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REVENUE CYCLE

NOTE FROM TIM: This document I found on the web seems to have some relevant CPA
Exam Questions that are worth studying.
I.

REVENUE CYCLE. As you will recall, the revenue cycle involves accounting transactions
resulting from economic events that produce revenue for the accounting entity. The major
events occurring in the revenue cycle are: receiving and ordering from a customer,
delivering goods or services to the customer, requesting payment from the customer, and
receiving the payment. Understanding a cycle involves familiarity with the documentation
of the cycle. Flowcharts, internal control questionnaires and narratives are common
methods of documentation. Fill in the flowcharts for revenue (credit sales and cash
sales and receipts).

I.

I.

Identify appropriate internal control procedures for the revenue cycle using DAASI.
(Reconciliation to ARCCS: D (Recorded) A (Custody) A (Authorized) S (Seg of Duties) I
(Comparison).)
D=

Prenumbered (and accounted for), multiple-copy SO, SD, SI used


One copy of the SO, SD, SI filed in the department generated
Remittance advices used to post from
A/R subsidiary ledger, sales journals, cash receipts journal
Prenumbered cash receipt tickets, credit memos & bad debt write-off forms
Aging prepared monthly
Prepare a prelisting of cash receipts

A=

Individuals with access to cash or goods should be bonded


Use of a lockbox
Cash deposited intact daily
Checks restrictively endorsed
Control over write-offs and collection of write-offs
Cash registers --internal tapes, locked drawers, correct change, bell, window to
customer, assigned drawers, preprogrammed prices, drawers reconciled

A=

Credit approved prior to shipment of goods


Monthly statements reviewed by supervisor before sent out
Appropriate credit policy
Approved sales price list with deviations authorized
Authorization of A/R write-offs

S=

Segregate the sales order function from the A) credit function from the B) shipping
function from the C) billing function from the D) cash receipts function
Segregate cash receipts from accounts receivable record keeping
Segregate cash receipts from the credit function
Segregate accounts receivable subsidiary ledger from the general ledger

I=

A/R general ledger reconciled to subsidiary ledger


Rotate duties between G/L and A/R subsidiary ledger (S/L) clerks
Sendout monthly statements to customers
Compare SO, SD, & SI to ensure ordered goods were shipped/shipped goods billed

Compare duplicate deposit slip with a) cash receipts journal, and b) A/R sub ledger
Daily reconciliation of cash collections
Match credit memoranda and receiving report
Internal controls frequently missing in the revenue cycle.
A.
A.
A.
A.
A.

Credit granted by the credit department


Sales orders and invoices prenumbered and controlled
Sales return credit memoranda prenumbered and matched with receiving reports
Subsidiary ledger reconciled to control ledger regularly
Individual who does not post accounts receivables reviews monthly statements before
sending to customer
A. Monthly statements sent to all customers
A. Write-offs approved by mgmt official independent of recordkeeping responsibility

A. Cash receipts received in mail listed by individual(s) with no recordkeeping


responsibility; cash goes directly to cashier
A. Over-the-counter cash receipts controlled (cash register tapes)
A. Cash deposited intact daily
A. Employees handling cash are bonded
A. Bank reconciliation prepared by individuals independent of cash receipts recordkeeping

I. Internal control questionnaire designed using DAASI.


TITLE
D=
A=
I=

Yes or No

Are prenumbered SO, SD, and SI used and accounted for?


Is posting of the A/R S/L done from remittance advices?
Is a trial balance and aging of the A/R prepared monthly?
Is credit approved prior to shipment of goods?
Are monthly statements reviewed by the supervisor prior to mailing?
Is the A/R G/L reconciled with the S/L on a regular basis?
Are sales invoices compared to sales orders and shipping documents?
to determine that ordered goods were shipped and shipped goods were
ordered?

NOTE: A NO answer on an I/C questionnaire indicates a weakness.

The following questions are from the CPA Exam. You are given 15 - 25 minutes to
answer each question. Each essay question is worth 10 points.
CPA EXAMPLE ESSAY #1
(Internal Controls for Cash Receipts) You have been asked by the board of trustees of a local
church to review its internal controls. As a part of this review, you have prepared the following
comments relating to the collection made at weekly services and recordkeeping for members
pledges and contributions:
The churchs board of trustees has delegated responsibility for financial management and
audit of the financial records to the finance committee. This group prepares the annual budget
and approves major disbursements, but is not involved in collections or recordkeeping. No
audit has been considered necessary in recent years because the same trusted employee has
kept church records and has served as financial secretary for fifteen years.
The collection at the weekly service is taken by a team of ushers. The head usher counts
the collection in the church office following each service. He then places the collection and a
notation of the amount counted in the church safe. Next morning, the financial secretary
opens the safe and recounts the collection. She withholds about $100 to meet cash
expenditures during the coming week and deposits the remainder of the collection intact. In
order to facilitate the deposit, members who contribute by check are asked to draw their
checks to cash.
At their request, a few members are furnished prenumbered, predated envelopes in which
to insert their weekly contributions. The head usher removes the cash from the envelopes to
be counted with the loose cash included in the collection and discards the envelopes. No

record is maintained of issuance or return of the envelopes and the envelope system is not
encouraged.
Each member is asked to prepare a contribution pledge card annually. The pledge is regarded
as a moral commitment by the member to contribute a stated weekly amount. Based upon the
amounts shown on the pledge cards, the financial secretary furnishes a letter to the members
that supports the tax deductibility of their contributions.

REQUIRED: Identify the internal control weaknesses apparent in this scenario and
recommendations for improvements.
CPA ESSAY ANSWER #1
Weaknesses
Financial secretary exercises too
much control over collections.

Recommended Improvements
To the extent possible, financial secretarys responsibilities should be
confined to record-keeping.

Finance committee is not exercising


its assigned responsibility for
collections.

Finance committee should assume a more active supervisory role.

The auditing function has been


assigned to the finance committee,
which also has responsibility for the
administration of the cash function.
Moreover, the finance committee
has not performed the auditing
function.

An audit committee should be appointed to perform periodic auditing


procedures or engage outside auditors.

The head usher has sole access to


cash during the period of the count.
One person should not be left alone
with the cash until the amount has
been recorded or control has been
established in some other way.

The number of counters should be increased to at least two, and cash


should remain under joint surveillance until counted and recorded so
that any discrepancy will be brought to attention.

The collection is vulnerable to


robbery while it is being counted
and transported from the church
safe to its deposit bank.

The collection should be deposited in the banks night depository


immediately after the count. Physical safeguards, such as locking and
bolting the door during the period of the count, should be instituted.
Vulnerability to robbery will also be reduced by increasing the number of
counters.
The financial secretary should receive a copy of the collection report for
posting to the financial records. The head usher should maintain a copy
of the report for use by the audit committee.

The head ushers count lacks


usefulness from a control
standpoint because he surrenders
custody of both the cash and the
record of the count.
Contributions are not deposited
intact. There is no assurance that
amounts withheld by the financial
secretary for expenditures will be
properly accounted for.

Contributions should be deposited intact. If it is considered necessary


for the financial secretary to make cash expenditures, he or she should
be provided with a cash-working fund. The fund should be replenished
by check based upon satisfactory support and a properly approved
reimbursement request.

Members are asked to draw checks


to cash thus making the checks
completely negotiable and
vulnerable to misappropriation.

Members should be asked to make checks payable to the church. At


the time of the count, ushers should stamp the churchs restrictive
endorsement (For Deposit Only) on the back of the check.

The envelope system has not been


encouraged. Control features which
it could provide have been ignored.

The envelope system should be encouraged. Ushers should indicate on


the outside of each envelope the amount contributed. Envelope
contributions should be reported separately and supported by the empty
collection envelopes. Prenumbered envelopes will permit ready
identification of the donor by authorized persons without general loss of
confidentiality.

CPA EXAMPLE ESSAY #2


Trapan Retailing Inc., has decided to diversify operations by selling through vending
machines. Trapans plans call for the purchase of 312 vending machines which will be situated
at 78 different locations within one city, and the rental of a warehouse to store merchandise.
Trapan intends to sell only canned beverages at a standard price.
Management has hired an inventory control clerk to oversee the warehousing functions,
and two truck drivers who will periodically fill the machines with merchandise, and deposit cash
collected at a designated bank. Drivers will be required to report to the warehouse daily.
Required:
What internal controls should the auditor expect to find in order to assure the integrity of
the cash receipts and warehousing functions?
The internal controls should provide for

S or I
I
A
D
I
I
I

A
I or A
A
S
D or I
I
I

Drivers to count and then sign for all merchandise received.


Daily verification of each drivers ending inventory.
Cash to be deposited daily by each driver.
Daily return of duplicate deposit slips by each driver.
Reconciliation of cash deposits with the daily net change in inventory.
Provision for explanation of overages and shortages.
Periodic independent surprise check of machines to verify that
a. Machines contain only authorized Trapan-purchased merchandise.
b. Machines are mechanically programmed to charge the authorized prices.
c. Cash and merchandise in machines equal a predetermined total.
Bonding of employees
Alternate driver routes and required vacations.
Restricting access to the warehouse.
The warehouseman to count and sign for all items.
Maintenance of perpetual inventory records.
Periodic physical inventory count of merchandise in the warehouse.
Analytical review of collections.

CPA EXAMPLE ESSAY #3


Taylor, CPA, has been engaged to audit the financial statements of Johnson
Coat Outlet, Inc., a medium-sized mail-order retail store that sells a wide
variety of coats to the public.
Required:
Prepare the Shipments segment of Taylors internal control questionnaire.
Each question should elicit either a yes or no response.
Do not prepare questions relating to the cash receipts, sales returns and
allowances, billing, inventory control, or other segments.
Use the following format:
Question
Yes
No
JOHNSON COAT OUTLET, INC.
Shipments
Internal Control Questionnaire
Question

D or A
D
D
D
D
I
S

A
I
I

Yes

No

1. Are shipping documents prepared from sales orders


approved in accordance with managements
authorization?
2. Are shipping documents prenumbered?
3. Are shipping documents periodically accounted for?
4. Are shipping documents recorded in a register, log, or file?
5. Are copies of shipping documents forwarded to the
Billing department?
Inventory control department?
6. Do shipping documents include cross reference to sales
orders; customer identity and address; description and
quantities of goods shipped; date; and other details?
7. Is the shipping function independent of
Sales orders?
Credit approval?
Billing and accounts receivable?
Cash receipts?
Warehouse?
Receiving?
Inventory Control?
8. Is access to merchandise restricted and controlled within
the shipping department?
9. Are type and quantities of goods withdrawn and packed for
shipping verified by independent counts?
10. Are receipts from carriers obtained and filed?

CPA EXAMPLE ESSAY #4


A CPAs audit working papers include the narrative description below of the cash receipts and billing
portions of the internal controls of Parktown Medical Center, Inc. Parktown is a small health care
provider that is owned by a publicly held corporation. It employs seven salaried physicians, ten nurses,
three support staff in a common laboratory, and three clerical workers. The clerical workers perform such
tasks as reception, correspondence, cash receipts, billing, and appointment scheduling and are
adequately bonded. They are referred to in the narrative as office manger, clerk #1, and clerk #2.
Most patients pay for services by cash or check at the time services are rendered. Credit is not
approved by the clerical staff. 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 the billing clerk (clerk
#2) to set up the receivable from data generated by the physician.
The servicing physician prepares a charge slip that is given to clerk #1 for pricing and preparation of
the patients bill. Clerk #1 transmits a copy of the bill to clerk #2 for preparation of the revenue summary
and for posting in the accounts receivable subsidiary ledger.
The cash receipts functions are performed by clerk #1, who receives cash and checks directly from
patients and gives each patient a prenumbered cash receipt. Clerk #1 opens the mail and immediately
stamps all checks for deposit only and lists cash and checks for deposit. The checks and cash are
deposited daily by the office manager. The list of cash and checks, together with related remittance
advices, are forwarded by clerk #1 to clerk #2. Clerk #1 also serves as receptionist and performs
general correspondence duties.
Clerk #2 prepares and sends monthly statements to patients with unpaid balances. Clerk #2 also
prepares the cash receipts journal and is responsible for the accounts receivable subsidiary ledger. No
other clerical employee is permitted access to the accounts receivable subsidiary ledger. Uncollectible
accounts are written off by clerk #2 only after the physician who performed the respective services
believes the account to be uncollectible and communicates the write-off approval to the office manager.
The office manager then issues a write-off memo that clerk #2 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. The accountant reports directly to the parent corporation.
Required:
Based only on the information in the narrative, describe the reportable conditions and one resulting
misstatement that could occur and not be prevented or detected by Parktowns internal controls
concerning the cash receipts and billing function. Do not describe how to correct the reportable
conditions and potential misstatements. Use the format illustrated below.
Reportable condition
There is no control to
verify that fees are
recorded and billed at
authorized rates and
terms.

Potential misstatement
Accounts receivable could
be overstated and
uncollectible accounts
understated because of the
lack of controls.

CPA ESSAY ANSWER #4


The reportable conditions and resulting misstatements, in addition to the example that could occur
and not be prevented or detected by Parktowns internal controls concerning the cash receipts and billing
functions include the following:
Reportable condition
Potential misstatement
The employees who perform services also are
permitted to approve credit without an external
credit check.

Uncollectible accounts expense could be understated


and accounts receivable could be overstated because
of the lack of an appropriate credit check.

There is no independent verification of the billing


process.

Fees earned and accounts receivable may be


understated because not all services performed might
be reported for billing.
or
Fees earned and accounts receivable may be either
overstated or understated because of the use of
incorrect price or service data or because of
mathematical errors.

The employees who approve credit also approve


write-offs of uncollectible accounts.

Accounts receivable could be understated and


uncollectible accounts expense overstated because
write-offs of accounts receivable could be approved for
accounts that are, in fact, collectible.
or
Accounts receivable could be overstated and
uncollectible accounts expense understated because
write-offs of accounts receivable might not be initiated
for accounts that are uncollectible.
Uncollectible accounts expense could be either
understated or overstated because the lack of
established credit limits may make it more difficult to
identify uncollectible amounts.

Credit is not granted on the basis of established


limits.

The employee who initially handles cash receipts


also prepares billings.

Fees earned and cash receipts or accounts receivable


could be understated because of omitted or inaccurate
billing.

The employee who makes bank deposits also


reconciles bank statements.

The cash balance per books may be overstated


because not all cash is deposited.

Uncollectible accounts are not determined on the


basis of established criteria.

Uncollectible accounts expense could be either


understated or overstated because of the lack of
established write-off criteria.

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.

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.
or Fees earned and cash receipts or accounts
receivable could be understated because of failure to
record billing, cash receipts, or write-offs accurately.

SMALLCO LUMBER, INC.


(Estimated time -- 15 to 25 minutes)
The following flowchart depicts the activ ities relating to the shipping, billing and collecting processes used by Smallco Lumber, Inc.
WAREHOUSE CLERK

SALES CLERK

RECEIVES
CUSTOMER
ORDER BY
PHONE

BOOKKEEPER #1

SALES ORDER

BOOKKEEPER #2

APPROVED SALES
ORDER

SALES ORDER
2

COLLECTION CLERK

CUSTOMER
CHECK

IN VOIC E
3

IN VOIC E
2

PREPARES
4-COPY
SALES
ORDER

SALES ORDER
SALES ORDER
SALES ORDER
SALES ORDER
CONFIR MATION

AUTHORIZED
CUSTOMER'S
CREDIT

PREPARES
SHIPPIN G
ADVIC E

SHIPPING ADVICE

1
2

MATCHES INV.
& APPROVED
SALES ORDER
INFORMATION

APPROVED
SALES ORDER

SALES ORDER

1
2

SALES
JOURNAL

BY
NUMBER

DAILY
COPY OF
SALES
JOURNAL

POST TO
RECORDS

4
PREPARES
3-COPY
IN VOIC E

STAMPS
SALES
ORDER #2
WITH DATE
SHIPPED

BY
NUMBER

SALES ORDER
(DATED)

SUBSID IARY
ACCOUNTS
RECEIVABLE

IN VOIC E
IN VOIC E
2

1
IN VOIC E

TO
CUSTOMER

BY
CUSTOMER

STAMPS
"FOR
DEPOSIT
ONLY"

POSTS TO
RECORDS

FOOTS &
POSTS TO
GENERAL
LEDGER

WEEKLY
COPY OF
CASH REC.
JOURNAL

2
3

RELEASES
LUMBER
TO
CARRIER

CASH REC. JOURNAL

TO
CUSTOMER

Required: Identify weaknesses in the internal control structure relating to the acitivties of
a) warehouse clerk, b) bookkeeper #1, c) bookkeeper #2, and d) collection clerk

GENERAL
LEDGER

DEPOSITS
CHECKS
WEEKLY

FROM
MAIL
CLERK

SMALLCO LUMBER ANSWER


The Weaknesses in Smallco Lumbers internal controls are:
Warehouse Clerk

Bookkeeper #2

A - Releases lumber prior to


authorization, for example, approval
of customers credit.

S - Bookkeeper who maintains general


ledger should not be responsible for
footing and crossfooting of journals,
that is, sales and cash receipts
journals.

D - Copies of shipping advice should be


prepared and forwarded to
Bookkeeper #1.
D - Lacks documentation that lumber
was given to the carrier.

I - Subsidiary accounts receivable


ledger should be reconciled to
general ledger.

Bookkeeper #1

Collection Clerk

A - Credit authorized by bookkeeper and


not a responsible officer.

S - Collection clerk should not maintain


sales journal.

I - Prepares and mails invoice without


knowledge of what was shipped.

S - Collection clerk should not maintain


accounts receivable subsidiary
ledger.
D - Remittance advice not used as the
basis for posting collections.
A - Checks are not promptly endorsed by
the mail clerk.
A - Cash receipts are not promptly
deposited.
I - Deposit slips are not reconciled to
cash receipts journal or debits to
general ledger.

CREDIT SALES FLOWCHART


SALES ORDER DEPT.

SHIPPING DEPARTMENT
From
Order
Dept

Customer Order
Sales Order
Sales Order
Sales Order

Sales Order
2

Sales Order
Shipping Doc.
Customer Order

Customer Order
Sales Order
Sales Order
Sales Order
Sales Order
4
Sales Order
3

Sales Order

Sales Order
3
6

File sales order


pending
receipt
of goods and
approval of
sales order

5
To
Custom er

Sales Order
2

To
Credit

Custom er Order
Sales Order
Sales Order
Shipping Doc.
Sales Invoic e

3
2

Shipping
Document

Sales Order

Considered
the
supporting
documentation for the
sales

To
Bil ing
Sales Order
Sales Order
Shipping
ShippiDocum
ng ent
Docum ent

File sales
order and
customer
order
pending
notice of
shipment

Sales Invoic e
Sales Invoic e

To
A/R

Sales Invoic e

To
Bil ing

To Customer
(Packing Slip)

3
1

N
To
Custom er

To
Inventory
Acctg.

CASH RECEIPTS FLOWCHART


SALES

CASHIER

Cash

Remittance Advice
Checks From
Customers

Document

Cash Sales
Invoice

2
1

Register Reading

Count Sheet

Supervisor
reading of
register daily
and
reconciliation
with cash

Cash

Prelist

Prelist
Register Reading
3
Count Sheet

Deposit Slip

Checks
Prelist

2
Prelist of
Mail Receipts 1

Document
Document
Cash

3
Cash and Checks

2
1

Document

Prelist
Register Reading
3
Cash Count Sheet
2
Deposit Slip
Daily Cash Summary

Document

2
1

Daily Cash
Summary

To
Accounting

To Bank

To General
Accounting

2
2
1

Register Reading
Prelist
Prelist
2
3
Register Reading
2
Count Sheet
1
Deposit Slip
Daily Cash
Summary

2
2

2
2

Remittance Advice

Prelist

To
Treasurer

Daily Cash
Summary

Supervisor
preparation of
Cash Count
Sheet

Register
Reading

Checks

BAD DEBTS FLOWCHART


CREDIT MANAGER

TREASURER

ACCOUNTS RECEIVABLE

GENERAL ACCOUNTING

Start Write
Offs

Reviews
Aged Trial
Balance

From Credit
Manager

Prepare
Aged Trial
Balance

Prepares
Credit
Memo

Approves
Write Off

Aged Trial
Balance

Credit Memo
Credit Memo
1

Document

Post to
Customer
Account

Document

Credit Memo

Post To
Customer
Account

2
1

Individual
Customer
Account
To
Treasurer

Credit
Memo

C/N
C/N

Account
Receivable
Control

Allowance
For Doubtful
Accounts

Credit
Memo

C/N

SALES RETURNS FLOWCHART


SALES

RECEIVING

Start
Returns

Inspect
returned
goods

TREASURER

BILLING

GENERAL LEDGER

ACCOUNTS RECEIVABLE

From
Receiving

Receiving
Report

Route
return to
receiving

Prepare
Receiving
Report

File pending
arrival of CM

C/N

General
Ledger

Prepare
Credit
Memo

Document

Receiving
Report

3
2
1

Approves
Returns

Credit Memo
C/N

Post
General
Ledger

Posts To
Customer
Accounts

Receiving Report

Receiving Report

R. R.

Credit Memo

Credit Memo
Returns
And
Allowances

C/N

Individual
A/R

A/R General
Ledger
Account

CREDIT SALES FLOWCHART


SALES ORDER DEPT.

SHIPPING DEPARTMENT
From
Order
Dept

Customer Order
Sales Order
Sales Order
Sales Order

Sales Order
2

Sales Order
Shipping Doc.
Customer Order

Customer Order
Sales Order
Sales Order
Sales Order
Sales Order
4
Sales Order
3

Sales Order

Sales Order
3
6

File sales order


pending
receipt
of goods and
approval of
sales order

5
To
Custom er

Sales Order
2

To
Credit

Custom er Order
Sales Order
Sales Order
Shipping Doc.
Sales Invoic e

3
2

Shipping
Document

Sales Order

Considered
the
supporting
documentation for the
sales

To
Bil ing
Sales Order
Sales Order
Shipping
ShippiDocum
ng ent
Docum ent

File sales
order and
customer
order
pending
notice of
shipment

Sales Invoic e
Sales Invoic e

To
A/R

Sales Invoic e

To
Bil ing

To Customer
(Packing Slip)

3
1

N
To
Custom er

To
Inventory
Acctg.

CASH RECEIPTS FLOWCHART


SALES

CASHIER

Cash

Remittance Advice
Checks From
Customers

Document

Cash Sales
Invoice

2
1

Register Reading

Checks

Count Sheet

Supervisor
reading of
register daily
and
reconciliation
with cash

Cash

Supervisor
preparation of
Cash Count
Sheet

Remittance Advice

Checks
Prelist
Prelist

2
Prelist of
Mail Receipts 1

Document
Document
Cash

Cash and Checks

2
1

Document

Prelist
Register Reading
3
Cash Count Sheet
2
Deposit Slip
Daily Cash Summary

Document

Register
Reading

Prelist

2
1

Daily Cash
Summary

To
Accounting

2
2
1

To Bank

To
Treasurer

To General
Accounting

CHARTING
Charting, Inc. processes its sales and cash receipts documents as follows:
Payment on account: The mail is opened each morning by a mail clerk in the sales
department. The mail clerk prepares a remittance advice showing customer and amount paid if
one is not received. The checks and remittance advices are then forwarded to the sales
department supervisor who reviews each check and forwards the checks and remittance
advices to the accounting department supervisor.
The accounting department supervisor, who also functions as credit manager approving
new credit and all credit limits, reviews all checks for payments on past due accounts and then
forwards the checks and remittance advices to the A/R clerk, who arranges the advices in
alphabetical order. The remittance advices are posted directly on the A/R ledger cards. The
checks are endorsed by stamp and totaled. The total is posted to the cash receipts journal.
The remittance advices are filed chronologically.

Re
Co
Depo

Daily Ca
Summa

After receiving the cash from the previous days cash sales, the A/R clerk prepares the
daily deposit slip in triplicate. The third copy of the deposit slip is filed by date, and the second
copy and the original accompany the bank deposit.
Sales: Sales clerks prepare sales invoices in triplicate. The original & second copy go to
the cashier. The third copy is retained by the sales clerk in the sales book. For cash sales, the
customer pays the sales clerk, who presents the money to the cashier with the invoice copies.
A credit sale is approved by the cashier from an approved credit list after the sales clerk
prepares the three-part invoice. After receiving the cash or approving the invoice, the cashier
validates the original copy of the sales invoice and gives it to the customer. At the end of each
day, the cashier recaps the sales and cash received and forwards the cash and the second
copy of all sales invoices to the accounts receivable clerk.
The A/R clerk balances the cash received with cash sales invoices and prepares a daily
sales summary. The sales invoices are sent to the inventory control clerk in the sales
department for posting to the inventory control cards. After posting, the inventory control clerk
files all invoices numerically. The A/R clerk posts the daily sales summary to the cash receipts
journal and sales journal and files the sales summaries by date. The clerk also post the credit
sales to the accounts receivable subsidiary ledger account.
The cash sales and cash received on account make up the daily bank deposit.
Bank deposits: The bank validates the deposit slip and returns the second copy to the
accounting department where it is filed by date by the accounts receivable clerk. Monthly bank
statements are reconciled promptly by the accounting department supervisor and filed by date.
REQUIRED:
1. Complete the flowchart on the following page by labeling the appropriate symbols and
indicating information flows.
The chart is complete as to symbols and document flows.
2. Identify weaknesses in Chartings internal controls.

SALES AND CASH RECEIPTS FOR CHARTING, INC.


CLERKS
Mail

CASHIER

SALES SUPER.

A/R SUPER

Mail Clerk

Checks

Checks

Remittance
Advice

Checks
Open
Mail

ACCOUNTING DEPARTMENT/ACCOUNTS RECEIVABLE CLERK

Remittance
Advice

Remittance
Advice

Prepare Remittance
Advice if Needed

Sales Clerks
Write
Invoice For
Cust. Order

Post

Retained
In Sales
Book

Post
Check
Total

Sales
Invoice

Filed Third
Copy of
Deposit
Slip

Remittance
Advice
3

Sales
Invoice

Accounts
Receivable
Ledger

Checks

Endorse
Checks Total
Cash and
Prepare
Deposit Slip

T
S

Sales
Journal

R
Q

From Customer

Daily Sales
Summary

Post

File
D

Cash

D
C

Customer

To Bank

Inventory Control Clerk

Sales
Invoice

Sales Invoice
2

Cash

File
N

Post

N
H

CONTROL RISK ASSESSMENT CONSIDERATIONSCREDIT SALES TRANSACTIONS

Validated
Deposit Slip

Monthly Bank
Statement

From
Bank

Potential
Misstatement
Sales may be made to unauthorized customers.

Sales may be made without


credit approval.

Necessary
Control

Potential Test
of Control

Determination that customer


is on approved customer list.

Reperform procedure.

Approved sales order form for


each sale.

Examine approved sales


order forms.

Credit department credit


check on all new customers.

Inquire about procedures for


checking credit on new
customers.

Check on customers credit


limit prior to each sale.

Examine evidence of credit


limit check prior to each sale.

Goods may be released from


warehouse for unauthorized
orders.

Approved sales order for all


goods released to shipping.

Observe warehouse
personnel filing orders.

Goods shipped may not


agree with goods ordered.

Independent check by
shipping clerks of agreement
of goods received from
warehouse with approved
sales order.

Examine evidence of
performance of independent
check.

Unauthorized shipments may


be made.

Segregation of duties filling


and shipping orders.

Observe segregation of
duties.

Preparation of shipping
document for each shipment.

Inspect shipping documents.

Billings may be made for


fictitious transactions or
duplicate billings may be
made.

Matching shipping document


and approved sales order for
each invoice.

Vouch invoices to shipping


documents and approved
sales orders.

Some shipments may not be


billed.

Matching sales invoice for


each shipping document.

Trace shipping documents to


sales invoices.

Sales invoices may have


incorrect prices.

Independent check on pricing


of invoices.

Reperform check on accuracy


of pricing.

Invoices may not be


journalized or posted to
customer accounts.

Independent check of
agreement of sales journal
entries and amounts posted
to customer accounts with
control totals of invoices.

Review evidence of
independent checks; reperform checks.

Invoices may be posted to


wrong customer account.

Mailing of monthly statement


to customers.

Observe mailing of monthly


statements.

CONTROL RISK ASSESSMENT CONSIDERATIONCASH RECEIPTS TRANSACTIONS


Potential
Misstatement
Cash sales may not be
registered.

Necessary
Control
Use of cash registers or pointof-sale devices.
Periodic surveillance of cash
sales procedures.

Potential Test
of Control
Observe cash sales
procedures.
Inquire of supervisors about
results of surveillance.

Mail receipts may be lost or


misappropriated after receipt.

Restrictive endorsement of
checks immediately on
receipt.
Immediate preparation of
prelist of mail receipts.

Examine checks for restrictive


endorsement.

Cash and checks received for


deposit may not agree with
cash count sheets and prelist.

Independent check of
agreement of cash and
checks with cash count
sheets and prelist.

Examine evidence of
independent check.

Cash may not be deposited


intact daily.

Independent check of
agreement of validated
deposit slip with daily cash
summary.

Reperform independent
check.

Remittance advices may not


agree with prelist.

Independent check of
agreement or remittance
advices with prelist.

Examine evidence of
independent check.

Some receipts may not be


recorded.

Independent check of
agreement of amounts
journalized and posted with
daily cash summary.

Reperform independent
check.

Errors may be made in


journalizing receipts.

Preparation of periodic
independent bank

Examine bank reconciliations.

Observe preparation of
prelists.

reconciliations.
Receipts may be posted to
the wrong customer account.

Mailing of monthly statements


to customers.

Observe mailing of monthly


statements.

OOF QUESTION 2 (CPA, adapted) 15-25 minutes

Internal Control Activities

Field, CPA, is auditing the financial statements of Miller Mailorder, Inc.


(MMI) for the year ended January 31, 1996. Field has compiled a list of possible
errors and fraud that may result in the misstatement of MMI's financial statements
and a corresponding list of internal control activities that, if properly designed and
implemented, could assist MMI in preventing or detecting errors and fraud.
Required
For each possible error and fraud numbered 1 through 15, select one internal
control activity from the answer list at right that, if properly designed and
implemented, most likely could assist MMI in preventing or detecting the errors
and fraud. Each response in the list of internal control activities may be selected
once, more than once, or not at all.

A.

Shipping clerks compare goods received from the warehouse with the details
on the shipping documents.

B.

Approved sales orders are required for goods to be released from the
warehouse.

C.

Monthly statements are mailed to all customers with outstanding balances.

D.

Shipping clerks compare goods received from the warehouse with approved
sales orders.

E.

Customer orders are compared with the inventory master file to determine
whether items ordered are in stock.

Possible Errors and Frauds

F.

Daily sales summaries are compared with control totals of invoices.

G.

Shipping documents are compared with sales invoices when goods are
shipped.

1.

Invoices for goods sold are posted to incorrect customer accounts.

2.

Goods ordered by customers are shipped but are not billed to anyone.

H.

Sales invoices are compared with the master price file.

3.

Invoices are sent for shipped goods but are not recorded in the sales journal.

I.

Customer orders are compared with an approved customer list.

4.

Invoices are sent for shipped goods and are recorded in the sales journal but
are not posted to any customer account.

J.

Sales orders are prepared for each customer order.

5.

Credit sales are made to individuals with unsatisfactory credit ratings.

K.

Control amounts posted to the accounts receivable ledger are compared with
control totals of invoices.

6.

Good are removed from inventory for unauthorized orders.

L.

7.

Goods shipped to customers do not agree with goods ordered by customers.

Sales invoices are compared with shipping documents and approved customer
orders before invoices are mailed.

8.

Invoices are sent to allies in a fraudulent scheme, and sales are recorded for
fictitious transactions.

N.

9.

Customers' checks are received for less than the customers' full account
balances, but the customers full account balances are credited.

Goods returned for credit are approved by the supervisor of the Sales
Department.

O.

10. Customers' checks are misappropriated before being forwarded to the cashier
for deposit.

Remittance advices are separated from the checks in the mail room and
forwarded to the Accounting Department.

P.

Total amounts posted to the accounts receivable ledger from remittance


advices are compared with the validated bank deposit slip.

12. Different customer accounts are each credited for the same cash receipt.

Q.

The cashier examines each check for proper endorsement.

13. Customers' checks are properly credited to customer accounts and are properly
deposited, but errors are made in recording receipts in cash receipts journal.

R.

Validated deposit slips are compared with the cashier's daily cash summaries.

S.

An employee, other than the bookkeeper, periodically prepares a bank


reconciliation.

T.

Sales returns are approved by the same employee who issues receiving reports
evidencing actual return of goods.

M. Prenumbered credit memos are used for granting credit for goods returned.

11. Customers' checks are credited to incorrect customer accounts.

14. Customers' checks are misappropriated after being forwarded to the cashier for
deposit.
15. Invalid transactions granting credit for sales returns are recorded.

1.

2.

The correct answer is (C).


DISCUSSION:
Mailing monthly statements to customers with outstanding
accounts will detect invoices posted to the wrong accounts. Customers whose
accounts were misposted for goods not ordered will contest the statements.
The correct answer is (G).
DISCUSSION:
Each shipping document should have a corresponding
invoice when the goods are shipped. The appropriate direction of testing is
from the shipping documents to the sales invoices.

3.

The correct answer is (F).


DISCUSSION:
Daily sales summaries are from the book of original
entry--the sales journal. Comparing the summaries with the total of invoices
will detect failure to record all invoices.

4.

The correct answer is (K).


DISCUSSION:
Comparing control total amounts posted to the accounts
receivable (subsidiary) ledger with the control total of all invoices for the
same period should detect invoices not posted.

5.

The correct answer is (I).


DISCUSSION:
Credit approval should be received before sales are made.
Thus, shipping to customers on an approved list should reduce the risk of
sales to customers with unsatisfactory credit.

6.

The correct answer is (B).


DISCUSSION:
An approved sales order should be presented to the
storekeeper before release of goods from the warehouse to prevent goods from
being removed for unauthorized orders.

7.

The correct answer is (D).


DISCUSSION:
Requiring shipping clerks to compare the amounts and
type of goods received from the warehouse with approved sales orders assures
that goods shipped agree with those ordered by customers.

8.

The correct answer is (L).


DISCUSSION:
Comparing sales invoices with shipping documents will

assure that each invoice is supported by a shipment. Fictitious sales, i.e.,


those for which no shipment was made, should be detected.
9.

The correct answer is (P).


DISCUSSION: The total receipts credited to customer accounts in the
subsidiary ledger should equal the total receipts deposited, given that daily
receipts are deposited intact.

10. The correct answer is (C).


DISCUSSION:
Checks misappropriated (stolen) prior to forwarding to the
cashier are not posted to customer accounts (assuming that the remittance
advices were stolen as well). Thus, customers will complain when their
payments fail to be reflected in the balances on the monthly statements.
11. The correct answer is (C).
DISCUSSION:
Mailing monthly statements to customers with outstanding
accounts will detect receipts posted to the wrong accounts. Customers whose
accounts were misposted will contest the statements.
12. The correct answer is (P).
DISCUSSION:
If more than one customer account is credited for the same
cash receipt, the error will be detected when the total of the amounts posted to
the accounts receivable ledger is compared with the total cash receipts.
13. The correct answer is (S).
DISCUSSION:
The bank reconciliation will detect errors in recording
cash receipts (and disbursements). The balance in the ledger will not
reconcile with the amount in the bank statement.
14. The correct answer is (P).
DISCUSSION- If the checks are misappropriated (stolen) prior to deposit, the
total of the amounts posted to the accounts receivable ledger will be greater
than the validated bank deposit slip.
15. The correct answer is (N).
DISCUSSION:
Invalid sales returns are prevented by requiring approval
of returns by the Sales Department supervisor.

REVENUE CYCLE MULTIPLE CHOICE

1. For effective internal control, the billing function should be performed by the
a. Accounting department.
c. Shipping department.
b. Sales department.
d. Credit & collection department.

2. For good internal control, which of the following functions should not be the
responsibility of the treasurers department?
a. Data processing.
c. Custody of securities.
b. Handling of cash.
d. Establishing credit policies.

3. When a customer fails to include a remittance advice with a payment, it is


common practice for
the person opening the mail to prepare one.
Consequently, mail should be opened by which of the
following four company
employees?
a. Credit manager.
c. Sales manager.
b. Receptionist.
d. Account receivable clerk.

4. Which one of the following is not a universal rule for achieving strong internal
control over cash?
a. Separate cash handling and the record keeping functions.
b. Decentralize the receiving of cash as much as possible.
c. Deposit each days cash receipts by the end of the day.
d. Have bank reconciliations performed by employees independent with respect

5. The least crucial element of internal control over cash is


a. Separation of cash record keeping from custody of cash.
b. Preparation of the monthly bank reconciliation.
c. Batch processing of checks.
d. Separation of cash receipts from cash disbursements.

6. Which of the following sets of duties would ordinarily be considered basically


incompatible in terms of good internal control?
a. Preparation of monthly statements to customers and maintenance of the
accounts receivable subsidiary ledger.
b. Posting to the general ledger and approval of additions and terminations
relating to the payroll.
c. Custody of unmailed signed checks and maintenance of expense subsidiary

to handling cash.

ledgers.
d. Collection of receipts on account and maintaining accounts receivable
records.

7. Internal control over cash receipts is weakened when an employee who


mail receipts also
a. Prepares initial cash receipts records.
b. Records credits to individual accounts receivable.
c. Prepares bank deposit slips for all mail receipts.
d. Maintains a petty cash fund.

8. Which of the following is an effective internal control over accounts receivable?


a. Only persons who handle cash receipts should be responsible for the
preparation of documents that reduce accounts receivable.
b. Responsibility for approval of the write-off of uncollectible accounts should lie
c. Balances in the subsidiary accounts receivable ledger should be reconciled
to the G/L control account once a year, preferably at the year end.
d. The billing function should be assigned to persons other than those
responsible for maintaining accounts receivable subsidiary records.

receives customer

with sales personnel.

9. Smith Manufacturing Companys accounts receivable clerk has a friend who is


also Smiths customer. The accounts receivable clerk, on occasion, has issued
fictitious credit memorandums to his friend for goods supposedly returned. The
most effective procedure for preventing this activity is to
a. Prenumber and account for all credit memorandums.
b. Require receiving reports to support all credit memorandums.
c. Have the sales department independent of the A/R department.
d. Mail monthly statements.

10. Salesmens commissions are based on gross sales. Sales continue to increase; but uncollectible A/R are also
increasing at an alarming rate. The most effective procedure for preventing the increase in uncollectible A/R is to
a. Have the sales manager review activity of individual salesmen.
b. Age accounts receivable regularly.
c. Have the write-off of accounts properly approved.
d. Have the credit dept approve credit to customers before shipment.

11. The sales department bookkeeper has been crediting house-account sales to

her brother-in-law, an outside salesman. Commissions are paid on outside


sales but not on house-account sales. This might have been prevented by
requiring that
a. Sales order forms be prenumbered and accounted for by the sales department bookkeeper.
b. Sales commission statements be supported by sales order forms and
approved by the sales manager.
c. Aggregate sales entries be prepared by the general accounting department.
d. Disbursement vouchers for sales commissions be reviewed by the internal
audit department and checked to commission statements.

12. Which of the following control procedures may prevent the failure to bill
customers for some shipments?
a. Each shipment should be supported by a prenumbered sales invoice.
b. Each sales order should be approved by authorized personnel.
c. Sales journal entries should be reconciled to daily sales summaries.
d. Each sales invoice should be supported by a shipping document.

13. To achieve good I/C which department should match shipping documents with
sales orders and prepare daily sales summaries?
a. Billing.
c. Credit.
b. Shipping.
d. Sales.

CPA ESSAY ON A COMPUTERIZED REVENUE CYCLE FLOWCHART


Required:
The flowchart on the following page depicts part of a revenue cycle. Some of the flowchart
symbols are labeled to indicate control procedures and records. For each symbol numbered 1
through 13, select one response from the answer lists below. Each response in the lists may
be selected once or not at all.
Operations and control procedures
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
M.
N.
O.

Enter shipping data


Verify agreement of sales order and shipping document
Write off accounts receivable
To warehouse and shipping department
Authorize account receivable write-off
Prepare aged trial balance
To sales department
Release goods for shipment
To accounts receivable department
Enter price data
Determine that customer exists
Match customer purchase order with sales order
Perform customer credit check
Prepare sales journal
Prepare sales invoice

Documents, journals, ledgers, and files


P.
Q.
R.
S.
T.
U.
V.
W.
X.
Y.
Z.

Shipping document
General ledger master file
General journal
Master price file
Sales journal
Sales invoice
Cash receipts journal
Uncollectible accounts file
Shipping file
Aged trial balance
Open order file

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.

CPA COMPUTERIZED REVENUE CYCLE FLOWCHART

DESC

NOVEMBER
1993
WAREHOUSE &
SHIPPING
DEPARTMENT

COMPUTER
PROCESSING
DEPARTMENT

SALES DEPT.
From
Customer

COMPUTERIZED
SHIPPING PROGRAM:

COMPUTERIZED
ORDER PROGRAM:

Cust.
Credit
File

#1

and perform edit


checks and prepare sales
order

Customer
Purchase
Order

From
Com pute r
Processin g
Dept.

Retrieve Open Orders; Add


Shipping Data; Transfer to
Shipping File; and Prepare
Shipping Docum ents

#2

Sales Order
Sales Order
Sales Order

Sales Order

T ransmit
Customer
Data to
Computer

To
Warehouse
and Shipping
Dept.

Shipping Doc.
Shipping
Document

2
#4

Accounts
Rec.
Master
File

Customer
Purchase
Order

Shipping
File

#6
#5

Inventory
Master
File

#3

Customer P.O.
Sales Order
Sales Order

#10

COMPUTERIZED UPDATE
PROGRAM:
Update m aster files: Prepare
G/L Transaction Sum m ary,
Prepare Accounts Receivable
Ledger, Prepare Aged T/B,
and #11

#8

To
Customer

General Ledger
Transaction
Sum m ary

To
Accounting

COMPUTERIZED
BILLING PROGRAM:
Retrieve Shipping Data;
Enter Pric e Data;
Prepare Sales
Transaction File; and

Sales
T ransaction
File

#12

To
Accounting

#7

2
1

To
Customer

#9

Accounts
Receiv able
Ledger

#13

To
Accounts
Receivable

T o Customer
Credit

Transm it
Shipping
Inform ation to
Com puter

Sales Order
Shipping Doc.
Shipping
Document

3
2
1

To
Customer
with
Goods

RIPTION OF ON-LINE ENTRY/BATCH PROCESSING FOR REVENUE APPLICATION


Figure 1 shows a flowchart of an on-line batch entry processing system that
incorporates most of the controls discussed in the preceding sections.
In the illustrated system, as orders are received sales order clerks use on-line terminals
and an order program to determine that the customer has been approved, and that the order
will not cause the customer's balance to exceed the customer's authorized credit limit. The

program also checks the inventory master file to determine that goods are on hand to fill the
order. If the order is accepted, the computer enters it into an open order file and a multicopy
sales order form is produced on a printer in the sales order department. When an order is, not
accepted, a message is displayed on the terminal indicating the reason for rejection.
Copies of the approved sales order are forwarded to the warehouse as authorization to
release goods to shipping. In shipping, personnel first makes an independent check on
agreement of the goods received with the accompanying sales order form. They then use their
on-line terminals and a shipping program to retrieve the corresponding sales order from the
open order file and add appropriate shipping data. Next the computer transfers the transaction
from the open order file to a shipping file and produces a shipping document on the printer in
the shipping department.
As matching shipping documents and sales order forms are received in the billing
department, they are batched and batch totals are manually compared. Using their on-line
terminals and a billing program, billing department personnel first enter the manually prepared
batch totals. Next the previously entered order and shipping data for each transaction is
retrieved from the shipping file and a sales invoice is generated using prices from the master
price file. As each billing is completed, the computer enters it into a sales transactions file.
After all the transactions in a batch have been processed in this manner, the billing program
compares a computer generated batch total with the manual batch total previously entered by
the billing clerk. Discrepancies are displayed on the terminal and corrected by the billing clerks
before processing continues. Finally, sales invoices for the batch are printed in the EDP
department and distributed as shown in the flowchart.
The recording of sales transactions is completed at the end of each day when the EDP
department runs the master file update program. As shown, this program updates three
master files and produces a sales journal and general ledger transaction summary which are
sent to accounting. The use of a separate program to produce monthly customer statements
is not shown in the flowchart.

FIGURE 1
EXAMPLE OF ON-LINE ENTRY/BATCH PROCESSING FOR A REVENUE
APPLICATION

SALES ORDER

SHIPPING

EDP

Customer's
Order

From
Warehouse

Enter
Order
Data

ORDER PROGRAM
Perform Edit and
Credit Checks;
Print Sales Orders

Customer Order
Sales Order
Sales Order
Sales Order

Accts.
Rec.
Master
File

Sales
Orders

Inventory
Master
File

Open
Order
File

General
Ledger
Master
File

Enter
Shipping
Date

SHIPPING PROGRAM
Retrieve Open Orders;
Add Shipping Data;
Transfer to Shipping File;
Print Shipping Documents

Master
Price
File

Shipping Doc.
Sales Order
Shipping Doc.
4
Shipping Doc.

Shipping
File

Shipping
Document

3
2

3
2
1

1
MASTER FILE
UPDATE PROGRAM
Update Master Files;
Print Sales Journal and
General Ledger
Transaction Summary

To Customer

WAREHOUSE
Release
Goods to
Shipping

Sales Journal
General Ledger
Transaction
Summary

Sales Order

Sales
Order

Sales
Trans.
File

BILLING PROGRAM
Retrieve Shipped Order
Data;
Prepare Invoice;
Accumulate
and Compare Batch
Total;in Sales Transactions
Enter
File; Print Invoices

BILLING

Prepare
Batch
Total

Sales Invoice
Sales
Invoice

Enter Batch
Total; Prepare
Billing

2
1

Sales Order

To
Shipping
with
Goods

Check Agreement
of Goods and
Sales Order

To Accounting

To Customer

Shipping
Document

2
3