CHAPTER 4

THE REVENUE CYCLE

REVIEW QUESTIONS
 Chapter 4 page 131

1. A customer order usually in the form of a purchase order initiates the sales

process.

2. The packing slip travels with the goods to the customer, and it describes

the contents on the order. Upon filling the order, the shipping department

sends the shipping notice to the billing department to notify them that the

order has been filled and shipped. The shipping notice contains additional

information that the packing slip may not contain, such as shipment date

and carrier and freight charges. The bill of lading is a formal contract

between the seller and the transportation carrier; it shows legal ownership

and responsibility for assets in transit.

3. The receiving department counts and inspects items that are returned by

customers. The receiving department prepares a return slip, copies of

which go to the warehouse for restocking, and to the sales order

department so that a credit memo can be issued to the customer.4. The

general ledger clerk receives a total of all sales from the billing

department in the form of a summary journal voucher. The accounts

receivable department sends an account summary of the individual

accounts receivable so that the accounts receivable control account can

be verified against the accounts receivable ledger. The inventory control

department sends summary information in the form of a journal voucher

that reflects the total reductions of inventory in financial terms and the

associated charges to cost of goods sold.

5. a. credit checks
 Chapter 4 page 132

b. returns policy for granting cash refunds and credits, and

c. cash prelists providing verification that customer checks and

remittance advices match in amount.

6. The three rules that ensure segregation of functions are:

a. Transaction authorization should be separate from transaction

processing.

b. Asset custody should be separate from asset record keeping.

c. The organization structure should be such that the perpetration of a

fraud requires collusion between two or more individuals.

7. a. Shipping department—verifies that the correct amount and types of

goods are sent from the warehouse by reconciling the stock release

document and the packing slip.

b. Billing department—reconciles the shipping notice with the

invoice to ensure that customers are appropriately billed.

c. GL clerks—reconcile journal vouchers from various departments

such as the billing department, the accounts receivable department,

and inventory control

 Chapter 4 page 133

8. The purpose of physical controls is to control the actions of people.

9. Once an item is on order, control should be in place to ensure that it is not

ordered again until the original order has been received from the supplier.

By entering a value (e.g., the number of items ordered) in the on-

order field of the inventory record. This field has a value of zero when the item in

question is not on order.

10. 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. 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. 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.

 Chapter 4 page 134

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. 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. 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. EDI was devised to expedite routine transactions between manufacturers

and wholesalers, and between wholesalers and retailers. An added benefit

is the reduction of clerical errors.

16. Cash and inventory.

 Chapter 4 page 135

17. Billing occurs after the product is shipped to the customer.

18. A billing of lading is a formal contract between the seller and the shipping

company (carrier) to transport the goods to the customer.

19. The billing process is initiated by the shipping notice, which signals the

shipment of the goods to the buyer.

20. Supervision plays an important role in the mail room where both the check

(asset) and remittance advice (accounting record) 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.

 Chapter 4 page 136

DISCUSSION QUESTIONS

1. 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.

 Chapter 4 page 137

2. 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
 Chapter 4 page 138

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.

 Chapter 4 page 139

3. 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 mail room 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. 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. 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.

 Chapter 4 page 140

6. 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. 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. The Internet is rapidly becoming a popular source for information

gathering, price comparison, and the purchase of products. The Internet

may be used to allow buyers to submit orders through the Internet. Until

intelligent agents are commonly used, this type of transaction will occur

with a lag.

9. Accounts receivable may be overstated because allowance for doubtful

accounts is understated due to poor credit policy. Bad debt expense

may be understated.

10. Lock on the cash drawer. Internal cash register tape that can be

accessed only by the manager. Physical security over the inventory.

The following are examples: Steel cables to secure expensive leather

 Chapter 4 page 141

coats to the clothing rack. Locked showcases to display jewelry and

costly electronic equipment. Magnetic tags attached to merchandise,

which will sound an alarm when removed from the store.

Note to Instructor: Some physical security devices could also be classified as

supervision.

11. The advantage of real-time updating is that the general ledger would be

current after every transaction. The tradeoff is a potential decline in

operating efficiency, depending on the volume of transactions processed

by the system.

12. If credit is denied, the sales clerk should not be able to force the

transaction to continue. However, to allow for operational flexibility in

unusual circumstances, the system provides a management override

option that may only be performed by a supervisor. Any such overrides

should be fully documented in the credit history record and in

management reports.
 Chapter 4 page 142

13. All of the record keeping functions, which in the basic technology system

were performed manually by accounting clerks, are automated in the

advanced technology system. In the advanced technology system, a

computer application, which is not influenced by situational pressures,

opportunities, and ethical shortcomings, decides which accounts to update

and by how much. By eliminating the human element from such

accounting activities, the potential for errors and opportunity for fraud are

significantly reduced. Also, since these are labor-intensive activities,

automating them greatly improves efficiency of operations.

14. 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.

15. No, the bar-codes are not read with 100% accuracy. Another potential

error can occur if the wrong bar-coded stickers are attached to the

merchandise, which can occur in some discount retail stores that do not

update the database; they just print out bar-coded stickers and attach

them to the merchandise. Devious customers may switch stickers on price

tags.
 Chapter 4 page 143

16. EDI represents a unique business arrangement between the buyer and

seller in which they agree, in advance, to the terms of their relationship on

such items as selling price, quantities, delivery times, payment terms and

methods of handling disputes. The terms of agreement are binding. One

problem is ensuring that only valid transactions are processed. Another

risk is that a non-trading partner will masquerade as a trading partner and

access the firm’s processing systems.

17. Two common methods for achieving multilevel security are the access

control list (ACL) and role based access control (RBAC). The ACL method

assigns privileges, such as the right to perform computer program

procedures and access data files, directly to the individual. In large

organizations with thousands of employees, this can become a

considerable administrative burden as access needs constantly change

with changes in job responsibilities. RBAC involves creating standard

tasks (e.g., cash receipts processing) called roles. Each role is assigned access

privileges to specific data and procedures, such as the right to add a record to

the cash receipts journal. Once a role is created, individuals are assigned to it.

Using this technique, individuals may be easily added or deleted from roles as

their job responsibilities change. Individuals assigned to a particular role may not

access program procedures and data that are not specified by that role.
 Chapter 4 page 144

MULTIPLE CHOICE

1. C

2. A

3. A

4. C

5. B

6. D
 Chapter 4 page 145

7. C

8. E

9. A

10. D
 Chapter 4 page 146

PROBLEMS

1. System Description and Internal Controls

a. Prepare a flowchart of the cash receipts procedures described

 Chapter 4 page 147

b. Describe the risks, if any,that are inherent in the current system

configuration.

1) Risk of Cash misappropriation in mailroom fraud (skimming)

2) Risk of cash misappropriation by skimming, lapping, or other forms of larceny

in the AR department

3) Risk of incorrect record keeping in the AR Department

c. Describe the controls, if any, that are needed to reduce or eliminate the

risks identified in (b) above.

1) Supervision in the Mailroom is inadequate with one supervisor overseeing 40

clerks. This span of control can be reduced by having customers submit their

payment to a separate POX address. The US mail service will then pre-sort and

separate cash receipts from the general mail. The smaller number of cash

receipts can then be processed in a smaller mailroom area where fewer clerks

who work exclusively with cash receipts can be more effectively supervised.

2) A remittance list should be prepared under supervision in the mailroom.

Remittance Checks should be separated from remittance advices in the

mailroom and not go to the AR department.

3) The AR department should not have access to general ledger accounts.

 Chapter 4 page 148

2. INTERNAL CONTROLS AND FLOWCHART ANALYSIS

 No credit check is performed.

Billing clerk should not record sales in the Sales Journal before the economic

event (shipping the goods) has occurred.

 Billing department bills customer before the goods are shipped

and without confirmation of shipment and quantity shipped. A

shipping notice should trigger the billing process.

 Warehouse clerk, who controls the physical inventory, should

not also maintain the inventory subsidiary records.

 Warehouse clerk updates the Inventory subsidiary ledger and

the GL Inventory Control.

 Accounting clerk updates AR subsidiary, and various GL

accounts.
 Chapter 4 page 149

IT Controls for a centralized integrated system should include:

3. FLOWCHART ANALYSIS

a. Cash prelist or remittance list

 Chapter 4 page 150

b. Cash Receipts department

c. Post to Cash Receipts Journal and deposit checks

d. Bank

e. Cash Receipts Journal

f. Accounts Receivable Department

g. Update AR

h. Accounts Receivable file

 Chapter 4 page 151

4. SEGREGATION OF FUNCTIONS

All are proper segregation of functions except b. The sales department should

not be allowed to approve credit memos since it could potentially overstate sales

in one period to meet quotas and boost bonuses and reverse them in a

subsequent period. The receiving report indicating that goods have been

received by the receiving department should be the source document for credit

memos and it should be authorized by someone independent of the sales

department.
 Chapter 4 page 152

5. RISKS AND INTERNAL CONTROLS

Risks Control Weaknesses

Sales to un-creditworthy customers Sales clerk approves credit

Inaccurately recording the sales Sale is recorded when the sales clerk

transactions in journals takes the order rather than after it is

shipped.

Misappropriation of cash Accounting department clerk has

access to the cash, the remittance

advice, the AR sub – ledger, and the

General ledger. Opportunity for

embezzlement such as lapping

Mailroom span of control is wide (32

employees) for a single supervisor.

This inhibits close supervision. The

mailroom clerks, with access to the

cash and remittance advices, have

an opportunity to commit mailroom

fraud.
 Chapter 4 page 153

Shipping customers the wrong items Warehouse / shipping are combined

allowing for no reconciliation between

what is picked and what is ordered

and shipped.

Misappropriation of inventory
Warehouse clerk has custody of

inventory and the inventory sub -

Ledger

6. INTERNAL CONTROL EVALUATION

A) Sales clerk should not record sales in the Sales Journal

before the economic event (shipping the goods) has occurred. Billing

should perform this role.

 No credit check is performed.

 Billing department bills customer before the goods are shipped

and without confirmation of shipment and quantity shipped. A

shipping notice should trigger the billing process.

 Accounts Receivable should not process cash receipts and

maintain the AR subsidiary records.

 Warehouse clerk, who controls the physical inventory, should

 Chapter 4 page 154

not also maintain the inventory subsidiary records.

 The general ledger department should receive journal vouchers

and account summaries from AR, Cash Receipts, Billing, and

Inventory control. Instead they inappropriately use source

documents to update GL accounts.

B)

The IT controls in a basic technology system such as this include the following:

7. STEWARDSHIP

a. Customer open order file Sales

b. Sales journal Billing

c. Journal voucher file General Ledger

 Chapter 4 page 155

d. Cash receipts journal Cash Receipts

e. Inventory subsidiary ledger Inventory Control

f. Acct Rec subsidiary ledger Accounts Receivable

g. Sales history file Sales

h. Shipping report file Shipping

i. Credit memo file Sales

j. Sales order file Sales

k. Closed sales order file Sales

8. CONTROL WEAKNESSES

a. Elaine performs many incompatible tasks. She opens the mail, deposits

all cash and check receipts, and keeps the accounts receivable

records. She could easily keep checks and alter the accounts

receivable to cover her theft. Furthermore, she records the bills, so she

could potentially bill a customer, not record it in the books and keep the

money when the check is received. Even more troublesome is the fact

that she handles the point of sale receipts and prepares the daily

deposits, which are a substantial amount of sales (30%). Elaine never

takes enough vacation time where anyone else can perform her duties

long enough to check the books. The employee who handles the

inventory and accounts payable function also has incompatible tasks.

This employee could be making payments to a family or friend for

inventory not received. The employee who handles all receipts,

 Chapter 4 page 156

stocking, and shipping of inventory is also performing incompatible

tasks and could be pilfering some inventory as it comes in and shipping

it to him or herself.

b. Close supervision is needed for the employee working in the receiving,

stocking, and shipping department. This employee needs to be kept

from stealing inventory. Close supervision should help this aspect.

Prenumbered shipping forms which must be accounted for may deter

this employee from shipping any goods to him or herself or friends. The

accounting function should be redistributed among the remaining two

employees and close supervision should be exercised at one time. One

possible reallocation of tasks would be:

Employee 1 Employee 2
record point of sale receipts prepare the daily cash deposits and

reconcile to daily cash sales

update the accounts receivable open the mail and make a list of all
 Chapter 4 page 157

account records incoming checks; prepare deposit

prepare the bills for accounts accounts payable

receivable
inventory general ledger
purchasing
payroll

This system is not perfect and close supervision is important.

 Chapter 4 page 158

9. INTERNAL CONTROL

Iris needs to consider whether she wishes to purchase one microcomputer

system or three. Assuming that she only wishes to purchase one microcomputer

for the central shop, she should definitely consider an accounting software

package that has an accounts payable and general ledger module. The purchase

of a payroll module will depend upon the number of employees paid each period.

Iris will need to determine if the time saved is worth the cost. The payroll module

may also help with year end forms such as W-2s and 1099s. Iris may also wish

to consider centralizing the purchasing function in order to obtain quantity

discounts by placing larger orders. If she wishes to do this, an inventory control

module may be appropriate. As the system is currently designed, Iris has no

good way to determine whether the managers are purchasing the right mix of

inventory items, nor whether they are being used efficiently. Floral shops,

because of the perishability of inventory and need to respond to unexpected

orders suddenly, may not lend themselves to centralized purchasing and/or

centralized inventory control.

If Iris wishes to purchase a computer for each store then, in addition to the

modules discussed above, she should consider purchasing software that can

process point of sale transactions and balance the cash receipts at the end of the

day. Inventory control software, which helps to track the profitability and spoilage

of certain items as well as to aid the managers in their purchasing decisions,

might be considered. The system could then provide summary reports for Iris so
 Chapter 4 page 159

that she may examine the inventory purchasing and usage decisions of the

managers. The cash receipts should provide better management over cash

receipts due to errors than a manual system, and if the correct controls are

included, then control may increase. For example, a notice might be placed over

the cash register that states “If you do not get a receipt from the computer, your

order is free.” The information system then will cut down on the possibility that a

customer may pay cash and the employee or manager keeps the money and

never rings up the sale.

Iris may be able to find software specifically designed for florists. She should

examine them to see if they will suit her partially decentralized management.

With the correct system, Iris should see increased control over cash receipts and

maybe even over inventory purchases and usage. A disadvantage is that the

managers may feel that they are being watched more closely and this may cause

some resentment.

10. INTERNAL CONTROL

a) Prepare a POS system flowchart for a restaurant (see following page)

b) Describe the risks inherent in the system and the physical and computer

controls needed to mitigate the risks.

 Chapter 4 page 160

Risk: Data input errors

Control: Input control edits to detect clerical errors and invalid entries

Risk: Theft of Cash through Coupon fraud. An employee should not be able to

ring up a sale at the coupon price for a customer without a coupon, then charge

the customer full-price and keep the difference.

Control: The manager should reconcile physical coupons with the number of

coupons entered into the system.

Risk: Theft of Cash through access to cash register

Control:

Supervision over the cash drawer by the manager.

If possible each cash register should be assigned to only one cashier during a

shift.

The internal tape should be reconciled with the cash drawer at the end of the

shift. The flowchart provided shows the procedures for reducing employee theft

of cash received.

Risk: Direct theft of food by employees and employees theft by giving away free

food to friends and relatives.

 Chapter 4 page 161

Control: The system should track all food items recorded as sold and the related

waste and compare with the materials used.

 Chapter 4 page 162

11. CONTROL WEAKNESSES AND RELATED RISKS

Refer to the system flowchart in the figure labeled Problem 11 in the text.

a. Discuss the uncontrolled risks associated with the system as currently

configured.

1) Risk of Cash misappropriation in mailroom (skimming) by clerk1 and

clerk2 before the remittance list is prepared.

2) Risk of cash misappropriation by lapping or other forms of larceny in

the AR department.

3) Risk of incorrect record keeping in the AR Department

b. Describe the controls that need to be implemented into the system to

mitigate the risks in (a) above.

1) Supervision over opening checks in the mailroom.

2) Remittance list should be prepared as soon as possible after the

envelopes are opened.

3) Checks should be separated from remittance advices in the

mailroom and not go to the AR department.

4) Segregation of duties. The AR clerk should not be responsible for

receiving checks and depositing them into the bank.

5) AR clerk should not have access to the general ledger accounts.

 Chapter 4 page 163

12. CONTROL WEAKNESSES AND RELATED RISKS

Refer to the system flowchart in the figure labeled Problem 12 in the text.

Required;

a. Describe the control weaknesses depicted in the system flowchart.

1. Sales clerk approves credit and processes the sales order

2. AR Clerk has Access to both the AR –Sub Ledger and the AR-

Control account in the general ledger.

3. Billing Clerk is billing the customer and recording the sale based on

the sales order without evidence that the goods were shipped.

4. The warehouse clerk has access to the inventory and the inventory

sub-ledger.

5. Shipping clerk does not prepare a shipping notice to notify the billing

function the goods were shipped

b. Discuss the risks associated with the control weaknesses in identified

(a) above.

1. Risk of selling to un-creditworthy customers is increased when the

sales clerk also approves credit.

2. Independent verification between the AR sub ledger and the AR

Control is lost when the AR clerk also updates the GL. This increases

the risk that transactions will be incorrectly recorded.

 Chapter 4 page 164

3. The billing clerk runs the risk that sales transactions will be

recorded in the wrong period because he or she does not know when

the products are shipped to the customer. Transactions that occur

towards the end of the period are at risk since the order may occur in

one period and the actual shipment takes place in the subsequent

period.

Also, since no shipping document is produced, the billing clerk does

not know the actual quantity shipped and may bill the customer for

items on back order. This situation increases the risk that customers

will be incorrectly billed.

4. The risk of inventory misappropriation is increased by allowing the

warehouse clerk to also maintain the inventory subsidiary ledger.

5. Failure to prepare a shipping notice increases the risk of transaction

recording errors. See 3 above for details.

 Chapter 4 page 165

INTERNAL CONTROL CASES

1. Solution Smith’s Market

a), b) See diagrams on the following pages.

c) Internal Control Weaknesses

1) Access to the cash drawers by sales clerks requires more

accountability. Each drawer is accessed by various clerks throughout
the day and cash may be withdrawn by any of them.

2) The internal cash register tape should be used as a control to

determine how much cash (including checks, and credit card vouchers)
should be in the register drawer.

3) The shift supervisor does not sign for the specific amount of cash
received or returned at the end of the day. He simply logs the drawers
in and out.

4) The treasury clerk is unsupervised in the counting of cash.

5) The treasury clerk has asset custody and responsibility for recording
sales and cash in the journal and General Ledger.

d)
Chapter 4 page 166
Chapter 4 page 167
 Chapter 4 page 168

2. Solution to Tight Lines Fishing and Camping

a, b, and d, see pages that follow

c) Internal Control Weaknesses. The following tie to the numbered circles on the
flowchart.

1) The sales clerk performs the credit check this is a segregation of duties
and transaction authorization problem.

Risk: Clerk may grant credit to non-creditworthy customers

2) Warehouse should not update the inventory subsidiary and General ledger
control accounts. Multilevel security controls are needed to provide a separation
of duties.

Risk: Clerk could steal inventory, adjust the subsidiary ledger, and adjust the GL
control account to cover the theft.

3) and 7) AR Clerk should not update the general ledger.

Risk: The ability to reconciliation the AR Sub Ledger and the AR Control account
is diminished when both are updated by the same person.

4) Billing and AR are combined.

Risk: This structure will mask discrepancies between what was billed and what
was recorded as a sale.

5) Supervision is needed in the mailroom.

Risk: Employees who open the mail have access to both cash and the remittance
advice. This increases the risk of mailroom fraud through skimming.

6) The cash receipts clerk has access to the assets (cash) and is responsible
for updating the general ledger.

Risk: The clerk could steal cash and adjust the cash account to cover the theft.
Chapter 4 page 169
 Chapter 4 page 170

Customer 20
Update A/R Subsidiary
A/R Ledger
Subsidiary
Remittance Advice 19 Remittance Ledger
& Remittance List Reconcile Advice
Check &
14 Docu-
Remittance
Prepare ments 21
Advice
Remitt- Update
ance General General Ledger
Lists Ledger

Checks &
Remittance
List

15 Signed Checks & 16 Signed Checks &

Reconcile Remittance List Prepare Deposit Slips
Bank
Docu- Deposit
ments Slip

Cash Receipts
Information

17
18
Update
Update
Cash
General
Receipts
Ledger
Journal

Cash Receipts General

Journal Ledger Bait ’n Reel Superstore Cash Receipts DFD
Tight Lines Cash Receipts System
DFD
Chapter 4 page 171
Chapter 4 page 172
 Chapter 4 page 173

Computer
Sales Operations Warehouse Shipping

Customer Inventory Printer

Records Credit A
History Stock
Release

Customer Stock
Credit & Release
Order
Inventory Printer
Check

Reconcile
Terminal Goods & Packing
Docs. Slip
Approved Pick Raw
Sales Orders
Mats. &
A Make Stock
Goods Release
Packing
Slip

Update
Records Stock
Release Bill of
File Lading 2
Bill of
A/R Subsidiary Lading 1
Inv. Subsidiary Ledger
Ledger

Sales
Journal
General Ledger

Carrier

Customer Manage.
Invoice Reports

Customer Management

Bait
Tight’n Reel Superstore
Lines RevisedRevised Sales Order
Sales System
System Flowchart
Flowchart
 Chapter 4 page 174

Mailroom Computer Operations Cash Receipts

Read & Printer

Customer Reconcile

Deposit
Check
Slip
Remit. Cash Receipts A/R Subsidiary
File Ledger Check
Advice

Machine General Ledger

Manage-
ment
Reports
Bank

Management

Tight Lines
Bait ’n Reel Revised Cash
Superstore Receipts
Revised System
Cash Receipts
System
Flowchart Flowchart
 Chapter 4 page 175

3. Solution to TVR Classics. a) and b) See diagrams on the following pages.

c) Internal Control Weaknesses

1) No credit check is performed before placing the order

2) The Sales Journal is updated before the goods are shipped. This can
result in sales being incorrectly matched to the period.

3) The warehouse clerk has access to inventory and also updates the
inventory ledger. The clerk may be capable of stealing inventory and
covering up the theft by adjusting the inventory records.

4) Mailroom clerk has access to both the remittance advice and the checks,
no remittance list is prepared. This weakness can result in mailroom fraud
through skimming cash and destroying the remittance advice.

5) AR clerk has access to both the checks and the remittance advices. This
can result in theft of cash through skimming or lapping.
 Chapter 4 page 176

Stock rel

Prepare SO Prepare Pick good Prepare

Stock rel
Sales Order Invoice and Update BOL and
Cust Ledger ship
Customer Order
Order
File Journal
Inventory Pack Slip,
Voucher BOL
Sales Journal
Invoice
Journal Voucher
Carrier

Summary
Update AR
Update GL GL

AR Ledger
Journal Bank
Check, Voucher
Remit Advice
Check
Update CR Check Deposit
Journal Check
Check, Deposit
Check, Remit
Advice Slip
Open Mail

Customer CR Journal

TVR Revenue
AV Safety Cycle
Revenue Cycle DFD
DFD
 Sales Department Billing Department Warehouse Shipping

Stock A
Sales Rep Sales Release Chapter 4 page 177
Order
2
Packing
Customer Slip
Order Pick Stock
Prepare Sales Goods Release
Invoice Journal

Prepare
Sales Stock Review /
Order Sales Journal Release Prepare
1 Invoice
Order Voucher BOL
3
Sales
Order Update
Stock
Packing Ledger
B Customer C Release
Slip
Stock
Inv Sub
Release
Ledger
A Customer
Order Stock
Release Packing
Slip
Inventory BOL
Summary

AV Safety Sales Order System Flow Chart Page 1

TVR Sales Order System C Carrier
 Chapter 4 page 178

Account Receivable General Ledger

B C
E

Sales Journal
Order Voucher
D
Inventory Journal
Summary Voucher
AR Sub
Update AR Ledger AR
Summary

Sales AR
Order Summary General
Update GL Ledger

Journal
Voucher
Inventory
Summary
Journal
Voucher
AR
Summary

TVR
AV Sales
Safety Order
Sales Order System Continued
System Flow Chart Page 2
 Chapter 4 page 179

Mail Room Accounts Receivable Cash Receipts

Customer Check
Check
Remit
Advice
Check
Remit
Advice AR Sub
5
Ledger
Update CR
Update AR Journal CR Journal
Open
Mail
4

Journal
Remit AR Voucher
Check Advice Summary
Remit
Advice

D E
Checks

Checks
Prepare
Deposit Checks
Slip Deposit
Slip
AV Cash Receipts System Flow Chart
TVR Cash Receipts Flowchart
Bank
 Chapter 4 page 180

d) Student responses will vary for this part of the assignment, but should address
the internal control issues identified above.
 Chapter 4 page 181

4. SOLUTION TO DISCOUNT TOOLS

a), b), d) See diagrams on the following pages.

c) Internal Control Weaknesses

1) Transaction is recorded in Sales Journal before goods are shipped.

2) Warehouse and Shipping functions are combined. This removes control

over picking and shipping the wrong products.

3) Mail room clerk should prepare a remittance list to control remittance

advices and checks

d) IT Controls
 Chapter 4 page 182

Invoice
File

Sales Order
Sales
Journal

Pick Goods
Approval
Receive Sales Order Sales
/Rejection
Customer Order
Check Credit Prepare Sales
Order
Order

Ship Notice
Sales Order
Customer Order

File
Batch Totals
Sales Order
Approval/ Reconcile and
Rejection Bill Customer
Customer
Sales Order

Batch Totals File

Update
Check
Post to Cash General Ledger
Rec Journal
Check
Remit Advice
Batch Totals

Receive Bank
Customer Check
Payment
Invoice Copy

Remit Advice
Update Accts
Receivable

Premier Sports Revenue Cycle DFD

Discount Tool DFD
 Chapter 4 page 183

Sales Department Central Computer Server Warehouse Billing Department

On Line Sales
Customer Orders On Line A
Sales Order
Order Credit Check Order
2

Sales Pick Reconcile B

Enter Sales System Goods
Order and
Prepare
Docs Sales
Prepares Order
B
Rejectio Sales Invoice
Sales Journal Sales
n or Order Ship Notice Order
Sales Invoice
AR Sub
Order BOL
CR Journal
1 Gen Ledger Packing
Enter Sales Slip
Order C
Order Customer
Rejection
Sales
Order Carrier

Customer
Prepare
Ship Notice
Sales
Order
Sales
Order B
Sales
Order

Premier Sports Revenue Cycle System Flowchart

A Discount
Page 1
Tools Sales Process Flowchart
 Chapter 4 page 184

Mail Room AR Department Cash Receipts Department

C
Check

Remit Remit Check

Invoice
Advice Advice

B Post to CR
B Update AR Journal
Open
and
Separate
Check
Invoice
Deposit
Remit
3 Remit
Advice
Slip
Advice

Bank

Check

Discount
PremierTools
Sports Cash
RevenueReceipts Process
Cycle System Flowchart Flowchart
Page 2
 Chapter 4 page 185

e) Student solutions to this part of the case will vary. The solution should

address the control issues identified in part C.

 Chapter 4 page 186

5. SOLUTION TO ABE PLUMBING

a), b) See diagrams on the following pages.

c) Internal Control Weaknesses

1) No Credit check is performed.

2) The sales clerk closes the open sales order causing the sale to be
recorded before the goods are actually shipped.
3) The warehouse clerk has asset custody and should not also update the
inventory records.
4) The shipping clerk does not reconcile the stock release with the original
order. This allows for the wrong items and or quantities to be shipped.
5) Customer is billed before the goods are shipped. Billing should be
triggered by shipping notice. Instead, the customer invoice is printed from
the closed sales order, which was prepared before the goods were
shipped.
Chapter 4 page 187
 Chapter 4 page 188

d) Flowchart of revised system

Student responses will vary for this part of the assignment. The following issues,

however, need to be addressed.

 The internal control problems already covered that need to be corrected in

the new system.

 Chapter 4 page 189

6. SOLUTION TO GREEN PRODUCTS GARDEN SUPPLY

a), b), See diagrams on the following pages.

c) Internal Control Weaknesses

1) No credit check

2) Inventory control function is performed by warehouse clerk.

3) Accounting department bills customer, updates the AR account, and

records sales in the Sales Journal thus reducing the opportunity to detect
discrepancies between total sales and AR postings.

4) Customer is billed before order is actually shipped

5) Remittance List should be prepared in the mailroom

6) No journal voucher prepared by cash receipts clerk.

 Chapter 4 page 190

GPG Supply Sales Process DFD

 Chapter 4 page 191

GPG Cash Receipts System DFD

 Chapter 4 page 192

GPG Sales Order Process Flowchart

 Chapter 4 page 193

GPG Sales Order System Flowchart Continued

 Chapter 4 page 194

Check

Dep Slip

GPG Cash Receipts System Flowchart

 Chapter 4 page 195

d) Flowchart of revised system

Student responses will vary for this part of the assignment. The following issues,

however, need to be addressed.

 Upgrade stand-alone computers to a networked environment

 The internal control problems already covered that need to be corrected in

the new system.

 Chapter 4 page 196

7. SOLUTION TO CUSTOM FABRICATIONS

a), b) and e) See diagrams on the following pages.

c) Internal Control Weaknesses

1. The customer should not be billed until the goods are shipped. The billing
process, however, is triggered in this system by the sales order, rather
than the shipping notice.

Risk: Billing before shipment occurs leads inaccurate record keeping and
the possibility of recording sales in the wrong period.
This activity can also damage customer relationships.

2. The billing process includes updating accounts receivable.

Risk: This prevents a meaningful independent verification between sales

and AR by the general ledger because both numbers are created in the
same function.

3. Asset custody should be kept separate from record keeping. In this

system, however, the warehouse clerk has custody of inventory and also
updates the inventory records.

Risk: The Warehouse clerk could steal inventory and cover the theft by
adjusting the inventory records.

4. The shipping department fails to reconcile the stock release with a sales
order copy or the packing slip.

Risk: The wrong product or quantities could be shipped to the customer.

The shipping function serves as an important independent verification
checkpoint and is the last control point to determine if the order is correct
before the goods change hands.

5. The General ledger function updates the cash account and AR control
account from a remittance list. It should receive a journal voucher from
the cash receipts function and a summary of the AR subsidiary. The
journal voucher plays an important audit trail role.

Risk: The GL accounts may be corrupted with unauthorized transactions.

 Chapter 4 page 197

Customer Invoice Sales Details Sales Journal

Customer Order Copy

Customer Order
Update Accounts
Sales Order Copy 1 Bill Customer Invoice Copy Amount, Date AR Subsidiary
Receivable

Receive Order Sales Order Copy 3

Update Accounts
Summary of Sales Journal and AR Subsidiary
Receivable

Sales Order Copy 2

Schedule Production Order 2 Open
Production Order 1
Production Materials Requisition Production File

Open Sales
Order File Voucher

Production Order 2
Materials Requisition

Produce Goods Materials Used Update Inventory

Revenue Cycle DFD Production Order 2 Store Goods

Item, Quantity

CUSTOM FABRICATIONS
Inventory
Subsidiary
Stock Release

Bill of Lading Copy 3 Ship Goods Shipping Details Shipping Log

Carrier Bill of Ladings 1 & 2, Packing Slip

 Chapter 4 page 198

Cash Amount

Open Mail, Prepare Update General

Customer Check, Remittance Advice Remittance List 3 Posting Details General Ledger
Remittance Advice Ledger

Check, Remittance List 1

Remittance List 2
Record and Deposit Remit Advice
Checks

Reconcile and
Payment Amount General Ledger
Update AR

Check, Deposit Slips 1 & 2

Bank

Cash Receipts DFD

CUSTOM FABRICATIONS
Chapter 4 page 199
 Chapter 4 page 200

Cash Receipts System Flowchart

Mail Room Cash Receipts Billing General Ledger

Customer Remit List 1 B A

Check

Check Remit List 3

Remit List 2
Remit Advice Update AR Remit Advice
Subsidiary

Prepare Update AR Update General

Remittanc Cash Subsidiary Subsidiary Ledger
e List

Deposit Slip

Remit List 1 Deposit Slip AR Subsidiary General Ledger

Check Check

Remit List 2

Remit Advice

Remit List 3 Bank

B A
Will Richens
 Chapter 4 page 201

Revised Cash Receipts System Flowchart

Mail Room Cash Receipts Accounts Receivable Data Processing

Customer Remit List 1 A B

Check

Check
Remit List 2
Sales Order System
Remit Advice
Remit Advice
Update AR
Subsidiary, Prepare
Deposit Slips

Prepare Cash Subsidiary

Remittance
List
B Update AR
Subsidiary

General Ledger

Remit List 1
Deposit Slip
Check
Deposit Slip B AR Subsidiary
Remit List 2 Check

Remit Advice

Remit List 3

Bank

Temporary
Production
File
Will Richens
Chapter 4 page 202
 Chapter 4 page 203

8. SOLUTION TO PERFORMANCE WATER PUMPS

a), b) See diagrams on the following pages.

c) Internal Control Weaknesses

1) The sales clerk who processes the orders also performed the credit check. This creates
internal control problems as sales staff pay is sometimes linked to sales levels.

2) The shipping function does not notify the billing function that goods are shipped.
Without this necessary transaction authorization, customers could be billed before
items are shipped which leads to inaccurate record keeping.

3) The billing department records the accounts receivable and also prepares and sends the
AR summary to the general ledger function. The problem here is that the billing
department also prepares and sends to the general ledger function the sales journal
voucher. This approach eliminates the GL reconciliation function.

4) The inventory warehouse clerk updates the inventory records. This can lead to
inventory theft and concealment by adjusting the inventory records.

d)
 Chapter 4 page 204

PWP Sales System DFD

 Chapter 4 page 205

PWP Cash Receipts DFD

 2 Chapter 4 page 206

4
1

PWP Sales System Flowchart

 Chapter 4 page 207

Mail Room Cash Receipts Department Billing Dept Computer Center

Remittance A B
Check List
Remittance
Check
Advice Remittance Accounting
List D
System
Remittance
Advice
Review Verifies
and and Signs
Prepare Cash receipts
Remi List Journal

Update AR

AR Sub Ledger
Remittance Check
List
Deposit B AR Journal Voucher
Check Slip Summary File

Remittance
List General Ledger
Update Cash
Remittance Rec C
Advice
Bank General Ledger Department
Journal
voucher
A
C

C
AR Summary
Journal Review and D
Update GL
PWP Cash
Steeles Receipts
Cash Flowchart
Receipts Process Voucher
 Chapter 4 page 208

Student solutions will vary, but should address the internal control issues
identified above