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ACCY225 Tri 2 2019 Tutorial 3 Revenue and Expenditure

controls- Solution
Introduction to Accounting Systems (Victoria University of Wellington)

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School of Accounting and Commercial Law

ACCY 225 ACCOUNTING INFORMATION SYSTEMS
Trimester Two 2019
Tutorial 3: Revenue and Expenditure controls
Week 7 starting 2 September 2019
SOLUTION

Objective of Tutorial:
At the end of this tutorial, students will
• Demonstrate understanding of the Code of Ethics and the ethical decision-making model

We expect that with respect to the tutorial:

• Students will have prepared answers to the questions before the tutorial and will be able
to discuss them
• Tutors will provide guidance, but no model answers will be handed out.

QUESTION ONE: REVENUE CONTROL AND DOCUMENTATION

O’Brien Corporation is a midsize, privately owned, industrial instrument manufacturer supplying

precision equipment to manufacturers in the Midwest. The corporation is 10 years old and uses an
integrated ERP system. The administrative offices are located in a downtown building and the
production, shipping, and receiving departments are housed in a renovated warehouse a few blocks
away.

Customers place orders on the company’s website, by fax, or by telephone. All sales are on credit,
FOB destination. During the past year sales have increased dramatically, but 15% of credit sales
have had to written off as uncollectible, including several large online orders to first-time
customers who denied ordering or receiving the merchandise.

Customer orders are picked and sent to the warehouse, where they are placed near the loading dock
in alphabetical sequence by customer name. The loading dock is used both for outgoing shipments
to customers and to receive incoming deliveries. There are ten to twenty incoming deliveries every
day, from a variety of sources.

The increased volume of sales has resulted in a number of errors in which customers were sent the
wrong items. There have also been some delays in shipping because items that supposedly were
in stock could not be found in the warehouse. Although a perpetual inventory is maintained, there
has not been a physical count of inventory for two years. When an item is missing, the warehouse
staff writes the information down in log book. Once a week, the warehouse staff uses the log book
to update the inventory records.

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The system is configured to prepare the sales invoice only after shipping employees enter the actual
quantities sent to a customer, thereby ensuring that customers are billed only for items actually
sent and not for anything on back order.

Required:

a. Identify at least three weaknesses in O’Brien Corporation’s revenue cycle procedures,

explain the associated problem, and propose a solution. Present your answer in a
three-column table with these headings: Weakness, Problem, Solution.

b.Draw a BPMN diagram to depict O’Brien Corporation’s revenue cycle revised to

incorporate your solutions to step a.
(CMA Examination, adapted)

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SOLUTION
QUESTION ONE: REVENUE CONTROL AND DOCUMENTATION
a. Identify at least three weaknesses in O’Brien Corporation’s revenue cycle procedures,
explain the associated problem, and propose a solution. Present your answer in a
three-column table with these headings: Weakness, Problem, Solution.

Recommendation(s) to Correct
Weaknesses and Potential Problem(s) Weaknesses

1. Orders from new customers do not require
any form of validation, resulting in several
large shipments being sent and never paid for.
2. Customer credit histories are not checked
before approving orders, resulting in excessive
uncollectible accounts.
3. Outgoing shipments are placed near the
loading dock door without any physical
security. The loading dock is also used to
receive incoming deliveries. This increases the
risk of theft, which may account for the
unexplained shortages in inventory.
4. Physical counts of inventory are not made at
least annually. This probably accounts for the
inaccuracies in the perpetual inventory records
and may also prevent timely detection of theft.
5. Shipments are not reconciled to sales orders,
resulting in sending customers the wrong
items.
6. The perpetual inventory records are only
updated weekly. This contributes to the
unanticipated shortages that result in delays in
filling customer orders.
Require digital signatures on all online orders
from new customers.
Require a written customer purchase order as
confirmation of telephone and fax orders.
Customers’ credit should be checked and no
sales should be made to those that do not meet
credit standards.
Separate the shipping and receiving docks.
Physically restrict access to the loading dock
area where customer orders are placed.
Physical counts of inventory should be made at
least once a year.
Inventory records discrepancies should be
corrected and investigated.
The system should be configured to match
shipping information to sales orders and alert
the shipping employees of any discrepancies.
The warehouse staff should enter information
about shortages as soon as they are discovered.

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b. Solutions to part b will vary depending upon which weaknesses the students identified and corrected. The following corrects all six
weaknesses listed above.

Employee Activity Performed (sequential, left-to-right across all rows)

Sales Clerk
Receive No Prepare
Sale > Credit
Customer Sales
Limit?
Order Order

Warehouse
Clerk Pick &
Pack
Order

Shipping Clerk

Ship to
Customer
Yes

Credit Manager
No
Approve
Credit Sale?

Accountant
Prepare & Update
Mail Invoice Accounts
to Customer Receivable

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QUESTION TWO: EXPENDITURE CYCLE INFORMATION SYSTEM

a. Explain what is meant by the expenditure cycle as a "mirror image" of the revenue
cycle.

SOLUTION

The expenditure cycle has been called a "mirror image" of the revenue cycle because the
activities of the expenditure cycle are the opposite, or "reflection" of several activities
found in the revenue cycle. For example, the order goods activity generates a purchase
order, which serves as customer input to the sales order entry process. The receive goods
activity handles the goods sent via the supplier's shipping function. The pay for goods
activity generates the payments that are processed by the supplier's cash collection
activity. This mirror image also means that major technological improvements in the
expenditure cycle may bring about complementary improvements in suppliers' revenue
cycle as well.

b. Identify ten threats and applicable control procedures in the expenditure cycle.

SOLUTION
This can include the following information:
1: Stock-outs — Controls: Inventory control system; accurate perpetual inventory; and vendor
performance analysis is needed to prevent this problem
2: Requesting goods not needed — Controls: Review and approval by supervisors; use of pre-
numbered requisition forms; and restricted access to blank purchase orders
3: Purchasing goods at inflated prices — Controls: Competitive bidding and proper
supervision; approved purchase orders; and price list consultations are needed to prevent this
problem
4: Purchasing goods of inferior quality — Controls: Use experienced buyers who know good
vendors; review purchase orders; and incorporate approved vendor list into formal procedures
5: Purchasing from unauthorized vendors — Control: Pre-numbered purchase orders should
be approved; restrict access to approved vendor list and have procedures in place for any
change to the list
6: Kickbacks paid to buyers to influence their decisions — Controls: Clear conflict of interest
policy prohibiting the acceptance of any gift from vendors; disclosure of financial interest
policy for purchasing agents; and vendor audits
7: Receiving unordered goods — Controls: Receiving department must reject any goods for
which there is no approved purchase order
8: Errors in counting goods received — Controls: Use "blind" P.O. copies to force receiving
personnel to actually count goods; provide incentives for counting goods
9: Theft of inventory — Controls: Secure inventory storage locations; make transfers of
inventory with proper approval and documentation; do periodic physical count and

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reconciliation with recorded amounts

10: Errors in vendor invoices — Controls: Invoice accuracy should be verified and compared
to P.O.s and receiving report data
11: Paying for goods not received — Controls: Voucher package and original invoice should
be necessary for payments
12: Failure to take available purchase discounts — Controls: File approved invoices by due
date; track invoices by due date; use a cash budget to plan for cash needs
13: Paying same invoice twice — Controls: Invoices should be approved only with a full
voucher package and paid ones should be canceled so they cannot be used again; do not pay
invoices marked "Duplicate" or "Copy"
14: Recording and posting errors for purchases and payments — Controls: Data entry
controls, and periodic reconciliation of subsidiary ledger with general ledger control account
15: Misappropriation of cash by paying fictitious vendors and alteration of checks —
Controls: Restrict access to cash, blank checks, and check signing machine; use check
protection, pre-numbered checks, and imprinted amounts on checks to cut down on forgery
and fraud; use petty cash fund for small expenditures only; have proper segregation of duties
and independent bank reconciliation function
16: Theft associated with EFT use — Controls: Access controls to the system; encryption of
transmissions; time-stamp and number transmissions; control group should monitor all EFT
activity
17: Loss of data — Controls: Use file labels, back up of all data files regularly; and, use
access controls
18: Poor performance — Controls: Preparation and review of performance reports

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