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AIS S09 Revenue Cycle Exercise Pack

Accounting Information Systems (Singapore Management University)

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AY 2016-2017 Term 1

ACCT221 - Accounting Information Systems

Revenue Cycle Exercise Pack

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1) In an effort to cut costs, management of a retail department store located in a mall laid off
a third of the sales staff. A few months later, both sales and profits declined sharply. Why
do you think this happened? What external data might have been useful in providing an
early warning to management? How would you efficiently collect such data?

2) The use of some form of electronic “cash” that would provide the same kind of
anonymity for e-commerce that cash provides for traditional physical business transactions
has been discussed for a long time, but has not been widely adopted. Why? What are the
advantages and disadvantages to customers? To businesses? What are some of the
accounting implications of using electronic cash?

3) For the table below, please indicate the types of controls used at various steps in the
revenue cycle.

Process/ Threat Control

Activity
Sales order 1. Inaccurate customer orders
entry 2. Credit sales to customers with poor credit
3. Legitimacy of order
4. Lost sales due to stockouts, excessive carrying costs,
and lost revenue due to markdowns
Shipping 5. Shipping errors:
• Wrong merchandise
• Wrong quantities
• Wrong address
6. Theft of inventory
Billing and 7. Failure to bill
accounts 8. Billing errors
receivable 9. Errors in maintaining customer accounts
Cash 10. Theft of cash
collections

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4) The Quality Building Supplies Company operates six wholesale outlets that sell roofing
materials, electrical and plumbing supplies, lumber, and other building materials to general
contractors in a large metropolitan area. The company is studying the feasibility of
introducing a guaranteed same-day delivery plan, under which it would guarantee delivery
within 4 hours for orders received from approved customers by noon of that day. For
orders received in the afternoon, delivery would be guaranteed by 8 A.M. the next day.
The company believes that this system would give it a substantial competitive advantage
relative to other regional building wholesalers because it would enable contractors to
maintain smaller inventories yet still be assured of having building supplies when needed.

You have been asked to help design the proposed system. It will be designed to receive
customer orders by phone so that contractors can call from the construction site. Customers
will be billed monthly for all purchases. You want to streamline the processing of cash
collections and minimize the time it takes to deposit those funds in the company’s bank
account.

Required:
a) Identify the input transactions that this system must process and the output documents
(excluding reports) that it should produce.
b) Describe several reports that would be useful to management’s implementation of the
new credit sales policy. What data need to be collected to produce these reports?
c) Identify possible threats to the system and the control procedures required in the new
system to address those threats.
d) Identify ways to use IT to streamline the revenue cycle. System controls?

Solutions

1) Early warning data could be such things as walk-in traffic, customer phone inquiries, or
customer complaints about service. These data may be collected electronically through
entry detection systems, hard copy phone logs, and complaint logs.

2) Any form of electronic or digital cash has the same audit risks as physical cash:
susceptibility to theft and loss of an audit trail. In addition, digital “cash” also has risks
associated with the durability of the store of value – to what extent can the cash be
recovered if the storage media becomes defective? Another issue concerns the potential
loss of privacy, because the digital currency can be “marked” in a manner that enables
tracing its path through the economy.

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3)

Process/ Threat Control

Activity
Sales order 1. Incomplete or inaccurate 1. Various programmed edit controls
entry customer orders 2. Proper credit approval, prior to
2. Credit sales to customers delivery of goods or services; accurate,
with poor credit current customer data.
3. Legitimacy of order 3. Authorized customer purchase order;
digital signatures.
4. Lost sales due to stockouts, 4. Inventory control systems; periodic
excessive carrying costs, physical inventory counts; improved
and lost revenue due to sales forecasts; better supply chain
markdowns management
Shipping 5. Shipping errors: 5. Compare sales order with packing
• Wrong merchandise list and shipping documents; bar coding
• Wrong quantities 6. Physical access controls;
• Wrong address documentation of all inventory
6. Theft of inventory movements; periodic physical
inventory counts
Billing and 7. Failure to bill 7. Segregation of shipping and billing
accounts functions; one-for-one matching of
receivable invoices (or EDI acknowledgments)
against shipping documents
8. Billing errors 8. Comparison of sales orders, shipping
documents, and invoices; various
programmed edit checks.
9. Errors in maintaining
customer accounts 9. Data entry programmed edit checks;
use of remittance advices; monthly
statements to customers
Cash 10. Theft of cash Segregation of cash handling and
collections accounts receivable functions; use of
EFT; bank account reconciliation by
someone not involved in cash receipts
processing; segregation of bad
debt/credit memo authorization from
cash handling and accounts receivable
functions.

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4)

a) Input Transactions: Customer orders

Output Documents: (1) Shipping orders

(2) Delivery schedules
(3) Customer invoices

b) Reports include:
• Accounts Receivable Aging
• Percentage of orders filled on time
• Deliveries by customer, by delivery person, by geographic area, and by
product
• Dollar value of deliveries over time
• Orders by time of day
• Deliveries by time of day

To produce these reports, proper data will need to be collected such as sales
order amounts and dates; billing amounts and dates; cash collection amounts
and dates; delivery dates, times, and delivery person; and estimated delivery
dates and times. Each of the data groups should include the customer involved.

c)

Threat Control
Incomplete, inaccurate, or lost customer Data entry programmed edit checks
orders
Lost orders Maintain written order logs
Credit Sales to customers with poor credit Credit approval by credit manager prior to
shipment
Legitimacy of orders Phone orders should only be accepted from
approved contractors and only from
authorized personnel from those
contractors. The authorized personnel
should also be required to provide an order
authorization code to the order taker.
Stock-outs Inventory control systems
Shipping errors Reconciliation of sales order with picking
ticket and packing slip; bar code scanners,
RFID, data entry application controls
Failure to bill customers Separation of shipping and billing
functions, prenumbering all shipping
documents, reconciliation of shipping
documents to invoices, reconciliation of
picking tickets and bills of lading with sales
orders.

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Billing errors Data entry programmed edit controls and

price lists
Posting errors in updating accounts Reconciliation of subsidiary accounts
receivable receivable ledger with general ledger.
Monthly statements to customers.
Loss of data Backup and disaster recovery procedures.
Access controls both physical and logical.

d) Some ways that IT could be used to improve efficiency include:

• The system should include automatic credit checks on customers as well as check
inventory availability
• Email notification of each department (shipping, billing, etc.) whenever another
department performs an action (e.g., billing is notified whenever shipping enters
data indicating that an order has been released)
• EDI billing of customers
• Establishment of electronic fund transfer so that customer payments go directly to
company’s account

Controls that should be implemented in the new system include:

• Passwords to limit access to authorized users, and to restrict the duties each employee
may perform and which files they may access
• A variety of input programmed edit check

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