KEY TERMS
independently.
access control list (ACL) - lists containing
information that defines the access privileges for
all valid users of the resource. An access control
list assigned to each resource controls access to
system resources such as directories, files,
programs, and printers.
accounts receivable (AR) subsidiary ledger -
account record that shows activity by detail for
each account type, and containing, at minimum:
customer name; customer address; current
balance; available credit; transaction dates;
invoice numbers; and credits for payments,
returns, and allowances.
approved credit memo - the credit manager
evaluates the circumstances of the return and
makes a judgment to grant (or disapprove) credit.
approved sales order - contains sales order
information for the sales manager to review once
the sales order is approved.
back-order - records that stay on file until the
inventories arrive from the supplier. Back-ordered
items are shipped before new sales are
processed.
bill of lading - formal contract between the seller
and the shipping company that transports the
goods to the customer.
cash receipts journal - records that include details
of all cash receipts transactions, including cash
sales, miscellaneous cash receipts, and cash
received.
controller’s - the cash receipts department
typically reports to the treasurer, who has
responsibility for financial assets. Accounting
functions report to the controller. Normally these
two general areas of responsibility are performed
goods to the customer to describe the contents of
credit memo - document used to authorize the
customer to receive credit for the merchandise
returned.
customer order - document indicating the type and
quantity of merchandise being requested.
deposit slip - written notification accompanying a
bank deposit that specifies and categorizes the
funds (such as checks, bills, and coins) being
deposited.
electronic data interchange (EDI) - intercompany
exchange of computer-processible business
information in standard format.
inventory subsidiary ledger - ledger with inventory
records updated from the stock release copy by
the inventory control system.
journal voucher - accounting journal entries into an
accounting system for the purposes of making
corrections or adjustments to the accounting data.
For control purposes, all JVs should be approved
by the appropriate designated authority.
journal voucher file - compilation of all journal
vouchers posted to the general ledger.
ledger copy - copy of the sales order received
along with the customer sales invoice by the billing
department clerk from the sales department.
multilevel security - it employs programmed
techniques that permit simultaneous access to a
central system by many users with different
access privileges but prevent them from obtaining
information fo which they lack authorization
packing slip - document that travels with the
the order.
point-of-sale (POS) systems - revenue system in
which no customer accounts receivable are
maintained and inventory is kept on the store’s
shelves, not in a separate warehouse.
Prenumbered documents - Documents (sales
orders, shipping notices, remittance advices, and
so on) sequentially numbered by the printer that
allow every transaction to be identified uniquely.
Remittance advice - Source document that
contains key information required to service the
customer’s account.
Remittance list - Cash prelist, where all cash
received is logged.
Return slip - Document recording the counting
and inspect of items returned, prepared by the
receiving department employee.
Role - Formal technique for grouping users
according to the system resources they require to
perform their assigned tasks.
Role-based access control (RBAC) - is a
method of restricting network access based on the
roles of individual users within an enterprise.
S.O. pending file - It is where the sales order
(invoice copy) is placed until receipt of the sipping
notice, which describes the products that were
actually shipped to the customer.
Sales invoice - Document that formally depicts
the charges to the customer.
Sales journal - Document that formally depicts the
charges to the customer.
Sales order - Source document that captures
such vital information as the name and address of
the customer making the purchase; the customer’s
account number; the name, number, and
description of the product; the quantities and unit
price of the items sold; and other financial
information.
Sales order (credit copy) - Copy of sales order
sent by the receive-order task to the check-credit
task. It is used to check the credit-worthiness of a
customer.
Sales order (invoice copy) - Copy of sales order
to be reconciled with the shipping notice,. It
describes the products that were actually shipped
to the customer.
Shipping log - Specifies orders shipped during
the period.
Shipping notice - Document that informs the
billing department that the customer’s order has
been filled and shipped.
Stock records - Formal accounting records for
controlling inventory assets.
Stock release - Document that identifies which
items of inventory must be located and picked
from the warehouse shelves.
Universal product code (UPC) - Label containing
price information (and other data) that is attached
to items purchased in a point-of-sale system.
Verified stock release - After stock is picked,
verification of the order for accuracy and release of
the goods.
REVIEW QUESTIONS
1. What document initiates the sales
process?
A customer order usually in the form of a purchase
order initiates the sales process
2. Distinguish between a packing slip, a
shipping notice, and a bill of lading.
The packing slip is the document that travels with
the goods to the customer to describe the contents
of the order. The shipping notice is another
document which is forwarded to the billing function
as evidence of that the customer’s order was filled
and shipped and it conveys pertinent new facts
such as the date of shipment, the items and
quantities actually shipped, the name of the
carrier, and freight charges. The bill of lading is a
formal contract between the seller and the
shipping company(carrier) to transport the goods
to the customer and it establishes legal ownership
and responsibility for asset in transit.
3. What function does the receiving
department serve in the revenue cycle?
When items are returned, the receiving
department employee counts, inspects, and
prepares a return slip describing the items. The
goods, along with a copy of the return slip, go to
the warehouse to be restocked. The employee
then sends the second copy of the return slip to
the sales function to prepare a credit memo.
The sales return process begins in the receiving
department, where personnel receive, count,
inspect for damage, and send returned products to
the warehouse. The receiving clerk prepares a
return slip, which is forwarded to the sales
department for processing.
4. The general ledger clerk receives
summary data from which department?
What form of summary data?
General ledger clerk receives an accounts
receivable summary from accounts receivable
department and a journal voucher summary from
Cash receipt department.
5. What are the three authorization controls
The three authorization controls are the following:
1. Credit check
2. Return policy
3. Remittance list
6. What are the three rules that ensure that
no single employee or department
processes a transaction in its entirety?
a. Transaction authorization should be
separate from transaction
processing.
b. Asset custody should be separate
from the task of asset record
keeping.
c. The organization should be
structured so that the perpetration of
a fraud requires collusion between
two or more individuals.
7. At which points in the revenue cycle are
independent verification controls
necessary?
Independent verification controls in the revenue
cycle exist at the following points:
1. The shipping function verifies that
the goods sent from the
warehouse are correct in type and
quantity. Before the goods are
sent to the customer, the stock
release document and the packing
slip are reconciled.
2. The billing function reconciles the
original sales order with the
shipping notice to ensure that
 customers are billed for only the
quantities shipped.
3. Prior to posting to control
accounts, the general ledger
function reconciles journal
vouchers and summary reports
prepared independently in
different function areas. The billing
function summarizes the sales
journal, inventory control
summarizes the changes in the
inventory subsidiary ledger, the
cash receipts function summarizes
the cash receipts journal, and
accounts receivable summarizes
the AR subsidiary ledger.
8. What is the purpose of physical controls?
Purpose of this section is to support the system
concepts presented in the previous section with
models depicting people, organizational units, and
physical documents and files. This helps you
envision the segregation of duties and
independent verifications, which are essential to
effective internal control regardless of the
technology in place. In addition, it highlights
inefficiencies intrinsic to manual systems, which
gave rise to modern systems using improved
technologies.
9. How can we prevent inventory from being
reordered automatically each time the
system detects a low inventory level?
The on-order information will prevent items from
being accidentally reordered and will assist
customer service clerks in advising customers as
to the status of inventory and expected due dates
for out-of-stock items.
10. Distinguish between an edit run, a sort
run, and an update run.
An edit run is the first run; it detects most data
entry errors. Only "clean" data progresses to the
sort run. The sort run sequences the transaction
records according to its primary key field and
possibly a secondary key field. Once the data is
sorted, the update program posts the transactions
to the appropriate corresponding records in the
master file. During a sequential update, each
record is copied from the original master file to the
new master file regardless of whether the balance
is affected
11. What are the key features of a POS
system?
A point of sale system immediately
records both cash and credit transactions and
inventory information. The sales journal, accounts
receivable, and inventory accounts may be
updated in real-time, or a transaction file may be
used to later update a master file.
12. How is a credit check in the advanced
technology systems fundamentally different
from a credit check in the basic technology
system?
In the advanced technology system, the
system logic, not a human being, makes the
decision to grant or deny credit based on the
customer's credit history contained in the credit
history file. If credit is denied, the sales clerk
should not be able to force the transaction to
continue.
In the basic technology system, credit
checking of prospective customers is a function of
the credit department, which has responsibility for
ensuring the proper application of the firm's credit
policies. The complexity of credit procedures will
vary depending on the organization, its
relationship with the customer, and the materiality
of the transaction. Credit approval for first-time
customers may take time and involve consultation
with an outside credit bureau. In contrast, credit
decisions about existing customers that involve
ensuring only that the current transaction does not
exceed the customer's credit limit may be dealt
with very quickly.
13. What is multilevel security?
Multilevel security employs programmed
techniques that permit simultaneous access to a
central system by many users with different
access privileges but prevents them from obtaining
information for which they lack authorization
14. Why does billing receive a copy of the
sales order when the order is approved but
does not bill until the goods are shipped?
The billing department's receipt of the
sales order occurs in most instances before the
goods are actually shipped; thus, the economic
event is not complete. Some of the goods may not
be available to ship; thus, the customer should not
be billed until the goods are shipped and the
economic event is complete.
15. Why was EDI devised?
EDI technology was devised to expedite
routine transactions between manufacturers and
wholesalers and between wholesalers and
retailers. The customer’s computer is connected
directly to the seller’s computer via telephone
lines. When the customer’s computer detects the
need to order inventory, it automatically transmits
an order to the seller. The seller’s system receives
the order and processes it automatically. This
system requires little or no human involvement.
16. What assets are at greatest risk in a POS
system?
Inventory and cash. Customers have direct
access to inventory in the POS system.
17. In a manual system, after which event is the
sales process should the customer be billed?
 Shipment of goods marks the completion of
the economic event and the point at which the
customer should be billed. Upon receipt of the
shipping notice and stock release, the billing clerk
compiles the relevant facts about the transaction
(product prices, handling charges, freight, taxes,
and discount terms) and bills the customer.
18. What is bill of lading?
A bill of lading is a formal contract
between the seller and the shipping company that
transports the goods to the customer. It also
serves as a shipment receipt when the carrier
delivers the goods at a predetermined destination.
This document must accompany the shipped
products, no matter the form of transportation, and
must be signed by an authorized representative
from the carrier, shipper, and receiver.
19. What documents initiates the billing
process?
The shipping notice is proof that the product
has been shipped and is the trigger document that
initiates the billing process.
20. Where in the cash receipts process does
supervision play an important role?
Supervision plays an important role in the
mail room where both the check (asset) and
remittance advice (accounting records) are in the
hands of one person. Mail room fraud can result,
which involves stealing the check and destroying
the remittance advice to cover the theft.
DISCUSSION QUESTIONS
1. Why do firms have separate departments
for warehousing and shipping? What about
warehousing and inventory control?
Doesn’t this just create more paperwork?
The separation of the warehouse and the
shipping department allows for segregation of
functions over two departments for the custody of
the assets during two distinct phases of the
revenue cycle. The warehouse attendants have
custody over the finished goods until they receive
a stock release form from the sales department.
The warehouse clerks pick the inventory items
from the warehouse and send them to shipping
along with a copy of the stock release form. The
shipping department is only able to ship goods that
it receives from the warehouse personnel. Further,
it must match the goods with a packing slip and
shipping notice that originates from the sales
department. Thus, warehouse personnel are not
allowed to ship out any unauthorized inventory
items because the shipping personnel would not
have the corresponding paperwork. The additional
paperwork required is considered a necessary
cost for the added benefit of control over inventory.
The warehouse personnel do not keep the
formal accounting records. The asset custodial
tasks must be kept separate from the formal
record-keeping tasks. The inventory control keeps
the formal accounting records of inventory stock
items.
2. Distinguish between the sales order,
billing, and AR departments. Why can’t the
sales order or AR departments prepare the
bills?
The sales order department (included in the
sales department in the text) is responsible for
taking the customer order and placing it into a
standard format. This department records
information such as the customer's name,
address, account number, quantities and units of
each item, discounts, freight preferences, etc. The
sales order processing may, in some instances,
play a role in verifying or determining the promised
shipping date.
The billing department receives a copy of the
sales order from the sales department. Upon
receipt of the shipping notice and the stock release
documents, the billing department prepares the
sales invoice, which is the customer's bill reflecting
charges for items shipped, which may be different
from items ordered, taxes and freight, and any
discounts offered. The sales order department
should not prepare the bills because the
salespeople may bill their favorite clients less than
they should be billed. The salespeople place the
order, and thus start the wheels in motion for
inventory to be shipped. Further, the salespeople
should not be allowed to determine how much the
customers pay for their inventory, because they
may be tempted to charge lower prices and
receive kickbacks. The accounts receivable
department receives the sales orders and posts
them to the accounts receivable subsidiary ledger.
As remittance advices are received, they are
posted to the customer's account in the accounts
receivable subsidiary ledger. The accounts
receivable department should not be allowed to
prepare the bills since this department has custody
over the accounts receivable assets. Accounts
receivable personnel record customer payments
and track unpaid bills by customers. If they were
allowed to prepare the bills, they might not bill
certain customers and receive a kickback from the
customers for the free goods.
3. Explain the purpose of having mail room
procedures.
The checks received in payment for accounts
receivable are a crucial asset for the firm. These
checks must be protected from individuals who
might try to deposit these checks into their own
accounts. The process of having a member of the
mailroom personnel open the mail and record all
checks received before they are routed to the
cashier or the accounts receivable department is
to ensure that the accounts receivable personnel
do not engage in such activities as lapping the
accounts receivable accounts.
4. Explain how segregation of duties is
accomplished in an integrated data
processing environment.
In this environment, segregation of duties is
accomplished through multilevel security
procedures. Multilevel security employs
programmed techniques that permit simultaneous
access to a central system by many users with
different access privileges but prevents them from
obtaining information for which they lack
authorization.
5. How could an employee embezzle funds by
issuing an unauthorized sales credit memo
if the appropriate segregation of duties and
authorization controls were not in place?
An employee who has access to incoming
payments, either cash or check, as well as the
authorization to issue credit memos may pocket
the cash or check of a payment for goods
received. This employee could then issue a credit
memo to this person's account so that the
customer does not show a balance due.
6. What task can the AR department engage
in to verify that all customer’s checks have
been appropriately deposited and
recorded?
The company should periodically, perhaps
monthly, send an account summary to each
customer listing invoices and amounts paid by
check number and date. This form allows the
customer to verify the accuracy of the records. If
any payments are not recorded, they will notify the
company of the discrepancy. These reports should
not be handled by the accounts receivable clerk or
the cashier.
7. Why is access control over revenue cycle
documents just as important as the
physical control devices over cash and
inventory?
Access control to the billing and accounts
receivable records that are part of the revenue
cycle is just as important as the physical control
devices over cash and inventory because these
records affect the collectability of an asset—
accounts receivable—which should eventually be
converted into cash. If these records are not
adequately controlled, inventory may not be
ultimately converted into the cash amount
deserved by the firm.
8. How can reengineering of the sales order
processing subsystem be accomplished
using the Internet?
In the past decade, the Internet has become
an integral part of our everyday lives, its ability to
quickly gather the data we need in a matter of
seconds vastly improve a company's margin of
error. With the Internet's ability to quickly process
and gather data, it would greatly improve sales
order processing subsystem by automating much
of the data processing and ensuring the margin
profit is high through lower rate of error. With the
ability to quickly determine the inventory level, it
will reduce extra cost a company may incur due to
backorder items and will prevent a company from
over selling items causing customers to lose faith
in the company.
9. What financial statement misrepresentations
may result from an inconsistently applied
credit policy? Be specific.
Financial misinterpretations are made by
showing the financial figures in such a way that the
overall financial position of the company looks
healthier than what is in real life. This can be done
in many ways like over evaluation of assets and
under evaluation of liabilities.
Credit policy implies that the terms at
which credits are forwarded to the organization's
customer. Inconsistently applied credit policies
may result in an overstatement of accounts
receivable. Nonstandard or substandard
customers having long dues can be provided with
further credits, this would result in an
overstatement of accounts receivable
10. Give three examples of access control in a
POS system.
A. Assign each clerk to a separate cash
register for an entire shift. When the clerk
leaves the register to take a break, the
cash drawer should be locked to prevent
unauthorized access.
B. Magnetic tags are attached to
merchandise, which will sound an alarm
when removed from the store.
C. Locked showcases are used to display
jewelry and costly electronic equipment.
11. Discuss the trade-off in choosing to update
the general ledger accounts in real time versus
batch.
In real-time processing, changes are
updated in real-time as and when such changes
occur; whereas, in batch processing changes are
grouped and each group is processed in a single
batch.
In choosing between real-time or batch
update, the following points could be taken into
consideration. If the basis is updating method, in
real-time processing changes are made at the time
such changes occur while in batch processing,
updates are accumulated and are processed in
batches. If the basis is staffing requirements, in
real-time processing it increases while batch
processing does not require the recruitment of
additional staff.

12. If an automated credit checking function
denies a customer credit, should the sales
clerk ever be authorized to override the
decision? If so when?
The sales clerk is not authorized to
override the decision because within the revenue
cycle, the credit department is segregated from the
rest of the process so formal authorization of a
transaction is an independent event.
Often, compensation for sales staff is
based on their individual sales performance. In
such cases, sales staff have an incentive to
maximize sales volume and thus may not
adequately consider the creditworthiness of
prospective customers. By acting in an
independent capacity, the credit department may
objectively detect risky customers and disallow
poor and irresponsible sales decisions.
13. How can advanced technology transaction
processing systems reduce fraud?
Advanced technology transaction
processing systems reduce fraud in such a way
that there is authorization of transactions. The
objective of this is to ensure that only valid
transactions are being processed and thus
reducing the occurrence of fraud.
14. What makes POS systems different from
revenue cycles of manufacturing firms?
In point-of-sale systems, the customer
literally has possession of the items purchased,
thus the inventory is in hand. Typically, for
manufacturing firms, the order is placed and the
good is shipped to the customer at some later time
period. Thus, updating inventory at the time of sale
is necessary in point-of-sale systems since the
inventory is changing hands, while it is not
necessary in manufacturing firms until the goods
are actually shipped to the customer. Also, POS
systems are used extensively in grocery stores,
department stores, and other types of retail
organizations. Generally, only cash, checks, and
bank credit card sales are valid. Unlike
manufacturing firms, the organization maintains no
customer accounts receivable. Unlike some
manufacturing firms, inventory is kept on the
store's shelves, not in a separate warehouse. The
customers personally pick the items they wish to
buy and carry them to the checkout location,
where the transaction begins. Shipping, packing,
bills of lading, etc. are not relevant to POS
systems.
15. Is a POS system that uses bar coding and a
laser light scanner foolproof against
inaccurate updates? Discuss.
First, the checkout clerk scans the
universal product code (UPC) label on the items
being purchased with a laser light scanner. The
scanner, which is the primary input device of the
POS system, may be handheld or mounted on the
checkout table. The POS system is connected
online to the inventory file from which it retrieves
product price data and displays this on the clerk’s
terminal. The inventory quantity on hand is
reduced in real time to reflect the items sold. As
items fall to minimum levels, they are automatically
reordered. When all the UPCs are scanned, the
system automatically calculates taxes, discounts,
and the total for the transaction.
16. How is EDI more than technology? What
unique control problems may it pose?
EDI is more than just a technology. It
represents a business arrangement between the
buyer and seller in which they agree, in advance,
to the terms of their relationship. For example,
they agree to the selling price, the quantities to be
sold, guaranteed delivery times, payment terms,
and methods of handling disputes. These terms
are specified in a trading partner agreement and
are legally binding. Once the agreement is in
place, no individual in either the buying or selling
company actually authorizes or approves a
particular EDI transaction. In its purest form, the
exchange is completely automated.
EDI poses unique control problems for an
organization. One problem is ensuring that, in the
absence of explicit authorization, only valid
transactions are processed. Another risk is that a
trading partner, or someone masquerading as a
trading partner, will access the firm’s accounting
records in a way that is unauthorized by the
trading partner agreement.
17. Discuss the two common methods of
achieving multilevel security in a system.
Two methods for achieving multilevel
security are the access control list (ACL) and role-
based access control (RBAC). Through these
techniques, purchasing, receiving, AP, cash
disbursement and general ledger are limited in
their access based on the privileges assigned to
them.
MULTIPLE CHOICE QUESTION
1. Which function or department records
a sale in the sales journal?
C. sales department
In accounting system, one of the special
journals is sales journal. In this, only sales
made by a company on account are
recorded. Credit sales of inventory and
merchandise are recorded in this journal.
2. Which functions should be
segregated?
B. Picking goods from the warehouse
shelves and updating the inventory
subsidiary ledger
The function segregated is opening the
mail and recording the cash receipts in the
journal. Segregation duties are very
 important to the internal control structure
as it founds the faults in the system. Its
main duties are approval, accounting and
asset custody. The above-mentioned
function is used in reconciling or
accounting purpose.
The person who performs the above
function cannot make the deposit. In his
duties no person can perform the same
task. Different job assignments are
provided to different person according to
shift wise.
3. Which of the following is incompatible
task?
C. The AR clerk authorizes the write-off
of bad debts
Weak internal control structure:
Account receivable clerk authorizes the
write-off bad debts indicates the weak
internal control structure. The effective
internal control structure is that all the
accounting records get matched when the
audit takes place. If there is no control on
the accounting records that means the
internal control structure is weak. Reduced
records of transfers between warehouse
often results in the ineffective controls in
internal structure.
4. Which control helps to ensure that the
inventory items shipped to the
customer are the correct type and the
correct amount?
D. Reconcile stock release document
and packing slip
The effective control that helps ensuring a
check of the inventory systems that
shipped to the customer are correct type
and amount, a proper and effective
reconciliation of stock release document
with the packing slip.
5. The bill of lading is prepared by
C. Shipping clerk
The shipping clerk packages to goods,
attaches the packing slip, completes the
shipping notice, and prepares a bill of
lading.
6. Which of the following is NOT an
independent verification control?
D. The billing department reconciles
the shipping notice with the sales
invoice to ensure that customers are
billed for only the quantities shipped.
The cashier collects the cash receipts from
the customers and presents remittance
advices, to ensure that the amounts are
entered properly for reconciliation. As a
part of independent verification control,
duties must be segregated between the
employees to avoid fraud in cash
transactions. In other words, cash
collections should be made by one
employee and the remittances should be
made by another employee to avoid cash
have any falsification of information
In the present case, both the cash receipts
and cash remittances are handled by a
single person only. It will lead to fraud by
the employee and falsification of financial
information. Therefore, it is not an
independent verification control.
7. Which department defines terms for
shipped goods ownership?
D. Bill of Lading
The bill of lading is a formal contract
between the seller and the shipping
company to transport the goods to the
customer. This ownership establishes
legal ownership and responsibility for
assets in transit.
8. Which of the following sets of tasks
should not be separated?
E. All of the above tasks should be
separated
As a part of independent verification
control, duties must be segregated
between the employees to avoid fraud in
cash transactions.
9. Which of the following is often called a
compensating control?
A.Supervision
Implementing adequate segregation of
duties requires that a firm employ a
sufficiently large number of employees.
Achieving adequate segregation of duties
often presents difficulties for small
organizations. Obviously, it is impossible
to separate five incompatible tasks among
three employees.
Therefore, in small organizations or in
functional areas that lack sufficient
personnel, management must compensate
for the absence of segregation controls
with close supervision. For this reason,
supervision is often called a compensating
control.
10. Which document triggers the billing
function?
A. Shipping notice
The shipping notice provides proof that the
product has been shipped and is the
trigger document that initiates the billing
process.