REVENUE CYCLE: SALES TO CASH COLLECTION

ACTIVITY THREAT CONTROLS (FIRST NUMBER REFERS TO THE CORRESPONDING THREAT)

1. Inaccurate or invalid master data 1.1 Data processing integrity controls
2. Unauthorized disclosure of 1.2 Restriction of access to master data
General issues sensitive information 1.3 Review of all changes to master data
throughout entire 3. Loss or destruction of data 2.1 Access controls
revenue cycle 4. Poor performance 2.2 Encryption
3.1 Backup and disaster recovery procedures
4.1 Managerial reports
5.1 Data entry edit controls (see Chapter 10)
5.2 Restriction of access to master data
6.1 Digital signatures or written signatures
7.1 Credit limits
5. Incomplete/inaccurate orders 7.2 Specific authorization to approve sales to new customers or sales that
6. Invalid orders exceed a customer’s credit limit
7. Uncollectible accounts 7.3 Aging of accounts receivable
Sales order entry 8. Stockouts or excess inventory 8.1 Perpetual inventory control system
9. Loss of customers 8.2 Use of bar codes or RFID
8.3 Training
8.4 Periodic physical counts of inventory
8.5 Sales forecasts and activity reports
9.1 CRM systems, self-help Web sites, and proper evaluation of customer
service ratings
10.1 Bar-code and RFID technology
10.2 Reconciliation of picking lists to sales order details
10. Picking the wrong items or the 11.1 Restriction of physical access to inventory
wrong quantity 11.2 Documentation of all inventory transfers
11. Theft of inventory 11.3 RFID and bar-code technology
12. Shipping errors (delay or failure 11.4 Periodic physical counts of inventory and reconciliation to recorded
Shipping to ship, wrong quantities, wrong quantities
items, wrong addresses, 12.1 Reconciliation of shipping documents with sales orders, picking lists, and
duplication) packing slips
12.2 Use RFID systems to identify delays
12.3 Data entry via bar-code scanners and RFID
12.4 Data entry edit controls (if shipping data entered on terminals) 12.5
Configuration of ERP system to prevent duplicate shipments
13.1 Separation of billing and shipping functions
13.2 Periodic reconciliation of invoices with sales orders, picking tickets, and
shipping documents
14.1 Configuration of system to automatically enter pricing data
14.2 Restriction of access to pricing master data
14.3 Data entry edit controls
14.4 Reconciliation of shipping documents (picking tickets, bills of lading, and
13. Failure to bill
packing list) to sales orders
14. Billing errors
Billing 15.1 Data entry controls
15. Posting errors in accounts receivable
15.2 Reconciliation of batch totals
16. Inaccurate or invalid credit memos
15.3 Mailing of monthly statements to customers
15.4 Reconciliation of subsidiary accounts to general ledger
16.1 Segregation of duties of credit memo authorization from both sales order
entry and customer account maintenance
16.2 Configuration of system to block credit memos unless there is either
corresponding documentation of return of damaged goods or specific
authorization by management
17.1 Segregation duties—the person who handles (deposits) payments from
customers should not also
a. Post remittances to customer accounts.
b. Create or authorize credit memos.
c. Reconcile the bank account.
17.2 Use of EFT, FEDI, and lockboxes to minimize handling of customer payments
by employees
17. Theft of cash 17.3 Obtain and use a UPIC to receive EFT and FEDI payments from customers.
Cash collections
18. Cash flow problems 17.4 Immediately upon opening mail, create list of all customer payments received.
17.5 Prompt, restrictive endorsement of all customer checks
17.6 Having two people open all mail likely to contain customer payments
17.7 Use of cash registers
17.8 Daily deposit of all cash receipts
18.1 Lockbox arrangements, EFT, or credit cards
18.2 Discounts for prompt payment by customers
18.3 Cash flow budgets
Summary and Case Conclusion
An organization’s accounting system should be designed to maximize the efficiency and effectiveness with which the four
basic revenue cycle activities (sales order entry, shipping, billing, and cash collections) are performed. It must also incorporate
adequate internal control procedures to mitigate such threats as uncollectible sales, billing errors, and lost or misappropriated
inventory and cash. Control procedures also are needed to ensure that the information provided for decision making is both accurate
and complete. Finally, to facilitate strategic decision making, the accounting system should be designed to accommodate the
integration of internally generated data with data from external sources.
At the next executive meeting, Elizabeth summarized the proposals that she, Trevor, and Ann developed to provide the
information needed to better manage customer relationships and cash flows. Among the recommendations were the following:
1. Equip the sales force with wireless-enabled pen-based tablets. Trevor Whitman, vice president of marketing, believes that
AOE will still need its sales staff to visit existing customers to identify which additional products can be profitably carried.
Sales staff also will continue to make cold calls on prospective customers to try to convince them to carry AOE’s products.
As they walk down store aisles, sales representatives can check off the items that need to be restocked and then write in the
appropriate quantities. When the or- der is complete, they can transmit the order back to headquarters. The system can check
the customer’s credit status and inventory availability and confirm orders within minutes, including an estimated delivery
date. After the customer approves the order, the system will immediately update all affected files so that current information
about inventory status is available to other sales representatives.
2. Improve warehouse and shipping efficiency by replacing bar codes with RFID tags.
3. Improve billing process efficiency by increasing the number of customers who agree to participate in invoice less sales
relationships and, when possible, by using EDI to transmit
invoices to those customers who still require them.
4. In an effort to improve customer service, periodically survey and monitor customer satisfaction with AOE’s products and
performance.
5. Improve efficiency of cash collections by encouraging customers to use EFT and, preferably, FEDI to remit payments.
Obtain a UPIC from their bank to avoid having to share detailed bank account information with customers. Monthly develop
and monitor cash flow budgets to anticipate short-term borrowing needs.
MULTIPLE CHOICE
1. Which activity is part of the sales order entry process?
a. setting customer credit limits
b. preparing a bill of lading
c. checking customer credit
d. approving sales returns

2. Which document often accompanies merchandise shipped to a customer?

a. picking ticket
b. packing slip
c. credit memo
d. sales order

3. Which method is most likely used when a company offers customers discounts for prompt payment?
a. open-invoice method
b. balance-forward method
c. accounts receivable aging method
d. cycle billing method

4. Which of the following techniques is the most efficient way to process customer payments and update accounts receivable?
a. EFT
b. UPIC
c. FEDI
d. ACH

5. Which of the following revenue cycle activities can potentially be eliminated by technology?
a. sales order entry
b. shipping
c. billing
d. cash collections
6. The integrated database underlying an ERP system results in which of the following general threats to the revenue cycle?
a. inaccurate or invalid master data
b. unauthorized disclosure of sensitive
c. loss or destruction of data
d. all of the above information

7. Which document is used to authorize the release of merchandise from inventory control (warehouse) to shipping?
a. picking ticket
b. packing slip
c. shipping order
d. sales invoice

8. Which of the following provides a means both to improve the efficiency of processing customer payments and also to
enhance control over those payments?
a. CRM
b. lockboxes
c. aging accounts receivable
d. EDI

9. For good internal control, who should approve credit memos?

a. credit manager
b. sales manager
c. billing manager
d. controller

10. For good internal control over customer remittances, the mailroom clerk should sepa- rate the checks from the remittance
advices and send the customer payments to which department?
a. billing
b. accounts receivable
c. cashier
d. sales
THE EXPENDITURE CYCLE: PURCHASING TO CASH DISBURSEMENT
ACTIVITY THREAT CONTROLS (FIRST NUMBER REFERS TO THE CORRESPONDING THREAT)
1. Inaccurate or invalid 1.1 Data processing integrity controls
master data 1.2 Restriction of access to master data
General issues throughout 2. Unauthorized disclosure of 1.3 Review of all changes to master data
entire expenditure cycle sensitive information 2.1 Access controls
3. Loss or destruction of data2.2 Encryption
4. Poor performance 3.1 Backup and disaster recovery procedures 4.1 Managerial reports
5.1 Perpetual inventory system
5.2 Bar coding or RFID tags
5.3 Periodic physical counts of inventory
6.1 Perpetual inventory system
6.2 Review and approval of purchase requisitions
6.3 Centralized purchasing function
5. Stockouts and excess 7.1 Price lists
inventory 7.2 Competitive bidding
6. Purchasing items not 7.3 Review of purchase orders
needed 7.4 Budgets
7. Purchasing at inflated 8.1 Purchasing only from approved suppliers
prices 8.2 Review and approval of purchases from new suppliers
Ordering 8. Purchasing goods of 8.3 Holding purchasing managers responsible for rework and scrap costs
inferior quality 8.4 Tracking and monitoring product quality by supplier
9. Unreliable suppliers 9.1 Requiring suppliers to possess quality certification (e.g., ISO 9000)
10. Purchasing from 9.2 Collecting and monitoring supplier delivery performance data
unauthorized 10.1 Maintaining a list of approved suppliers and configuring the system
suppliers to permit purchase orders only to approved suppliers
11. Kickbacks 10.2 Review and approval of purchases from new suppliers
10.3 EDI-specific controls (access, review of orders, encryption, policy)
11.1 Prohibit acceptance of gifts from suppliers
11.2 Job rotation and mandatory vacations
11.3 Requiring purchasing agents to disclose financial and personal
interests in suppliers
11.4 Supplier audits
12.1 Requiring existence of approved purchase order prior to accepting
any delivery
13.1 Do not inform receiving employees about quantity ordered
13.2 Require receiving employees to sign receiving report
13.3 Incentives
13.4 Use of bar codes and RFID tags
12. Accepting unordered items 13.5 Configuration of the ERP system to flag discrepancies between
13. Mistakes in counting received and ordered quantities that exceed tolerance threshold for
Receiving 14. Verifying receipt of investigation
services 14.1 Budgetary controls
15. Theft of inventory 14.2 Audits
15.1 Restriction of physical access to inventory
15.2 Documentation of all transfers of inventory between receiving and
inventory employees
15.3 Periodic physical counts of inventory and reconciliation to recorded
quantities
15.4 Segregation of duties: custody of inventory versus receiving
16.1 Verification of invoice accuracy
16.2 Requiring detailed receipts for procurement card purchases
16.3 ERS
16. Errors in supplier invoices 16.4 Restriction of access to supplier master data
Approving supplier invoices 17. Mistakes in posting to accounts 16.5 Verification of freight bill and use of approved delivery channels
payable 17.1 Data entry edit controls
17.2 Reconciliation of detailed accounts payable records with the general
ledger
control account
 18.1 Filing of invoices by due date for discounts
18.2 Cash flow budgets
19.1 Requiring that all supplier invoices be matched to supporting
documents that are acknowledged by both receiving and inventory control
19.2 Budgets (for services)
19.3 Requiring receipts for travel expenses
19.4 Use of corporate credit cards for travel expenses
20.1 Requiring a complete voucher package for all payments
20.2 Policy to pay only from original copies of supplier invoices
20.3 Cancelling all supporting documents when payment is made
21.1 Physical security of blank checks and check-signing machine
21.2 Periodic accounting of all sequentially numbered checks by cashier
18. Failure to take advantage of dis-
21.3 Access controls to EFT terminals
counts for prompt payment
21.4 Use of dedicated computer and browser for online banking
19. Paying for items not received
21.5 ACH blocks on accounts not used for payments
Cash 20. Duplicate payments
21.6 Separation of check-writing function from accounts payable
disbursements 21. Theft of cash
21.7 Requiring dual signatures on checks greater than a specific amount
22. Check alteration
21.8 Regular reconciliation of bank account with recorded amounts by
23. Cash flow problems
someone independent of cash disbursements procedures
21.9 Restriction of access to supplier master file
21.10 Limiting the number of employees with ability to create one-time
suppliers and to process invoices from one-time suppliers
21.11 Running petty cash as an imprest fund
21.12 Surprise audits of petty cash fund
22.1 Check-protection machines
22.2 Use of special inks and papers
22.3 “Positive Pay” arrangements with banks
23.1 Cash flow budget

Summary and Case Conclusion

The basic business activities performed in the expenditure cycle include ordering materials, supplies, and services; receiving materials,
supplies, and services; approving supplier invoices for payment; and paying for goods and services.

The efficiency and effectiveness of these activities can significantly affect a company’s overall performance. For example,
deficiencies in requesting and ordering necessary inventory and supplies can create production bottlenecks and result in lost sales due
to stockouts of popular items. Problems in the procedures related to receiving and storing inventory can result in a company’s paying
for items it never received, accepting delivery and incurring storage costs for unordered items, and experiencing a theft of inventory.
Problems in approving supplier invoices for payment can result in overpaying suppliers or failing to take available discounts for
prompt payment. Weaknesses in the cash disbursement process can result in the misappropriation of cash.

IT can help improve the efficiency and effectiveness with which expenditure cycle activities are performed. In particular, EDI,
barcoding, RFID, and EFT can significantly reduce the time and costs associated with ordering, receiving, and paying for goods.
Proper control procedures, especially segregation of duties, are needed to mitigate various threats such as errors in performing
expenditure cycle activities and the theft of inventory or cash.

At the next executive meeting, Ann Brandt and Elizabeth Venko presented to Linda Spurgeon their recommendations for improving
AOE’s expenditure cycle business activities. Ann indicates that LeRoy Williams’s plan to conduct more frequent physical counts of
key raw materials components will increase the accuracy of the database and reduce the likelihood of future stockouts at the Wichita
plant. She also designed a query to produce a daily supplier performance report that will highlight any negative trends before they
become the types of problems that disrupted production at the Dayton plant. Ann also indicated that it would be possible to link
AOE’s inventory and production planning systems with major suppliers to better manage AOE’s inventory levels.

Elizabeth Venko stated that she was working to increase the number of suppliers who either bar-code or RFID tag their shipments.
This would improve both the efficiency and ac- curacy of the receiving process and also the accuracy of AOE’s inventory records,
thereby providing possible additional reductions in inventory carrying costs. In addition, Elizabeth wants to encourage more suppliers
to either send invoices via EDI or agree to ERS, which should improve the efficiency and accuracy of processing invoices and reduce
the costs associated with handling and storing paper invoices. Concurrently, Elizabeth plans to increase EFT as much as possible to
further streamline the cash disbursements process and reduce the costs associated with processing payments by check.

As the meeting draws to a close, LeRoy Williams asks if Elizabeth and Ann can meet with him to explore additional ways to improve
how AOE’s new system tracks manufacturing activities.
1. Which of the following inventory control methods is most likely to be used for a product for which sales can be reliably forecast?
a. JIT (Incorrect. JIT seeks to minimize inventory by making purchases only after sales. It is used primarily for products for which it is
hard to forecast demand.)
b. EOQ (Incorrect. EOQ represents the optimal amount of inventory to purchase to of ordering, carrying, and stockout costs.)
c. MRP (Correct. MRP forecasts sales and uses that information to purchase inventory to meet anticipated needs.)
d. ABC (Incorrect. ABC is a method for stratifying inventory according to importance and scheduling more frequent inventory counts
for the more important items.)

2. Which of the following matches is performed in evaluated receipt settlement (ERS)?

a. the vendor invoice with the receiving report (Incorrect. ERS eliminates the vendor invoice.)
b. the purchase order with the receiving report (Correct. ERS eliminates the vendor invoice and schedules payments based on
matching the purchase order and receiving report.)
c. the vendor in voice with the purchase order(Incorrect. ERS eliminates the vendor invoice.)
d. the vendor invoice, the receiving report, and the purchase order (Incorrect. ERS eliminates the vendor invoice.)

3. Which of the following is true?

a. It is easier to verify the accuracy of invoices for purchases of services than invoices for purchases of raw materials. (Incorrect. It is
easier to verify invoices for purchases of raw materials because you can compare to receiving reports. Receiving reports normally do
not exist for purchase of services.)
b. Setting up petty cash as an imprest fund violates segregation of duties. (Correct. Tech- nically, setting up petty cash as an
imprest fund violates segregation of duties because the same person has custody of the asset—cash—authorizes its
disbursement, and maintains records.)
c. The EOQ formula is used to identify when to reorder inventory. (Incorrect. The EOQ formula is used to determine how much to
order. The reorder point identifies when to reorder inventory.)
d. A voucher package usually includes a debit memo. (Incorrect. Voucher packages consist of the purchase order, receiving report, and
vendor invoice, if one is received; debit memos are used to record adjustments of accounts payable.)

4. Which document is used to establish a contract for the purchase of goods or services from a supplier?
a. vendor invoice (Incorrect. The vendor invoice is a bill.)
b. purchase requisition (Incorrect. A purchase requisition is an internal document.)
c. purchase order (Correct. A purchase order is an offer to buy goods.) accounts to debit when paying vendor invoices.)
d. disbursement voucher (Incorrect. A disbursement voucher is used to specify which

5. Which method would provide the greatest efficiency improvements for the purchase of noninventory items such as miscellaneous
office supplies?
a. bar-coding (Incorrect. Bar-coding improves accuracy of counting inventory items. The biggest efficiency-related problem with
noninventory purchases is the time and effort required to generate a purchase order, create a voucher package, and make payments for
a large number of small-dollar amount purchases.)
b. EDI (Incorrect. EDI is seldom used for miscellaneous purchases.)
c. procurement cards (Correct. Procurement cards were designed specifically for purchase of noninventory items.)
d. EFT (Incorrect. EFT improves the efficiency of payments, but does not improve the
efficiency of ordering and approving supplier invoices.)

6. Which of the following expenditure cycle activities can be eliminated through the use of IT or reengineering?
a. ordering goods (Incorrect. Even with vendor-managed inventory, the vendor’s system must initiate the ordering process.)
b. approving vendor invoices (Correct. ERS systems eliminate vendor invoices.)
c. receiving goods (Incorrect. Ordered goods must always be received and moved to the appropriate location.)
d. cash disbursements (Incorrect. IT can change the method used to make cash disbursements, such as by EFT instead of by check, but
the function must still be performed.)

7. What is the best control procedure to prevent paying the same invoice twice?
a. Segregate check-preparation and check-signing functions. (Incorrect. This is a good control procedure, but its purpose is to ensure
that payments are valid.)
b. Prepare checks only for invoices that have been matched to receiving reports and pur- chase orders. (Incorrect. This is a good
control procedure, but its purpose is to ensure that organizations pay only for goods ordered and received.)
c. Require two signatures on all checks above a certain limit. (Incorrect. This is a good control procedure, but its purpose is to better
control large outflows of cash.)
d. Cancelall supporting documents when the check is signed. (Correct. This ensures that the supporting documents cannot be
resubmitted to pay the same invoice again.)

8. For good internal control, who should sign checks?

a. cashier (Correct. The cashier is responsible for managing cash and reports to the treasurer.)
b. accounts payable (Incorrect. Accounts payable maintains vendor records.)
c. purchasing agent (Incorrect. The purchasing agent authorizes acquisition of goods.)
d. controller (Incorrect. The controller is in charge of accounting, the record-keeping function.)

9. Which of the following procedures is designed to prevent the purchasing agent from receiving kickbacks?
a. maintaining a list of approved suppliers and requiring all purchases to be made from suppliers on that list (Incorrect. The purpose of
this control is to minimize the risk of purchasing inferior goods at inflated prices or violating regulations.)
b. requiring purchasing agents to disclose any financial investments in potential suppliers (Correct. The purpose of such
disclosure is to minimize the risk of conflicts of interest that could result in kickbacks.)
c. requiring approval of all purchase orders (Incorrect. This control is designed to ensure that only goods that are really needed are
ordered and that they are ordered from approved vendors.)
d. prenumbering and periodically accounting for all purchase orders (Incorrect. This control procedure is designed to ensure that all
valid purchase orders are recorded.)

10. Which document is used to record adjustments to accounts payable based on the return of unacceptable inventory to the supplier?
a. receiving report (Incorrect. This document records quantities of goods received.)
b. credit memo (Incorrect. This document is used in the revenue cycle to adjust a customer’s account.)
c. debit memo (Correct. This document is used to adjust accounts payable.) goods.)
d. purchase order (Incorrect. This document establishes a legal obligation to purchase)