Accounting Information Systems

CHAPTER 10

THE REVENUE CYCLE: SALES AND CASH COLLECTIONS

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

10.1 This should generate a great deal of discussion. The basic issue concerns the willingness
of consumers to divulge the kind of information that would allow companies to
personalize the sales interaction versus concerns that such information would be misused
or sold to other parties. In addition, with the growing problem of identity theft,
consumers are becoming increasingly concerned about the safety and security of their
personal information. Companies that wish to collect this data will most likely have to
demonstrate the need for this information to the consumer and also the company’s ability
to keep this information secure.

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.

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Ch. 10: The Revenue Cycle: Sales and Cash Collections

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 Accounting Information Systems

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.

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Ch. 10: The Revenue Cycle: Sales and Cash Collections

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 =
Process/ Threat Corrective)
Activity
Sales order 1. Incomplete or inaccurate Various data entry edit controls P
entry customer orders

2. Credit sales to customers Proper credit approval, prior to delivery

with poor credit 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, Inventory control systems P; periodic

excessive carrying costs, physical inventory counts D; improved
and lost revenue due to sales forecasts P; better supply chain
markdowns management P and C
Shipping 5. Shipping errors:
 Wrong merchandise Compare sales order with packing list
 Wrong quantities and shipping documents D; bar coding
 Wrong address P

6. Theft of inventory
Physical access controls P;
documentation of all inventory
movements D; periodic physical
inventory counts D
Billing and 7. Failure to bill Segregation of shipping and billing
accounts functions P; one-for-one matching of
receivable invoices (or EDI acknowledgments)
against shipping documents D and C

8. Billing errors Comparison of sales orders, shipping

documents, and invoices P and C;
various edit checks D and C

9. Errors in maintaining Data entry edit checks D and C; use of

customer accounts remittance advices P; monthly
statements to customers D and C

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Applicable Controls
Process/ (P = Preventive, D = Detective, C =
Activity Threat Corrective)
Cash 10. Theft of cash Segregation of cash handling and
collections 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

12. Poor performance Development and periodic review of

appropriate performance metrics D and
C

10.2

Information Technology to enhance the restriction of physical access to inventory:

1. Electronic locks on all entrances and exits to the inventory area.
2. Smart card technology where employees must scan their ID card prior to entering/exiting
the inventory area.
3. Install motion detectors.
4. Attach security tags to inventory items and install security tag scanners at each exit of the
inventory area.
5. Attach RFID tags to inventory items to track the movement of inventory.
6. Install and monitor surveillance cameras in the inventory area.
7. Install an infrared alarm system.
8. Build a fence around the inventory area and equip the fence with cameras and sensors.

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Ch. 10: The Revenue Cycle: Sales and Cash Collections

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.

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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

Formulas:

Sales (1% Growth Rate)

E5 and Row 5: =D5*101%, =E5*101%, =F5*101%, …
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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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Ch. 10: The Revenue Cycle: Sales and Cash Collections

 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:

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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 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

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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.

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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 to
these fields.

Controls Chec Field Sign Limit Rang Size Complete Validi Reasonable Prompti Pre- Closed- Transact
k Chec Chec Chec e Chec ness ty ness ng formattin loop ion Log
Digit k k k Chec k Check Chec Check g verificati
k k on
Document
Fields:
Account X X X X X X X X X X
Number
Order X X X X X X X X X X
Number
Item X X X X X X X X X X
Number
Quantity X X X X X X X X X
Description X X X X X
Unit Price X X X X X X X X X
Amount X X X X X X X X
Date X X X X X X X X X
Ordered
Date X X X X X X X X X
Shipped
Terms X X X X X
Customer X X X X X X X
Name

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 to
control for data entry errors. Thus, if a data entry clerk enters an erroneous account or item number, the check digit will not “check”
and prevent further transaction processing until the error is corrected. The Order number could also contain a check digit if deemed
cost effective.

Field Check: A field check is used to determine whether a particular “character” matches the character type of a particular field; i.e.,
numbers with number fields, and dates with date fields. The account, order, and item numbers, are typically numbers and will be
restricted to numerical input as is also the case with quantity, unit price, and amount. Date ordered and date shipped fields should be
restricted to date characters. Description, terms, and customer name are typically text oriented and can have alpha or numeric
characters so a field check would not be necessary.

Sign Check: A sign check is used to control for the appropriate sign in a given field. For example, a negative quantity, amount or unit
price would be problematic in processing orders.

Limit Check: A limit check tests for amounts that exceed a predefined level or limit. In this problem, a limit check on the unit price
of an item would control for entering a $100 unit price when the actual unit price is $10. Limit checks on dates can also be used to
control for mistakenly entering dates too far into the future.

Range Check: A range check is similar to a limit check except it has an upper and a lower bound. For this problem, the account
number, order number, item number can all be set to be included in a certain range of numbers. The quantity, unit price, and amount
should at least have a lower limit of 0 and an appropriate upper limit for the field. Similar to limit checks, dates can have range checks
limiting the entry of dates too far in the past or too far into the future.

Size Check: A size check is used to make sure that the data will fit into the assigned field. This control can generally be used on any
field since every field will have some limit to the amount of data it can hold. Size checks are absolutely essential on any fields in
which non-employee users enter data (e.g., on web forms) in order to prevent buffer overflow attacks.

Completeness Check: A completeness check is used to make sure the required data has been entered into the field. This control can
be applied to every field.

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Validity Check: The validity check compares the data entered into a certain field with corresponding data in an appropriate master
file. Thus, when the account number, item number, order number, and customer name are entered into their respective fields they can
be compared to corresponding data in various master files.

Reasonableness Check: The reasonableness check looks for the appropriateness of a logical relationship between two data items. For
example in this problem, a large quantity of a very high priced item would probably not be reasonable and would require investigation
and correction or special approval before the transaction processing could be completed. Also, the date shipped must be later than the
date ordered.

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

Pre-formatting: Similar to prompting, pre-formatting reduces errors by highlighting date entry fields and then waiting for them to be
completed. Pre-formatting is appropriate for all input fields.

Closed-loop Verification: Closed-loop verification helps to reduce data input errors by retrieving and displaying the data item that was
input into the field. The account number, order number, item number and customer name can be input and then the data linked to
those fields retrieved for visual verification that the correct account, order, and item number as well as customer name have been
correctly input into the system.

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

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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 create
a variety of checklists, thus a template with a few example questions is listed below.

Part b.

Student explanations will vary according to their checklist.

Revenue Cycle Controls Checklist

No. Question Yes No

1. Are customer credit limits set and modified by a credit manager with
not sales responsibility?
2. Are completeness checks included to ensure all data is recorded on
each invoice?
3. Is inventory kept in a secure location?
4. Are the shipping and billing functions segregated?
5. Are validity checks performed on all customer and invoice numbers?
10.7 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:
 Sales Order Data
Entry Display

Inventory
Online Master
Order Entry File
System
Sales Order
Data Entry

Order
Transactions Customer
Master
File

Order
Processing Shipping
System
Documents

Order Delivery
Transactions Schedules

Billing Customer
System Master
File

Customer Summary
Invoices Report

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 Require a written customer purchase order
not confirmed by customers in writing. as confirmation of telephone orders.
This could result in errors or in filling
bogus orders.

2. Customer credit histories are not Customers’ credit should be checked and
checked before approving orders. This is no sales should be made to those that do
resulting in excessive late collections and not meet credit standards.
uncollectible accounts.

3. Sales orders are filed by date in the Establish customer files and file sales
Marketing Department. This leads to orders by customers.
difficulty in handling customer questions
and complaints.

4. Only two copies of sales orders are Prepare, at a minimum, a three-part sales
prepared. This is not enough to insure a order, sending one to Shipping and one to
proper matching in the Billing Department. 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 Establish procedures to schedule
noted. Inaction in these cases could cause production for back orders and to ship and
lost sales. bill the product once it is available.

6. There is no reconciliation of inventory Billing and shipping records should be

amounts shipped with billings. This could integrated on the computer system to
result in undetected underbilling. provide for reconciliation of inventory
amounts shipped and billed.
7. The Receiving Department and the Each department should have its own
Shipping Department share a computer terminal and the terminals should be for
terminal. In addition, the personnel in both inquiry purposes only. The physical
departments have access to the physical custody and recordkeeping of inventory
inventory and can update the perpetual should be separated (perpetual records
inventory records through the terminal. should be updated on the computer by
This could result in theft of inventory with Purchasing/Accounts Payable and Billing).
no means of tracing the theft. 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 Copies of purchase orders without quantity
compare incoming deliveries to purchase information should be sent to Receiving.
orders. This may lead to the acceptance of Receiving should match the shipment to
unordered goods. the purchase order and indicate the quantity
received.

9. A complete inventory listing is printed Inventory listings should be printed

only once a year. Errors in the perpetual periodically throughout the year, and
inventory records may remain undetected physical counts compared to the listing on
for too long a time period. a cycle basis.

b. How O'Brien Corporation could use its new computer system to improve control
and efficiency:
 Maintain an online master file for customer account and credit data in addition to
inventory data.
 Use online terminals to enter sales order data into the system as orders are received.
 Have the system check inventory availability as order data are entered; if the
customer is on the phone at this time, inventory availability may be confirmed
directly to the customer.
 Have the system perform a credit check as order data are entered, and reject orders
from customers who are not credit-worthy.
 Immediately following approval of a sales order, have the system (1) print or
display a shipping order for Shipping Department use, (2) print a packing slip and
mailing label for use in shipping the goods to the customer.
 Once the order has been shipped, the system should generate a customer invoice.
 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 Failure to prepare would Inventory posting should be

posting to inventory records result in inaccurate done by sales clerk once
by preparing shipping advice inventory records; could sales approved.
release goods to friends
with no invoice.

Warehouse clerk releases Loss of inventory to Do not release goods until

merchandise prior to credit customers who do not pay. notified of credit approval.
approval.

Warehouse clerk does not Cannot easily identify loss Use 4-copy shipping advice
retain copy of shipping if carrier has accident. and retain one copy in
advice. warehouse.

Bookkeeper A authorizes Sales to friends that exceed Credit manager should

customer credit and prepares credit limit. approve all credit.
source documents for posting
to customer accounts.

Bookkeeper A prepares Billing mistakes. Prepare invoice only after

invoices without notification receive copy of shipping
about what was shipped and advice indicating quantities
when. shipped and date.

Bookkeeper A authorizes Can approve sales to Someone else should

write-offs of customer friends and later write authorize write-off of
accounts and approves credit. them off. customer accounts.
Bookkeeper B does not Failure to bill customers. Periodically verify that all
periodically verify that all sales orders and shipping
sales orders and shipping advices have been invoiced.
advices have been invoiced.

Bookkeeper C does not Potential imbalances due Reconcile subsidiary A/R

reconcile subsidiary A/R to posting errors. ledger with the general
with general ledger. ledger.

Bookkeeper C maintains No independent check on Bookkeeper B should record

journals and posts to ledgers. accuracy of recording in journals and Bookkeeper
process. C post to ledgers.
Collection Clerk directly Theft of checks. Have all checks endorsed
receives and records and listed in mail room prior
customer checks. to delivery to collection
clerk and send a copy of the
remittance list to
Bookkeeping.
Collections Clerk does not Possible theft of checks. Deliver all checks not
deliver postdated checks and deposited to another
checks with errors to an employee who has no bank
employee independent of the deposit/reconciliation
bank deposit for review and duties.
disposition.

Collection Clerk initiates Theft by lapping. Have one of the

posting of receipts to Bookkeepers record
subsidiary accounts customer checks, using a
receivable ledger and has copy of the check or a
initial access to cash receipts. remittance listing.

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

Cash collection clerk Can cover up theft by Have bank reconciliation

reconciles bank statement “fudging” the bank performed by an employee
and has initial access to cash reconciliation. with no other involvement
receipts. in cash 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 Approve Transfer Bill Receive Credit Deposit
Customer Agrees to Credit Goods Customer Remittance Accounts Cash
Sale Receivable
Accounting Sale Cash Receipt
Transaction
Journal Dr. A/R Dr. Cash
Entry Cr. Sales Cr. A/R
Documents Call sheet Purchase Sales order; Packing slip, Invoice Remittance Remittance Deposit
order from picking list shipping advice; Advice slip
customer advice remittance list
Data Name All items Current Carrier Amount due Name Name Total
Collected Address needed to balance Items & Amount Invoice* deposit
Contact complete the Credit limit Qty. shipped Amount
person order
Department Sales Sales Credit Shipping Accounting Mail Accounting Cashier
Control Follow Do not violate Only Ship only Bill for every Prevent theft Prevent Theft
Issues company laws or approved what was shipment; bill of checks or lapping;
policy and company customers get ordered; accurately cash properly credit
strategy policy credit document all customer
shipments 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 "=COUNTIF(B2:B23,">200000")
products with sales
> 200,000
c. Total sales all "=SUMIF(C2:C23,"A",B2:B23)
products for
Division A

Division to sum
d. Total sales all =IF(B28="A",SUMIF(C2:C23,"A",B2:B23),IF(B28="B",SU
products in that MIF(C2:C23,"B",B2:B23),IF(B28="C",SUMIF(C2:C23,"C",
division 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:

Preparation
Member of Order
File Forms

Member Order
Forms

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

New Member New Member

Enrollment & Data Entry
Order Forms Display New Member
Data Entry
Process
New Member Data
Entry

New Member
Enrollment &
Order Records

Member Enrollment Book

File and Order Inventory
Processing File

New Member
New Member Data Entry Welcome
Orders Letter

To New Members
Process #3: Processing of regular and free book orders:

Regular
Member Orders

OCR Input Order

Process Transactions

Free Book
Orders

Sort By
Member Number

Order
Transactions

Member Order Book

File Processing Inventory
File

Sales Free Book

Orders Order Forms

To Eligible
Members
 Inventory
Sales
Orders Edit and
Process
Shipments

Print
Picking
Ticket
2
1
Bill of Shipments Bill of
Picking Lading Lading
Ticket

Pick
Carrier
Books

Enter
Shipping Data

Customer
Process #4: Shipping

Member
Process #5: Billing

Bill of New Member Data Entry Shipments

Lading Orders

Billing Customer

2
1 Sales General
Invoice Invoices Ledger
History

Customer
Process #6: Processing of cash receipts on account:

Payment Payment Data

Member Data Entry Entry Process
Payments Display

Payment Data
Entry
Payment
Transactions

Sort By
Member Number

Payment
Transactions

Member Cash Receipts

File Processing

Receivables Member
Aging Statements of
Schedule Account

To Credit To Members
Manager
Process #7: Book inventory processing:

Book Book Receipts

Receipts Data Entry
Display Book Receipts
Records Data Entry
Process

Book Receipts Book

Data Entry Receipts
Data

Sort by Book
Code Number

Book
Receipt Data

Book
Inventory
Inventory
Processing
File

Inventory Turnover To
Report Editors
Process #8: Advertising media analysis:

Advertising
Transactions Advertising
Advertising Transaction
Transactions Data Data Entry
Entry Display Process

Advertising Advertising
Transactions Media
Data Entry Transactions

Sort by Media
Code Number
Retrieve
Sales by Advertising
Member File Media Code Media
Transactions

Sales by Advertising
Media Media
Code Analysis

Advertising
Media Performance Media Files
Analysis

To Advertising
Manager
 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.