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ADVANCED TECHNOLOGY REVENUE CYCLE

*Advanced technologies allows systems designers to integrate accounting and other business functions through a common information system.
*The objective of integration is to improve operational performance and reduce costs by identifying and eliminating nonvalue-added tasks.

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INTEGRATED CASH RECEIPTS SYSTEM

Mail room:
*The mail room clerk opens the envelopes containing the checks and remittance advices and endorded the checks for deposit only.
*The clerk then reconciles the checks and remittance advices and prepares a remittance list.
*All of the things are sent to the cash receipts department.

Cash Receipts Department:
*Cash receipts clerk reconciles the checks and the remittance advices with the remittance list and prepares deposits slips.
*The clerk files the remittance list, remittance advices

(*watch at 2.04 to 3.11 for this section)

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Current Asset Cash: Internal Controls for Cash Receipts & Payments

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INTEGRATED SALES ORDER PROCESSING SYSTEM

- Notice the functions of credit checking accounts receivable updating, customer billing, inventory updating, and posting to the general ledger are performed automatically by the central computer system illustratedin diagram.

Sales Procedures:
*The process begins with sales clerks receiving customer orders, which may be hard-copy documents as
illustrated in the diagram below or may be received via e-mail, fax, or phone.

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(CONTINUED)

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1.PASSWORDS

- Digital accounting records are vulnerable to unauthorized and undetected access.

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.

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1.ACCESS CONTROL

- Source documents and accounting records need to be physically protected.

2.SEGREGATION OF DUTIES

- Certain record-keeping tasks must be separated.

- Specifically, the subsidiary ledgers (AR and inventory) the journals (sales and cash receipts), and the general ledger should be separately maintained.

- By separating the tasks, the risk of collusion is not eliminated, but it is reduced because the collusion will require the involvement of more people.

- More the number of people involved, the greater the risk of detection.

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1.MULTILEVEL SECURITY

-          In a basic technology environment, segregation of duties is accomplished by physically separating individuals and the data over which they have custody.

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1.TRANSACTION AUTHORIZATION

- The remittance list provides a control against the loss or theft of checks and remittance advices as they flow through the system.

2.SUPERVISION

- The mail room is a point of risk in most cash receipts system.

- By closely supervising employees who perform potentially incompatible functions such as cash receipts and AR updating a firm can compensate for this control weakness.

3.ACCESS CONTROLS

- The following physical access controls should be in place to help prevent and detect unauthorized access to the firm’s assets:

i)Warehouse security, such as fences, alarms, and guards.

ii)Depositing cash daily in the bank.

iii)Using a safe or night deposit box for cash.

iv)Locking cash drawers and safes in the cash receipts department.

4.SEGREGATION OF DUTIES

- This control ensures that no single individual or department processes a transactionin its entirely.

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1.DATA INPUT EDITS

- 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.

- Transportation 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.

- If not detect before being processed, these errors will corrupt the master files of the system.

2.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.

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1.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.

- Discrepancies between the check and remittance advice should be noted when the documents are logged in the remittance list.

2.ACCOUNTING RECORDS

- Sometimes transactions get lost in the system.

- By following the audit trail, management can discover whew an error occurred.

3.PRENUMBERED DOCUMENTS

- Prenumbered documents (sales orders, shipping notices, remittance advices, etc.) are sequentially numbered by the printer and allow every transaction to be identify uniquely.

4.SPECIAL JOUENALS

- By grouping similar transactions together into special journals, the system provides a concise record of an entire class of events.

- For this purpose, revenue cycle systems use the sales journal and the cash receipts journal.

5.SUBSIDIARY LEDGERS

- By grouping similar transactions together into special journals.

6.GENERAL LEDGERS

- Two subsidiary ledgers are used for capturing transaction event details in the revenue cycle: the inventory and AR subsidiary ledgers.

7.FILES

- The revenue cycle employs several temporary and permanent files that contribute to the audit trail.

8.INDEPENDENT VERIFICATION

- The objective of this control is to verify the accuracy and completeness of tasks performed by other functions in the process.

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1.SCANNER TECHNOLOGY

-          Product code scanners in the warehouse and shipping department will reduce the risk of human error in picking and shipping incorrect products.

2.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.

-          When this is the case, the organization needs to reorder inventory to avoid a stock out.

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1.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 customer.

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1.AUTOMATED CREDIT CHECKING

- Credit checking may be performed automatically by the system as a programmed process control.

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1.TRANSACTION AUTHORIZATION

- The objective of this physical control is to ensure that only valid transactions are processed.

- The authorization process in the sales function is a credit check of the customer.

2.SEGREGATION OF DUTIES

- An objective of segregation of duties is to separate transaction authorization from transaction processing.

- To provide independence to the credit authorization process, the credit function should be organizationally and physically segregated from the sales function.

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BASIC TECHNOLOGY CASH RECEIPTS SYSTEM

Mail Room :
*Customer payments and remittance advices arrive at the mail room, where a clerk opens the envelopes, reconciles the checks and remittance advices, endorses the checks, gathers the remittance advices and checks into batches and prepares a remittance list.

Cash Receipts :
*The cashier records the checks in the cash receipts journal and promptly sends them to the bank, accompanied by two companies of the deposit slip.

Accounts Receivable :
*The Accounts Receivable department uses the remittance advices to reduce the customers’ account balances consistent with the amount paid.

General Ledger Department :
*Upon receipt of the journal voucher and account summary from cash receipts and Accounts Receivable, respectively the general ledger clerk reconciles the information and posts to the control accounts.

Controller’s Office :
*Cash is a liquid and subject to misappropriation, someone from the controlller’s office periodically performs a bank reconciliation by comparing deposit slips returned from the bank, account summaries used to post to the accounts  and journal vouchers.

Automatic Data Processing Procedures :

*Closes the sales invoices that are covered by the customer checks by placing the customer check number and payment date in the invoice record.
*Posts to the GL accounts.
*Prepares and distributes various management reports, including transaction listings, discrepancy reports and general ledger change reports.

Revenue Cycle Risks and Internal Controls :
*Selling to un-creditworthy customers.
*Shipping customers the wrong items or incorrect quantities.
*Inaccurately recording sales and cash receipts transaction in journals and accounts.
*Unauthorised access to accounting records and confidential reports.

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BASIC TECHNOLOGY SALES ORDER PROCESSING SYSTEM

Sales Department :
*The sales process begins with a customer contacting the sales department by telephone, mail, e-mail, fax or in person.

Credit Department Approval :
*To provide independence to the credit authorisation process, the credit department is organisationally and physically segregated from the sales department.

Warehouse Procedures :
*To ship the merchandise. The warehouse clerk receives the stock release copy of the sales order and uses this to locate the inventory.

The Shipping Department :
*The shipping clerk reconciles the products received from the warehouse with the shipping notice copy of the sales order received earlier.

The Billing Department :
*The shipping notice provides proof that the product has been shipped and is the trigger document that initiates the billing process. Upon receipt of the shipping notice and stock release, the billing clerk uses the department PC to compile the relevant facts about the transaction and bills to the customers.

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1. Open mail & Prepare Remittance List

- A mail room employee opens envelopes
containing customers’ payments and remittance list. In other cases, this could be the original customer invoice, which was described in the sales order procedures.

- The remittance list is a form of a turnaround document. Its importance is most recognizable in firms that process large volumes of cash receipts daily.

- Mail room personnel route the checks and remittance advices to an administrative clerk who endorses the checks ‘‘For Deposit Only’’ and reconciles the amount on each remittance advice with the corresponding
check.

- The clerk then records each check on a form called a remittance list (or cash prelist), where all cash received is logged.

2. Record & Deposit Cheques

- A cash receipts employee verifies the accuracy and completeness
of the checks against the prelist. Any checks possibly lost or misdirected between the mail room and this function are thus identified.

- After reconciling the prelist to the checks, the employee records the
check in the cash receipts journal. All cash receipts transactions, including cash sales,miscellaneous
cash receipts, and cash received on account, are recorded in the cash receipts journal.

- Then, the clerk prepares a bank deposit slip showing the amount of the day’s receipts and forwards this
along with the checks to the bank.

- After deposit of the funds, the bank teller validates the deposit slipand returns it to the company for reconciliation. At the end of the day, the cash receipts employee summarizes the journal entries and sends the following journal voucher entry to the general ledger function.

3. Update Account Receivable Records

- The remittance list are used to post to the customers’ accounts in the AR subsidiary ledger.

- Regularly, the changes in account balances are summarized and forwarded to the general ledger function.

4. Update General Ledger

- After receipt of the journal voucher and the account summary, the
general ledger function reconciles the figures, posts to the cash and AR control accounts, and files the journal voucher.

5. Reconcile Cash Receipts & Deposits

- Periodically weekly or monthly, a clerk from
the controller’s office or an employee that not involved with the cash receipts procedures will reconciles cash
receipts by comparing a copy of the prelist, deposit slips received from the bank, and  related journal vouchers.

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1. Prepare Return Slip

- When items are returned, the receiving department employee counts, inspects, and prepares a return slip to describe the items.

- The goods, along with a copy of the return slip, go to the warehouse to be restocked. The employee then sends the second copy of the return slip to the sales function to prepare a credit memo.

2. Prepare Credit Memo

- After receipt of the return slip, the sales employee prepares a credit memo.

- This document is the approval for the customer to receive credit for the merchandise returned.

3. Approve Credit Memo

- The credit manager analyse the circumstances of the return and makes a judgment to approve or disapprove credit.

- The manager then returns the approved credit memo to the sales department.

4. Update Sales Journal

- After receipt of the approved credit memo, the transaction is recorded in the sales journal as a contra entry.

- The credit memo is then forwarded to the inventory control function for posting. At the end of the period, total sales returns are summarized in a journal voucher and sent to
the general ledger department.

5. Update Inventory & AR Records

- The inventory control function adjusts the inventory records and forwards the credit memo to accounts receivable, where the customer’s account is also
adjusted.

- Occasionally, inventory control sends a journal voucher summarizing the total value of inventory
returns to the general ledger update task. Similarly, accounts receivable submits an AR account summary to the general ledger function.

6. Update General Ledger

- After receipt of the journal voucher and account summary information, the general ledger function reconciles the figures and posts to the appropriate control accounts.

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1. Receive Order

- Start with the receipt of customer order indicating the type and quantity of merchandise desired.

- When customer is also a business entity, the order is often a copy of the customer’s purchase order (expenditure cycle document).

- After that, a copy of it is placed in the customer open order file for future reference.

2. Check Credit

- Before processing the order further, the customer’s creditworthiness needs to be established. The credit approval process authorization control and should be performed as a function separate from the sales activity.

- The receive order task sends the sales order (credit copy) to the check credit task for approval. The returned approved sales order then triggers the continuation of the sales process by releasing sales order information simultaneously to various tasks.

3. Pick Goods

- Stock release document which also called the picking ticket.

- This document identifies the items of inventory that must be located and picked from the warehouse and also provides formal authorization for warehouse personnel to release the specified items.

- After picking the stock, the order is verified for accuracy, the goods and verified stock release document are sent to the ship goods prepares a backorder record, which stays on file until the inventories arrive from the supplier. Backordered items are shipped before new sales are processed and the warehouse employee adjusts the stock records to reflect the reduction in inventory.

4. Ship Goods

- Before the arrival of  goods and verified stock release document, the shipping department receives the packing slip that will deliver with the goods to the customer to describe the contents of the order.

- The shipping notice will later be forwarded to the billing function as evidence that the customer’s order was filled and shipped.
This document conveys relevant new facts such as the date of shipment, the items and quantities actually shipped.

- The shipping clerk packages the goods, attaches the packing slip, completes the shipping notice, and prepares a bill of lading.

5. Bill Customer

- The customer’s bill, describes the charges to the customer.

- In addition, the billing function performs the following record keeping–related tasks such as records the sale in the sales journal.

- Forwards the ledger copy of the sales order to the update accounts receivable task.

- Sends the stock release document to the update inventory records task.

6. Update Inventory Records

- Updates inventory subsidiary ledger accounts from information contained in the stock release document.

7. Post to General Ledger

-  By the close of the transaction processing period, the general ledger function has received journal vouchers from the billing and inventory control tasks and an account summary from the Account Receivable (AR) function. This information set serves two purposes.