ACCT3303 - Chapter 9 Extra Practice Question - Revenue Cycle
BBS Solution
INTERNAL CONTROL WEAKNESSES
Internal Control Weakness
W1 - No credit department
OR
Orders are shipped out of the
warehouse upon receipt of the
sales order.
W2 - No shipping documents
used.
OR
Invoices/sales are based on sales
order, not actual shipments.
W3 - Customer receipts only
provided on request.
W4 – Lack of segregation of the
A/R clerk’s duties: He/she has
the following incompatible
functions:
 custody of assets (handles
cash receipts, makes bank
deposit)
Risk/Implication
Could sell to customers who are
a bad credit risk or to customers
who have exceeded their credit
limits, which increases the risk of
bad debts.
Since they are basing invoices
(and sales) on sales orders, not
shipments, could result in errors
(over/undercharging customers
and/or cutoff errors).
Without shipping documents,
there is no summary of the
goods actually shipped.
Customers could claim that the
goods were never received.
If customers’ payments are not
being posted to their accounts
(see A/R clerk issue below) or if
there are other errors with the
customers’ accounts, customers
will not be able to present their
receipts as proof of payment.
Could steal cash and not deposit
in the bank. Could hide the
missing cash by recording it as
uncollectible (bad debt expense).
Because Max is recording entries
based on A/R clerk’s totals and
not reviewing aged A/R listing,
Recommendation
Set up credit department to
perform credit checks on
customers and set credit limits
AND before delivery of product,
ensure sale will not result in
customer exceeding their limit.
Should use pre-numbered
shipping documents (bills of
lading) AND use the shipping
document as the source
document for preparing
invoices/recording sales.
It is also a good idea (if possible)
to have customers sign
indicating that they have
accepted the goods.
Should have pre-numbered
receipts and give to all
customers as proof of payment
AND receipts should reconcile to
invoices (to ensure all amounts
invoiced have been collected).
Segregate duties - have someone
else prepare listing of cash
receipts immediately, then
forward on to A/R clerk. Max
should do journal entry using the
cash receipts listing AND bank
deposit.
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 access to G/L (at least
indirectly, since no one is
monitoring) (generates tape
for G/L entry)
W5 - No cash receipts ‘pre-
listing’.
OR
No dual custody of cash
(receptionist opens the mail and
takes payments on her own)
W6 - G/L entry done only
monthly by controller OR
Revenues/A/R not posted timely.
W7 - No internal verification
(reconciliation) of ‘tapes’ to
supporting documentation (sales
orders, invoices, payments)
W8 - No ledger/sub ledger
system used – too much
dependency on manual filing and
no reconciliation of A/R sub
ledger (yellow copies) to G/L
control account.
this could go unnoticed.
The receptionist could take the
cash and not send it to the
accounts receivable clerk.
OR
A/R clerk could steal money and
cover up by not including the $
in the bank deposit or tapes.
Both of these errors would go
unnoticed by both customers
and Max b/c there are no
monthly statements sent and no
preparation/review of an aged
A/R sub ledger.
Could be cut-off errors - Revenue
could be overstated by orders
that have not been shipped yet,
or understated by orders that
have been shipped but haven’t
been recorded in the monthly
journal entry. Will also affect
inventory balances.
Could be errors (accuracy,
completeness (not all included –
missing or lost), existence
(duplicates) with revenues/A/R.
This would likely also affect
inventory and cost of goods sold.
Could be errors (loss of
revenues/higher bad debts)
because there is no way to track
customer balances and no follow
up on overdue accounts, which
could result in lost revenues/bad
Two people should receive cash
and prepare a cash receipts
listing immediately AND cash
receipts listing should then be
reconciled to the bank deposit
and the G/L.
Should be done daily. Use A/R
sub ledger system, which would
include aging of accounts.
Record revenue when goods
delivered to customer (use a
signed shipping document or bill
of lading).
Reconcile to supporting
documentation (order, invoices,
and payments) before posting
AND use sub ledger system.
Use sub-ledger system and
reconcile sub ledger (yellow
copies) to G/L account monthly.
It is also a good idea to send
monthly statements to
customers so that customers can
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W9 – Bank deposits made three
times/week
W10 - No monthly bank
reconciliations done.
W11 - Bad debt expense
estimate made using 2% because
no aging of A/R is possible.
Note: sales orders being written out by sales staff is NOT a weakness, as sales staff do not price the
orders (therefore commissions are based on totals of invoices, which are prepared independently by
the accounting department).
debts.
If cash is significant, risk of theft
increases the longer cash is held
on hand.
Bank recs can help uncover any
errors or missing funds. If they
are not done on a timely basis,
mistakes or lost $ could go
unnoticed for a whole year.
Delinquent customers not
identified for follow up/AFDA
estimate is not reliable. Risk of
uncollectible accounts being
overvalued.
confirm the accuracy of the
balances owing.
Bank deposits should be made
daily.
Bank reconciliations should be
done at least monthly AND
reviewed by someone with
authority.
Should prepare aging report of
A/R. Estimate of bad debts
should be based on aging report
and collection efforts, not a
subjective estimate (in order to
meet the requirements of
GAAP).