REVENUE CYCLE

NOTE FROM TIM: This document I found on the web seems to have some relevant CPA
Exam Questions that are worth studying.

I. REVENUE CYCLE. As you will recall, the revenue cycle involves accounting transactions
resulting from economic events that produce revenue for the accounting entity. The major
events occurring in the revenue cycle are: receiving and ordering from a customer,
delivering goods or services to the customer, requesting payment from the customer, and
receiving the payment. Understanding a cycle involves familiarity with the documentation
of the cycle. Flowcharts, internal control questionnaires and narratives are common
methods of documentation. Fill in the flowcharts for revenue (credit sales and cash
sales and receipts).

II. Identify appropriate internal control procedures for the revenue cycle using DAASI.
(Reconciliation to ARCCS: D (Recorded) A (Custody) A (Authorized) S (Seg of Duties) I
(Comparison).)

D= Prenumbered (and accounted for), multiple-copy SO, SD, SI used

One copy of the SO, SD, SI filed in the department generated
Remittance advices used to post from
A/R subsidiary ledger, sales journals, cash receipts journal
Prenumbered cash receipt tickets, credit memos & bad debt write-off forms
Aging prepared monthly
Prepare a prelisting of cash receipts

A= Individuals with access to cash or goods should be bonded

Use of a lockbox
Cash deposited intact daily
Checks restrictively endorsed
Control over write-offs and collection of write-offs
Cash registers --internal tapes, locked drawers, correct change, bell, window to
customer, assigned drawers, preprogrammed prices, drawers reconciled

A= Credit approved prior to shipment of goods

Monthly statements reviewed by supervisor before sent out
Appropriate credit policy
Approved sales price list with deviations authorized
Authorization of A/R write-offs

S= Segregate the sales order function from the A) credit function from the B) shipping
function from the C) billing function from the D) cash receipts function
Segregate cash receipts from accounts receivable record keeping
Segregate cash receipts from the credit function
Segregate accounts receivable subsidiary ledger from the general ledger

I= A/R general ledger reconciled to subsidiary ledger

Rotate duties between G/L and A/R subsidiary ledger (S/L) clerks
Sendout monthly statements to customers
Compare SO, SD, & SI to ensure ordered goods were shipped/shipped goods billed

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Compare duplicate deposit slip with a) cash receipts journal, and b) A/R sub ledger
Daily reconciliation of cash collections
Match credit memoranda and receiving report

2
III. Internal controls frequently missing in the revenue cycle.

A. Credit granted by the credit department

B. Sales orders and invoices prenumbered and controlled
C. Sales return credit memoranda prenumbered and matched with receiving reports
D. Subsidiary ledger reconciled to control ledger regularly
E. Individual who does not post accounts receivables reviews monthly statements before
sending to customer
F. Monthly statements sent to all customers
G. Write-offs approved by mgm’t official independent of recordkeeping responsibility
H. Cash receipts received in mail listed by individual(s) with no recordkeeping
responsibility; cash goes directly to cashier
I. Over-the-counter cash receipts controlled (cash register tapes)
J. Cash deposited intact daily
K. Employees handling cash are bonded
L. Bank reconciliation prepared by individuals independent of cash receipts recordkeeping

IV. Internal control questionnaire designed using DAASI.

TITLE Yes or No

D= Are prenumbered SO, SD, and SI used and accounted for?

Is posting of the A/R S/L done from remittance advices?
Is a trial balance and aging of the A/R prepared monthly?
A= Is credit approved prior to shipment of goods?
Are monthly statements reviewed by the supervisor prior to mailing?
I= Is the A/R G/L reconciled with the S/L on a regular basis?
Are sales invoices compared to sales orders and shipping documents?
to determine that ordered goods were shipped and shipped goods were
ordered?

NOTE: A “NO” answer on an I/C questionnaire indicates a weakness.

The following questions are from the CPA Exam. You are given 15 - 25 minutes to
answer each question. Each essay question is worth 10 points.

CPA EXAMPLE ESSAY #1

(Internal Controls for Cash Receipts) You have been asked by the board of trustees of a local
church to review its internal controls. As a part of this review, you have prepared the following
comments relating to the collection made at weekly services and recordkeeping for members’
pledges and contributions:
The church’s board of trustees has delegated responsibility for financial management and
audit of the financial records to the finance committee. This group prepares the annual budget
and approves major disbursements, but is not involved in collections or recordkeeping. No

3
audit has been considered necessary in recent years because the same trusted employee has
kept church records and has served as financial secretary for fifteen years.
The collection at the weekly service is taken by a team of ushers. The head usher counts
the collection in the church office following each service. He then places the collection and a
notation of the amount counted in the church safe. Next morning, the financial secretary
opens the safe and recounts the collection. She withholds about $100 to meet cash
expenditures during the coming week and deposits the remainder of the collection intact. In
order to facilitate the deposit, members who contribute by check are asked to draw their
checks to “cash”.
At their request, a few members are furnished prenumbered, predated envelopes in which
to insert their weekly contributions. The head usher removes the cash from the envelopes to
be counted with the loose cash included in the collection and discards the envelopes. No
record is maintained of issuance or return of the envelopes and the envelope system is not
encouraged.
Each member is asked to prepare a contribution pledge card annually. The pledge is regarded
as a moral commitment by the member to contribute a stated weekly amount. Based upon the
amounts shown on the pledge cards, the financial secretary furnishes a letter to the members
that supports the tax deductibility of their contributions.

REQUIRED: Identify the internal control weaknesses apparent in this scenario and
recommendations for improvements.

4

Weaknesses
Financial secretary exercises too
much control over collections.
Finance committee is not exercising
its assigned responsibility for
collections.
The auditing function has been
assigned to the finance committee,
which also has responsibility for the
administration of the cash function.
Moreover, the finance committee
has not performed the auditing
function.
The head usher has sole access to
cash during the period of the count.
One person should not be left alone
with the cash until the amount has
been recorded or control has been
established in some other way.
The collection is vulnerable to
robbery while it is being counted
and transported from the church
safe to its deposit bank.
The head usher’s count lacks
usefulness from a control
standpoint because he surrenders
custody of both the cash and the
record of the count.
Contributions are not deposited
intact. There is no assurance that
amounts withheld by the financial
secretary for expenditures will be
properly accounted for.
Members are asked to draw checks
to “cash” thus making the checks
completely negotiable and
vulnerable to misappropriation.
The envelope system has not been
encouraged. Control features which
it could provide have been ignored.
CPA ESSAY ANSWER #1
Recommended Improvements
To the extent possible, financial secretary’s responsibilities should be
confined to record-keeping.
Finance committee should assume a more active supervisory role.
An audit committee should be appointed to perform periodic auditing
procedures or engage outside auditors.
The number of counters should be increased to at least two, and cash
should remain under joint surveillance until counted and recorded so
that any discrepancy will be brought to attention.
The collection should be deposited in the bank’s night depository
immediately after the count. Physical safeguards, such as locking and
bolting the door during the period of the count, should be instituted.
Vulnerability to robbery will also be reduced by increasing the number of
counters.
The financial secretary should receive a copy of the collection report for
posting to the financial records. The head usher should maintain a copy
of the report for use by the audit committee.
Contributions should be deposited intact. If it is considered necessary
for the financial secretary to make cash expenditures, he or she should
be provided with a cash-working fund. The fund should be replenished
by check based upon satisfactory support and a properly approved
reimbursement request.
Members should be asked to make checks payable to the church. At
the time of the count, ushers should stamp the church’s restrictive
endorsement (For Deposit Only) on the back of the check.
The envelope system should be encouraged. Ushers should indicate on
the outside of each envelope the amount contributed. Envelope
contributions should be reported separately and supported by the empty
collection envelopes. Prenumbered envelopes will permit ready
identification of the donor by authorized persons without general loss of
confidentiality.
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 CPA EXAMPLE ESSAY #2

Trapan Retailing Inc., has decided to diversify operations by selling through vending
machines. Trapan’s plans call for the purchase of 312 vending machines which will be situated
at 78 different locations within one city, and the rental of a warehouse to store merchandise.
Trapan intends to sell only canned beverages at a standard price.
Management has hired an inventory control clerk to oversee the warehousing functions,
and two truck drivers who will periodically fill the machines with merchandise, and deposit cash
collected at a designated bank. Drivers will be required to report to the warehouse daily.

Required:
What internal controls should the auditor expect to find in order to assure the integrity of
the cash receipts and warehousing functions?

The internal controls should provide for—

S or I • Drivers to count and then sign for all merchandise received.

I • Daily verification of each driver’s ending inventory.
A • Cash to be deposited daily by each driver.
D • Daily return of duplicate deposit slips by each driver.
I • Reconciliation of cash deposits with the daily net change in inventory.
I • Provision for explanation of overages and shortages.
I • Periodic independent surprise check of machines to verify that—
a. Machines contain only authorized Trapan-purchased merchandise.
b. Machines are mechanically programmed to charge the authorized prices.
c. Cash and merchandise in machines equal a predetermined total.
A • Bonding of employees
I or A • Alternate driver routes and required vacations.
A • Restricting access to the warehouse.
S • The warehouseman to count and sign for all items.
D or I • Maintenance of perpetual inventory records.
I • Periodic physical inventory count of merchandise in the warehouse.
I • Analytical review of collections.

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 CPA EXAMPLE ESSAY #3

Taylor, CPA, has been engaged to audit the financial statements of Johnson
Coat Outlet, Inc., a medium-sized mail-order retail store that sells a wide
variety of coats to the public.

Required:
Prepare the “Shipments” segment of Taylor’s internal control questionnaire.
Each question should elicit either a yes or no response.
Do not prepare questions relating to the cash receipts, sales returns and
allowances, billing, inventory control, or other segments.
Use the following format:
Question Yes No

JOHNSON COAT OUTLET, INC.

Shipments
Internal Control Questionnaire

Question Yes No

D or A 1. Are shipping documents prepared from sales orders

approved in accordance with management’s
authorization?
D 2. Are shipping documents prenumbered?
D 3. Are shipping documents periodically accounted for?
D 4. Are shipping documents recorded in a register, log, or file?
D 5. Are copies of shipping documents forwarded to the
Billing department?
Inventory control department?
I 6. Do shipping documents include cross reference to sales
orders; customer identity and address; description and
quantities of goods shipped; date; and other details?
S 7. Is the shipping function independent of
Sales orders?
Credit approval?
Billing and accounts receivable?
Cash receipts?
Warehouse?
Receiving?
Inventory Control?
A 8. Is access to merchandise restricted and controlled within
the shipping department?
I 9. Are type and quantities of goods withdrawn and packed for
shipping verified by independent counts?
I 10. Are receipts from carriers obtained and filed?

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 CPA EXAMPLE ESSAY #4

A CPA’s audit working papers include the narrative description below of the cash receipts and billing
portions of the internal controls of Parktown Medical Center, Inc. Parktown is a small health care
provider that is owned by a publicly held corporation. It employs seven salaried physicians, ten nurses,
three support staff in a common laboratory, and three clerical workers. The clerical workers perform such
tasks as reception, correspondence, cash receipts, billing, and appointment scheduling and are
adequately bonded. They are referred to in the narrative as “office manger, “ “clerk #1,” and “clerk #2.

Most patients pay for services by cash or check at the time services are rendered. Credit is not
approved by the clerical staff. The physician who is to perform the respective services approves credit
based on an interview. When credit is approved, the physician files a memo with the billing clerk (clerk
#2) to set up the receivable from data generated by the physician.
The servicing physician prepares a charge slip that is given to clerk #1 for pricing and preparation of
the patient’s bill. Clerk #1 transmits a copy of the bill to clerk #2 for preparation of the revenue summary
and for posting in the accounts receivable subsidiary ledger.
The cash receipts functions are performed by clerk #1, who receives cash and checks directly from
patients and gives each patient a prenumbered cash receipt. Clerk #1 opens the mail and immediately
stamps all checks “for deposit only” and lists cash and checks for deposit. The checks and cash are
deposited daily by the office manager. The list of cash and checks, together with related remittance
advices, are forwarded by clerk #1 to clerk #2. Clerk #1 also serves as receptionist and performs
general correspondence duties.
Clerk #2 prepares and sends monthly statements to patients with unpaid balances. Clerk #2 also
prepares the cash receipts journal and is responsible for the accounts receivable subsidiary ledger. No
other clerical employee is permitted access to the accounts receivable subsidiary ledger. Uncollectible
accounts are written off by clerk #2 only after the physician who performed the respective services
believes the account to be uncollectible and communicates the write-off approval to the office manager.
The office manager then issues a write-off memo that clerk #2 processes.
The office manager supervises the clerks, issues write-off memos, schedules appointments for the
doctors, makes bank deposits, reconciles bank statements, and performs general correspondence duties.
Additional services are performed monthly by a local accountant who posts summaries prepared by
the clerks to the general ledger, prepares income statements, and files the appropriate payroll forms and
tax returns. The accountant reports directly to the parent corporation.

Required:
Based only on the information in the narrative, describe the reportable conditions and one resulting
misstatement that could occur and not be prevented or detected by Parktown’s internal controls
concerning the cash receipts and billing function. Do not describe how to correct the reportable
conditions and potential misstatements. Use the format illustrated below.
Reportable condition Potential misstatement

There is no control to Accounts receivable could

verify that fees are be overstated and
recorded and billed at uncollectible accounts
authorized rates and understated because of the
terms. lack of controls.

8
 CPA ESSAY ANSWER #4
The reportable conditions and resulting misstatements, in addition to the example that could occur
and not be prevented or detected by Parktown’s internal controls concerning the cash receipts and billing
functions include the following:
Reportable condition
The employees who perform services also are
permitted to approve credit without an external
credit check.
There is no independent verification of the billing
process.
The employees who approve credit also approve
write-offs of uncollectible accounts.
Credit is not granted on the basis of established
limits.
The employee who initially handles cash receipts
also prepares billings.
The employee who makes bank deposits also
reconciles bank statements.
Uncollectible accounts are not determined on the
basis of established criteria.
Trial balances of the accounts receivable
subsidiary ledger are not prepared independently
of, or verified and reconciled to, the accounts
receivable control account in the general ledger.
Potential misstatement
Uncollectible accounts expense could be understated
and accounts receivable could be overstated because
of the lack of an appropriate credit check.
Fees earned and accounts receivable may be
understated because not all services performed might
be reported for billing.
or
Fees earned and accounts receivable may be either
overstated or understated because of the use of
incorrect price or service data or because of
mathematical errors.
Accounts receivable could be understated and
uncollectible accounts expense overstated because
write-offs of accounts receivable could be approved for
accounts that are, in fact, collectible.
or
Accounts receivable could be overstated and
uncollectible accounts expense understated because
write-offs of accounts receivable might not be initiated
for accounts that are uncollectible.
Uncollectible accounts expense could be either
understated or overstated because the lack of
established credit limits may make it more difficult to
identify uncollectible amounts.
Fees earned and cash receipts or accounts receivable
could be understated because of omitted or inaccurate
billing.
The cash balance per books may be overstated
because not all cash is deposited.
Uncollectible accounts expense could be either
understated or overstated because of the lack of
established write-off criteria.
Any of fees earned, cash receipts, and uncollectible
accounts expense could be either understated or
overstated because of undetected differences between
the subsidiary ledger and the general ledger.
or Fees earned and cash receipts or accounts
receivable could be understated because of failure to
record billing, cash receipts, or write-offs accurately.
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 SMALLCO LUMBER, INC.
(Estimated time -- 15 to 25 minutes)
The following flowchart depicts the activities relating to the shipping, billing and collecting processes used by Smallco Lumber, Inc.

SALES CLERK WAREHOUSE CLERK BOOKKEEPER #1 BOOKKEEPER #2 COLLECTION CLERK

RECEIVES
CUSTOMER APPROVED SALES
ORDER BY ORDER 1 CUSTOMER FROM
SALES ORDER SALES ORDER INVOICE MAIL
PHONE CHECK
2 1 CLERK
INVOICE 3

PREPARES
4-COPY PREPARES AUTHORIZED
STAMPS
SALES SHIPPING CUSTOMER'S MATCHES INV.
POSTS TO "FOR
ORDER ADVICE CREDIT & APPROVED
SALES ORDER RECORDS DEPOSIT
INFORMATION ONLY"
BY
NUM-
BER
SALES ORDER SALES
SHIPPING ADVICE JOURNAL
SALES ORDER APPROVED BY
CUSTO- DAILY POST TO
SALES ORDER 1 SALES ORDER MER
SALES ORDER COPY OF RECORDS
2 1 SALES
SALES ORDER 2
3 JOURNAL
CONFIRMATION
4
STAMPS PREPARES
SALES 3-COPY
INVOICE SUBSIDIARY
ORDER #2
ACCOUNTS
WITH DATE CASH REC. JOURNAL
RECEIVABLE
SHIPPED
WEEKLY
FOOTS & COPY OF
INVOICE POSTS TO CASH REC.
SALES ORDER GENERAL JOURNAL
INVOICE
BY (DATED) LEDGER
NUMBER 2 1
INVOICE 2
TO 3
CUSTOMER DEPOSITS
RELEASES GENERAL CHECKS
LUMBER TO
LEDGER WEEKLY
TO CUSTO-
MER
CARRIER

Required: Identify weaknesses in the internal control structure relating to the acitivties of
a) warehouse clerk, b) bookkeeper #1, c) bookkeeper #2, and d) collection clerk
 SMALLCO LUMBER ANSWER
The Weaknesses in Smallco Lumber’s internal controls are:
Warehouse Clerk
A - Releases lumber prior to
authorization, for example, approval
of customer’s credit.
D - Copies of shipping advice should be
prepared and forwarded to
Bookkeeper #1.
D - Lacks documentation that lumber
was given to the carrier.
Bookkeeper #1
A - Credit authorized by bookkeeper and
not a responsible officer.
I - Prepares and mails invoice without
knowledge of what was shipped.
Bookkeeper #2
S - Bookkeeper who maintains general
ledger should not be responsible for
footing and crossfooting of journals,
that is, sales and cash receipts
journals.
I - Subsidiary accounts receivable
ledger should be reconciled to
general ledger.
Collection Clerk
S - Collection clerk should not maintain
sales journal.
S - Collection clerk should not maintain
accounts receivable subsidiary
ledger.
D - Remittance advice not used as the
basis for posting collections.
A - Checks are not promptly endorsed by
the mail clerk.
A - Cash receipts are not promptly
deposited.
I - Deposit slips are not reconciled to
cash receipts journal or debits to
general ledger.
 CREDIT SALES FLOWCHART
SALES ORDER DEPT. SHIPPING DEPARTMENT

From
Order
Dept

Customer Order
Sales Order
Sales Order Sales Order
Sales Order 4 2 1 Sales Order
3 Shipping Doc.
Customer Order Sales Order Customer Order 3
Sales Order File sales 1
Sales Order 3 N Sales Order
order and
Sales Order 6 N Sales Order customer 1
File sales order
Sales Order 5 pending 2 order
Sales Order 4 receipt pending
3 To of goods and
Customer notice of
approval of
Sales Order 2 shipment
sales order
1

Considered
the
supporting
To
documenta- Customer Order
Billing
tion for the Sales Order
Sales Order sales
Sales Order
Sales Order
Shipping Doc.
Shipping 3
Sales Invoice
ShippingDocument 2
To Document Sales Invoice
Credit Shipping Sales Invoice
N To
Document
A/R
Sales Invoice

To
To To Customer N Inventory
(Packing Slip)
Billing To N Acctg.
Customer
 CASH RECEIPTS FLOWCHART
SALES CASHIER

Cash Remittance Advice

Document
Checks From
Cash Sales Customers
2
Invoice
1

Register Reading
Prelist
Checks 1 2 Register Reading
Supervisor Count Sheet Count Sheet 3
reading of 2 Prelist
Cash 3 Deposit Slip 2
register daily
and Daily Cash
reconciliation 2
Summary
with cash 2

Supervisor Remittance Advice

preparation of
Checks
Cash Count
Sheet Prelist
Prelist
3
Prelist of 2
Document Mail Receipts 1 Cash and Checks Prelist
Cash
Document 2 Register Reading
1 Cash Count Sheet 3
Document Deposit Slip 2
Document Daily Cash Summary Register Reading
Register
2 2 Prelist
Reading Daily Cash
1 2 Prelist 2
To
Summary
1 Register Reading 3
Accounting
Count Sheet 2
Deposit Slip 1
A
Daily Cash
2
Summary
2
To
To Bank To General
Accounting
Treasurer
 BAD DEBTS FLOWCHART
CREDIT MANAGER TREASURER ACCOUNTS RECEIVABLE GENERAL ACCOUNTING

Reviews Start Write

Aged Trial Offs
From Credit
Balance
Manager
Prepare
Aged Trial
Balance
Prepares
Credit
Approves
Memo
Write Off
Aged Trial
Balance

Credit Memo
Post To
Credit Memo 2 Customer
Document 1
Post to Account
Document 3
Customer
Credit Memo 2 Account
1
Account Credit
Individual Credit Receivable Memo
Customer Control 2
Memo 1
Account

To C/N
Allowance C/N
Treasurer
C/N For Doubtful
Accounts
 SALES RETURNS FLOWCHART
SALES RECEIVING TREASURER BILLING ACCOUNTS RECEIVABLE GENERAL LEDGER

Start From
Inspect Receiving
Returns returned
goods

Receiving
Route
Report
return to 2
receiving Prepare
Receiving
Report
C/N File pending
arrival of CM
Prepare
Credit
General Memo Posts To Post
Document General
Ledger Customer
3 Accounts Ledger
Receiving Approves
2 Receiving Report
Report Returns
1
1 Receiving Report
Credit Memo 2 R. R.
1 Credit Memo 2
C/N 2
Credit Memo

Returns
And
Allowances

C/N
Individual
A/R A/R General
Ledger
Account
D
 CREDIT SALES FLOWCHART
SALES ORDER DEPT. SHIPPING DEPARTMENT

From
Order
Dept

Customer Order
Sales Order
Sales Order Sales Order
Sales Order 4 2 1 Sales Order
3 Shipping Doc.
Customer Order Sales Order Customer Order 3
Sales Order File sales 1
Sales Order 3 N Sales Order
order and
Sales Order 6 N Sales Order customer 1
File sales order
Sales Order 5 pending 2 order
Sales Order 4 receipt pending
3 To of goods and
Customer notice of
approval of
Sales Order 2 shipment
sales order
1

Considered
the
supporting
To
documenta- Customer Order
Billing
tion for the Sales Order
Sales Order sales
Sales Order
Sales Order
Shipping Doc.
Shipping 3
Sales Invoice
ShippingDocument 2
To Document Sales Invoice
Credit Shipping Sales Invoice
N To
Document
A/R
Sales Invoice

To
To To Customer N Inventory
(Packing Slip)
Billing To N Acctg.
Customer
 CASH RECEIPTS FLOWCHART
SALES CASHIER

Cash Remittance Advice

Document
Checks From
Cash Sales Customers
2
Invoice
1

Register Reading
Prelist
Checks 1 2 Register Reading
Supervisor Count Sheet Count Sheet 3
reading of 2 Prelist
Cash 3 Deposit Slip 2
register daily
and Daily Cash
reconciliation 2
Summary
with cash 2

Supervisor Remittance Advice

preparation of
Checks
Cash Count
Sheet Prelist
Prelist
3
Prelist of 2
Document Mail Receipts 1 Cash and Checks Prelist
Cash
Document 2 Register Reading
1 Cash Count Sheet 3
Document Deposit Slip 2
Document Daily Cash Summary Register Reading
Register
2 2 Prelist
Reading Daily Cash
1 2 Prelist 2
To
Summary
1 Register Reading 3
Accounting
Count Sheet 2
Deposit Slip 1
A
Daily Cash
2
Summary
2
To
To Bank To General
Accounting
Treasurer
 CHARTING

Charting, Inc. processes its sales and cash receipts documents as follows:

Payment on account: The mail is opened each morning by a mail clerk in the sales
department. The mail clerk prepares a remittance advice showing customer and amount paid if
one is not received. The checks and remittance advices are then forwarded to the sales
department supervisor who reviews each check and forwards the checks and remittance
advices to the accounting department supervisor.
The accounting department supervisor, who also functions as credit manager approving
new credit and all credit limits, reviews all checks for payments on past due accounts and then
forwards the checks and remittance advices to the A/R clerk, who arranges the advices in
alphabetical order. The remittance advices are posted directly on the A/R ledger cards. The
checks are endorsed by stamp and totaled. The total is posted to the cash receipts journal.
The remittance advices are filed chronologically.
After receiving the cash from the previous day’s cash sales, the A/R clerk prepares the
daily deposit slip in triplicate. The third copy of the deposit slip is filed by date, and the second
copy and the original accompany the bank deposit.
Sales: Sales clerks prepare sales invoices in triplicate. The original & second copy go to
the cashier. The third copy is retained by the sales clerk in the sales book. For cash sales, the
customer pays the sales clerk, who presents the money to the cashier with the invoice copies.
A credit sale is approved by the cashier from an approved credit list after the sales clerk
prepares the three-part invoice. After receiving the cash or approving the invoice, the cashier
validates the original copy of the sales invoice and gives it to the customer. At the end of each
day, the cashier recaps the sales and cash received and forwards the cash and the second
copy of all sales invoices to the accounts receivable clerk.
The A/R clerk balances the cash received with cash sales invoices and prepares a daily
sales summary. The sales invoices are sent to the inventory control clerk in the sales
department for posting to the inventory control cards. After posting, the inventory control clerk
files all invoices numerically. The A/R clerk posts the daily sales summary to the cash receipts
journal and sales journal and files the sales summaries by date. The clerk also post the credit
sales to the accounts receivable subsidiary ledger account.
The cash sales and cash received on account make up the daily bank deposit.
Bank deposits: The bank validates the deposit slip and returns the second copy to the
accounting department where it is filed by date by the accounts receivable clerk. Monthly bank
statements are reconciled promptly by the accounting department supervisor and filed by date.
REQUIRED:
1. Complete the flowchart on the following page by labeling the appropriate symbols and
indicating information flows. The chart is complete as to symbols and document flows.
2. Identify weaknesses in Charting’s internal controls.
 SALES AND CASH RECEIPTS FOR CHARTING, INC.
CLERKS CASHIER SALES SUPER. A/R SUPER ACCOUNTING DEPARTMENT/ACCOUNTS RECEIVABLE CLERK
Mail Mail Clerk Checks Checks
Remittance L Remittance
Checks E Advice Advice
Open O
Remittance
Mail
Advice

Prepare Remittance Accounts Filed Third

Advice if Needed Receivable Post Copy of
Checks Ledger P Deposit
Sales Clerks
Remittance F Slip
Advice
Write Retained Endorse
Invoice For In Sales Post Checks Total
3 Book
J Check Cash and
Cust. Order
Sales 2
Total Prepare T
Invoice Deposit Slip
1
2
S
Sales Sales
Invoice Journal R
1

Q
From Customer Daily Sales File
B Post Summary D

Cash
D

Customer C K M To Bank

Inventory Control Clerk

Sales Sales Invoice

Invoice 2 Cash 2
G
From
File Bank
N Validated
N
Deposit Slip
Post H

Monthly Bank
Statement
A I
 CONTROL RISK ASSESSMENT CONSIDERATIONS—CREDIT SALES TRANSACTIONS
Potential Necessary
Misstatement Control
Sales may be made to un- Determination that customer
authorized customers. is on approved customer list.
Approved sales order form for
each sale.
Sales may be made without Credit department credit
credit approval. check on all new customers.
Check on customer’s credit
limit prior to each sale.
Goods may be released from Approved sales order for all
warehouse for unauthorized goods released to shipping.
orders.
Goods shipped may not Independent check by
agree with goods ordered. shipping clerks of agreement
of goods received from
warehouse with approved
sales order.
Unauthorized shipments may Segregation of duties filling
be made. and shipping orders.
Preparation of shipping
document for each shipment.
Billings may be made for Matching shipping document
fictitious transactions or and approved sales order for
duplicate billings may be each invoice.
made.
Some shipments may not be Matching sales invoice for
billed. each shipping document.
Sales invoices may have Independent check on pricing
incorrect prices. of invoices.
Invoices may not be Independent check of
journalized or posted to agreement of sales journal
customer accounts. entries and amounts posted
to customer accounts with
control totals of invoices.
Invoices may be posted to Mailing of monthly statement
wrong customer account. to customers.
Potential Test
of Control
Reperform procedure.
Examine approved sales
order forms.
Inquire about procedures for
checking credit on new
customers.
Examine evidence of credit
limit check prior to each sale.
Observe warehouse
personnel filing orders.
Examine evidence of
performance of independent
check.
Observe segregation of
duties.
Inspect shipping documents.
Vouch invoices to shipping
documents and approved
sales orders.
Trace shipping documents to
sales invoices.
Reperform check on accuracy
of pricing.
Review evidence of
independent checks; re-
perform checks.
Observe mailing of monthly
statements.
 CONTROL RISK ASSESSMENT CONSIDERATION—CASH RECEIPTS TRANSACTIONS
Potential
Misstatement
Cash sales may not be
registered.
Mail receipts may be lost or
misappropriated after receipt.
Cash and checks received for
deposit may not agree with
cash count sheets and prelist.
Cash may not be deposited
intact daily.
Remittance advices may not
agree with prelist.
Some receipts may not be
recorded.
Errors may be made in
journalizing receipts.
Receipts may be posted to
the wrong customer account.
Necessary
Control
Use of cash registers or point-
of-sale devices.
Periodic surveillance of cash
sales procedures.
Restrictive endorsement of
checks immediately on
receipt.
Immediate preparation of
prelist of mail receipts.
Independent check of
agreement of cash and
checks with cash count
sheets and prelist.
Independent check of
agreement of validated
deposit slip with daily cash
summary.
Independent check of
agreement or remittance
advices with prelist.
Independent check of
agreement of amounts
journalized and posted with
daily cash summary.
Preparation of periodic
independent bank
reconciliations.
Mailing of monthly statements
to customers.
Potential Test
of Control
Observe cash sales
procedures.
Inquire of supervisors about
results of surveillance.
Examine checks for restrictive
endorsement.
Observe preparation of
prelists.
Examine evidence of
independent check.
Reperform independent
check.
Examine evidence of
independent check.
Reperform independent
check.
Examine bank reconciliations.
Observe mailing of monthly
statements.
OOF QUESTION 2 (CPA, adapted) 15-25 minutes Internal Control Activities

Field, CPA, is auditing the financial statements of A. Shipping clerks compare goods received from the
Miller Mailorder, Inc. (MMI) for the year ended January warehouse with the details on the shipping
31, 1996. Field has compiled a list of possible errors and documents.
fraud that may result in the misstatement of MMI's B. Approved sales orders are required for goods to be
financial statements and a corresponding list of internal released from the warehouse.
control activities that, if properly designed and
implemented, could assist MMI in preventing or detecting C. Monthly statements are mailed to all customers with
errors and fraud. outstanding balances.
Required D. Shipping clerks compare goods received from the
For each possible error and fraud numbered 1 through warehouse with approved sales orders.
15, select one internal control activity from the answer list
at right that, if properly designed and implemented, most E. Customer orders are compared with the inventory
likely could assist MMI in preventing or detecting the master file to determine whether items ordered are
errors and fraud. Each response in the list of internal in stock.
control activities may be selected once, more than once, or
not at all. F. Daily sales summaries are compared with control
totals of invoices.
Possible Errors and Frauds G. Shipping documents are compared with sales invoices
when goods are shipped.
1. Invoices for goods sold are posted to incorrect
customer accounts. H. Sales invoices are compared with the master price
file.
2. Goods ordered by customers are shipped but are not
billed to anyone. I. Customer orders are compared with an approved
customer list.
3. Invoices are sent for shipped goods but are not
recorded in the sales journal. J. Sales orders are prepared for each customer order.

4. Invoices are sent for shipped goods and are recorded
in the sales journal but are not posted to any
customer account.
5. Credit sales are made to individuals with
unsatisfactory credit ratings.
K. Control amounts posted to the accounts receivable
ledger are compared with control totals of invoices.
L. Sales invoices are compared with shipping documents
and approved customer orders before invoices are
mailed.

6. Good are removed from inventory for unauthorized M. Prenumbered credit memos are used for granting
orders. credit for goods returned.

7. Goods shipped to customers do not agree with goods N. Goods returned for credit are approved by the
ordered by customers. supervisor of the Sales Department.

8. Invoices are sent to allies in a fraudulent scheme, and
sales are recorded for fictitious transactions.
9. Customers' checks are received for less than the
customers' full account balances, but the customers
full account balances are credited.
10. Customers' checks are misappropriated before being
forwarded to the cashier for deposit.
11. Customers' checks are credited to incorrect customer
accounts.
12. Different customer accounts are each credited for the
same cash receipt.
13. Customers' checks are properly credited to customer
accounts and are properly deposited, but errors are
made in recording receipts in cash receipts journal.
14. Customers' checks are misappropriated after being
forwarded to the cashier for deposit.
15. Invalid transactions granting credit for sales returns
are recorded.
O. Remittance advices are separated from the checks in
the mail room and forwarded to the Accounting
Department.
P. Total amounts posted to the accounts receivable
ledger from remittance advices are compared with
the validated bank deposit slip.
Q. The cashier examines each check for proper
endorsement.
R. Validated deposit slips are compared with the
cashier's daily cash summaries.
S. An employee, other than the bookkeeper, periodically
prepares a bank reconciliation.
T. Sales returns are approved by the same employee who
issues receiving reports evidencing actual return of
goods.
1. The correct answer is (C).
DISCUSSION: Mailing monthly statements to
customers with outstanding accounts will detect
invoices posted to the wrong accounts. Customers
 whose accounts were misposted for goods not ordered
will contest the statements.
2. The correct answer is (G).
DISCUSSION: Each shipping document should
have a corresponding invoice when the goods are
shipped. The appropriate direction of testing is from
the shipping documents to the sales invoices.
3. The correct answer is (F).
DISCUSSION: Daily sales summaries are from
the book of original entry--the sales journal.
Comparing the summaries with the total of invoices
will detect failure to record all invoices.
4. The correct answer is (K).
DISCUSSION: Comparing control total amounts
posted to the accounts receivable (subsidiary) ledger
with the control total of all invoices for the same
period should detect invoices not posted.
5. The correct answer is (I).
DISCUSSION: Credit approval should be
received before sales are made. Thus, shipping to
customers on an approved list should reduce the risk
of sales to customers with unsatisfactory credit.
6. The correct answer is (B).
DISCUSSION: An approved sales order should
be presented to the storekeeper before release of
goods from the warehouse to prevent goods from
being removed for unauthorized orders.
7. The correct answer is (D).
DISCUSSION: Requiring shipping clerks to
compare the amounts and type of goods received from
the warehouse with approved sales orders assures
that goods shipped agree with those ordered by
customers.
8. The correct answer is (L).
DISCUSSION: Comparing sales invoices with
shipping documents will assure that each invoice is
supported by a shipment. Fictitious sales, i.e., those
for which no shipment was made, should be detected.
9. The correct answer is (P).
DISCUSSION: The total receipts credited to
customer accounts in the subsidiary ledger should
equal the total receipts deposited, given that daily
receipts are deposited intact.
10. The correct answer is (C).
DISCUSSION: Checks misappropriated (stolen)
prior to forwarding to the cashier are not posted to
customer accounts (assuming that the remittance
advices were stolen as well). Thus, customers will
complain when their payments fail to be reflected in
the balances on the monthly statements.
11. The correct answer is (C).
DISCUSSION: Mailing monthly statements to
customers with outstanding accounts will detect
receipts posted to the wrong accounts. Customers
whose accounts were misposted will contest the
statements.
12. The correct answer is (P).
DISCUSSION: If more than one customer account
is credited for the same cash receipt, the error will be
detected when the total of the amounts posted to the
accounts receivable ledger is compared with the total
cash receipts.
13. The correct answer is (S).
DISCUSSION: The bank reconciliation will
detect errors in recording cash receipts (and
disbursements). The balance in the ledger will not
reconcile with the amount in the bank statement.
14. The correct answer is (P).
DISCUSSION- If the checks are misappropriated
(stolen) prior to deposit, the total of the amounts
posted to the accounts receivable ledger will be
greater than the validated bank deposit slip.
15. The correct answer is (N).
DISCUSSION: Invalid sales returns are prevented
by requiring approval of returns by the Sales
Department supervisor.
 REVENUE CYCLE MULTIPLE CHOICE

——— 1. For effective internal control, the billing function should be performed by the
a. Accounting department. c. Shipping department.
b. Sales department. d. Credit & collection department.

——— 2. For good internal control, which of the following functions should not be the
responsibility of the treasurer’s department?
a. Data processing. c. Custody of securities.
b. Handling of cash. d. Establishing credit policies.

——— 3. When a customer fails to include a remittance advice with a payment, it is

common practice for the person opening the mail to prepare one.
Consequently, mail should be opened by which of the following four
company employees?
a. Credit manager. c. Sales manager.
b. Receptionist. d. Account receivable clerk.

——— 4. Which one of the following is not a universal rule for achieving strong internal
control over cash?
a. Separate cash handling and the record keeping functions.
b. Decentralize the receiving of cash as much as possible.
c. Deposit each day’s cash receipts by the end of the day.
d. Have bank reconciliations performed by employees independent with
respect to handling cash.

——— 5. The least crucial element of internal control over cash is

a. Separation of cash record keeping from custody of cash.
b. Preparation of the monthly bank reconciliation.
c. Batch processing of checks.
d. Separation of cash receipts from cash disbursements.

——— 6. Which of the following sets of duties would ordinarily be considered basically
incompatible in terms of good internal control?
a. Preparation of monthly statements to customers and maintenance of the
accounts receivable subsidiary ledger.
b. Posting to the general ledger and approval of additions and terminations
relating to the payroll.
c. Custody of unmailed signed checks and maintenance of expense subsidiary
ledgers.
d. Collection of receipts on account and maintaining accounts receivable
records.

——— 7. Internal control over cash receipts is weakened when an employee who
receives customer mail receipts also
a. Prepares initial cash receipts records.
b. Records credits to individual accounts receivable.
c. Prepares bank deposit slips for all mail receipts.
d. Maintains a petty cash fund.

——— 8. Which of the following is an effective internal control over accounts receivable?
 a. Only persons who handle cash receipts should be responsible for the
preparation of documents that reduce accounts receivable.
b. Responsibility for approval of the write-off of uncollectible accounts should
lie with sales personnel.
c. Balances in the subsidiary accounts receivable ledger should be reconciled
to the G/L control account once a year, preferably at the year end.
d. The billing function should be assigned to persons other than those
responsible for maintaining accounts receivable subsidiary records.

——— 9. Smith Manufacturing Company’s accounts receivable clerk has a friend who is
also Smith’s customer. The accounts receivable clerk, on occasion, has issued
fictitious credit memorandums to his friend for goods supposedly returned. The
most effective procedure for preventing this activity is to
a. Prenumber and account for all credit memorandums.
b. Require receiving reports to support all credit memorandums.
c. Have the sales department independent of the A/R department.
d. Mail monthly statements.

——— 10. Salesmen’s commissions are based on gross sales. Sales continue to increase;
but uncollectible A/R are also increasing at an alarming rate. The most effective
procedure for preventing the increase in uncollectible A/R is to
a. Have the sales manager review activity of individual salesmen.
b. Age accounts receivable regularly.
c. Have the write-off of accounts properly approved.
d. Have the credit dep’t approve credit to customers before shipment.

——— 11. The sales department bookkeeper has been crediting house-account sales to
her brother-in-law, an outside salesman. Commissions are paid on outside
sales but not on house-account sales. This might have been prevented by
requiring that
a. Sales order forms be prenumbered and accounted for by the sales
department bookkeeper.
b. Sales commission statements be supported by sales order forms and
approved by the sales manager.
c. Aggregate sales entries be prepared by the general accounting department.
d. Disbursement vouchers for sales commissions be reviewed by the internal
audit department and checked to commission statements.

——— 12. Which of the following control procedures may prevent the failure to bill
customers for some shipments?
a. Each shipment should be supported by a prenumbered sales invoice.
b. Each sales order should be approved by authorized personnel.
c. Sales journal entries should be reconciled to daily sales summaries.
d. Each sales invoice should be supported by a shipping document.

——— 13. To achieve good I/C which department should match shipping documents with
sales orders and prepare daily sales summaries?
a. Billing. c. Credit.
b. Shipping. d. Sales.
 CPA ESSAY ON A COMPUTERIZED REVENUE CYCLE FLOWCHART
Required:
The flowchart on the following page depicts part of a revenue cycle. Some of the flowchart
symbols are labeled to indicate control procedures and records. For each symbol numbered 1
through 13, select one response from the answer lists below. Each response in the lists may
be selected once or not at all.

Operations and control procedures

A. Enter shipping data

B. Verify agreement of sales order and shipping document
C. Write off accounts receivable 1.
D. To warehouse and shipping department 2.
E. Authorize account receivable write-off 3.
F. Prepare aged trial balance 4.
G. To sales department 5.
H. Release goods for shipment 6.
I. To accounts receivable department 7.
J. Enter price data 8.
K. Determine that customer exists 9.
L. Match customer purchase order with sales order 10.
M. Perform customer credit check 11.
N. Prepare sales journal 12.
O. Prepare sales invoice 13.

Documents, journals, ledgers, and files

P. Shipping document
Q. General ledger master file
R. General journal
S. Master price file
T. Sales journal
U. Sales invoice
V. Cash receipts journal
W. Uncollectible accounts file
X. Shipping file
Y. Aged trial balance
Z. Open order file
 CPA COMPUTERIZED REVENUE CYCLE FLOWCHART
NOVEMBER
1993

COMPUTER WAREHOUSE &

SALES DEPT. PROCESSING SHIPPING
DEPARTMENT DEPARTMENT

From COMPUTERIZED
COMPUTERIZED
Customer SHIPPING PROGRAM: From
Cust. ORDER PROGRAM: Computer
Retrieve Open Orders; Add
Credit #1 and perform edit #2 Shipping Data; Transfer to Processing
checks and prepare sales Dept.
File Shipping File; and Prepare
order Shipping Documents
Customer
Purchase Sales Order
Order 3
Sales Order To Shipping Doc.
Sales Order Warehouse
and Shipping Shipping
Sales Order 3 Dept. Document 2
2
Transmit 1
Customer 1
Data to #4
Computer

Accounts
Customer
Rec. Shipping
Purchase #6
Master File
Order
File
#5

Sales COMPUTERIZED
Inventory BILLING PROGRAM:
#3 Master #10 Trans-
Retrieve Shipping Data;
action
File Enter Price Data;
File Prepare Sales
Transaction File; and #7 Transmit
Customer P.O. Shipping
Sales Order Information to
Sales Order COMPUTERIZED UPDATE Computer
PROGRAM: 2
2 Update master files: Prepare #8 Sales Order
1 G/L Transaction Summary, 1 Shipping Doc.
Prepare Accounts Receivable
Ledger, Prepare Aged T/B, 3
Shipping
and #11 To Document
2
Customer #9 1
To
Customer

General Ledger
Accounts
Transaction
Summary
#12 Receivable #13
Ledger
To
Customer
with
To
To To To Customer Goods
Accounts
Accounting Accounting Receivable Credit
 DESCRIPTION OF ON-LINE ENTRY/BATCH PROCESSING FOR REVENUE APPLICATION

Figure 1 shows a flowchart of an on-line batch entry processing system that

incorporates most of the controls discussed in the preceding sections.
In the illustrated system, as orders are received sales order clerks use on-line terminals
and an order program to determine that the customer has been approved, and that the order
will not cause the customer's balance to exceed the customer's authorized credit limit. The
program also checks the inventory master file to determine that goods are on hand to fill the
order. If the order is accepted, the computer enters it into an open order file and a multicopy
sales order form is produced on a printer in the sales order department. When an order is, not
accepted, a message is displayed on the terminal indicating the reason for rejection.
Copies of the approved sales order are forwarded to the warehouse as authorization to
release goods to shipping. In shipping, personnel first makes an independent check on
agreement of the goods received with the accompanying sales order form. They then use their
on-line terminals and a shipping program to retrieve the corresponding sales order from the
open order file and add appropriate shipping data. Next the computer transfers the transaction
from the open order file to a shipping file and produces a shipping document on the printer in
the shipping department.
As matching shipping documents and sales order forms are received in the billing
department, they are batched and batch totals are manually compared. Using their on-line
terminals and a billing program, billing department personnel first enter the manually prepared
batch totals. Next the previously entered order and shipping data for each transaction is
retrieved from the shipping file and a sales invoice is generated using prices from the master
price file. As each billing is completed, the computer enters it into a sales transactions file.
After all the transactions in a batch have been processed in this manner, the billing program
compares a computer generated batch total with the manual batch total previously entered by
the billing clerk. Discrepancies are displayed on the terminal and corrected by the billing clerks
before processing continues. Finally, sales invoices for the batch are printed in the EDP
department and distributed as shown in the flowchart.
The recording of sales transactions is completed at the end of each day when the EDP
department runs the master file update program. As shown, this program updates three
master files and produces a sales journal and general ledger transaction summary which are
sent to accounting. The use of a separate program to produce monthly customer statements
is not shown in the flowchart.
 FIGURE 1
EXAMPLE OF ON-LINE ENTRY/BATCH PROCESSING FOR A REVENUE
APPLICATION
SALES ORDER SHIPPING
EDP
Customer's Check Agreement
From
of Goods and
Order Warehouse
Sales Order

Enter ORDER PROGRAM SHIPPING PROGRAM Enter

Retrieve Open Orders;
Order Perform Edit and Open
Add Shipping Data;
Shipping
Order
Credit Checks; Date
Data File Transfer to Shipping File;
Print Sales Orders Print Shipping Documents

Shipping Doc.
Customer Order
Sales Order
Sales Order
Accts. General Shipping Doc.
Sales Order Rec.
Inventory
Ledger
Master
Shipping Shipping Doc. 4
Sales Order Master Price
Master Master File 2
File File
4 File File
Shipping 3
Sales 3
Document 2
Orders 2
1 N
1
N
MASTER FILE BILLING PROGRAM
UPDATE PROGRAM Retrieve Shipped Order
Update Master Files; Sales
To Customer Data;
Prepare Invoice;
Print Sales Journal and Trans.
WAREHOUSE Accumulate
and Compare Batch Prepare
General Ledger File
Total;in Sales Transactions
Enter
BILLING
Batch
Transaction Summary File; Print Invoices
Release Total
Goods to
Shipping
Sales Journal Sales Invoice
General Ledger Enter Batch
Sales Order Sales Total; Prepare
Transaction 2
Invoice Billing
Summary
Sales 1
Order 3
2
Sales Order

N Shipping
N
To To Accounting To Customer Document 2
Shipping 3
with
Goods