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Electronic data interchange (EDI) is the intercompany exchange of computer-processable business information in standard format.

EDI is more than just a technology. EDI technology was devised to expedite routine transaction between manufactures and wholesalers, and between wholesalers and retailers.

EDI represents a strategic business arrangement between buyer and seller in which they agree, to the terms of their relationship.

EDI poses unique control problems for organizations. Risk of EDI is that a trading partner, or someone masquerading as a trading partner, will access firm's accounting records in a way that is unauthorized by the trading partner agreement.

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POS systems are used extensively in grocery stores, department stores, and other types of retail organizations.

It involves the exchange of goods directly for cash in transaction at the point of sale.

Inventory is kept on the store’s shelves, not in a separate warehouse.

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➥ In this section, we will examine the revenue cycle conceptually. Using DFDs as a guide, we will trace the sequence of activities through 3 processes that constitute the revenue cycle for most retail, wholesale and manufacturing organization.

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1) Risk of Selling to Un-creditworthy Customer.

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1) Risk of Selling to Un-creditworthy Customer.

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Physical Control:
✎ Transaction authorization.

To ensure that only valid        transaction are processed.

✎ Segregation of duties.

To provide independence to the credit authorization process.

IT Control:
✎Automated credit check

To allow for operational flexibility in unusual circumstances.

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1. Sales Department

Customer contacting sales department.

Sales department clerk manually records the essential details.

Multipart document is filed while one copy of it is sent to credit department for approval.

2. Credit Department Approval

Review the customer's credit history in the customer records file to verify customer's creditworthiness.

Access an online credit bureau for new customers.

Customer order and credit approval are then placed in the customer order file.

3. Warehouse Procedures

Receives the stock release copy of the sales order and uses this to locate the inventory.

The inventory items and stock release are sent to the shipping department.

Record the inventory reduction in the stock records file.

4. The Shipping Department

Reconciles the products received with the shipping notice copy of the sales order received.

Prepare a bill of lading, package the product and ship to customer.

Record transaction and sends the shipping notice and stock release document to the billing department.

5. The Billing Department

The shipping notice provides proof that the product has been shipped and is the trigger document that initiates the billing process.

Compile the relevant facts about the transaction and bills the customer.

Enters the transaction into sales journal file, distributes stock release and ledger copies of the sales order.

Shipping notice is sent where it is filed in the customer order file.

Periodically prints out a hard copy journal voucher and send it to general ledger department.

6. Accounts Receivable, Inventory Control and General Ledger Departments

AR & IC clerks update their subsidiary ledgers.

Search their respective files for the correct records by entering the primary key data.

AR clerk updates the current balance field in the AR record.

IC clerk updates the quantity-on-hand field.

A record is added to the purchase requisition file.

Periodically, AR and IC clerks prepare hand-copy journal vouchers and account summaries and send to GL department (reconciliation and posting to the GL accounts).

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1. Mail Room

Customer payments and remittance advices arrive at the mail room.

Clerk sends the checks and a copy of remittance list to the cashier in cash receipts department.

Remittance advices and a copy of remittance list are sent to the AR department.

2. Cash Receipts

The cashier records the checks and promptly sends them to the bank including two copies of deposit slip.

Periodically, employee prepares a journal voucher and sends it to GL department.

3. Accounts Receivable

Uses the remittance advice to reduce the customer's account balances.

Prepares summary of changes to account balances and sent to GL department.

4. General Ledger Department

GL clerk reconciles the information (receipt of journal voucher & account summary) and posts to the control accounts.

5. Controller'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.

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1. Receive Order ✓
➥ The seller receive customer's order. The sales order captures vital information such as customer's name, address and account number.

2. Check Credit ✓
➥ Before processing the order, the customer's creditworthiness need to be established.

3. Pick Goods ✓
➥ To receive order activity forwards the stock release document to pick goods in warehouse.

4. Ship Goods ✓
➥ The shipping clerk packages the goods, attaches the packing slip, completes the shipping notice, and prepares a bill of lading.

5. Bill Customer ✓
➥ This is the point where customer should be billed. Billing before shipment encourages inaccurate record keeping and inefficient operations.

6. Update Inventory Records ✓
➥ The inventory control function updates inventory subsidiary ledger accounts from information contained in the stock release document.

7. Post to GL ✓
➥ By the close of transaction processing period, the general ledger function has received journal vouchers from the billing and inventory control tasks and an account summary from the AR account.

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2) Risk of Shipping Customers Incorrect Items or Quantities.

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2) Risk of Shipping Customers Incorrect Items or Quantities.

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Physical Control:
✎ Independent verification.

Verifies that the goods sent from the warehouse are correct.

IT Control:
✎ Scanner technology.

Product code scanner will reduce the risk of human error in shipping incorrect product.

✎ Automated inventory ordering.

The computer logic should check to determine if the reduction in inventory drops the inventory quantity-on-hand.

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Thousands of organizations worldwide have home pages on the Internet to promote their products and solicit sales.

Typically, Internet sales are credit card transactions that are sent to the seller’s e-mail file.

Example include B2B and business-to-consumer (B2C) transactions.

Connecting to the Internet exposes the organization to threats from computer hackers, viruses, and transaction fraud.

Most organizations take these threats seriously and implement controls, including password techniques, message encryption, and firewalls, to minimize their risk.

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3) Risk of Inaccurately Recording Transactions.

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3) Risk of Inaccurately Recording Transactions.

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Physical Control:
✎ Transaction authorization

The remittance list or cash prelist verify that customer checks and remittance advice match.

✎ Accounting records.

Audit trail can discover where an error occurred.

✎ Prenumbered documents.

Allow every transaction to be identified uniquely, would be easier to verify and trace the transactions.

✎ Special journals.

The system provides a concise record of and entire class of events ; Sales Journal and Cash Receipt Journal.

✎Subsidiary ledgers.

Used for capturing transaction event details in the revenue cycle.

✎ General ledgers.
✎ Files.
✎Independent verification.

IT Control:
✎ Data input edits.

Checks for missing data, would reduce the risk.

✎ Automated posting to subsidiary and GL accounts.
✎ File backup.

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INTERGRATED SALES ORDER PROCESSING SYSTEM

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INTERGRATED SALES ORDER PROCESSING SYSTEM

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Sales Procedures

1. Checks the availability of the items requested and performs a credit check.

2. If credit is approved:
✔ A record is added to the sales invoice file.
✔ Transmits a digital stock release document to warehouse.
✔ Sends a digital copy of the packing slip to the shipping department.

3. Warehouse clerk's terminal:
✔ Immediately produces a hard copy printout  of the electronically transmitted stock release document.
✔ Picks out the goods and sends them to shipping department, along with a copy of the stock release.

4. Shipping department:
✔ Reconciling the goods with the packing slip.
✔ Preparing them for shipment and select carrier.
✔ Access the system and transmit a digital shipping notice (when goods shipped).

5. System automatically perform accounting tasks:
✔ Updates the customer's credit history.
✔ Reduces the quantity-on-hand field in the inventory subsidiary records.
✔ If the quantity-on-hand has fallen below the reorder point, add a record to the purchase requisition in file.
✔ Place an "on-order" flag in the inventory record.
✔ Insert a shipped date in sales invoice.
✔ Update the GL accounts.
✔ Produces and distributes various management reports.

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1. Mail Room

Opens the envelopes containing checks and remittance advices.

Endorses the checks for deposit only.

Reconciles the checks and remittance advices and prepares a remittance list.

Send all of them to the cash receipts department.

2. Cash Receipts Department

Reconciles the checks and remittance advices with the remittance list and prepares deposit slips.

Accesses the cash receipts system via terminal.

Creates a record in the remittance file for each remittance advice received.

Files the remittance list, remittance advices and one copy of the deposit slip.

Deposits the checks in the bank.

3. Automatic Data Processing Procedures
When cash receipts data entry is complete, the system:

Closes the sales invoices that are covered by the customer.

Posts to the GL accounts.

Prepares and distributes various management reports.

4. Controller's Office

Periodically performs a reconciliation of remittance lists, bank deposit slips, cash receipts journals  and GL cash accounts.

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1. Prepare Return Slip ✓
➥ When items are returned, the receiving department employee counts, inspects and prepares a return slip describing the items.

2. Prepare Credit Memo ✓
➥ Prepared by sales employee as authorization for the customer to receive credit for the merchandise returned.

3.  Approve Credit Memo ✓
➥ The credit manager evaluates the circumstances of the return and decides to approve the credit or not and return to sales department.

4. Update Sales Journal ✓
➥ If approved, the transaction will then be recorded in the sales journal as a contra entry.

5. Update Inventory & AR Records ✓
➥ Inventory control function adjusts the inventory records and proceed to AR.

6. Update General Ledger ✓
➥ The general ledger function reconciles the figures and post to control accounts.

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4) Risk of Misappropriation of Cash Receipts and Inventory.

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4) Risk of Misappropriation of Cash Receipts and Inventory.

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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.

✎ Supervision.

By closely supervising employees who perform potentially incompatible functions can compensate for this control weakness.

✎ Access control.

Help prevent and detect unauthorized access to the firm's assets ; Warehouse security such as fences, alarms and guards.

✎ Segregation of duties.

Ensures that no single individual or department processes a transaction in its entirely.

IT Control:
✎ Multilevel security.

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1. Authorization

○ The authorization process involves validating credit card changes and establishing that the customers 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.

2. Supervision

○ 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.

○ Supervision using surveillance cameras and shop floor security personnel can reduce these risks.

3. Access Control

○ The organization must restrict access to cash assets.

○ This can be accomplished with a physical lock and key or by password control.

○ 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.

4. Accounting 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.

5. Independent Verification

○ It's content are reconciled against the internal register tape, when the clerk whose shift has ended takes the cash drawer to the cash room.

○ The cash drawer should contain cash and credit card vouchers equal to the amount recorded on the tape.

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5) Risk of Unauthorized Access to Accounting Records and Reports.

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5) Risk of Unauthorized Access to Accounting Records and Reports.

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Physical Control:
✎ Access control.

Hard-copy accounting records and department PC's that contain accounting information on hard drive should be kept in secure areas.

✎ Segregation of duties.

The organization should be structured that the perpetration of a fraud requires collusion between two or more individuals.

IT Control:
✎ Password.

Organization management should implement a robust password control policy to prevent unauthorized access.

✎ Multilevel security.

Permit simultaneous access to a control system by many users with different access privileges.

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1. Open Mail ✓
➥ Employee opens envelopes containing customers' payments and remittance advices.

2. Prepare Remittance List ✓
➥ The clerk then records each check on a form called remittance list, where all cash received is logged.

3. Record & Deposit Checks ✓
➥ After reconciling the prelist to the checks, the employee records the check in cash receipts journal. Next, the clerk prepares a bank deposit slip  showing amount of the day's receipts and sent this along the check to bank.

4. Update AR Records ✓
➥ Remittance advices are used to post to the customers' accounts in AR subsidiary ledger.

5. Update GL ✓
➥ When the journal voucher and account summary received, the GL will reconciles the figures.

6. Reconcile Cash Receipts & Deposits ✓
➥ Clerk from the controller's office reconciles cash receipts by comparing the following documents:

A copy of prelist.

Deposit slips  from bank.

Related journal voucher.