IT Concepts &

Systems Analysis
Revenue Cycle - Internal Control

What is common revenue cycle process?

What are the typical of internal controls

set-up in revenue cycle?

What internal controls are present in an

computer-based revenue cycle?
What is the revenue cycle?

Cash
Sales
Receipts/ order
Collection

Revenue Cycle
(Subsystem)
Billing/ Credit/
Accounts Customer
Receivable Service

Shipping
 What is the revenue cycle?

Cash
Receipts/ Sales order Sales Order process procedures include
Collection the tasks involved in:
1. receiving and processing a customer
order,
2. filling the order and
Revenue Cycle 3. shipping products to the customer,
4. billing the customer at the proper time,
(Subsystem)
Billing/ Credit/ and
Accounts Customer 5. correctly accounting for the transaction.
Receivable Service

Shipping
Sales Order Processing : Data Flow Diagram
Sales Order Processing : Process Flow Chart
Sales Order Processing : Process Flow Chart
 What are the important activities in each
subsystem?
Sales Order process procedures include the tasks involved in:
1. Receiving and processing a customer order
a) Begins with a customer placing an order.
b) The sales department captures the essential details on a sales order form.
c) The transaction is authorized by obtaining credit approval by the credit department.
d) Sales information is released to:
✓ Billing
✓ Warehouse (stock release or picking ticket)
✓ Shipping (packing slip and shipping notice)
 What are the important activities in each
subsystem?
Sales Order process procedures include the tasks involved in:
1. Receiving and processing a customer order
2. filling the order and
3. shipping products to the customer,
a) The merchandise is picked from the Warehouse and sent to Shipping. Stock records
are adjusted.
b) The merchandise, packing slip, and bill of lading are prepared by Shipping and sent to
the customer. Shipping reconciles the merchandise received from the Warehouse with
the sales information on the packing slip.
c) Shipping information is sent to Billing. Billing compiles and reconciles the relevant facts
and issues an invoice to the customer and updates the sales journal. Information is
transferred to:
✓ Accounts Receivable (A/R)
✓ Inventory Control
 What are the important activities in each
subsystem?
Sales Order process procedures include the tasks involved in:
1. Receiving and processing a customer order
2. filling the order and
3. shipping products to the customer,
4. billing the customer at the proper time, and
5. correctly accounting for the transaction.
a) A/R records the information in the customer’s account in the accounts receivable
subsidiary ledger.
b) Inventory Control adjusts the inventory subsidiary ledger.
c) Billing, A/R, and Inventory Control submits summary information to the General Ledger
dept., which then reconciles this data and posts to the control accounts in the G/L.
 What is the revenue cycle?

Cash
Receipts/ Sales order Cash Receipts process procedures include
Collection the tasks involved in:

1. receiving and securing the cash;

2. depositing the cash in the bank;
Revenue Cycle 3. matching the payment with the
customer and adjusting the correct
(Subsystem)
Billing/ Credit/ account; and
Accounts Customer 4. properly accounting for and reconciling
Receivable Service the financial details of the transaction.

Shipping
Cash Receipts Processing : Data Flow Diagram
Cash Receipts Processing : Process Flow Chart
 What are the important activities in each
subsystem?
Cash Receipt processes procedures include the tasks involved in:
1. receiving and securing the cash;
a) Customer checks and remittance advices are received in the Mail Room.
b) A mail room clerk prepares a cash prelist and sends the prelist and the
checks to Cash Receipts.
c) The cash prelist is also sent to A/R and the Controller.

Cash Receipts:
✓ verifies the accuracy and completeness of the checks
✓ updates the cash receipts journal
✓ prepares a deposit slip
✓ prepares a journal voucher to send to G/L
 What are the important activities in each
subsystem?
Cash Receipt processes procedures include the tasks involved in:
1. receiving and securing the cash;
2. depositing the cash in the bank;
3. matching the payment with the customer and adjusting the correct account; and
4. properly accounting for and reconciling the financial details of the transaction.
a) A/R posts from the remittance advices to the accounts receivable
subsidiary ledger. Periodically, a summary of the postings is sent to G/L.
b) G/L department:
a) reconciles the journal voucher from Cash Receipts with the
summaries from A/R
b) updates the general ledger control accounts
c) The Controller reconciles the bank accounts.
 Internal Control
System
The internal control system comprises policies, practices,
and procedures employed by the organization to achieve
four broad objectives
What are the different types of Internal Control applicable
for revenue cycle?
Chapter 3 defined six classes of
internal control activities that guide us
in designing and evaluating transaction
processing controls. They are
transaction authorization, segregation
of duties, supervision, accounting
records, access control, and
independent verification.
What are the different types of Internal Control applicable
for revenue cycle?
Transaction Authorization

The objective of transaction authorization is to

ensure that only valid transactions are processed.

a) Credit Check - Credit checking of prospective

customers is a credit department function.
This department ensures the proper
application of the firm’s credit policies. The
principal concern is the credit-worthiness of
the customer. In making this judgment, the
credit department may employ various
techniques and tests.
b) Return Policy - An approval determination is
based on the nature of the sale and the
circumstances of the return. The concepts of
specific and general authority also influence
this activity.
c) Remittance List - The cash prelist provides a
means for verifying that customer checks and
remittance advices match in amount. The
prelist authorizes the posting of a remittance
advice to a customer’s account.
What are the different types of Internal Control applicable
for revenue cycle?
Segregation of Duties

Segregating duties ensures that no single

individual or department processes a transaction in
its entirety. What are the three rules in identifying
activities to be separated?

1. Transaction authorization should be separate

from transaction processing.
2. Asset custody should be separate from the
task of asset record keeping.
3. The organization should be structured so that
the perpetration of a fraud requires collusion
between two or more individuals.
What are the different types of Internal Control applicable
for revenue cycle?
Supervision

Some firms have too few employees to achieve an

adequate separation of functions. These firms must
rely on supervision as a form of compensating
control. By closely supervising employees who
perform potentially incompatible functions, a firm
can compensate for this exposure.

Example of activity that requires supervision:

The mail room is a point of risk in most cash
receipts systems. The individual who opens the
mail has access both to cash (the asset) and to the
remittance advice (the record of the transaction).
What are the different types of Internal Control applicable
for revenue cycle?
Accounting Records

An audit trail that allows independent auditors to

trace transactions through various stages of
processing. This control is also an important
operational feature of well-designed accounting
systems. Sometimes transactions get lost in the
system. By following the audit trail, management
can discover where an error occurred. Several
specific control techniques contribute to the audit
trail.

By having the following documents might help in

maintaining adequate audit trail:
1) Prenumbered documents
2) Special Journal
3) Subsidiary Ledgers
4) General Ledgers
5) Specific files (temporary and permanent files)
as supporting evidences
What are the different types of Internal Control applicable
for revenue cycle?
Access

Access controls prevent and detect unauthorized and illegal

access to the firm’s assets. The physical
assets at risk in the revenue cycle are inventories and cash.
Limiting access to these items includes:
• Warehouse security, such as fences, alarms, and
guards.
• Depositing cash daily in the bank.
• Using a safe or night deposit box for cash.
• Locking cash drawers and safes in the cash receipts
department

Information is also an important asset at risk. Access

control over information involves restricting
access to documents. Examples below are access risk that
needs internal control:
❑ An individual with access to the AR subsidiary ledger
could remove his or her account (or someone else’s)
from the books.
❑ Access to sales order documents may permit an
unauthorized individual to trigger the shipment of a
product.
❑ An individual with access to both cash and the general
ledger cash account could remove cash from the firm
and adjust the cash account to cover the act.
What are the different types of Internal Control applicable
for revenue cycle?
Independent Verification

The objective of independent verification is to

verify the accuracy and completeness of tasks that
other functions in the process perform. To be
effective, independent verifications must occur at
key points in the process where errors can be
detected quickly and corrected.

Physical procedures as well as record-keeping

should be independently reviewed at various
points in the system to check for accuracy and
completeness:
✓ shipping verifies the goods sent from the
warehouse are correct in type and quantity
✓ warehouse reconciles the stock release
document (picking slip) and packing slip
✓ billing reconciles the shipping notice with the
sales invoice
✓ general ledger reconciles journal vouchers
from billing, inventory control, cash receipts,
and accounts receivable
 How to automate Revenue Cycle?
Here are the following activities that can be automated for revenue process:

✓ Authorizations and data access can be performed through computer screens.

✓ There is a decrease in the amount of paper.
✓ The manual journals and ledgers are changed to disk or tape transaction and master files.
✓ Input is still typically from a hard copy document and goes through one or more
computerized processes.
✓ Processes store data in electronic files (the tape or disk) or prepare data in the form of a
hardcopy report.
 How to automate Revenue Cycle?

Computer-Based Accounting Systems is the technological innovation used for business

processing.

CBAS technology can be viewed as a continuum with two extremes:

✓ automation - use technology to improve efficiency and effectiveness. Too often,
however, the automated system simply replicates the traditional (manual) process that it
replaces.
✓ reengineering – use technology to restructure business processes and firm
organization. The objective of reengineering is to improve operational performance and
reduce cost by identifying and eliminating non–value-added tasks.
Example of Automated Batch Sales
Reengineering Sales Order Processing Using
Real-Time Technology

Manual procedures and physical documents are

replaced by interactive computer terminals.
Real time input and output occurs, with some
master files still being updated using batches.
• Real-time - entry of customer order, printout of
stock release, packing slip and bill of lading;
update of credit file, inventory file, and open
sales orders file
• Batch - printout of invoice, update of closed
sales order (journal), accounts receivable and
general ledger control account
 What internal controls can be put in place in CBAs?
• Authorization - in real-time systems, authorizations are automated
Programmed decision rules must be closely monitored

• Segregation of Functions - consolidation of tasks by the computer is common

Protect the computer programs
Coding, processing, and maintenance should be separated.

• Supervision - in POS systems, the cash register’s internal tape or database is an added form of
supervision

• Access Control - magnetic records are vulnerable to both authorized and unauthorized exposure
and should be protected
Must have limited file accessibility
Must safeguard and monitor computer programs

• Accounting Records - rest on reliability and security of stored digitalized data

Accountants should be skeptical about the accuracy of hard-copy printouts.
Backups - the system needs to ensure that backups of all files are continuously kept
• Independent Verification – consolidating accounting tasks under one computer program can
remove traditional independent verification controls. To counter this problem:
perform batch control balancing after each run
produce management reports and summaries for end users to review
Reference: Accounting Information Systems, James Hall