The Revenue Cycle: Accounting Information Systems 9e James A. Hall

Chapter 4
The
Revenue
Cycle
Accounting Information
Systems 9e
James A. Hall
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in
whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
Objectives for Chapter 4
• Understand the fundamental tasks performed in the revenue
cycle, regardless of the technology in place.
• Identify functional departments in the revenue cycle and the
flow of revenue transactions through the organization.
• Specify documents, journals, and accounts needed for audit
trails, records, decision making, and financial reporting.
• Understand risks associated with the revenue cycle and the
recognize controls that reduce these risks.
• Be aware of operational and control implications of technology
used to automate and reengineer the revenue cycle.
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2
The Conceptual System: Sales Order Procedures
• Receive order.
– Begins with receipt of customer order which is transcribed into
a formal sales order which is placed in the customer order file
for future reference. May take days or weeks.
• Check credit.
– Before processing order, creditworthiness must be established.
• Pick goods.
– The stock release or picking ticket provides authorization to
warehouse personnel to release goods which are sent to
shipping along with the verified stock release.
– Warehouse employees adjust stock records to reflect inventory
reduction and prepares back-order records if insufficient goods.
• Ship goods.
– Shipping department uses the packing slip and shipping notice
to reconcile goods received from the warehouse.
– Goods are packaged, bill of lading is prepared, goods are given
to carrier, and shipment is recorded in the shipping log.
• Bill customer.
– Done after shipment by sending a completed sales invoice.
– Billing record-keeping includes recording the sale in the sales
journal.
– The sales journal is a special journal used for recording
completed sales transactions. Entries are summarized in a sales
journal voucher used to update the GL control account.
• Update inventory records.
– The inventory control function updates inventory subsidiary
ledger accounts from the stock release document information.
• Update accounts receivable records.
– Customer records in the accounts receivable (AR) subsidiary
ledger updated from the sales order ledger copy.
• Post to general ledger.
– General ledger function uses journal vouchers to update control
accounts.
The Conceptual System: Sales Return Procedures
• Prepare return slip.
– Customer records in the accounts receivable (AR) subsidiary
ledger updated from the sales order ledger copy.
• Prepare credit memo.
– If clerk has authorization, sent directly to billing function.
• Approve credit memo.
– Credit manager evaluates and return the approved credit
memo to the sales department.
• Update sales journal.
• Update inventory and AR records.
The Conceptual System: Cash Receipt Procedures
• Open mail and prepare remittance list.
– Remittance advice is a turnaround document.
• Record and deposit checks.
– After reconciling, employee records check in the cash receipts
journal and prepares a bank deposit slip.
• Update accounts receivable records.
• Update general ledger.
• Reconcile cash receipts and deposits.
– Employee not involved in cash receipts process reconciles
receipts by comparing (1) a copy of the prelist, (2) deposit slips
and (3) related journal vouchers.
Physical Systems
• Physical accounting information systems combine
technology and human activity.
– Smaller businesses tend to rely less on technology, whereas
larger companies tend to employ advanced technologies.
– Nature of the mix employed in a system impacts the internal
controls needed to control the system.
• Computers in basic technology revenue systems are
independent.
– Information between departments is communicated via hard-
copy documents.
– Maintaining physical files of source documents is critical to the
audit trail.
Physical Systems: Basic Sales Order Processing
• Begins with a customer placing an order.
– Sales department captures details on a sales order form.
• Credit department verifies credit and approves order.
• Warehouse sends inventory to shipping and records
inventory reduction.
• Shipping reconciles order, prepares bill of lading, ships
items, records transaction and sends stock release to billing.
• Billing department bills customer and updates sales journal.
• AR and inventory clerks update subsidiary ledgers.
– Journal vouchers and summaries are periodically sent to GL for
reconciliation and posting.
Physical Systems: Basic Cash Receipts Processes
• Checks and remittance advices received in mail room.
– Clerk reconciles items, endorses checks, prepares remittance list
and sends checks and list copy to cash receipts department.
– Remittance advices and list copy sent to AR.
• Cash receipts clerk records checks in cash receipts journal,
prepares deposit slip and sends checks to bank.
– Periodically a journal voucher is sent to GL department.
• AR updates customer balances and sends summary to GL.
• GL clerk reconciles amounts and posts to control accounts.
• Controller clerk performs periodic bank reconciliations.
Physical Systems: Advanced Technology
• Advanced technologies allow integration of accounting
with other business systems through a common
information system.
– Objective is to improve performance and reduce costs.
– Can significantly alter and simplify the revenue cycle.
– Remittance advices and list copy sent to AR.
• With an integrated sales order processing system many
functions are performed automatically to the center
computer system.
– These labor intensive activities increase operating costs and
contribute to human error.
– Technology reduces costs and errors, increasing efficiency.
Physical Systems: Integrated Cash Receipts
• Checks and remittance advices received in mail room.
– Clerk reconciles items, endorses checks, prepares remittance list
and sends checks, remittance advices and list to cash receipts.
• Cash receipts clerk reconciles checks and creates a record
in the cash receipts journal for each remittance advice, and
prepares deposit slip.
– Member of security group deposits checks in bank.
• System automatically closes sales invoice, posts to GL, and
prepares and distributes various management reports.
• Controller clerk periodically reconciles remittance lists,
deposit slips, cash receipts journal and GL cash account.
Physical Systems: Risks and Internal Controls
• Primary risks associated with revenue cycle transactions:
• Undetected data input errors:
– IT controls include data checks and check digit edits to help
prevent errors.
• Selling to un-creditworthy customers:
– Physical controls include proper transaction authorization,
including a segregation of duties between transaction
authorization and transaction processing.
– IT controls include automatic credit checking.
• Shipping incorrect items or quantities:
– Physical controls include independent verification.
– IT controls include scanner technology and automated ordering.
• Inaccurately recording transactions in journals and
accounts.
– Physical controls include transaction authorization, accounting
records, prenumbered documents, special journals, subsidiary
ledgers, general ledger control accounts, files and independent
verification:
• Shipping department reconciles goods being shipped against packing
slip to ensure customer is receiving correct items and quantity.
• Billing function reconciles original sales order with shipping notice to
ensure bills are correct and sales are recorded properly.
• GL function reconciles journal vouchers and summary reports prepared
independently in different functional areas before posting to control
accounts.
– IT controls include automated postings and file backups.
• Misappropriation of cash receipts and inventory.
– Physical controls include transaction authorization, supervision
(especially in the mail room), access controls and segregation of
duties:
• Cash receipts function should be separate from the AR function.
• Cash receipts clerk should not have access to GL cash.
• Personnel with physical custody of inventory should not update records.
– IT controls include multilevel security.
• Unauthorized access to accounting records and reports.
– Motives include attempt to create a fraud, data theft and malicious
acts.
– Physical controls include access controls and segregation of duties
such that the perpetration of a fraud requires collusion.
– IT controls include passwords and multilevel security.
Physical Systems: Multilevel Security
• Employs programmed techniques that permit
simultaneous access to a central system by many users
with different access privileges.
– Users are prevented from obtaining information for which they
lack authorization.
• Two common multilevel security methods:
– Access control list (ACL) method assigns privileges directly to
individuals which is burdensome in large organizations.
– Role-based access control (RBAC) creates standard tasks called
roles that are assigned specific privileges.
• Once a role is created, individuals are assigned to it.
• Easy to add or delete roles as job responsibilities change.
Physical Systems: Point-of-Sale (POS) Systems
• POS systems used extensively in retail establishments.
– Customers pick items from shelves and take them to a cashier.
• Clerk scans the Universal product code (UPC) of items.
– Price and description retrieved from inventory file.
– Inventory levels are updated and reordered as needed.
• System automatically calculates taxes, discounts and total.
– Non-cash payments are approved via online connection.
• At shift end, money and receipts reconciled to the internal
cash register tape with cash over and shorts accounts for.
• Cash receipts clerk prepares deposit slip for total daily cash
receipts and batch program posts entry to the GL.
Physical Systems: POS Control Issues
• Authorization:
– Clerk should match customer signature with credit card.
• Supervision:
– Surveillance cameras and floor security help prevent shoplifting
and employee theft.
• Access Control:
– Separate cash drawers, locked showcases and magnetic tags
attached to merchandise help control theft.
• Accounting records:
– Only supervisors should access internal cash register tapes.
• Independent verification:
– Cash drawers should be reconciled to internal register tapes.
Physical Systems: Reengineering
• Electronic data interchange (EDI) expedites transactions.
– Customer’s computer automatically orders inventory as needed.
– Seller processes order with little or no human involvement.
– Binding terms specified in a trading partner agreement.
– Control problems include ensuring only valid transactions are
processed and that accounting records are not compromised.
• Doing business on the Internet involves both business-to-
business (B2B) and business-to-consumer (B2C) transactions.
– Opens the door to thousands of business partners without formal
trading agreements.
– Risks include threats from computer hackers, viruses and
transaction fraud.

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