Chapter 3

Revenue and receipts cycle

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Introduction
 Ownership transferred
o Begins – request by customer
o Ends – receipt of cash
 Transactions and balances
o Sales (cash and credit)
o Cash receipts
o Sales returns and allowances
o Bad debts
o Provision for bad debts
o Accounts receivable
(continued)
2
Introduction (cont’d)
 Functions
o Processing customer orders
o Granting credit
o Shipping goods
o Billing and recording
o Cash receipts and recording
o Sales returns and allowances
o Write-off bad debts and providing for bad
debts

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Processing orders
 Customer requests goods
o Customer order (document, letter, fax, telephone,
internet)
 Sales order prepared
o Sales department
o Authorised price list
o Sales order
o Documentary controls (number sequence/safely
stored away)
o Confirm availability of goods
o Independent checks
(continued)

4
Processing orders (cont’d)
 Risks
o Unable to carry out order
o Items ordered not shipped
o Fictitious orders
o Incorrect prices, terms
 Forwarded to credit control

5
Granting credit
 Credit-worthiness checked and order
approved
o Credit controller
 Authorisation
 Segregation of duties
 Credit granting policies
o New client
 Credit application/credit authorisation form
 Credit bureau report
• Set limits and terms
(continued)

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Granting credit (cont’d)
 Existing client
o List of credit limits
o Outstanding balances
o Amount of order compared to:
 Credit limit/outstanding balance
 Payment history
 Sign as evidence
(continued)

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Granting credit (cont’d)
 Copies of authorised order to:
o Customer (original)
o Sales department – filed numerically
o Finished Goods store/warehouse
o Accounting department – debtors clerk
 Risks
o Sales made without payment
o Bad debts

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Shipping
 Goods picked for delivery
o FG storeman
 Same goods as on order form
 Register of movements (useful)
 Goods moved to dispatch area
o Despatch clerk
 Order form
• Segregation of duties
 Inspect goods
 Compare to order form
 Shipping document prepared
o Despatch clerk
 Delivery note
• Documentary controls (number sequence/safely
stored away
(continued)
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Shipping (cont’d)
 Goods checked at gate
o Security guard
o Gate register
 Only one authorised exit
 All goods accompanied by approved DN
 Record details in register
 Reconciliation of DN and register
 Reconciliation of register to Sales Journal
 Goods delivered to customer
o Signature of customer
 Signed delivery note to accounting department
(continued)
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Shipping (cont’d)
 Risks
o Goods shipped without authorised order
o Goods never reach customer
o Incorrect/wrong goods shipped
o Delivery note – incorrect quantities, description,
etc
o Orders received not carried out
o Goods delivered not invoiced
o Customer claims goods never received
(continued)

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Shipping (cont’d)
 Shipping document approved
o Head of despatch
 Inspect goods
 Compare to order and delivery note
 Sign
 Copy of approved delivery note to:
o Customer (2)
o Despatch - filed
o FG store
o Proof of receipt by despatch
o Perpetual inventory records
o Sales
 Match with orders
 Follow-up of unmatched orders

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Invoicing and recording
 Invoice prepared
o Accounting department
o Sales order
o Delivery note
o Signed delivery note
o Invoice
 Documentary controls
 Follow-up unmatched documents
 Independent checks
(continued)

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Invoicing and recording (cont’d)
 Invoice recorded
o Sales/debtors journal
 Recorded from invoices
o Accounts receivable
o Debtors subsidiary ledger
 Recorded from invoices
o Accounts receivable
o General ledger
 Total of sales journal
o Accounting (G/L) department
(continued)
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Invoicing and recording (cont’d)
 Invoice recorded
o Segregation of duties
o Recorded immediately
o Chart of accounts
o Format of sales journal
o Internal verification
o Independent reconciliation – subsidiary ledger
and control account
(continued)

15
Invoicing and recording (cont’d)
 Statements and remittance advices
o Accounting department
o Debtors’ statements
o Payment advices
 Segregation of duties
(continued)

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Invoicing and recording (cont’d)
 Risks
o Goods delivered but not invoiced
o Deliveries invoiced more than once
o Fictitious sales
o Customer billed – goods not ordered/received
o Incorrect amount
o Incorrect period
o Incorrectly classified
o Incorrectly summarised/posted

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Cash receipts
 Cash received
o Cash department (cashier)
o Cash receipt book
 Segregation of duties
 Physical security
 Daily totals
 Documentary controls
(continued)

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Cash receipts (cont’d)

 Cash receipt to
o Customer
o Cashier (filed)
o Accounts receivable
o Cash book department (accounting)
(continued)

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Cash receipts (cont’d)
 Cheques received by mail
o Independent person
o Mail register
o 2 persons
o Cross cheques
o Remittance advice
o Compare to cheque
o Cheque register
o Signed
o Predated cheques
o Daily totals
(continued)
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Cash receipts (cont’d)
 Remittance advice to
o Accounting department
 Cheques to
o Cash department
o Receipt issued
(continued)

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Cash receipts (cont’d)

 Cash/cheques deposited
o Cash department
o Bank deposit slip
 Count the money/cheques
 Sign receipt book/mail register
 Independent reconciliation
 Banked daily
(continued)

22
Cash receipts (cont’d)
 Recording
o Cash receipt journal (cashbook)
 Bank deposit slips, receipts, mail register
 Cashbook function (acc)
o Debtors subsidiary ledger
 Receipts and remittance advices
 Accounts receivable
o General ledger
 Total of cash receipt journal
 General ledger department
(continued)

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Cash receipts (cont’d)
 Recording – controls
o Separation of duties
o Format of journals
o Timely recording
o Number sequence
o Independent reconciliation – cash book and deposit
slips
o Independent reconciliation – debtors ledger vs.
control account
o Internal verification
o Bank reconciliation
(continued)

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Cash receipts (cont’d)
 Risks
o Misappropriation of cash
o Cheque taken upon receipt
o Cashier steals money
o Cash deposited not recorded
o Recorded at incorrect amount
o Company loses interest

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Returns and allowances
 Accounts receivable
o Receiving department (returns)
 Credit note
 GRN (returns)
 Sales returns journal
 Debtors’ subs ledger
 General ledger
 Document controls
o Match documents
o Authorisation
o Reconciliation – debtors’ ledger vs. general ledger
o Internal verification
(continued)
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Returns and allowances (cont’d)
 Risk examples
o Invalid returns/discount
o Credit note incorrect
o Credit granted without goods actually returned

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Bad debts
 Senior official
o Valid supporting documentation
 Proper authorisation
 Adjustment of credit limit
(continued)

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Bad debts (cont’d)
 Recording
o General journal
o Debtors’ subs ledger
o General ledger
 Risks
o Unauthorised
o Still collectable
o Sales made to ‘bad debtor’

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Compliance audit

 Risks, control activities and compliance

procedures
o See pages 60-69

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Financial audit: substantive procedures

 Transactions:
o Occurrence
o Completeness
o Cut-off
o Accuracy
o Classification
o Presentation and disclosure
(continued)

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Financial audit: substantive
procedures (cont’d)
 Balances
o Existence
o Completeness
o Valuation and allocation
o Obligation
o Presentation and disclosure
(continued)

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 Financial audit: substantive
procedures (cont’d)
 Analytical procedures
o Revenue
 Compare current year’s gross profit percentage with
previous years’ and with industry data
 Compare actual credit sales with budgeted credit sales for
the year
 Compare credit sales as a percentage of total revenue with
previous year’s figures
o Accounts receivable
 Compare current year’s accounts receivable balance with
previous years’
 Compare bad debts as a percentage of accounts receivable
with previous years’ figures
(continued)
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Financial audit: substantive
procedures (cont’d)

 Other aspects
o Operational audits
o Disposal of non-current assets
o IT perspective

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