ACCT3303 - Chapter 9 Extra Practice Question - Revenue Cycle
BSC Solution
Internal Control Weakness
W1 – Lack of segregation of the
bookkeeper’s duties. The
bookkeeper has the following
incompatible functions:
 Custody of cash (bank deposits)
 Periodic Reconciliation (bank
rec, customer statements)
 Authorization (customer
discounts, write offs)
 Recording in the G/L (A/R sub
ledger)
W2 – Source document for posting
cash receipts to the individual
customers in the A/R sub ledger is
the stamped bank deposit book
(not the cash receipts listing and/or
the remittance advices
accompanying customer cheques).
W3 – No independent check of
sales invoices for accuracy of data
entry of the quantity of items
shipped or the inventory item
number.
W4 – Monthly customer
statements of A/R balances sent to
customers only upon request.
INTERNAL CONTROL WEAKNESSES
Risk/Implication
Theft of cash after it has been received
from the receptionist. This could be
covered up by one or more of the
following:
 Removing the customer payment from
the CR listing and not including it in the
listing to update A/R. A customer
would not complain since monthly
statements are sent only upon request.
 Show missing cash as a customer
discount (even though one has not
been take) – customers would not
notice this.
 Show missing cash as a write off of A/R
when one is not justified – customers
would not notice.
 Show missing cash as a reconciling
item in the bank rec.
If cash has been stolen after the cash
receipts listing was made but before the
bank deposit was done, this would go
unnoticed.
The customer could be billed for an
incorrect inventory item or an incorrect
quantity. Since inventory items are
individually priced, the customer may be
over/under billed.
The customer will not be able to indirectly
confirm the accuracy over their A/R
balance. Therefore, if transactions have
Recommendation
Segregate the duties – the
bookkeeper should only have
access to the G/L; access to cash,
authorization, and reconciliation
duties should be removed.
Note: If this is not feasible, add
compensating controls such as
review by the Controller of bank
reconciliation, write offs,
discounts, etc.
ALL documentation should be
forwarded to billing clerk – when
he/she posts the amounts, they
should be based on both cash
receipts listing AND bank deposit
slip.
Someone should independently
check sales invoice details to the
bill of lading to ensure items are
input accurately.
This could also be a system
control, where the system will
retrieve the bill of lading details
and automatically populate the
invoice for quantity and items
shipped.
Customer statements to be sent
to all customers at the end of
each month, regardless of
 Internal Control Weakness Risk/Implication Recommendation

been incorrectly reflected in a customer’s whether or not they are

account or if certain transactions are requested.
missing (sales/ cash receipts/ discounts
taken/ inventory returned), the customer
will not be able to notify BSC of the
mistake.

May also increase risk of bad debts, since

monthly statements serve as a reminder of
the total amount owed.

W5 – No dual custody of cash –
receptionist opens the mail
(cheques) and receives cash and
prepares cash receipts listing
Theft could occur and be hidden by not
including the cash on the cash receipts
listing. This would be difficult to conceal
since the receptionist doesn’t have access
to the G/L, but it may go unnoticed since
no monthly statements are sent to
customers (they wouldn’t notice if their
payment hasn’t been processed) and/or if
there is not a detailed review of delinquent
accounts before they are written off.
Have two people present when
counting the cash/preparing the
cash receipts listing.
Customer statements to be sent
to all customers at the end of
each month, regardless of
whether or not they are
requested.
 INTERNAL CONTROL STRENGTHS
Internal Control How Internal Control Prevents, Detects, and/or Test of Control
Strength Corrects Errors

S1 – Customers must fill This minimizes the risk that the company will sell to Select a sample of new credit
out a credit application customers who are not credit-worthy, which reduces customers that were granted
form in order to the risks of bad debts. It also allows them to establish credit during the year. Review
purchase from the credit limits to ensure customers are not allowed to their credit application forms for
company. The credit purchase beyond their means. approval by the credit supervisor
application will be (ex. initials, signatures). Note the
approved by the credit credit limit that has been
supervisor after approved per the credit
reviewing the application form and agree this
customer’s overall amount to that listed in the sales
credit profile. system. Ensure approval
happened before the goods were
shipped.

S2 – Computer will not This minimizes the risk that a customer will purchase Select a sample of customers.
allow sales order to be goods beyond their approved credit limits, which Attempt to enter a sales order
processed if credit limit reduces the risk of bad debt losses to the company. into the system which would
will be exceeded. cause that customer’s credit limit
to be exceeded. Ensure the
computer will not allow the sales
order to be processed. (Note: A
test of one should be sufficient as
this is an automated control.)

S3 – Invoice quantities This will ensure that the customer is only billed (and Select a sample of sales orders in
are entered into the revenue is recognized) only for goods actually the year. Trace to bills of lading
billing system based on shipped. and invoices. Ensure that the # of
the number of units items billed on the invoice agree
shipped per the bill of to the # items shipped per the bill
lading (not units of lading.
ordered).

S4 – Invoice prices This ensures that only approved prices are used for Select a sample of sales invoices -
automatically entered each inventory item. It also minimizes the risk of data agree the invoice price listed on
by the computer upon entry errors with respect to pricing (although a risk the invoice to the most current
data entry of inventory still exists that an incorrect inventory item # may still price list approved by
item #. be entered.) management.

S5 – Pre-numbered If the company checks the numerical continuity of
documents are used the documents, they will be able to identify if there
(sales orders, bill of are any missing transactions (for example, a missing
ladings, invoices) bill of lading might indicate that the shipment went
out but was not invoiced) or duplicate transactions.
Scan the sales journal / bill of
lading files for different periods
during the year (block sample) to
ensure that numerical continuity
is maintained and no missing
numbers or duplicate numbers
 Internal Control How Internal Control Prevents, Detects, and/or
Strength Corrects Errors
S6 – Sales invoices, bills Ensures that the company sends the customer only
of lading, and sales inventory that they ordered and customer is invoiced
orders are matched. only for inventory delivered and received. Ensures
orders = shipments = invoices. Unmatched
documents can be followed up and corrective action
can be taken (i.e. bills of lading that have not been
matched to an invoice means the shipment has gone
out but has not been invoiced).
S7 – Daily bank deposits Reduces the risk of theft/ loss of cash assets due to
are made. storage on company premises.
S8 – Month end bank Regular bank reconciliations will uncover
reconciliations are errors/fraud on a timely basis.
done.
Test of Control
are present.
Select a sample of sales orders
processed during the year. Trace
to bills of lading and invoices to
ensure all the details match and
amounts are posted correctly to
A/R sub ledger and sales journal.
Select a sample of business days
during the year and verify, by
examining the bank-stamped
deposit slip, that a bank deposit
was made on that day.
Select a sample of months and
ensure bank reconciliation has
been performed/reviewed by
someone with authority.