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ACCOUNTING INFORMATION SYSTEMS


CONTROLS AND PROCESSES
TURNER / WEICKGENANNT

CHAPTER 8: Revenue and Cash Collection Processes

TEST BANK - CHAPTER 8 - TRUE / FALSE

1. Because different companies conduct business in different manners, there tends to be few
similarities in the way the related business processes are carried out.

2. Sales processes need supporting practices such as credit checks and stock authorization.

3. Even though most companies collect order data from customers, the manner of receiving
order data seldom varies.

4. What a customer refers to as a purchase order is referred to as a sales order by the vendor.

5. When a sales order has been entered into the system, the customer’s credit status must be
checked. For existing customers, the sale on account should be approved only if the customer
has exceeded their credit limit.

6. If a sales order comes from a new customer, it is necessary to evaluate the creditworthiness
of that customer before the sale is approved.

7. Whenever a sales order is received, it is necessary to check the inventory to make sure that
the items ordered are in stock. If the items are in stock, a packing slip will be prepared.

8. Billing to the customer should take place prior to shipment so that the customer receives the
bill before the merchandise arrives.

9. If a vendor waits too long to send the bill to the customer due to the fact that it could cause a
delay of the collection of the cash.

10. When the customer is billed, the accounts receivable records should be updated to reflect the
decreased balance.

11. The existence of good internal controls do not ensure high sales and profits.

12. Effective and efficient internal control often takes up valuable management time that could
otherwise be spent on attention to revenue growth and cost controls.

13. Proper sales authorization control requires obtaining approval before processing an order and
again before the order is shipped.

14. The internal control activity, related to the authorization of transactions, requires that only
specific individuals within the company should have the authoritative responsibility for
establishing sales prices and credit terms.
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15. The individuals who are given the authority to establish sales prices, credit limits, and
guidelines for accepting customers should be sure to keep most of the information
confidential.

16. In order to meet the objectives of internal controls, individuals with authoritative
responsibilities need to have access to the record keeping functions.

17. Record files related to sales can be organized by customer name or by the numerical sequence
of the documents.

18. A benefit of a company accounting for their documents in a numerical sequence is that it is
much easier to see if a document or documents are missing.

19. Independent checks and reconciliations should be performed on a regular basis as part of the
segregation of duties area of internal controls.

20. A reconciliation should be prepared by the same person who is responsible for the recording
function.

21. A company is more likely to implement internal controls if they view the cost of the controls to
be less than the benefits provided.

22. When a credit memorandum has a reference to the original sales invoice and approved price
list it will assure that the correct customer receives credit for the return.

23. Internal controls over sales returns are similar to those for the revenue process where it is
important to match receiving reports for returns with the related credit memos to ensure that
the company issues credit for all returns for the correct amounts.

24. Specific internal control procedures to be performed, specifically independent checks and
reconciliations, should be performed by someone who as the responsibility for the recording of
the transactions and the custody of the assets received.

25. It is necessary for a company to consider the risks of its system to determine whether the
costs of implementing a control procedure are worthwhile in terms of the benefits realized
from the control.

26. As a rule, the higher the risk, the more controls are generally required and the less costly its
accounting system may become.
27. Company to company sales normally occur on account and involve a time span given for the
customer to pay the vendor. The actual number of days will depend on the credit terms and
the diligence of the customer concerning on-time payments.

28. The remittance advice send by the customer with the related payment is used by the vendor
to properly apply the payment to the customer’s account.

29. The segregation of duties states that the authorization of duties is to be separated from the
recording function but not from the custody function.
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30. At a minimum, those who handle cash should be the ones to reconcile the bank statement.

31. Those who handle cash should not have access to the related accounting records.

32. At a minimum, cash receipts should be deposited on a weekly basis.

33. Detailed customer accounts should be maintained and reconciled with customer statements
regularly.

34. Access to cash collections needs to limited to those who are expressly authorized to record the
cash transactions.

35. Controls over cash collections are likely the most important control procedure because cash is
the asset most susceptible to theft and misappropriation.

36. Integrated IT systems that are used to conduct internet sales in a business to customer
manner are referred to as e-commerce.

37. Business to business sales on the internet are referred to as e-commerce.

38. The use of control totals and related acknowledgments can reduce the risk of denial of service
attacks by hackers.

39. Because the point-of-sale systems are not normally connected to outside trading partners,
they pose fewer risks related to security and confidentiality than e-commerce or EDI systems.

40. Because the point-of-sale systems are not normally connected to outside trading partners,
they pose fewer risks related to availability.

41. Few deceptions and fraudulent acts in the business and accounting environment relate to
revenue measurement and recognition.

42. Regardless of how effective and good the accounting system is, if top management is intent
on falsifying financial statements by inflating revenue, they can usually find ways to misstate
revenue.

43. In many cases where revenue has been overstated by management, accountants have
participated in the deception. Thankfully, once the overstatement has occurred, it will be
offset by lower revenues in the subsequent year and normally will not recur.
44. When top management behaves ethically and encourages ethical behavior, there are usually
fewer cases of frauds, errors, or other ethical problems.

45. Establishing proper processes, internal controls, and ethical guidelines does not lead to better
corporate governance, even though it does improve the financial stewardship.
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ANSWERS TO TEST BANK – CHAPTER 8 – TRUE / FALSE:

1. F 10. F 19. F 28. T 37. F


2. T 11. T 20. F 29. F 38. F
3. F 12. F 21. T 30. F 39. T
4. T 13. T 22. F 31. T 40. F
5. F 14. T 23. T 32. F 41. F
6. T 15. F 24. F 33. T 42. T
7. F 16. F 25. T 34. F 43. F
8. F 17. T 26. F 35. T 44. T
9. T 18. T 27. T 36. T 45. F

TEST BANK - CHAPTER 8 - MULTIPLE CHOICE

46. In a large company, there are hundreds, possibly thousands, of sales transactions each day.
The company needs to have in place, systems and processes to:
A. Capture the results of the sales transactions
B. Record the proper and complete sales transactions
C. Summarize and report the results of the transactions
D. All of the above

47. The policies and procedures that employees follow when completing the sale, capturing
customer data and sales quantities, and routing the resulting sales documents to the right
departments within the company are referred to as:
A. Transactions
B. Processes
C. Posting
D. Systems

48. When a sale occurs, the information resulting from that sale must flow into the sales recording
systems, the accounts receivable and cash collection systems, and the inventory tracking
systems. In IT accounting systems, these recording and processing systems are referred to as:
A. Transaction Processing Systems
B. Revenue and Cash Processing Systems
C. Point of Sale System
D. E-business System

49. The business processes that are common in company-to-company sales business types include
all of the following, except:
A. Collect order data
B. Record receivable and bill the customer
C. Update affected records, such as accounts payable and cash
D. Handle any product returns from the customer
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50. The business processes that are common in company-to-company sales business are divided
into three groups. Which of the following is not one of those groups?
A. Sales processes, including ordering, delivery, and billing
B. Purchase of inventory, including ordering, delivery, and billing
C. Sales Returns processes
D. Cash Collection processes

51. The risks that may affect the revenue and cash collection processes include all of the following,
except:
A. Transactions recorded by the wrong company.
B. Valid transactions may have been omitted from the records.
C. Transactions may not have been recorded in a timely manner.
D. Recorded transactions may not be valid or complete.

52. The risks that may affect the revenue and cash collection processes include all of the following,
except:
A. Transactions may have been recorded in the wrong customer account.
B. Transactions may be recorded in the wrong amount.
C. Invalid transactions may have been omitted from the records.
D. Transactions may not have been accumulated or transferred to the accounting records
correctly.

53. Common means of presenting the revenue and cash collections processes pictorially include:
A. Data Flow Diagram
B. Document Flowchart
C. Business Process Map
D. All of the above

54. The sales and cash collections process begins when:


A. Merchandise is shipped to a customer
B. A customer places an order with the company
C. Merchandise is purchased
D. A vendor places an order with the company

55. The form, or source document, that conveys the details about a customer’s order, prepared by
the customer, is referred to as:
A. Sales Order
B. Sales Invoice
C. Purchase Order
D. Purchase Invoice

56. Sales orders are calculated based on current selling prices of the items sold. The source of
these prices, which would include the entire set of preestablished and approved prices for each
product, is referred to as a(n):
A. Price list
B. Purchase order
C. Packing slip
D. Pick list
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57. The maximum dollar amount that a customer is allowed to carry as an accounts receivable
balance:
A. Maximum Limit
B. Credit Balance
C. Maximum Balance
D. Credit Limit

58. This item documents the quantities and descriptions of items ordered. Items from this
document should be pulled from the warehouse shelves and packaged for the customer.
A. Packing Slip
B. Price List
C. Pick List
D. Purchase Order

59. The terms of agreement between the company and the common carrier are documented in
a(n):
A. Pick List
B. Bill of Lading
C. Invoice
D. Packing Slip

60. A chronological listing of shipments that allows management to track the status of sales and to
answer customer inquiries regarding order status is called a(n):
A. Invoice
B. Bill of Lading
C. Pick List
D. Shipping Log

61. This document is prepared and sent to the customer once the shipment has occurred. The
document provides the details of the sale and requests payment.
A. Sales Invoice
B. Accounts Receivable Statement
C. Bill of Lading
D. Sales Order

62. A special journal that is used to record sales transactions and is periodically posted to the
general ledger.
A. General Journal
B. Subsidiary Journal
C. Sales Journal
D. Accounts Receivable Journal

63. This document is prepared on a regular basis to accumulated and summarize all the transactions
that have taken place between the customer and the company within the period.
A. Accounts Receivable Journal
B. Sales Invoice
C. Subsidiary Journal
D. Customer Account Statements
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64. Which of the following relationships does not violate the rules of segregation of duties?
A. Credit authorization and preparation of the sales order.
B. Preparation of the sales order and sales invoice.
C. Preparing goods for shipment and accounting for inventory.
D. Entering sales in the sales journal and handling the inventory.

65. The internal control activity related to the adequate records and documents, related to sales,
includes which of the following?
A. Those responsible for recording sales should ensure that the supporting documentation is
retained and organized.
B. Information systems duties included in the revenue process includes the preparation of
sales orders and shipping logs.
C. All records are to be prepared by someone other than the person who has custody of the
assets.
D. The authorization process is to remain separate from the recording process.

66. Which of the following is not one of the stated physical controls for inventory in a warehouse?
A. Surveillance Cameras
B. Alarm Systems
C. Backup Copies
D. Security Guards

67. In order to protect data files, production programs, and accounting records from unauthorized
access, each of the following may be used, except:
A. Passwords
B. Physical controls (locked cabinets)
C. Backup copies
D. Surveillance cameras

68. Common types of independent checks within the revenue process include all of the following,
except:
A. Verification of information in the sales journal and on sales invoices.
B. Verification of the bank statement and the cash account in the general journal.
C. Reconciliation of accounts receivable detail with invoices and with the general ledger.
D. Reconciliation of inventory records with actual (counted) quantities on hand.

69. Examples of characteristics that indicate a company may be more risky with respect to the
revenue process include all of the following, except:
A. Changes in sales prices or customers are infrequent.
B. The pricing structure is complex or is based on estimates.
C. There is a large volume of transactions is carried out.
D. The company depends on a single or on very few customers.
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70. The comparison of the shipping records with the sales journal and invoices is completed to
minimize the related risk of:
A. Invalid transactions
B. Fictitious customers
C. Omitted transactions
D. Duplicate transactions

71. The preparation of packing lists and shipping records on prenumbered forms will help to
minimize the related risk of:
A. Incorrect amounts
B. Invalid sales
C. Wrong customers
D. Omitted transactions

72. The separation of the responsibility for the authorization of new customers from the custody of
inventory will help to minimize the related risk of:
A. Invalid sales
B. Fictitious customers
C. Incorrect amounts
D. Timing issues

73. A document prepared that lists the chronological sequence of all returned items is referred to as
a(n):
A. Receiving log
B. Receiving report
C. Invoice
D. Packing list

74. A source document prepared by the personnel in the receiving dock that documents the quantity
and condition of the items received is called a(n):
A. Invoice
B. Receiving log
C. Receiving report
D. Credit memorandum

75. A document prepared to prepare a record of the sales return and to adjust the amount of the
customer’s credit status is called a(n):
A. Receiving log
B. Credit memorandum
C. Sales invoice
D. Sales journal
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76. The authorization of sales returns requires that certain individuals within the company be
assigned the authority for all of the following, except:
A. Authorize Sales Returns
B. Approve Credit Memos
C. Develop Sales Return Policies
D. Record the Credit Memos

77. The segregation of duties related to sales returns would ideally separate the function of
performing the credit memo activity and all of the following, except:
A. Credit approval
B. Approve the credit memos
C. Billing
D. Data entry

78. Circumstances within a company, related to sales returns, that indicate a high level of risk
include all of the following, except:
A. Returns are received a one location with credit memos issued at the same location.
B. Quantities of products returned are often difficult to determine.
C. There is a high volume of credit memo activity.
D. Returns are received by consignees or under other arrangements not directly controlled by
the company.

79. Differences between a sales return and a sales allowance include:


A. The issuance of a credit memorandum
B. The existence of defective merchandise
C. The documentation in a receiving report
D. All of the above

80. The separation of the custody of inventory from the accounts receivable record keeping will help
to minimize the related risk of:
A. Incorrect amounts
B. Invalid returns
C. Fictitious customers
D. Timing issues

81. The documentation accompanying payment that identifies the customer account number and
invoice to which the payment applies is referred to as a(n):
A. Cash Receipts Journal
B. Promissory Note
C. Deposit List
D. Remittance Advice

82. A special journal used to record all cash collections is called a(n):
A. Cash Receipts Journal
B. Remittance Advice
C. Check Register Journal
D. Customer Subsidiary Journal
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83. In order to ensure that all records are updated only for authorized transactions, appropriate
individuals should be assigned all of the following duties, except:
A. Opening and closing all bank accounts.
B. Preparing the bank reconciliation.
C. Approving bank deposits.
D. Approving electronic transfers of funds.

84. The recording responsibilities for cash receipts includes all of the following, except:
A. Maintaining a cash receipts journal
B. Updating accounts receivable records for individual customers
C. Posting subsidiary ledger totals to the general ledger
D. Preparing bank deposits

85. The custody responsibilities for cash receipts include all of the following, except:
A. Updating accounts receivable records
B. Opening mail
C. Preparing a list of collections
D. Handling receipts of currency and checks

86. The internal control of cash receipts related to adequate records and documents would include
which of the following?
A. Cash receipts listings prepared on a daily basis and reconciled to supporting documentation
from the bank deposit.
B. Bank deposit receipts should be retained and filed chronologically.
C. Detailed customer accounts should also be maintained and reconciled with customer
statements regularly.
D. All of the above.

87. Independent checks and reconciliations, related to cash receipts, include all of the following,
except:
A. Cash counts should occur on a surprise basis and be conducted by someone not
responsible for cash receipts functions.
B. Cash collections should be deposited in the bank in a timely manner to prevent the risk of
theft.
C. Physical count of cash needs to be conducted from time to time in order to compare actual
cash on hand with the amounts in the accounting records.
D. Daily bank deposits should be compared with the detail on the related remittance advice
and in the cash receipts journal.

88. Bank reconciliation tasks include:


A. Procedures to ensure that deposits are examined for proper dates
B. Procedures to ensure that all reconciling items are reviewed and explained
C. Both of the above
D. None of the above
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89. The following circumstances may indicate risks related to cash collections, except:
A. High volume of cash collections
B. Centralized cash collections
C. Lack of consistency in the volume or source of collections
D. Presence of cash collections denominated in foreign currencies

90. Whenever a company grants credit to customers, there is a danger that customers will not pay.
In fact, most companies have occasional problems with customers who fail to pay which leads
to writing off the accounts receivable. Proper controls related to these uncollectible accounts
include all of the following, except:
A. Segregation of responsibilities so that no one has the opportunity to write off an account to
cover up stolen cash.
B. Thorough guidelines are to be established for determining the amount of an allowance for
uncollectible accounts.
C. An accounts receivable aging report should be generated to analyze all customer balances
and the lengths of time that have elapsed since the payments were due.
D. Mathematical verification of the cash receipts journal and the accounts receivable ledger.

91. The separation of the responsibility for custody of cash from the responsibility for reconciling the
bank accounts will help to minimize the related risk of:
A. Wrong customers
B. Incorrect amounts
C. Invalid bank account
D. Invalid transactions

92. The separation of the custody of cash from the accounts receivable record keeping will help to
minimize the related risk of:
A. Invalid cash receipts
B. Incorrect amounts
C. Invalid transactions
D. Duplicate transactions

93. The preparation of deposit slips on prenumbered forms will help to minimize the related risk of:
A. Invalid transactions
B. Incorrect amounts
C. Duplicate transactions
D. Omitted transactions

94. The security of having cash receipts deposited in the bank on a daily basis will help to minimize
the related risk of:
A. Invalid receipts
B. Invalid bank account
C. Lost or stolen cash
D. Duplicate transactions
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95. General controls of the IT system would include all of the following, except:
A. Security
B. Accuracy
C. Availability
D. Confidentiality

96. Application controls of the IT system would include:


A. Availability
B. Accuracy and Completeness
C. Security
D. Processing Integrity

97. This type of highly integrated IT system incorporates electronic processing of sales-related
activities and, generally, the sales processes are transacted over the internet.
A. E-commerce
B. Virtual commerce
C. Electronic data interchange
D. Point of sale

98. This type of highly integrated IT system, inter-company, computer-to-computer, communicates


sales documents electronically with a standard business format.
A. E-commerce
B. Virtual commerce
C. Electronic data interchange
D. Point of sale

99. This type of highly integrated IT system processes sales at a cash register in retail stores.
A. E-commerce
B. Virtual commerce
C. Electronic data interchange
D. Point of sale

100. The advantages of e-commerce, or e-business, include all of the following, except:
A. Reduced cost through lower marketing, employee, and paperwork costs.
B. Shorter sales cycles
C. Repudiation of sales transactions
D. Increased accuracy and reliability of sales data

101. The risks of e-commerce, or e-business, include all of the following, except:
A. Confidentiality
B. Accuracy
C. Security
D. Processing Integrity

102. Availability risks of e-commerce, or e-business, include all of the following, except:
A. Hardware and software system failures
B. Virus and worm attacks
C. Denial-of-service attacks by hackers
D. Incomplete audit trail
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103. Important characteristics of electronic data interchange (EDI) include all of the following,
except:
A. Sales register is used to record all transactions.
B. Inter-company refers to two or more companies conducting business electronically.
C. Computer-to-computer aspect indicates that each company’s computers are connected via
a network.
D. A standard business format is necessary so that companies can interact and trade with a
variety of buyers and sellers.

104. The standard format used with EDI allows all vendors and buyers to speak the same language.
Which group has developed the standard format for the common documents used in the sales
process?
A. Electronic Data Systems
B. American Common Forms Institute
C. Association of Naturalized Documents
D. American National Standards Institute

105. The standard format for common forms used in the United States for EDI data transmission is
divided into three parts. Which of the following is one of those “parts”?
A. Availability Segment
B. Labeling Interchanges
C. Security Trailer
D. Processing Data

106. This section of the common forms used as the standard format in EDI data transmission
contains data about the file or transmission and identify the end of a particular transaction.
A. Header and Trailer Data
B. Labeling Interchanges
C. Data Segments
D. Footer Data

107. Because it can be expensive to develop and maintain a system that links two companies directly,
the companies often use a third-party network. This third-party network provides other valuable
services such as translation and encryption of the EDI data and authentication of a valid and
authorized training partner. These third-party networks are called:
A. EDI Mailboxes
B. American National Standards Provider
C. Value Added Networks
D. Secured EDI Networks

108. EDI systems have many advantages within the revenue and cash collection processes. Which of
the following is not one of those benefits?
A. Reduction or elimination of data keying.
B. Trading partners gaining access to data.
C. Elimination of postage costs.
D. Competitive advantage through better customer service.
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109. The process of user identification to ensure that only authorized users are accessing the IT
system, which occurs through the use of user ID, password, and other unique identifiers, is
called:
A. Processing Integrity
B. Virtualization
C. Availability
D. Authentication

110. A control that limits the risk of network break-ins is the coding of data that makes data
unreadable to those without the appropriate key. This process does not stop the breaches, but
will make the data useless.
A. Encryption
B. Encoding
C. Repudiation
D. Hacking

111. This occurs when the IT system automatically makes a list of users and the actions they take
within the IT system.
A. Control Totals
B. Transaction Logging
C. Encryption Keys
D. Acknowledgment

112. The Point-of-sales (POS) systems capture all relevant sales data at the point of sale - the cash
register. The data that is captured includes all of the following, except:
A. Prices are determined by accessing inventory and price list data
B. Sales revenue is recorded
C. Ordering for low-inventory items
D. Inventory values are updated

113. Advantages to management and accountants, as the result of the point-of-sale systems, include
all of the following except:
A. Bar code scanning eliminates the need to manually enter product codes, quantities, or
prices.
B. Real-time update of cash, sales, and inventory records allows for immediate analysis of
sales trends, inventory needs, and cash on hand.
C. List prices can be changed by the check-out clerks to take advantage of any price changes.
D. Credit card authorization during the sale save time and help prevent credit card fraud.

114. This term refers to moving the current accounting period forward to include sales that correctly
occur in a future period. This activity occurs so that the selling company can inflate their sales
in the current period.
A. Channel stuffing
B. Leaving sales open
C. Shipping reversal
D. Sales deferral
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ANSWERS TO TEST BANK – CHAPTER 8 – MULTIPLE CHOICE:

46. D 60. D 74. C 88. C 102. D


47. B 61. A 75. B 89. B 103. A
48. A 62. C 76. D 90. D 104. D
49. C 63. D 77. B 91. B 105. B
50. B 64. B 78. A 92. A 106. A
51. A 65. A 79. C 93. D 107. C
52. C 66. C 80. B 94. C 108. B
53. D 67. D 81. D 95. B 109. D
54. B 68. B 82. A 96. B 110. A
55. C 69. A 83. B 97. A 111. B
56. A 70. C 84. D 98. C 112. C
57. D 71. D 85. A 99. D 113. C
58. C 72. B 86. D 100. C 114. B
59. B 73. A 87. B 101. B

TEST BANK – CHAPTER 8 – END OF CHAPTER QUESTIONS:

115. Within the revenue processes, a signed approval of a sales order indicates all of the following
except:
A. The date of delivery.
B. The sale is to an accepted customer.
C. The customer’s credit has been approved.
D. The sales price is correct.

116. An example of an independent verification in the sale process is:


A. Preparation of packing lists on prenumbered forms.
B. Initialing the sales order.
C. Proof of recorded dates, quantities, and prices on an invoice.
D. Physical controls in record storage areas.

117. The purpose of tracing shipping documents to prenumbered sales invoices would be to provide
evidence that:
A. Shipments to customers were properly invoiced.
B. No duplicate shipments or billings occurred.
C. Goods billed to customers were shipped.
D. All prenumbered sales invoices were accounted for.

118. The purpose of tracing sales invoices to shipping documents would be to provide evidence that:
A. Shipments to customers were properly invoiced.
B. No duplicate shipments or billings occurred.
C. Goods billed to customers were shipped.
D. All prenumbered sales invoices were accounted for.
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119. To ensure that all credit sales transactions of an entity are recorded, which of the following
controls would be most effective?
A. On a monthly basis, the accounting department supervisor reconciles the accounts
receivable subsidiary ledger to the accounts receivable control account.
B. The supervisor of the accounting department investigates any account balance differences
reported by customers.
C. The supervisor of the billing department sends copies of approved sales orders to the
credit department for comparison of authorized credit limits and current customer
balances.
D. The supervisor of the billing department matches prenumbered shipping documents with
entries recorded in the sale journal.

120. Under a system of sound internal controls, if a company sold defective goods, the return of
those goods from the customer should be accepted by the:
A. Receiving Clerk
B. Sales Clerk
C. Purchasing Clerk
D. Inventory Control Clerk

121. The source document that initiates the recording of the return and the adjustment to the
customer’s credit status is the:
A. Pick list
B. Sales journal
C. Credit memorandum
D. Sales invoice

122. Which of the following is not a document that is part of the cash collection process?
A. Remittance advice
B. Cash receipts journal
C. Bank deposit slip
D. Packing slip

123. Which of the following would represent proper segregation of duties?


A. The employee who has custody of cash also does accounts receivable record keeping.
B. The employee who has custody of cash completes the bank reconciliation.
C. The employee who opens mail containing checks prepares a list of checks received.
D. The employee who opens mail containing checks records transactions in the general
ledger.

124. Immediately upon receiving checks from customers in the mail, a responsible employee working
in an environment of adequate internal control should prepare a listing of receipts and forward it
to the company’s cashier. A copy of this cash receipts listing should also be sent to the
company’s:
A. Treasurer for comparison with the monthly bank statement.
B. Internal auditor for investigation of any unusual transactions.
C. Accounts receivable clerk for updating of the accounts receivable subsidiary ledger.
D. Bank for comparison with deposit slips.
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125. If a company does not prepare an aging of accounts receivable, which of the following accounts
is most likely to be misstated?
A. Sales revenues
B. Accounts receivable
C. Sales returns and allowances
D. Allowance for uncollectible accounts

126. When a company sells items over the Internet, it is usually called e-commerce. There are many
IT risks related to Internet sales. The risk of invalid data entered by a customer would be a(n):
A. Availability risk.
B. Processing integrity risk.
C. Security risk.
D. Confidentiality risk.

127. When a company sells items over the Internet, there are many IT risks. The risk of hardware
and software failures that prevent website sales would be a(n):
A. Availability risk.
B. Processing integrity risk.
C. Security risk.
D. Confidentiality risk.

128. The use of electronic data interchange (EDI) to conduct sales electronically has both risks and
benefits. Which of the following is a benefit of EDI, rather than a risk?
A. Incomplete audit trail
B. Repudiation of sales transactions
C. Unauthorized access
D. Shorter inventory cycle time

129. An IT system that uses touch screens, bar coded products, and credit card authorization during
the sale is called a(n):
A. Electronic data interchange system.
B. E-commerce system.
C. Point of sales system.
D. E-payables system.

130. Which of the following is not a method of unethically inflating sales revenue?
A. Channel stuffing
B. Holding sales open
C. Premature recognition of contingent sales
D. Promotional price discounts

ANSWERS TO TEST BANK – CHAPTER 8 – END OF CHAPTER QUESTIONS

115. A 119. D 123. C 127. A


116. C 120. A 124. A 128. D
117. A 121. C 125. D 129. C
118. C 122. D 126. B 130. D
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TEST BANK – CHAPTER 8 – SHORT ANSWER QUESTIONS

131. Why is it important to establish and monitor credit limits for customers?
Answer: Allow customers to order an excess over what they are able to pay poses a large risk for
companies. It is important to review a customer’s credit worthiness and based on that credit
worthiness, establish a credit limit. Once the limit is established, the company should have
processes or methods to insure the credit limit is not exceeded. Without a limit, or monitoring
that limit, the company has the risk of not being paid for goods or services purchased by
customers.

132. Distinguish between a pick list and a packing slip.


Answer: Although the information on these two documents is essentially the same, they are used
for two different purposes. Both documents contain the items and quantities for a particular
customer order. However, the pick list is used in the warehouse to pull items from the warehouse
shelves, while the packing slip is included in the box or boxes shipped to the customer. The
packing slip tells the customer which items should be in the shipment.

133. How can an effective system of internal controls lead to increased sales revenue?
Answer: When an effective systems of internal controls is in place, managers may be able to
spend less time overseeing operations and can therefore, spend more time on revenue growth
strategies and activities. For example, with a proper set of general authorization procedures for
sales, a manager would not need to approve each sale individually. This gives the manager more
time to focus on activities that could lead to increased revenue.

134. Why should the person responsible for shipping goods to customers not also have responsibility
for maintaining records of customer accounts?
Answer: Custody of assets and responsibility for record keeping should always be segregated. In
this case, the person shipping the goods has custody and could therefore, steal assets. Access to
customer records would allow that person to also alter records to hide the theft. The alteration to
the records could include deleting the sale or writing off the sale as a bad debt.

135. What is the purpose of a credit memorandum?


Answer: The credit memorandum documents the fact hat a customer has returned goods. The
credit memorandum is also used to reduce the customer’s receivable account balance based upon
the return of goods.

136. How are sales invoices used (in a manual system) in the preparation of credit memos?
Answer: The sales invoice is matched to the receiving report that results from returned goods.
This match is necessary to verify the fact that the merchandise was in fact sold to the customer,
and to verify the selling price that should be refunded.

137. How can a security guard in a warehouse be considered an important component of a


company’s accounting system?
Answer: Internal controls over asses should include physical controls to prevent theft or misuse.
For example, cash should be locked in a safe to prevent the theft of cash. Likewise, a security
guard can help prevent theft or misuse of assets. This internal control would not prevent all theft,
but would help reduce any theft.
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138. How could fraud be perpetrated through the sales returns process?
Answer: In the absence of good internal controls, there are several types of fraud that could
occur in sales returns. These include: 1) customers returning goods not originally purchased from
the company, 2) customers requesting a refund higher than the original sales amount, 3)
requesting refunds for goods that were never returned, but submitting false documentation of a
return, and 4) theft of returned goods by an employee.

139. Identify and distinguish between the three types of IT systems used in the sales process.
Answer: The three types of IT systems described are EDI, Internet EDI, and point of sale
systems. EDI and Internet EDI are used in company to company sales of goods and services. In
EDI systems, the buyer and seller computer systems are connected and order data is exchanged
electronically. EDI typically uses a value added network (VAN), while Internet EDI uses the
internet to exchange data. Internet EDI is usually much more cost effective than EDI because the
exchange via the Internet can be cost free. A POS system is used in end consumer sales such as
retail stores and restaurants. A POS system usually is a touch screen, or bar code system at the
cash register that records the sale and updates the appropriate cash, sales, and inventory
accounts. All three systems are IT enablement of the sales process and they each improve the
efficiency and effectiveness of sales processes.

140. Distinguish between B2B sales and B2C sales.


Answer: Other than those presented in this chapter, name a company from your personal
experience that uses B2C sales. B2B sales are IT enabled sales between two businesses. B2C
sales are IT enabled sales between a business and an end consumer. A student could mention
any online retailer, online bank, online broker, airline, or travel agent as examples of B2C.

141. List the advantages of e-commerce systems.


Answer: The advantages are reduced costs, shorter sales cycles, increased accuracy and reliability
of sales data, and an increase in the potential market.

142. Identify two of the biggest risks to companies who use e-commerce, along with controls to
prevent these risks.
Answer: Two of the business risks of e-commerce would be availability and security. If a
company relies on online sales extensively, any failure in the hardware or software may make the
online sales system unavailable and this causes lost sales. These lost sales can at times be very
large losses. Unauthorized access or hackers represent a big risk to e-commerce. Placing sales
online opens the company to unauthorized access and hacking, and therefore potential loss or
destruction of data.

143. What controls should a company implement to ensure consistency of sales information between
the front end and back end of its systems?
Answer: Reconciliations and verifications are important in the integration of front end and back
end systems. As data moves from a front end system, such as an online sales system, to a back
end system, such as warehouse systems, a reconciliation or verification can insure the data was
transmitted between systems accurately.

144. Why is a redundant server system needed in an e-commerce environment?


Answer: Availability is extremely important in e-commerce systems. Any failure of the system
represents lost sales because the system is not available for customer use. A large e-commerce
company could lose thousands of dollars in sales from a two or three hour downtime.
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145. Question not available.

146. What are the three components of an EDI system?


Answer: The three component parts are: 1) intercompany transfer, indicating the sale/purchase is
between two companies; 2) computer to computer, indicating the computer system of the two
companies are connected; and 3) a standard format for business documents to facilitate the
intercompany transference of electronic documents.

147. What are the three standard parts of an EDI data transmission?
Answer: Header and trailer data, labeling interchanges, and data segments. Header data is data
about the file or transmission being sent. The header identifies the beginning and end of a
particular transaction data set. Trailer data is also data about the file or transmission and
identifies the end of a particular transaction data set. Labeling interchanges identify the type of
transactions in the set, such as a set of sales invoices. Data segments include the actual data
within the invoices, such as quantities and prices.

148. How could it be possible for two companies to conduct EDI if they are not directly connected
with each other?
Answer: Two companies could use a value added network (VAN) as a third party to serve as the
provider of electronic inboxes for EDI exchanges.

149. List the advantages of an EDI system.


Answer: The advantages are elimination of keying, keying errors, and the time needed for keying,
the elimination of mailing time and postage costs, reduction of inventory levels, and competitive
advantage and/or preservation of existing business.

150. What is the purpose of maintaining transaction logs? Why are they especially important in IT
systems?
Answer: Transaction logs serve as the audit trail of transactions processed by the computer.
Review of these logs can insure that transactions are lost or unaccounted for. The logs also help
insure a company can avoid repudiation of sales.

151. List some advantages of a POS system.


Answer: Advantages are: ease of use by employees, the elimination of manually entered data,
real-time access to prices and inventory levels, real-time credit card authorization, real-time
update of affected accounting records, immediate summaries and reports of sales and cash, and
integration with the general ledger accounts.

152. Why are backup systems one of the most important controls for POS systems?
Answer: A system failure in a POS system would interrupt or halt sales. Such lost sales can be a
large dollar amount and there could be future lost sales if customers become irritated by the
system failures. To avoid these failures and the resulting lost sales, a company should maintain
some type of backup system.

153. Describe a popular fraud scheme where company employees misuse the sales revenues cutoff.
Answer: This is called leaving sales open. It counts sales from the first few days of the next
month in the current month, and thereby inflates sales.
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TEST BANK – CHAPTER 8 – SHORT ESSAY

154. Describe what is likely to occur if company personnel erroneously recorded a sales transaction
for the wrong customer? What if a cash receipt was applied to the wrong customer? Identify
internal controls that would detect or prevent this from occurring.
Answer: If the sale is attached to the wrong customer, the wrong customer would be billed and it
may cause both the wrong customer and the correct customer to have a negative opinion about
the company. In addition, if the company does not maintain adequate documentation, it may be
difficult to determine which customer should be billed. Therefore, the company may not be able
to collect the cash they should have collected. If a cash receipt is applied to the wrong customer,
then two customer balances will be erroneous. The company would continue to bill the customer
who paid, while not billing the correct amount to the wrong customer. Without adequate
documentation, it would be difficult to correct this situation. The internal controls that would
help prevent these errors are maintaining adequate documentation, including source documents
such as sales orders and remittance lists; the matching of key documents before recording;
reconciliations and verifications of invoices to receivables; and supervision.

155. Debate the logic used in the following statement: “The person responsible for handling cash
receipts should also prepare the bank reconciliation because he is most familiar with the
deposits that have been made to the bank account.”
Answer: It is true that if a person could be absolutely trusted to do both duties, it may be more
efficient. However, having both duties provides opportunity and temptation for that person to
steal cash and cover up the theft. In addition, a single person doing both duties might make an
error affecting both the receipts and reconciliation. Segregating these duties may slightly
decrease the efficiency of bank reconciliations, but the positive benefits of fraud prevention or
detection and error detection outweigh any efficiencies.

156. Revenue systems are crucial in the healthcare industry, where hundreds of billions of dollars are
spent annually reconciling revenues and billing data from the perspectives of providers (doctors
and clinics, etc.) and payers (insurance companies). Briefly describe how EDI would be
beneficial in this industry. Describe the purpose of the header data and trailer data. In an EDI
system, the computer systems of the biller and payer are connected and they would greatly
speed up the billing and paying process, as well as decrease the errors in the process.
Answer: Without EDI, the would be keying errors, delays related to keying data and mailing bills
and payments. The header and trailer data identify the transaction data set so that the two
computer systems can insure the correct transaction data is matched. The header and trailer also
identify the beginning and end of a transaction data set.
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157. Use the process maps in this chapter to answer the following questions:
a. What would a credit manager do if a sales order received caused a customer to exceed its
credit limit?
b. What happens after the shipping department verifies that the quantities and descriptions of
goods prepared for shipment are consistent with the sales order
c. What would an accounts receivable clerk do if a $100 credit memo is issued to a customer
whose accounts receivable balance is $1,000
d. When is it necessary for an accounts receivable clerk to notify a customer
Answer:
a. What would a credit manager do if a sales order received caused a customer to exceed
its credit limit? The sale should be disapproved (rejected).
b. What happens after the shipping department verifies that the quantities and
descriptions of goods prepared for shipment are consistent with the sales order? The
goods are shipped, an invoice is prepared and mailed; the following records are
updated: sales, general ledger; and a month end statement is prepared and mailed to
the customer.
c. What would an accounts receivable clerk do if a $100 credit memo is issued to a
customer whose accounts receivable balance is $1,000? The clerk should first check to
make sure of the balance. Then, that customer’s balance would be decreased to $900.
b) When is it necessary for an accounts receivable clerk to notify a customer? An accounts
receivable clerk would not need to notify customers.

158. Describe how the matching of key information on supporting documents can help a company
determine that its revenue transactions have not been duplicated.
Answer: For any sale, return or cash transaction, only one set of matching documents should
exist. Once the documents are matched and recorded for a particular transaction, they should be
filed as a completed transaction. Thus, that same transaction would not be recorded again since
the source documents are filed.

159. Describe how the use of pre-numbered forms for receiving reports and credit memos can help a
company determine that sales return transactions have not been omitted from the accounting
records.
Answer: When pre-numbered forms are used, it is much easier to insure that the entire series of
transactions have been accounted for. Conversely, a missing number in the sequence of pre-
numbered documents is a clear indication that a transaction has been omitted. This may be
easier to understand if you think about what it would mean if your own personal check book
record was missing a check numbered 154.

160. Describe how a POS system could be useful to a company’s marketing managers. How could it
be useful to production managers?
Answer: A POS system can provide immediate feedback about product sales and inventory levels.
Therefore, a marketing manager can get immediate feedback about which products sell well,
which do not, and how price changes may affect sales of individual products. A production
manager could use the inventory level feedback to more appropriately plan when to produce
certain products.
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161. Briefly describe an example from your personal experience where you purchased something
from a company that uses a POS system. How might your experience have been different if the
POS system did not exist in the experience you described?
Answer: There are many possible experiences students could describe. Each student would
probably describe. Most often students see or use POS systems at fast food restaurants and
retail stores. Many students will have been employees who have used POS systems and may
have very good examples. In regards to the differences if the POS system did not exist, the
check out experience would be slower, thereby leading to longer lines, and more errors in the
process. Errors include incorrect prices and incorrect orders.

TEST BANK – CHAPTER 8 – PROBLEMS

162. In 1956, Gussepi DeLucca opened a pizza restaurant that he named DeLucca’s in St. Louis,
Missouri. Over the years, he opened both company and franchise locations and grew the
business to include over 40 restaurants that serve the three states around the St. Louis area. In
1993, DeLucca introduced a centralized phone ordering system with one phone number for
customers to use. This meant that the customer did not need to look up the phone number of a
local restaurant and call that restaurant to order. Rather, customers call one number and the
employees taking the order can determine the closest DeLucca’s location and process the order.
This system also centralized the pricing, ordering, and inventory systems for DeLucca’s. In
2004, DeLucca’s began offering online pizza orders through its Web site. DeLucca’s advertises
this Web ordering as more convenient for the customer. For example, its ads suggest that a
customer can examine the entire menu on the Web site prior to ordering; something that is not
possible with phone orders.
While there are many customer advantages of Web ordering, there are also many advantages to
the company. From an accounting and internal control perspective, describe the advantages of
DeLucca’s system, and any risks that it reduces.
Answer: Advantages: The Web ordering system provides the advantages of: cost savings through
lower marketing, employee, and paperwork costs; shorter sales cycles due to reduced time to
place an order, increased accuracy and reliability of the order data; and increased potential
market for the company’s products. Accordingly, DeLucca’s Web ordering system reduces the
risks of misplacing an order, filling an order incorrectly, losing a sale due to a long wait time, and
recording erroneous data due to errors in manual paperwork processing. Although some of these
advantages and risk reductions are also realized through the company’s centralized phone
ordering system, that phone system still involves manual processes to input customer orders, so
there remain some costs and risks associated with employees, accuracy, and wait times.
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163. You are the recent heir of $20,000 cash, with which you are considering opening a sushi bar in
the university community. You would accept cash and credit card payments, which would be
handled primarily by your servers. You also plan to offer introductory specials to attract
customers during the initial months of business. Identify some advantages and disadvantages
of investing in a POS system as part of this new business venture. What internal controls
should be implemented to reduce the risk of theft or error related to the handling of cash,
credit card payments, and coupons?
Answer: The advantages of investing in a POS system as part of a new business venture include
the following:
• Ease of use and ease of training servers. This is expected to lead to fewer errors and more
accurate sales and inventory data.
• Time savings related to the elimination of manual input processes. This includes increased
efficiency and reduced fraud related to processing of credit card payments from customers.
• Increased accuracy due to the real-time access to inventory and price data. For instance, if
the sushi bar’s daily special is sold out, that information can be immediately changed online so
that servers can quickly inform customers of the change.
• Enhanced accounting features such as real-time update of cash, sales, and inventory records,
immediate summaries and analyses, and the potential for integration with a general ledger
system will save manual steps and provide timely information for management purposes.
Despite these many advantages, a new business venture would need to be especially careful of
the extensive hardware and software costs that are necessary to support a POS system. In
addition, availability risks may be significant, as any hardware and software failures could make
the system unavailable and interrupt efficient business processes. Therefore, it is important that
a new business venture consider these risks, analyze the costs and benefits of the system, and
implement backup systems should be in place to reduce the availability risk.
In order to reduce the risk of theft or error related to the handling of cash, credit card payments,
and coupons, the sushi bar should be sure that its POS system includes all relevant payment
information, including options to enter the use of coupons and method of payment. In addition,
summaries can be provided immediately, so servers should be required to reconcile their
transactions at the end of their shifts.

164. Aaron Preswick is the owner of AP’s Instant Replay, a consignment shop for used sporting
goods. Aaron accepts consigned goods and offers them for sale to the general public. Aaron
rents business space, including a retail store where the consigned goods are displayed and sold,
with adjoining office space where an Internet site is maintained and other administrative
functions are performed. The Internet site includes photos and descriptions of items available
for sale worldwide. If the goods sell, Aaron’s consignment fee is 40% of the sale price, and
60% is remitted to the consignor. Shipping costs on electronic orders are paid by the
customers. Identify internal control considerations for the following:
a. the e-commerce portion of the business
b. the retail portion of the business, assuming that the accounting systems are mostly
manual and handled by Aaron and his wife.
Answer:
a. the e-commerce portion of the business. Internal control considerations associated with
e-commerce should address the risks of security and confidentiality, processing
integrity, and availability. Regarding security and confidentiality, Aaron should ensure
that customers accessing the website and conducting sales transactions are valid
customers with valid payment authorization and that transactions are logged so that an
audit trail is established to avoid repudiation. Regarding processing integrity, Aaron
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should be concerned with data input checks that verify the completeness, accuracy, and
validity of the data entered on the website. In addition, he should implement back-end
controls, such as reconciliations and verifications, to ensure the accuracy of information
taken from this system to the company’s accounting systems. Finally, Aaron should
implement controls to minimize service disruptions that could reduce sales.
Accordingly, he should implement controls for redundant systems, disaster recovery,
testing of software changes, and capacity planning and testing.
b. the retail portion of the business, assuming that the accounting systems are mostly
manual and handled by Aaron and his wife. The five internal control activities should
be considered with respect to the retail business and manual accounting systems
involving sales and cash collections. Even though segregation of duties will be difficult
considering that only Aaron and his wife are operating the business, they can perform
business processes in a manner to promote good control. For instance, they can check
each other’s work in instances where they are performing incompatible duties involving
combinations of custody and record keeping. They can ensure that prices are properly
authorized by consignors and credit card payments are authorized at the time of the
sale. Thorough documentation (such as detailed sales receipts) should be maintained
and accounted for purposes of performing reconciliations and supporting the general
ledger. Also, physical controls should be in place at the retail store in order to protect
the company’s assets and records.

165. Identify an internal control procedure that would reduce each of the risks that follow in a
manual system. Also describe how (or if) an IT system could reduce these risks.
Answer: Student responses may vary, as more that one control may apply to risk reduction in
these circumstances. However, following are some likely answers:
a. Revenues may be recorded before the related shipment occurs. Shipping
documentation should be matched with sales order data and presented to the billing
department as the basis for recording the sale and preparing the bill. The IT system
can perform an automatic match whereby shipping data are required as a basis for
recording the revenue.
b. Employees responsible for shipping and accounts receivable may collude to steal goods
and cover up the theft by recording fictitious sales. To prevent this type of problem,
sales orders should be reviewed for proper customer and authorized by an independent
member of management prior to shipment. The IT system can include validity checks or
other controls that require a valid customer in order for the transaction to be recorded.
In addition, reconciliation procedures can compare manual documentation with system
records to determine that valid transactions are recorded. If the collusion involves
recording the fictitious sale in the account of a valid, existing customer, the process of
sending sales invoices and customer statements, and the subsequent reconciliation
procedures, would be important for uncovering this type of fraud.
c. Credit memos may be issued at full price, when the goods were originally sold at a
discount. Original sales documentation, including key information such as original sales
price, must be required as a basis for preparing credit memos. An IT system could
automatically match credit memo authorizations with the original sales data so that the
credit would be issued at amounts that are consistent with the original sale pricing.
d. Sales invoices may contain mathematical errors. Independent checks of sales invoices
should occur before the customer is billed. This includes verification of mathematical
accuracy. If an automated system is in place, the IT system can perform mathematical
computations at a great time savings.
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e. Amounts collected on accounts receivable may be applied to the wrong customer.


Customer account statements should be sent on a regular basis so that customer
records can be reconciled to the company’s records. This is likely to detect a
misapplication of a customer collection. An IT system could enhance the process by
requiring cash receipts to be entered along with a customer account number as well as
an invoice number to ensure that the receipt is applied properly.
f. Duplicate credit memos may be issued for a single sales return. A comparison of the
receiving log with the credit memo listing would indicate if duplicate credit memos have
been issued for a single sales return. An IT system could also prevent this risk by
requiring that credit memos be generated only upon entering key information from the
original sale and blocking the issuance of another credit memo for an item for which
credit had already been issued.
g. Sales invoices may not be prepared for all shipments. Shipping records should be
compared with the sales invoices records. This may be done through the verification of
the sequence of shipping documents to ensure that an invoice was prepared for each
item shipped. An IT system may enhance this process by matching shipping document
numbers with invoices, and preparing a warning report for any instances of unmatched
shipping documents.
h. Shipments may contain the wrong goods. Companies should require the matching of
key information on related documents prior to shipment. This includes inventory
quantities and descriptions on approved sales orders and packing lists. An IT system
may make this process more efficient by performing the match automatically; it can
verify whether product numbers and quantities on the sales orders match those on the
shipping documentation.
i. All sales transactions may not be included in the general ledger. A regular reconciliation
should be performed to compare the sales journal with the amounts recorded in the
general ledger. An IT system may perform a periodic automatic post of the sales journal
to the general ledger, thereby eliminating the potential for missing sales transactions.

166. The following list presents various internal control strengths (S) or risks (R) that may be found
in a company’s revenues and cash collection processes.
____ Credit is authorized by the credit manager.

____ Checks paid in excess of $5,000 require the signatures of two authorized members of
management. (Although this is viewed as an internal control strength, it is not
applicable to the revenues processes.)

____ A cash receipts journal is prepared by the Treasurer’s department. (This type of
accounting record should be prepared by those with recordkeeping responsibilities
rather than those in a position to perform reconciliations of the cash records.)

_____ Collections received by check are received by the company receptionist, who has no
additional recordkeeping responsibilities.

_____ Collections received by check are immediately forwarded unopened to the accounting
department. (This would place the accounting department in an incompatible role
combining recordkeeping and custody of cash.)

______ A bank reconciliation is prepared on a monthly basis by the Treasurer’s department.


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_____ Security cameras are placed in the shipping dock.

_____ Receiving reports are prepared on pre-printed, numbered forms.

_____ The billing department verifies the amount of customer sales invoices by referring to
the authorized price list. (This price authorization role should be performed before
billing. An approved sales order, including verified prices, should be in place at the time
the documents reach the billing department.)

_____ Entries in the shipping log are reconciled with the sales journal on a monthly basis.

_____ Payments to vendors are made promptly upon receipt of goods or services. (Vendor
payments relate to the expenditures processes rather than the revenues processes.)

_____ Cash collections are deposited in the bank account on a weekly basis. (If cash receipts
occur daily, they should be deposited promptly – preferably on a daily basis.)

_____ Customer returns must be approved by a designated manager before a credit memo is
prepared.

_____ Account statements are sent to customers on a monthly basis.

_____ Purchase returns are presented to the sales department for preparation of a receiving
report. (Receiving reports should be prepared promptly upon receipt of returned items.
This should be done in the receiving area, where the personnel have a custody
function, rather than in the sales department, where the personnel initiate sales
transactions.)
Answer:
__S__ Credit is authorized by the credit manager.

_N/A_ Checks paid in excess of $5,000 require the signatures of two authorized members of
management. (Although this is viewed as an internal control strength, it is not
applicable to the revenues processes.)

__R__ A cash receipts journal is prepared by the Treasurer’s department. (This type of
accounting record should be prepared by those with recordkeeping responsibilities
rather than those in a position to perform reconciliations of the cash records.)

__S__ Collections received by check are received by the company receptionist, who has no
additional recordkeeping responsibilities.

__R__ Collections received by check are immediately forwarded unopened to the accounting
department. (This would place the accounting department in an incompatible role
combining recordkeeping and custody of cash.)

__S___ A bank reconciliation is prepared on a monthly basis by the Treasurer’s department.

__S__ Security cameras are placed in the shipping dock.


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__S__ Receiving reports are prepared on pre-printed, numbered forms.

__R__ The billing department verifies the amount of customer sales invoices by referring to
the authorized price list. (This price authorization role should be performed before
billing. An approved sales order, including verified prices, should be in place at the time
the documents reach the billing department.)

__S__ Entries in the shipping log are reconciled with the sales journal on a monthly basis.

_N/A_ Payments to vendors are made promptly upon receipt of goods or services. (Vendor
payments relate to the expenditures processes rather than the revenues processes.)

__R__ Cash collections are deposited in the bank account on a weekly basis. (If cash receipts
occur daily, they should be deposited promptly – preferably on a daily basis.)

__S__ Customer returns must be approved by a designated manager before a credit memo is
prepared.

__S__ Account statements are sent to customers on a monthly basis.

__R__ Purchase returns are presented to the sales department for preparation of a receiving
report. (Receiving reports should be prepared promptly upon receipt of returned items.
This should be done in the receiving area, where the personnel have a custody
function, rather than in the sales department, where the personnel initiate sales
transactions.)

167. Question not available.

168. Question not available.


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169. Following are ten internal control failures related to the revenues and cash collection processes.

_____ A customer ordered 12 boxes of your product (total of 144 items) for express shipment.
Your data entry clerk inadvertently entered 12 individual items.

_____ You enter sales and accounts receivable data in batches at the end of each week. Several
problems have resulted recently as a result of recording invoices to the wrong customer
account.

_____ In an effort to boost sales, you obtain some of the stock of unissued shipping reports and
create a dozen fictitious shipments. You submit these documents to the billing department
for invoicing.

_____ Checks are received by the mailroom and then forwarded to the accounts receivable
department for recording. The accounts receivable clerk holds the checks until the proper
customer account has been identified and reconciled.

_____ Several shipping reports have been misplaced en route to the billing department from the
shipping department.

_____ Several sales transactions were not invoiced within the same month as the related
shipment.

_____ A sales clerk entered a non-existent date in the computer system. The system rejected the
data and the sales were not recorded.

_____ Upon entering sales orders in your new computer system, a sales clerk mistakenly omitted
customer numbers from the entries.

______ A computer programmer altered the electronic credit authorization function for a
customer company owned by the programmer’s cousin.

_____ Customer orders were lost in the mail en route from the sales office to the accounting
department (located at the company’s headquarters).

Required:
Select one internal control from the following list that would be most effective in the prevention of
the failure. Indicate the letter of the control next to each failure above. Letters should not be
used more than once and some letters may not be used at all.

a. Pre-formatted data entry screens


b. Pre-numbered documents
c. Programmed edit checks
d. 100% check for matching of customer orders and sales orders
e. 100% check for matching of sales orders, pick list, and packing slips
f. 100% check for matching of sales orders and invoices
g. 100% check for matching of deposit slip and customer check.
h. Prompt data entry immediately upon receipt of customer order
i. Customer verification
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j. Independent authorization for shipments


k. Independent authorization for billing
l. Reasonableness check
m. Hash totals
n. Data back-up procedures
o. Program change controls
p. Sequence verification
q. Periodic confirmation of customer account balances
Answer:

__d__ A customer ordered 12 boxes of your product (total of 144 items) for express shipment.
Your data entry clerk inadvertently entered 12 individual items.

__q__ You enter sales and accounts receivable data in batches at the end of each week. Several
problems have resulted recently as a result of recording invoices to the wrong customer
account.

__f__ In an effort to boost sales, you obtain some of the stock of unissued shipping reports and
create a dozen fictitious shipments. You submit these documents to the billing department
for invoicing.

__g__ Checks are received by the mailroom and then forwarded to the accounts receivable
department for recording. The accounts receivable clerk holds the checks until the proper
customer account has been identified and reconciled.

__p__ Several shipping reports have been misplaced en route to the billing department from the
shipping department.

__h__ Several sales transactions were not invoiced within the same month as the related
shipment.

__c__ A sales clerk entered a non-existent date in the computer system. The system rejected the
data and the sales were not recorded.

__a__ Upon entering sales orders in your new computer system, a sales clerk mistakenly omitted
customer numbers from the entries.

__o___ A computer programmer altered the electronic credit authorization function for a
customer company owned by the programmer’s cousin.

__n__ Customer orders were lost in the mail en route from the sales office to the accounting
department (located at the company’s headquarters).

170. Brathert Company is a small company with four people working in the revenue processes. One
of the four employees supervises the other three. Some tasks that must be accomplished within
the revenue processes are the following:

a. Accounts receivable record keeping


b. Approving credit of customers
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c. Authorizing customer returns


d. Authorizing new customers
e. Billing customers
f. Cash receipts journal posting
g. Entering orders received
h. Inventory record keeping
i. Maintaining custody of cash
j. Maintaining custody of inventory
k. Reconciling records to the bank statement

Required:
For each of the four employees (supervisor, employee 1, employee 2, and employee 3), consider
the duties you would assign to each employee. In assigning duties, no employee should have
more than three tasks and there should be a proper separation of duties to achieve appropriate
internal control. List the four people, the duties you assigned to each employee, and a
description of why those assignments achieve proper separation of duties.
Answer:
Supervisor: b., c., and d. (all Authorization functions)
Employee 1: a., f., and h. (receivables, collections, and inventory Recordkeeping)
Employee 2: e., g., and k. (sales and billing Recordkeeping and cash reconciliation)
Employee 3: i. and j. (all Custody functions)

171. Refer to the ethics case regarding a mail order scenario presented as number 54 in Chapter 3.
What term introduced in this chapter applies to the type of mail order deceit described in that
case? What could the mail order company do to avoid a loss resulting from an event, assuming
that it uses an e-commerce system?
Answer: This type of mail order deceit is known as repudiation. The mail order company should
have controls in place to make sure that each sale is to a valid customer with valid payment
authorization and that an audit trail is maintained to avoid repudiation. Customer authentication
through user ID and password should be used, as well as transaction logs and data trails. In this
case, it may be most effective if the company uses digital signatures or digital certificates to
authenticate and validate a customer. The signature verification would also be important upon
delivery.