KEY TERMS two general areas of responsibility are performed packing slip - document that travels with the
d packing slip - document that travels with the goods
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
independently.
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
to the customer to describe the contents of 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 17. Discuss the two common methods of
laser light scanner foolproof against inaccurate achieving multilevel security in a system.
updates? Discuss. Two methods for achieving multilevel
First, the checkout clerk scans the security are the access control list (ACL) and role-
universal product code (UPC) label on the items based access control (RBAC). Through these
being purchased with a laser light scanner. The techniques, purchasing, receiving, AP, cash
scanner, which is the primary input device of the disbursement and general ledger are limited in their
POS system, may be handheld or mounted on the access based on the privileges assigned to them.
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.