Internal Control Weakness and Related Recommendations of the Revenue and Receipts Cycle

#1 Unrestricted access to master files

Observation

The master files do not contain passwords and is open for all employees for recording.

Implication

Unrestricted access could facilitate fraud by allowing employees to change account balance to conceal
theft.

Recommendation

Management should ensure that the master file can only be accessed by the accountant.

#2 Sales order entry and credit approval functions are performed by the same person.

Observation

The employee approves changes in credit and takes customers orders.

Implication

He can increase credit limits for friends which may result to sales that are not collected.

Recommendation

Management should account for a person other than the one handling the sales to do a credit check.

#3 All forms of customers orders are accepted

Observation

Orders from new customers do not require any form of validation.

Implication

This may result in shipments that could go unpaid.

Recommendation

Management should require a written customer purchase order as confirmation of orders made thru the
telephone or digital signatures should be required for online orders of customers.

#4 Sales are made to customers who are unworthy of credit

Observation

Customer credit histories are not checked before approving orders.

Implication

This may result in excessive uncollectible accounts.

Recommendation

Management should ensure that customers’ credits are checked, and credit limits be established to control
the amount of credit offered.

#5 Perpetual inventory records are not up-to-date

Observation

The perpetual inventory records are only updated weekly.

Implication

This contributes to unexpected shortage that causes delays in filling customer orders.

Recommendation

Management should ensure that perpetual inventory records are updated every time goods are released
from the warehouse for shipment.

#6 Shipping goods to a customer but failing to bill that customer

Observation

The shipping clerk failed to give shipping notice to the billing department.

Implication

Shipments unbilled could potentially result to loss of revenue.

Recommendation

Management should ensure that customers are automatically billed for shipments and; that periodic
reconciliations of shipping documents, sales orders and sales invoices must be performed for review and
for corrective action.

#7 Credit memos are authorized for goods that are not returned

Observation

The company doesn’t require proper documentation and validation of sales returns prior to the issuance of
credit memos.
Implication

This results to understatement of inventory and overstatement of sales returns.

Recommendation

Management should ensure that a receiving report is required before a credit for sales returns is issued.

#8 Custody of cash and maintenance of Accounts Receivable records are handled by the same
person

Observation

The cashier has access to the accounts receivable records.

Implication

This cashier could steal cash and cover up the shortage by making adjustments to the accounts receivable
records.

Recommendation

Management should ensure that cash is handled by an employee who does not have access to accounts
receivable records.

#9 Delay in deposit of payments

Observation

Cashier does not deposit checks promptly.

Implication

This could result to possible loss of checks and interest.

Recommendation

Management should ensure that all checks received are deposited immediately.

#10 Shipping errors

Observation

Shipping clerk does not reconcile physical items and stock release forms from the warehouse with the
sales orders and shipping notice from the sales department.

Implication

Dissatisfaction of customers and lost sales may occur if customers are shipped the wrong items or there is
delay in receipt of items.
Recommendation

Management should ensure that the shipping clerk reconciles the physical items with stock release,
packing slip and shipping notice to verify if the orders are correct before shipment to customers.

Sources

Narvaez, G. (2018). Revenue and Receipt Cycle Power Point

Ng, M. (2013). Auditing and Assurance Principles, Standards and Fundamentals

Wagley, A. (2011). The Revenue Cycle: Sales and Cash Collections. Retrieved from
https://www.scribd.com/doc/85200356/raisl2-sm-CH12