CHAPTER 4 INTERNAL CONTROLS, SYSTEM DOCUMENTATION & RISK ANALYSIS

PROBLEM SAMPLE:

TASKS PRODUCT DOC / SOURCE DOC FUNCTIONAL DEPARTMENT

Actual Should be Actual Should be Actual Should be

1.Clerks receive checks and ✓ Checks 1. Mail room

Prepare “For Deposit Only”
remittance advices and verify Remittance advice

2a. Clear checks before

2a. Send to AR department. posting.
-review - Cash receipts should Preparation of
2a. AR department Cash receipts
-post to SL be the finance cash prelist
-correctness department instead of
AR

X- 2b. Prepare remittance list 2b. AR department Mailroom

3.Credit Department:
-Reconcile checks and
remittance list
-Post to cash receipts journal
-Prepare deposit slip
3.Credit department
-Deposit to bank
X -Summarize
X -Post to
General ledger-cash
General ledger-AR
➢ Control:
- Preparing “For Deposit Only”
- Preparing Cash Prelist
- Report
- To account all possible checks
- Failure to record or accomplishment result to lack of faithful representation.
➢ Timing should be accurate: Checks should be cleared before posting.
➢ Mailroom should receive remittance advice from customers.
➢ Cash Receipt department will verify if the checks is fine to deposit.
➢ Reconciling for verification and accuracy of checks
➢ Finance is custodian.
➢ For every business unit, there should be a report.
INTERNAL CONTROL- to mitigate the risk from error and frauds.
CONTROLLER’S OFFICE- a clerk periodically performs a reconciliation of remittance lists, bank deposit slips, cash receipt journals, and GL
cash accounts.

PRMARY RISKS ASSOCIATED WITH REVENUE CYCLE AND THEIR CONTROL

RISK
1. Sales to un-creditworthy
customers
-can lead to excessive bad debt losses
2. Shipping wrong item or
incorrect quantities
-damaged customer relations,
excessive sales returns, lost future
sales, & acctg erros
3. Inaccurate recording of sales
and cash receipts
PHYSICAL CONTROL
a. Transaction authorization- credit
check. Only valid transactions are
processed
b. Segregation of duties- separate
credit sales and sales function.
Separate transaction authorization
from transaction processing
a) Independent verification- shipping
department reconcile shipment with
order. Packing slip should be
reconciled.
a. Transaction authorization-
remittance list means of verifying
b. Accounting records- audit trail
docu, journals. Accts, files
c. Independent verification- shipping,
billing, Gl
IT CONTROL
Automated credit check makes the decision to grant
or deny credit based on the customer’s credit history
contained in the credit history file.
a. Scanner technology
- Product code scanners
b. Automated inventory ordering
- Quantity on hand<Reorder point and On-
order field= zero
- Reorder inventory to avoid stock out
a. Input date edits
-check for missing data
-check digit edits
b. Automated posting to accnts
- Reduce potential errors and fraud
d. File backup
- Backup for physical destruction

4. Misappropriation of assets
- Cash is at risk of being “skimmed”
or “embezzled”
5. Unauthorized access to data
-attempts to perpetrate fraud
-theft of data
-corrupting and deleting financial data
- Accuracy and completeness
of tasks perf by other
functions
a. Transaction authorization- rem. Multilevel security to achieve segregation of
List provides control against loss or duties
theft
b. Supervision- mailroom
c. Access control- warehouse
security, daily deposits cash, night
deposit box, locked safes
d. Segregation of duties- CR, GL, AR
func, warehouse, & inventory recs.
a. Access control- SD, journals, a. Password control
ledgers
b. Segregation of duties- SL, GL, & c. Multilevel security to prevent unauthorized
asset custody should be separately access to data
maintained -permit simultaneous access to central system but
prevents them from obtaining information for
which they lack authorization.
-Access control List (ACL)- assigns privileges
directly to individual
-Role-based access control- creating standard
tasks called roles which were assigned to specific
datas
CASH RECEIPTS

TASKS FUNCTIONAL DEPARTMENT

1. Receive checks Finance- Portfolio management

2. Deposit Finance- Credit

3. Record Accounting- AR/General Ledger

4. Reconcile Control

REVENUE CYCLE (SELLER’S POV)

JOURNAL PERIODIC PERPETUAL SOURCE DOCUMENT JOURNAL LEDGER

ENTRIES

1.CASH SALES
GL- cash
Cash + Cost of Sale Cash receipt GL- Sales
Prepare Official Receipt
Sales Merchandise Inv. Journal GL-COS
GL / SL- MI

2.CREDIT SALES GL-sales

AR + Cost of Sale GL / SL-AR
Sales Invoice Sales Journal
Sales Merchandise Inv. GL-COS
GL / SL-MI

3.COLLECTION Cash receipt

Prepare Official Receipt
Journal

Collection w/in Cash GL-Cash

discount period Sales Discount GL-SD
AR GL / SL-AR

Collection
Cash GL-Cash
beyond discount
AR GL / SL-AR
period
 4.FREIGHT OUT

Cash Cash
Freight Out GL-T
Official Receipt Disbursement
Cash GL-Cash
Journal

On account
Freight Out GL-T
Bill of lading General Journal
AR GL / SL-AR

5.SALES RETURN

Cash Cash
SR&A GL-SR&A
Official Receipt Disbursement
Cash GL-Cash
Journal

On account SR&A GL-SR&A

Bill of lading General Journal
AR GL / SL-AR

PURCHASE PROCEDURE

PRODUCT SOURCE
TASK FUNCTIONAL AREA RECORD
DOCUMENT DOCUMENT

Materials
Request Production
requisition Form

Approved Material Approved Material

Check Inventory Accounting – Inventory
Requisition Form (only) No Requisition Form (only)
(Availability) Leger Group
product document No source document

∙ If sufficient Storage na agad

Purchase
∙ If insufficient
requisition form
 Materials Management Purchase
Purchases/Buy Purchase Order
Purchasing Dept. Requisition Form

Receive (not Materials management

Receiving Report Purchase Order
enough) Receiving Dept.

Distribution
Storage (enough) Transaction Log Receiving Report
Warehouse Dept.

Accounting -
Bill (not enough) Invoice Journal Voucher Journal
Accounts Payable

Accounting-General
Post (ledger) none none
ledger

EXPENDITURE CYCLE (BUYER’S POV)

JOURNAL SOURCE
PERIODIC PERPETUAL JOURNAL LEDGER
ENTRIES DOCUMENT

GL- cash
1.Cash Purchase Merchandise Inv. Receive Cash Disbursement GL-
Purchases Cash Cash Official Receipt Journal Purchase
GL / SL- MI

GL-Purchase
2.Credit Purchase Merchandise Inv.
Purchase Invoice Purchase Journal GL / SL-AP
Purchases AP AP
GL / SL-MI
 Receive Cash Disbursement
3.Payment
Official Receipt Journal

GL / SL-AP
AP AP
Payment W/In GL-Cash
Cash Cash
Discount Period GL-PD
Purchase discount Merchandise Inv.
GL / SL-MI

Payment
AP AP GL / SL-AP
Beyond
Cash Cash GL-Cash
Discount Period

4.Freight In

GL-FI
Freight In Merchandise Inv. Cash Disbursement
Cash Official Receipt GL-Cash
Cash Cash Journal
GL / SL-MI

Freight In Merchandise Inv. GL-FI

On Account Bill of Lading General Journal
AP AP GL / SL-AP

5.Purchase
Return

GL-Cash
Cash Cash
Cash Official Receipt Cash receipt Journal GL-SR&A
PR&A Merchandise Inv.
GL / SL-MI

GL-PR&A
AP AP
On Account Bill of Lading General Journal GL / SL-AP
PR&A Merchandise Inv.
GL / SL-MI
CASH DISBURSEMENT PROCEDURE

TASK FUNCTIONAL AREA PRODUCT DOCUMENT/ SOURCE DOCUMENT

DUE (determine obligation) Accounting- Accounts Payable group None

APPROVE Accounting- Approved-Head Statement of Accounts(basis)

Finance- Cash Disbursement Check Remittance Advice

RECORD Accounting- Accounts Payable group Purchase Invoice

POST Accounting- General Ledger Journal