CHAPTER 4: REVENUE CYCLE

SALES ORDER PROCESSING

• Begins with a customer placenta an order
• The transaction is authorized by obtaining credit approval by the credit
department.
• Sales information is released to:
 Billing
 Warehouse (stock release or picking ticket)
 Shipping (packing slip and shipping notice)

SALES ORDER PROCESSING

• The merchandise is picked from the Warehouse and sent to Shipping.
• The merchandise, packing slip, and bill of lading are prepared by
Shipping and sent to the customer.
• Shipping information is sent to Billing. Billing compiles and reconciles
the relevant facts and issues an invoice to the customer and updates the
sales journal. Information is transferred to:
 Accounts Receivable (A/R)
 Inventory Control

SALES ORDER PROCESSING

• A/R records the information in the customer's account in the accounts
receivable subsidiary ledger.
• Inventory Control adjusts the inventory subsidiary ledger.
• Billing, A/R, and Inventory Control submits summary information to
the General Ledger dept., which then reconciles this data and posts to
the control accounts in the G/L.
CASH RECEIPTS PROCESSES
• Customer checks and remittance advices are received in the Mail Room.
• Cash Receipts:
 Verifies The Accuracy And Completeness Of The Checks
 Updates The Cash Receipts Journal
 Prepares A Deposit Slip
 Prepares A Journal Voucher To Send To G/L

CASH RECEIPTS PROCESSES

• A/R posts from the remittance advices to the accounts receivable
subsidiary ledger.
• G/L department:
 Reconciles the journal voucher from Cash Receipts with the
summaries from A/R.
 Updates the general ledger control accounts.
• The Controller reconciles the bank accounts.

Physical System
Physical accounting information systems are a combination of
computer technology and human activity. This technology\human mix creates a
continuum of alternative design options. On the end of the other part systems,
they employ the minimal technology and rely on manual procedures while on
the other part of the system they rely extremely on the technology; they replace
the human activities by automated processes.

Basic Technology Revenue Cycle

The computers used in this system are independent personal
computers. Therefore, information flows between departments are
communicated via hard-copy documents. In addition, in such system, physical
files of source document are critical to the audit trail.

Basic Technology Sales Order Processing System

The system flowchart in figure 4-12 shows the process, documents and
files of a basic technology sales order system. The following outline the key
activities in this system.
Sales Department
A sales department is responsible for selling products or services for a
company. The department comprises a sales team that works together to make
sales, increase profitability and build and maintain relationships with
customers to encourage repeat purchases and brand loyalty.

Credit Department Approval

The credit department needs to implement with the sales staff to
reduce the occurrence of bad debt. Securing a personal guarantee or letters of
credit, and sending or filing preliminary notices and liens are just a few tools
that construction industry business can use to mitigate the chance for bad debt.

Warehouse Procedures And The Shipping Department

 1. Receiving
 2. Put-Away
 3. Storage
 4. Picking
 5. Packing

The shipping departments are responsible for the safe and timely delivery
of products to customers. They monitor and manage the shipping process from
beginning to end. They are responsible for the accuracy of information entered
into the shipping system, as well as the timely and accurate shipment of
products to customers.

The Billing Department

The departments are the ones who compiles the relevant facts about
every transaction that is being made. They record the transactions sales journal
file and distributes stock release and ledger copies of the order to the inventory
control and AR departments, respectively.

Accounts Receivable, Inventory Control, And General Ledger Departments

They search their respective files for the correct records by entering
primary key data from the sales order into their computer systems. The system
searches their respective files and receives the matching records. The AR
department updates the current balance field in the AR record by entering the
sales order amount data into the system. Similarly, the inventory department
that updates the quantity-on-hand field from the sales.
Basic Technology Cash Receipt System Advanced Technology Revenue Cycle and Integrated Sales Order
Presents a system flowchart depicting the cash receipts procedures, which Processing System
begin in the mail room. This involves replacing traditional procedures with procedures that are
very different. We can see how advance technologies can significantly alter and
simplify the revenue cycle, compared to the basic technology system presented
in the previous sections. Reviewing the operational features of an integrated
sales order system and then examine the cash receipts.
Sales Procedure Revenue Cycle Risks And Internal Controls
A sales process is a set of repeatable steps that a sales person takes to An objective of internal control is to mitigate the risks from errors and fraud.
take a prospective buyer from the early stage of awareness to a closed sale. The following are the primary risks associated with revenue cycle transactions:

Integrated Cash Receipt System  Selling to un-creditworthy customers

This shows the customers which make payments on account with physical  Shipping customers the wrong items or incorrect quantities
checks that are mailed to the company. Organizations that use electronic funds  Inaccurately recording sales and cash receipts and inventory
transfer (EFT) to receive customer payments employ different procedures.  Unauthorized access to accounting records and confidential reports

Risk of Selling to Un-Creditworthy Customers

Selling on credit to customers who have not been properly vetted can
lead to excessive bad debt losses. This risk is more apparent in organizations
whose sales staffs are compensated on a commission basis. Consider the
potential conflict in objectives between the salesperson, whose compensation is
based on individual sales performance, and the organization.

Physical Controls

TRANSACTION AUTHORIZATION
The objective of transaction authorization is to ensure that only valid
transactions are processed. The authorization process in the sales function is a
credit check of the customer. This task is a function of the credit department,
which has responsibility for ensuring the proper application of the firm’s credit
policies. Determining the creditworthiness of the customer is the principal
concern of this function.

SEGREGATION OF DUTIES
To provide independence to the credit authorization process, the credit
function should be organizationally and physically segregated from the sales
function. This will help ensure that the task of reviewing prospective customers
is objectively performed and that the credit function is unconstrained in
detecting risky transactions and disallowing poor and irresponsible sales
decisions.

IT Controls

AUTOMATED CREDIT CHECKING

Credit checking may be performed automatically by the system as a
programmed process control. The system logic, not a human being, makes the
decision to grant or deny credit based on the customer’s credit history
contained in the credit history file.
Risk of Shipping Customers Incorrect Items or Quantities
Shipping customers the wrong items or incorrect quantities may result
in damaged customer relations, excessive sales returns, lost future sales, and
accounting errors. These risks may be due to human errors in the process of
picking up items from the inventory warehouse or because of unanticipated
inventory shortages known as stock-outs.
Physical Controls
INDEPENDENT VERIFICATION
The shipping function verifies that the goods sent from the warehouse are
correct in type and quantity. The stock release document and the packing slip
should be reconciled before the goods are sent to the customer
IT Controls
SCANNER TECHNOLOGY
Product code scanners in the warehouse and shipping department will
reduce the risk of human error in picking and shipping incorrect products.
When scanned by the warehouse and/or shipping clerk, the system will verify
that the items selected match those on the sales order.
AUTOMATED INVENTORY ORDERING
When an inventory record is updated to reflect a sale, the computer
logic should check to determine if the reduction in inventory drops the
inventory quantity-on-hand to a point below the inventory reorder point.
Risk of Inaccurately Recording Transactions in Journals and Accounts
Inaccurate record keeping can take many forms. The following outlines some
common revenue cycle errors but is not intended to be an exhaustive list:
• Sales to customers are incorrectly calculated.
• Sales are recorded in the wrong period.
• Customers are billed for items they did not receive (back ordered).
• Customer cash receipts are inaccurately posted to accounts or are
posted to the wrong customer accounts.
• Summaries of sales, accounts receivable, cash receipts, and inventory
levels are incorrectly posted to their respective GL accounts
Physical Controls
TRANSACTION AUTHORIZATION
The remittance list or cash prelist provides a means for verifying that
customer checks and remittance advices match in amount and represent valid
transactions.
ACCOUNTING RECORDS
A firm’s source documents, journals, and ledgers form an audit trail that
allows independent auditors to trace transactions through various stages of
processing. This control is also an important operational feature of well-
designed accounting systems. Sometimes transactions get lost in the system.
PRENUMBERED DOCUMENTS
Prenumbered documents are sequentially numbered by the printer and
allow every transaction to be identified uniquely. This permits the isolation and
tracking of a single event through the accounting system.
SPECIAL JOURNALS
By grouping similar transactions together into special journals, the
system provides a concise record of an entire class of events.
SUBSIDIARY LEDGERS
Two subsidiary ledgers are used for capturing transaction event details
in the revenue cycle: the inventory and AR subsidiary ledgers. These subsidiary
records provide links back to journal entries and to the source documents that
captured the events.
GENERAL LEDGERS
The general ledger control accounts are the basis for financial
statement preparation. Revenue cycle transactions affect the following GL
accounts: sales, inventory, cost of goods sold, AR, and cash.
FILES
The revenue cycle employs several temporary and permanent files that
contribute to the audit trail.
INDEPENDENT VERIFICATION
The objective of independent verification is to verify the accuracy and
completeness of tasks performed by other functions in the process. To be
effective, independent verifications must occur at key points in the process
where errors can be detected quickly and corrected.
IT Controls
DATA INPUT EDIT
A basic assumption in transaction processing system design is that
master files, such as inventory, accounts receivable, and the general ledger, are
“clean” and error free. Transaction data, in contrast, are assumed to be “dirty”
and contain various errors such as transposed digits in account numbers,
invalid part numbers of items sold, and clerical errors.
AUTOMATED POSTING TO SUBSIDIARY AND GL ACCOUNTS
The record-keeping functions, which in the basic technology system
were performed manually by accounting clerks, are automated in the advanced
technology system.
FILE BACKUP
The physical loss, destruction, or corruption of digital accounting
records are serious concerns. To reduce the risk of data loss, backup procedures
need to be in place. These techniques are behind-the-scenes activities that may
not appear on the system flowchart. The accountant should verify that such
procedures are, in fact, performed for all subsidiary and general ledger files.
Risk of Misappropriation of Cash Receipts and Inventory
Cash and inventory are the physical assets at risk in the revenue cycle.
In the absence of proper controls, cash from customer payments is at risk of
being “skimmed” before it is recorded or “embezzled” after it has been received
and recorded. Inventory in the warehouse can be stolen and sold for cash.
Physical Control
TRANSACTION AUTHORIZATION
The remittance list provides a control against the loss or theft of checks
and remittance advices as they flow through the system. The presence of an
extra remittance advice in the AR department or the absence of a customer’s
check in the cash receipts department would be detected when the batch is
reconciled with the prelist.
SUPERVISION
The mail room is a point of risk in most cash receipts systems. The
individual who opens the mail has access both to cash (the asset) and to the
remittance advice (the record of the transaction).
ACCESS CONTROLS
The following physical access controls should be in place to help prevent
and detect unauthorized access to the firm’s assets:
• Warehouse security, such as fences, alarms, and guards.
• Depositing cash daily in the bank.
• Using a safe or night deposit box for cash.
• Locking cash drawers and safes in the cash receipts department
SEGREGATION OF DUTIES
Segregating duties ensures that no single individual or department
processes a transaction in its entirety.
Consistent with this objective the following segregations of duties
should exist:
1. The cash receipts function, which has custody of the cash asset, should
be separated from the accounts receivable function that records the
payment in the customer records. An individual with responsibility for
both tasks could perpetrate a lapping fraud or possibly steal the
customer’s check and write off the AR as a bad debt.
2. The individual performing the cash receipts function should not have
access to the general ledger cash account. He or she could remove cash
from the firm and adjust the cash account to cover the act.
3. Inventory warehouse personnel who have physical custody of
inventory assets should not also be responsible for the accounting task
of updating the inventory records. To combine these tasks would open
the door to fraud and material errors. A person with combined
responsibility could steal or lose inventory and adjust the inventory
records to conceal the event.
IT Controls
MULTILEVEL SECURITY
In a basic technology environment, segregation of duties is
accomplished by physically separating individuals and the data over which they
have custody. The segregations of duties described previously are accomplished
through multilevel security procedures that limit an individual’s access to
authorized processes and data.
Risk of Unauthorized Access to Accounting Records and Reports
Accounting information is at risk to unauthorized access from outsiders
as well as employees of the organization. The motives for accessing accounting
information include:
• Attempts to perpetrate a fraud such as creating a false sales order and
wiping out an accounts receivable balance.
• Theft of data such as stealing a customer list for a competitor and
downloading customer credit card numbers and PINs to be sold over
the Internet.
• Malicious acts such as corrupting and deleting financial data.
Physical Controls
ACCESS CONTROLS
Source documents and accounting records need to be physically
protected. Hard-copy accounting records and department PCs that contain
accounting information on hard drives should be kept in secure areas and
access to them should be restricted on a need-to-know basis.
SEGREGATION OF DUTIES
The organization should be so structured that the perpetration of a
fraud requires collusion between two or more individuals
IT Controls

PASSWORDS
Digital accounting records are vulnerable to unauthorized and
undetected access. This may take the form of an attempt at fraud, a destructive
act by a disgruntled employee, or an honest mistake. Also at risk are the
computer programs that make programmed decisions, manipulate accounting
records, and permit access to assets.
To mitigate these risks, organization management should implement a
robust password control policy to prevent unauthorized access to computer
files and programs that reside in each of the departments. The application logic
should require, and prompt, users to change passwords periodically and not
allow simple and easy-to-guess passwords.

MULTILEVEL SECURITY
Multilevel security employs programmed techniques that permit
simultaneous access to a central system by many users with different access
privileges but prevent them from obtaining information for which they lack
authorization. Two common methods for achieving multilevel security are the
access control list (ACL) and role-based access control (RBAC).
The ACL method assigns privileges, such as the right to perform
computer program procedures and access data files, directly to the individual.
In large organizations with thousands of employees, this can become a
considerable administrative burden as access needs constantly change with
changes in job responsibilities.
RBAC involves creating standard tasks (e.g., cash receipts processing)
called roles. Each role is assigned access privileges to specific data and
procedures, such as the right to add a record to the cash receipts journal. Once a
role is created, individuals are assigned to it. Using this technique, individuals
may be easily added or deleted from roles as their job responsibilities change.
Individuals assigned to a particular role may not access program procedures
and data that are not specified by that role.

POINT-OF-SALE (POS) SYSTEMS

The revenue cycle systems that we have examined so far are used by
organizations that extend credit to their customers. Obviously, this assumption
is not valid for all types of business enterprises. For example, grocery stores do
not usually function in this way. Such businesses exchange goods directly for
cash in a transaction that is consummated at the point of sale.
POS systems are used extensively in grocery stores, department stores,
and other types of retail organizations. In this example, the organization
maintains no customer accounts receivable; all transactions are for cash, checks,
or bank credit/debit cards. Also, inventory is kept on the store’s shelves, not in a
separate warehouse. Customers personally pick the items they wish to buy and
carry them to the checkout location where the transaction begins.
DAILY PROCEDURES

First, the checkout clerk scans the Universal Product Code (UPC) label
on the items being purchased with a laser light scanner. The scanner, which is
the primary input device in the POS system, may be handheld or mounted on
the checkout counter. The POS system is connected online to the inventory file
from which it retrieves product price data, and it displays the data on the clerk’s
terminal. The inventory quantity-on-hand is reduced in real time to reflect the
items sold.

When all the UPCs are scanned, the system automatically calculates
taxes, discounts, and the total for the transaction. In the case of credit card
transactions, the sales clerk obtains transaction approval from the credit card
issuer via an online connection. When the approval is returned, the clerk
prepares a credit card voucher for the amount of the sale, which the customer
signs. The clerk gives the customer one copy of the voucher and secures a
second copy in the cash drawer of the register. For cash sales, the customer
renders cash for the full amount of the sale, which the clerk secures in the cash
drawer.
The clerk enters the transaction into the POS system via the register’s
keypad, and a record of the sale is added to the sales journal in real time.
The record contains the following key data:
• Date
• Time
• Terminal Number
• Total Amount Of Sale
• Cash Or Credit Card Sale
• Cost Of Items Sold
• Sales Tax
• Discounts Taken.
The sale is also recorded on a two-part paper tape.
• One copy is given to the customer as a receipt
• The other is secured internally within the register, which the clerk
cannot access.
This internal tape is later used to close out the register when the clerk’s
shift is over.
The accounting entry in the table may vary among businesses. Some
companies will treat credit card sales as cash. Others will maintain an AR until
the credit card issuer transfers the funds into their account.
POINT-OF-SALE CONTROL ISSUES
The IT control issues previously discussed apply also to POS
transaction processing systems and are not revisited here. The POS
environment, however, is associated with unique risks that give rise to the need
for additional physical controls.
Authorization
In POS systems, the authorization process involves validating credit
card charges and establishing that the customer is the valid user of the card.
After receiving online approval from the credit card company, the clerk should
match the customer’s signature on the sales voucher with the one on the credit
card.
Supervision
The POS environment places both inventory and cash at risk.
Customers have direct access to inventory, and the crime of shoplifting is of
great concern to management. Similarly, cash can be removed from the cash
drawer by a dishonest employee. Supervision using surveillance cameras and
shop floor security personnel can reduce these risks.

END-OF-DAY PROCEDURES
At the end of the day, the cash receipts clerk prepares a three-part
deposit slip for the total amount of the cash received. One copy is filed and the
other two accompany the cash to the bank. Because cash is involved, armed
guards are often used to escort the funds to the bank repository.
Finally, a batch program summarizes the sales and cash receipts
journals, prepares a journal voucher, and posts to the GL accounts as follows:
Access Control
Because POS systems involve cash transactions, the organization must
restrict access to cash assets. One method is to assign each sales clerk to a
separate cash register for an entire shift.
Inventory in the POS system must also be protected from unauthorized
access and theft. Both physical restraints and electronic devices are used to
achieve this.
For example, steel cables are often used in clothing stores to secure
expensive leather coats to the clothing rack. Locked showcases are used to
display jewelry and costly electronic equipment. Magnetic tags are attached to
merchandise, which will sound an alarm when removed from the store.
Accounting Records
In addition to the usual revenue cycle records, the internal cash
register’s tape is an important accounting document. The tape is a record of all
sales transactions processed at the register. Only the clerk’s supervisor should
have access to the tape, which is used at the end of the shift to balance the cash
drawer.
REENGINEERING USING THE INTERNET
Doing Business on the Internet
Thousands of organizations worldwide have home pages on the
Internet to promote their products and solicit sales. By visiting the seller’s home
page, a potential customer can access the seller’s product list, scan the product
line, and place an order. Typically, Internet sales are credit card transactions
that are sent to the seller’s e-mail file.
At the seller’s end, an employee reviews the order, verifies credit, and
enters the transaction into the seller’s system for processing in the normal way.
Because of the need to review the email file before processing, the turnaround
time for processing Internet sales is sometimes longer than for telephone
orders.

Independent Verification
When the clerk whose shift has ended takes the cash drawer to the cash
room, its contents are reconciled against the internal register tape. The cash
drawer should contain cash and credit card vouchers equal to the amount
recorded on the tape.

REENGINEERING USING EDI

Doing Business via EDI

Many organizations have reengineered their sales order process

through ELECTRONIC DATA INTERCHANGE (EDI). EDI technology was
devised to expedite routine transactions between manufacturers and
wholesalers, and between wholesalers and retailers. The customer’s computer
is connected to the seller’s computer via a private network or the Internet.
When the customer’s computer system detects the need to order inventory, it
automatically transmits a purchase order (customer order) to the seller. The
seller’s system receives the customer order and processes it automatically. This
system employs little or no human involvement.
EDI is more than just a technology. It represents a strategic business
arrangement between buyer and seller in which they agree, in advance, to the
terms of their relationship. For example, they agree to the selling price, the
quantities to be sold, guaranteed delivery times, payment terms, and methods of
handling disputes. These terms are specified in a trading partner agreement and
are legally binding. Once the agreement is in place, no individual in either the
buying or the selling company actually authorizes or approves a particular EDI
transaction. In its purest form, the exchange is completely automated.