing/Accounts Payable |

|result in theft of inventory with no means of tracing the theft. |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 |Copies of purchase orders without quantity information should be |

|to purchase orders. This may lead to the acceptance of unordered|sent to Receiving. Receiving should match the shipment to the |

|goods. |purchase order and indicate the quantity received. |

|9. A complete inventory listing is printed only once a year. |Inventory listings should be printed periodically throughout the |

|Errors in the perpetual inventory records may remain undetected |year, and physical counts compared to the listing on a cycle |

|for too long a time period. |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.

• 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.

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 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.

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

|Weakness |Exposure |Recommendation |

|No credit approval. |Uncollectible sales. |Separate credit approval |

|Warehouse clerk initiates posting to |Failure to prepare would result in |Inventory posting should be done by sales |

|inventory records by preparing shipping |inaccurate inventory records; could |clerk once sales approved. |

|advice |release goods to friends with no invoice.| |

| | | |

|Warehouse clerk releases merchandise prior to|Loss of inventory to customers who do not|Do not release goods until notified of |

|credit approval. |pay. |credit approval. |

|Warehouse clerk does not retain copy of |Cannot easily identify loss if carrier |Use 4-copy shipping advice and retain one |

|shipping advice. |has accident. |copy in warehouse. |

| | | |

|Bookkeeper A authorizes customer credit and |Sales to friends that exceed credit |Credit manager should approve all credit. |

|prepares source documents for posting to |limit. | |

|customer accounts. | | |

|Bookkeeper A prepares invoices without |Billing mistakes. |Prepare invoice only after receive copy of |

|notification about what was shipped and when.| |shipping advice indicating quantities |

| | |shipped and date. |

|Bookkeeper A authorizes write-offs of |Can approve sales to friends and later |Someone else should authorize write-off of |

|customer accounts and approves credit. |write them off. |customer accounts. |

|Bookkeeper B does not periodically verify |Failure to bill customers. |Periodically verify that all sales orders |

|that all sales orders and shipping advices | |and shipping advices have been invoiced. |

|have been invoiced. | | |

|Bookkeeper C does not reconcile subsidiary |Potential imbalances due to posting |Reconcile subsidiary A/R ledger with the |

|A/R with general ledger. |errors. |general ledger. |

|Bookkeeper C maintains journals and posts to |No independent check on accuracy of |Bookkeeper B should record in journals and |

|ledgers. |recording process. |Bookkeeper C post to ledgers. |

|Collection Clerk directly receives and |Theft of checks. |Have all checks endorsed and listed in mail|

|records customer checks. | |room prior to delivery to collection clerk |

| | |and send a copy of the remittance list to |

| | |Bookkeeping. |

|Collections Clerk does not deliver postdated |Possible theft of checks. |Deliver all checks not deposited to another|

|checks and checks with errors to an employee | |employee who has no bank |

|independent of the bank deposit for review | |deposit/reconciliation duties. |

|and disposition. | | |

|Collection Clerk initiates posting of |Theft by lapping. |Have one of the Bookkeepers record customer|

|receipts to subsidiary accounts receivable | |checks, using a copy of the check or a |

|ledger and has initial access to cash | |remittance listing. |

|receipts. | | |

|Cash collection clerk does not deposit checks|Possible loss of checks; loss of |Deposit all receipts promptly. |

|promptly. |interest. | |

|Cash collection clerk reconciles bank |Can cover up theft by “fudging” the bank |Have bank reconciliation performed by an |

|statement and has initial access to cash |reconciliation. |employee with no other involvement in cash |

|receipts. | |receipts processing. |

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

10.11.

|REVENUE CYCLE |

| |Contact Customer |Customer Agrees to Sale|Approve Credit |Transfer Goods |Bill Customer |Receive Remittance |Credit Accounts |Deposit Cash |

| | | | | | | |Receivable | |

|Accounting Transaction | | | |Sale | |Cash Receipt | | |

|Journal Entry | | | | |Dr. A/R | |Dr. Cash | |

| | | | | |Cr. Sales | |Cr. A/R | |

|Documents |Call sheet |Purchase order from |Sales order; picking |Packing slip, shipping |Invoice |Remittance advice; |Remittance Advice |Deposit slip |

| | |customer |list |advice | |remittance list | | |

|Data Collected |ΧName |All items needed to |ΧCurrent balance |ΧCarrier |ΧAmount due |ΧName |ΧName |ΧTotal deposit|

| |ΧAddress |complete the order |ΧCredit limit |ΧItems & Qty. shipped | |ΧAmount |ΧInvoice* | |

| |ΧContact person | | | | | |ΧAmount | |

|Department |Sales |Sales |Credit |Shipping |Accounting |Mail |Accounting |Cashier |

|Control Issues |Follow company |Do not violate laws or |Only approved customers|Ship only what was |Bill for every |Prevent theft of checks|Prevent lapping; |Theft |

| |policy and strategy |company policy |get credit |ordered; document all |shipment; bill |or cash |properly credit customer| |

| | | | |shipments |accurately | |accounts | |

|Information Required |* |* |* |* |* |* |* |* |

|Information Generated |* |* |* |* |* |* |* |* |

|Effect of Automation |* |* |* |* |* |* |* |* |

*-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.

10.12

1. e

2. i

3. g

4. k

5. c

6. j

7. h

8. f

9. a

10. l

11. b

12. 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 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 on-site 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.

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 |A |

|Thingamabobs |222000 |B |

|Thingamabobs |100000 |C |

|Whatchamacallits |278000 |A |

|Whatchamacallits |200000 |B |

|Whatchamacallits |129905 |C |

|Round2its |103000 |A |

|  |  |  |

|b. Number of products |"=COUNTIF(B2:B23,">200000") |  |

|with sales > 200,000 | | |

|c. Total sales all products |"=SUMIF(C2:C23,"A",B2:B23) |  |

|for Division A | | |

|  |  |  |

|Division to sum |  |  |

|d. Total sales all products in|=IF(B28="A",SUMIF(C2:C23,"A",B2:B23),IF(B28="B",SUMIF(C2:C23,"B",B2:B23),IF(B28="C",SUMIF(|  |

|that division |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 $100,000.

SUGGESTED ANSWERS TO THE CASES

10.1 1. 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:

Process #2: Processing of enrollment forms and orders received from new members:

Process #3: Processing of regular and free book orders:

Process #4: Shipping

Process #5: Billing

Process #6: Processing of cash receipts on account:

Process #7: Book inventory processing:

[pic]

Process #8: Advertising media analysis:

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3. 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.

10-2

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.

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.

d.

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.

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.

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[pic]

[pic]

[pic]

New Member Data Entry

Display

Payment Data Entry

Sales Order Data Entry Display

Book Receipts Data Entry Process

Advertising Transactions

Member

Member

File

To Members

Member

Payments

Advertising Transaction Data Entry Process

Processing

Payment Data

Entry Process

Payment

Transactions

Sort By

Member Number

Payment

Transactions

Cash Receipts

Processing

Receivables

Aging

Schedule

Member

Statements of

Account

To Credit Manager

Orders

Customer

Invoice

2

1

Invoices

Sales

History

Shipments

Bill of

Lading

Billing

Customer

General

Ledger

and Order

Enrollment

Order Records

Enrollment &

New Member

Process

Data Entry

New Member

Data Entry

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