Chapter 4

DFD of Sales Order Processing

The Revenue Cycle System

The Conceptual System

• Using data flow diagrams (DFDs)
you can trace the sequence of
activities through three processes
that constitute the revenue cycle for
most retail, wholesale, and
manufacturing organizations.

OVERVIEW OF REVENUE CYCLE

ACTIVITIES
• Sales Order Procedures
• RECEIVE ORDER:
Customer orders are
documents indicating the
type and quantity of Sales Order
merchandise being
requested. Sales order is a
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. The
customer order file shows
the status of customer
orders.
• CHECK CREDIT: Sales
order (credit copy) is a copy
of a sales order sent by the
receive-order task to the
check-credit task. It is used
to check the creditworthiness
of a customer. An approved
sales order contains sales
order information for the
sales manager to review
once the sales order is OVERVIEW OF REVENUE CYCLE
approved. ACTIVITIES (continued)
• Sales Order Procedures
(continued)
• PICK GOODS: A stock
release is a document that
identifies which items of
inventory must be located
and picked from the
warehouse shelves. A back-
order are records that stay
on file until the inventories
arrive from the supplier.
Back-ordered items are
shipped before new sales are
processed. Stock records
are formal accounting
records for controlling
inventory assets.
• SHIP GOODS: A packing
slip is a document that
travels with the goods to the
customer to describe the
contents of the order. A
shipping notice form is a OVERVIEW OF REVENUE CYCLE
document that informs the ACTIVITIES (continued)
billing department that the • Sales Order Procedures
customer’s order has been (continued)
filled and shipped. A bill of • BILL CUSTOMER: The sales
lading is a formal contract order (invoice copy) is the
between the seller and the copy of a sales order to be
shipping company that reconciled with the shipping
transports the goods to the notice. It describes the
customer. The shipping log products that were actually
specifies orders shipped shipped to the customer. An
during the period. S.O. pending file is used to
store the sales order (invoice
copy) from the receive-order
task until receipt of the
shipping notice. The sales
journal is a special journal
used for recording completed
sales transactions. The
journal voucher is
composed of accounting
journal entries into an
Bill of Lading 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. The journal
voucher file is a compilation
of all journal vouchers posted
to the general ledger.
Journal Voucher
OVERVIEW OF REVENUE CYCLE
ACTIVITIES (continued)
• Sales Order Procedures
(continued)
• UPDATE INVENTORY
RECORDS: The inventory
subsidiary ledger is a
ledger with inventory records
updated from the stock
release copy by the inventory
control system.
• UPDATE ACCOUNTS
RECEIVABLE RECORDS:
The accounts receivable
(AR) subsidiary ledger is an
account record that shows
activity by detail for each
account type, and contains,
at minimum: customer name;
customer address; current
balance; available credit;
transaction dates; invoice
numbers; and credits for
payments, returns, and
allowances. The ledger copy
is a copy of the sales order
received along with the
customer sales invoice by the
billing department clerk from
the sales department.
• POST TO GENERAL
LEDGER
Inventory Subsidiary Ledger
Accounts Receivable Subsidiary
Ledger
OVERVIEW OF REVENUE CYCLE
ACTIVITIES (continued)
• Sales Return Procedures
• PREPARE RETURN SLIP: A
return slip is a document
recording the counting and
inspect of items returned,
prepared by the receiving
department employee.
• PREPARE CREDIT MEMO:
A credit memo is a
document used to authorize
the customer to receive credit
for the merchandise returned.
• APPROVE CREDIT MEMO:
The approved credit memo
 is issued when the credit
manager evaluates the
circumstances of the return
and makes a judgment to
grant (or disapprove) credit.
• UPDATE SALES JOURNAL
• UPDATE INVENTORY AND
AR RECORDS
• UPDATE GENERAL
LEDGER
DFD Sales Return Procedures
Credit Memo
OVERVIEW OF REVENUE CYCLE
ACTIVITIES (continued)
• Cash Receipts Procedures
• OPEN MAIL AND PREPARE
REMITTANCE LIST: The
remittance advice is a
source document that
contains key information
required to service the
customers account. The
remittance list is a cash
prelist, where all cash
received is logged.
• RECORD AND DEPOSIT
CHECKS: The cash receipts
journals are records that
include details of all cash
receipts transactions,
including cash sales,
miscellaneous cash receipts,
and cash received. A
deposit slip is a written
notification accompanying a
bank deposit that specifies
and categorizes the funds
(such as checks, bills, and
coins) being deposited.
• UPDATE ACCOUNTS
RECEIVABLE RECORDS
OVERVIEW OF REVENUE CYCLE
ACTIVITIES (continued)
• Cash Receipts Procedures
(continued)
• UPDATE GENERAL
LEDGER
• RECONCILE CASH
RECEIPTS AND DEPOSITS:
A clerk from the controller’s
 office (or an employee not
involved with cash receipts
procedures) reconciles cash
receipts by comparing (1) a
copy of the prelist, (2) deposit
slips, and (3) related journal
vouchers.

Cash Receipts Journal

DFD of Cash Receipts Procedure

Remittance Advice Physical Systems

• Physical accounting information
systems are a combination of
computer technology and human
activity.
• As a general rule, smaller
businesses tend to rely less on
technology and more on manual
procedures, whereas larger
companies tend to employ
advanced technologies.
• Point-of-sale (POS) systems are
revenue systems in which no
customer accounts receivable are
maintained and inventory is kept on
the store’s shelves, not in a
separate warehouse.

BASIC TECHNOLOGY REVENUE

CYCLE
• The computers used in these
systems are independent
(nonnetworked) personal
computers (PCs).
• In addition, in such systems,
maintaining physical files of source Structures for AR and Inventory
documents is critical to the audit Subsidiary Files
trail.
BASIC TECHNOLOGY SALES
ORDER PROCESSING SYSTEM
• Sales Department
• Credit Department Approval
• Warehouse Procedures
• The Shipping Department
• The Billing Department
• Accounts Receivable, Inventory
Control, and General Ledger
Departments

Basic Technology Sales Order BASIC TECHNOLOGY CASH

Processing System
RECEIPTS SYSTEM
• Mail Room
• Cash Receipts
• Accounts Receivable
• General Ledger Department
• Controller’s Office

Basic Technology Cash Receipts

System

ADVANCED TECHNOLOGY
REVENUE CYCLE
• Advanced technologies allow
systems designers to integrate
accounting and other business
functions through a common
information system.
• The objective of integration is to
improve operational performance
and reduce costs by identifying and
eliminating nonvalue-added tasks.
INTEGRATED SALES ORDER
PROCESSING SYSTEM
• Sales Procedures
• The process begins with
sales clerks receiving
customer orders, which may
be hard-copy documents or
may be received via e-mail,
fax, or phone.
• Using a computer terminal
connected to a central sales
order system, the clerk
enters the sales order.
Integrated Sales Order System
INTEGRATED CASH RECEIPTS
SYSTEM
• Mail Room
• Cash Receipts Department
• Automatic Data Processing
Procedures
• Controller’s Office
Integrated Cash Receipts System
REVENUE CYCLE RISKS AND
INTERNAL CONTROLS
• Risk of Selling to Un-Creditworthy
Customers
• Physical Controls
• TRANSACTION
AUTHORIZATION
• SEGREGATION OF DUTIES
• IT Controls
• AUTOMATED CREDIT
CHECKING
REVENUE CYCLE RISKS AND
INTERNAL CONTROLS (continued)
• Risk of Shipping Customers
Incorrect Items or Quantities
• Physical Controls
• INDEPENDENT
VERIFICATION
• IT Controls
• SCANNER TECHNOLOGY
• AUTOMATED INVENTORY
ORDERING
REVENUE CYCLE RISKS AND
INTERNAL CONTROLS (continued)
• Risk of Inaccurately Recording
Transactions in Journals and
Accounts
• Physical Controls
• TRANSACTION
AUTHORIZATION
• ACCOUNTING RECORDS
• Prenumbered documents
are documents (sales orders,
shipping notices, remittance
 advices, and so on)
sequentially numbered by the
printer that allow every
transaction to be identified
uniquely.
• SPECIAL JOURNALS
• SUBSIDIARY LEDGERS
• GENERAL LEDGERS
• FILES
• INDEPENDENT
VERIFICATION
REVENUE CYCLE RISKS AND
INTERNAL CONTROLS (continued)
• Risk of Inaccurately Recording
Transactions in Journals and
Accounts (continued)
• IT Controls
• DATA INPUT EDITS
• AUTOMATED POSTING TO
SUBSIDIARY AND GL
ACCOUNTS
• FILE BACKUP
REVENUE CYCLE RISKS AND
INTERNAL CONTROLS (continued)
• Risk of Misappropriation of Cash
Receipts and Inventory
• Physical Controls
• TRANSACTION
AUTHORIZATION
• SUPERVISION
• ACCESS CONTROLS
• SEGREGATION OF DUTIES
• IT Controls
• MULTILEVEL SECURITY
REVENUE CYCLE RISKS AND
INTERNAL CONTROLS (continued)
• Risk of Unauthorized Access to
Accounting Records and Reports
• Physical Controls
• ACCESS CONTROLS
• SEGREGATION OF DUTIES
• IT Controls
• PASSWORDS.
• MULTILEVEL SECURITY:
Multilevel security employs
programmed techniques that
permit simultaneous access
to a central system by many
users with different access
privileges but prevent them
from obtaining information for
which they lack authorization.
REVENUE CYCLE RISKS AND
INTERNAL CONTROLS (continued)
• Risk of Unauthorized Access to
Accounting Records and Reports
(continued)
• IT Controls (continued)
• MULTILEVEL SECURITY
(continued): The access
control list (ACL) is a list
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. The role-
based access control
(RBAC) is a formal technique
for grouping users according
to the system resources they
require to perform their
assigned tasks. A role is a
formal technique for grouping
users according to the
system resources they
require to perform their
assigned tasks.
Summary of Revenue Cycle Risks
and Controls

POINT-OF-SALE (POS) SYSTEMS
• POS systems are used extensively
in grocery stores, department
stores, and other types of retail
organizations.
• Inventory is kept on the store’s
shelves, not in a separate
warehouse.
Point of Sale System
DAILY PROCEDURES
• The Universal Product Code
(UPC) is a label containing price
information (and other data) that is
attached to items purchased in a
point-of-sale system.
• When all the UPCs are scanned,
the system automatically calculates
taxes, discounts, and the total for
the transaction.
• The clerk enters the transaction
into the POS system via the
register’s keypad, and a record of
the sale is added to the sales
journal in real time.
• At the end of the clerk’s shift, a
supervisor unlocks the register and
retrieves the internal tape.
END-OF-DAY PROCEDURES
• At the end of the day, the cash
receipts clerk prepares a three-part
deposit slip for the total amount of
the cash received.
• One copy is filed and the other two
accompany the cash to the bank.
• Because cash is involved, armed
guards are often used to escort the
funds to the bank repository.
POINT-OF-SALE CONTROL ISSUES
• Authorization
• Supervision
• Access Control
• Accounting Records
• Independent Verification
REENGINEERING USING EDI
• Doing Business via EDI
• Electronic data interchange
(EDI) is the intercompany
exchange of computer-
processable business
information in standard
format.
• EDI is more than just a technology.
• EDI poses unique control problems
for organizations.
REENGINEERING USING THE
INTERNET
• Doing Business on the Internet
• Thousands of organizations
worldwide have home pages
on the Internet to promote
their products and solicit
sales.
• Typically, Internet sales are
credit card transactions that
are sent to the seller’s e-mail
file.
• Unlike EDI, which is
exclusively a B2B
arrangement between trading
partners, Internet sales are
both B2B and business-to-
 consumer (B2C)
transactions.
• Connecting to the Internet
exposes the organization to
threats from computer
hackers, viruses, and
transaction fraud.
• Most organizations take
these threats seriously and
implement controls, including Update of Accounts Receivable from
password techniques, Sales Orders
message encryption, and
firewalls, to minimize their
risk.
Appendix – Sales Return System
• Receiving Department
• Sales Department
• Processing the Credit Memo

Basic Technology Sales Returns

System
Appendix - Legacy Systems
• Batch Processing Using Sequential
Files
• DATA ENTRY
• EDIT RUN
• SORT RUN
• AR UPDATE AND BILLING
RUN
• SORT AND INVENTORY
UPDATE RUNS
• GENERAL LEDGER
UPDATE RUN
• Batch Processing Using Direct Update of Inventory from Sales
Access Files Orders
• KEYSTROKE
• EDIT RUN
• FILE UPDATE RUN

Batch Processing with Sequential

Files
 Direct Access Update for AR and
Inventory Files Concurrently

Batch Sales Order System