ACCOUNTING CYCLES
REVENUE CYCLE
NOTE FROM TIM: This document I found on the web seems to have
some relevant CPA Exam Questions that are worth studying. I.
REVENUE CYCLE. As you will recall, the revenue cycle involves
accounting transactions resulting from economic events that produce
revenue for the accounting entity. The major events occurring in
the revenue cycle are: receiving and ordering from a customer,
delivering goods or services to the customer, requesting payment
from the customer, and receiving the payment. Understanding a cycle
involves familiarity with the documentation of the cycle.
Flowcharts, internal control questionnaires and narratives are
common methods of documentation. Fill in the flowcharts for revenue
(credit sales and cash sales and receipts).
Identify appropriate internal control procedures for the revenue
cycle using DAASI. (Reconciliation to ARCCS: D (Recorded) A
(Custody) A (Authorized) S (Seg of Duties) I (Comparison).)
D=
Prenumbered (and accounted for), multiple-copy SO, SD, SI
used
One copy of the SO, SD, SI filed in the department generated
Remittance advices used to post from
A/R subsidiary ledger, sales journals, cash receipts journal
Prenumbered cash receipt tickets, credit memos & bad debt
write-off forms
Aging prepared monthly
Prepare a prelisting of cash receipts
A=
Individuals with access to cash or goods should be bonded
Use of a lockbox
Cash deposited intact daily
Checks restrictively endorsed
Control over write-offs and collection of write-offs
Cash registers --internal tapes, locked drawers, correct change,
bell, window to
customer, assigned drawers, preprogrammed prices, drawers
reconciled
A=
Credit approved prior to shipment of goods
Monthly statements reviewed by supervisor before sent out
Appropriate credit policy
Approved sales price list with deviations authorized
Authorization of A/R write-offs
S=
Segregate the sales order function from the A) credit function
from the B) shipping
function from the C) billing function from the D) cash receipts
function
Segregate cash receipts from accounts receivable record
keeping
Segregate cash receipts from the credit function
Segregate accounts receivable subsidiary ledger from the general
ledger
I=
A/R general ledger reconciled to subsidiary ledger
Rotate duties between G/L and A/R subsidiary ledger (S/L)
clerks
Sendout monthly statements to customers
Compare SO, SD, & SI to ensure ordered goods were
shipped/shipped goods billed
Compare duplicate deposit slip with a) cash receipts journal,
and b) A/R sub ledger
Daily reconciliation of cash collections
Match credit memoranda and receiving report
II. Internal controls frequently missing in the revenue
cycle.
II. Credit granted by the credit department
II. Sales orders and invoices prenumbered and controlled
II. Sales return credit memoranda prenumbered and matched with
receiving reports
II. Subsidiary ledger reconciled to control ledger regularly
II. Individual who does not post accounts receivables reviews
monthly statements before sending to customer
II. Monthly statements sent to all customers
II. Write-offs approved by mgmt official independent of
recordkeeping responsibility
II. Cash receipts received in mail listed by individual(s) with
no recordkeeping responsibility; cash goes directly to cashier
II. Over-the-counter cash receipts controlled (cash register
tapes)
II. Cash deposited intact daily
II. Employees handling cash are bonded
II. Bank reconciliation prepared by individuals independent of
cash receipts recordkeeping
III. Internal control questionnaire designed using DAASI.
TITLE
Yes or No
D=
Are prenumbered SO, SD, and SI used and accounted for?
Is posting of the A/R S/L done from remittance advices?
Is a trial balance and aging of the A/R prepared monthly?A=
Is credit approved prior to shipment of goods?
Are monthly statements reviewed by the supervisor prior to
mailing?I=
Is the A/R G/L reconciled with the S/L on a regular basis?
Are sales invoices compared to sales orders and shipping
documents?
to determine that ordered goods were shipped and shipped goods
were
ordered?
NOTE: A NO answer on an I/C questionnaire indicates a
weakness.
The following questions are from the CPA Exam. You are given 15
- 25 minutes to answer each question. Each essay question is worth
10 points.
CPA EXAMPLE ESSAY #1
(Internal Controls for Cash Receipts) You have been asked by the
board of trustees of a local church to review its internal
controls. As a part of this review, you have prepared the following
comments relating to the collection made at weekly services and
recordkeeping for members pledges and contributions:
The churchs board of trustees has delegated responsibility for
financial management and audit of the financial records to the
finance committee. This group prepares the annual budget and
approves major disbursements, but is not involved in collections or
recordkeeping. No audit has been considered necessary in recent
years because the same trusted employee has kept church records and
has served as financial secretary for fifteen years.
The collection at the weekly service is taken by a team of
ushers. The head usher counts the collection in the church office
following each service. He then places the collection and a
notation of the amount counted in the church safe. Next morning,
the financial secretary opens the safe and recounts the collection.
She withholds about $100 to meet cash expenditures during the
coming week and deposits the remainder of the collection intact. In
order to facilitate the deposit, members who contribute by check
are asked to draw their checks to cash.
At their request, a few members are furnished prenumbered,
predated envelopes in which to insert their weekly contributions.
The head usher removes the cash from the envelopes to be counted
with the loose cash included in the collection and discards the
envelopes. No record is maintained of issuance or return of the
envelopes and the envelope system is not encouraged.
Each member is asked to prepare a contribution pledge card
annually. The pledge is regarded as a moral commitment by the
member to contribute a stated weekly amount. Based upon the amounts
shown on the pledge cards, the financial secretary furnishes a
letter to the members that supports the tax deductibility of their
contributions.
REQUIRED: Identify the internal control weaknesses apparent in
this scenario and recommendations for improvements.
CPA ESSAY ANSWER #1
WeaknessesRecommended Improvements
Financial secretary exercises too much control over
collections.
To the extent possible, financial secretarys responsibilities
should be confined to record-keeping.
Finance committee is not exercising its assigned responsibility
for collections.
Finance committee should assume a more active supervisory
role.
The auditing function has been assigned to the finance
committee, which also has responsibility for the administration of
the cash function. Moreover, the finance committee has not
performed the auditing function.
An audit committee should be appointed to perform periodic
auditing procedures or engage outside auditors.
The head usher has sole access to cash during the period of the
count. One person should not be left alone with the cash until the
amount has been recorded or control has been established in some
other way.
The number of counters should be increased to at least two, and
cash should remain under joint surveillance until counted and
recorded so that any discrepancy will be brought to attention.
The collection is vulnerable to robbery while it is being
counted and transported from the church safe to its deposit
bank.
The collection should be deposited in the banks night depository
immediately after the count. Physical safeguards, such as locking
and bolting the door during the period of the count, should be
instituted. Vulnerability to robbery will also be reduced by
increasing the number of counters.
The head ushers count lacks usefulness from a control standpoint
because he surrenders custody of both the cash and the record of
the count.
The financial secretary should receive a copy of the collection
report for posting to the financial records. The head usher should
maintain a copy of the report for use by the audit committee.
Contributions are not deposited intact. There is no assurance
that amounts withheld by the financial secretary for expenditures
will be properly accounted for.
Contributions should be deposited intact. If it is considered
necessary for the financial secretary to make cash expenditures, he
or she should be provided with a cash-working fund. The fund should
be replenished by check based upon satisfactory support and a
properly approved reimbursement request.
Members are asked to draw checks to cash thus making the checks
completely negotiable and vulnerable to misappropriation.
Members should be asked to make checks payable to the church. At
the time of the count, ushers should stamp the churchs restrictive
endorsement (For Deposit Only) on the back of the check.
The envelope system has not been encouraged. Control features
which it could provide have been ignored.
The envelope system should be encouraged. Ushers should indicate
on the outside of each envelope the amount contributed. Envelope
contributions should be reported separately and supported by the
empty collection envelopes. Prenumbered envelopes will permit ready
identification of the donor by authorized persons without general
loss of confidentiality.
CPA EXAMPLE ESSAY #2
Trapan Retailing Inc., has decided to diversify operations by
selling through vending machines. Trapans plans call for the
purchase of 312 vending machines which will be situated at 78
different locations within one city, and the rental of a warehouse
to store merchandise. Trapan intends to sell only canned beverages
at a standard price.
Management has hired an inventory control clerk to oversee the
warehousing functions, and two truck drivers who will periodically
fill the machines with merchandise, and deposit cash collected at a
designated bank. Drivers will be required to report to the
warehouse daily.
Required:
What internal controls should the auditor expect to find in
order to assure the integrity of the cash receipts and warehousing
functions?
The internal controls should provide for
S or IDrivers to count and then sign for all merchandise
received.
IDaily verification of each drivers ending inventory.
ACash to be deposited daily by each driver.
DDaily return of duplicate deposit slips by each driver.
IReconciliation of cash deposits with the daily net change in
inventory.
I Provision for explanation of overages and shortages.
IPeriodic independent surprise check of machines to verify
that
a. Machines contain only authorized Trapan-purchased
merchandise.
b. Machines are mechanically programmed to charge the authorized
prices.
c. Cash and merchandise in machines equal a predetermined
total.
ABonding of employees
I or AAlternate driver routes and required vacations.
ARestricting access to the warehouse.
SThe warehouseman to count and sign for all items.
D or IMaintenance of perpetual inventory records.
IPeriodic physical inventory count of merchandise in the
warehouse.
IAnalytical review of collections.
CPA EXAMPLE ESSAY #3
Taylor, CPA, has been engaged to audit the financial statements
of Johnson Coat Outlet, Inc., a medium-sized mail-order retail
store that sells a wide variety of coats to the public.
Required:Prepare the Shipments segment of Taylors internal
control questionnaire. Each question should elicit either a yes or
no response.
Do not prepare questions relating to the cash receipts, sales
returns and allowances, billing, inventory control, or other
segments.
Use the following format:
QuestionYesNo
JOHNSON COAT OUTLET, INC.
Shipments
Internal Control Questionnaire
QuestionYesNo
D or A 1. Are shipping documents prepared from sales orders
approved in accordance with managements authorization?
D 2. Are shipping documents prenumbered?
D 3. Are shipping documents periodically accounted for?
D 4. Are shipping documents recorded in a register, log, or
file?
D 5. Are copies of shipping documents forwarded to the
Billing department?Inventory control department?
I 6. Do shipping documents include cross reference to sales
orders; customer identity and address; description and
quantities of goods shipped; date; and other details?
S 7. Is the shipping function independent of
Sales orders?Credit approval?Billing and accounts
receivable?Cash receipts?Warehouse?Receiving?Inventory Control?
A 8. Is access to merchandise restricted and controlled
within
the shipping department?
I 9. Are type and quantities of goods withdrawn and packed
for
shipping verified by independent counts?
I10. Are receipts from carriers obtained and filed?
CPA EXAMPLE ESSAY #4
A CPAs audit working papers include the narrative description
below of the cash receipts and billing portions of the internal
controls of Parktown Medical Center, Inc. Parktown is a small
health care provider that is owned by a publicly held corporation.
It employs seven salaried physicians, ten nurses, three support
staff in a common laboratory, and three clerical workers. The
clerical workers perform such tasks as reception, correspondence,
cash receipts, billing, and appointment scheduling and are
adequately bonded. They are referred to in the narrative as office
manger, clerk #1, and clerk #2.
Most patients pay for services by cash or check at the time
services are rendered. Credit is not approved by the clerical
staff. The physician who is to perform the respective services
approves credit based on an interview. When credit is approved, the
physician files a memo with the billing clerk (clerk #2) to set up
the receivable from data generated by the physician.
The servicing physician prepares a charge slip that is given to
clerk #1 for pricing and preparation of the patients bill. Clerk #1
transmits a copy of the bill to clerk #2 for preparation of the
revenue summary and for posting in the accounts receivable
subsidiary ledger.
The cash receipts functions are performed by clerk #1, who
receives cash and checks directly from patients and gives each
patient a prenumbered cash receipt. Clerk #1 opens the mail and
immediately stamps all checks for deposit only and lists cash and
checks for deposit. The checks and cash are deposited daily by the
office manager. The list of cash and checks, together with related
remittance advices, are forwarded by clerk #1 to clerk #2. Clerk #1
also serves as receptionist and performs general correspondence
duties.
Clerk #2 prepares and sends monthly statements to patients with
unpaid balances. Clerk #2 also prepares the cash receipts journal
and is responsible for the accounts receivable subsidiary ledger.
No other clerical employee is permitted access to the accounts
receivable subsidiary ledger. Uncollectible accounts are written
off by clerk #2 only after the physician who performed the
respective services believes the account to be uncollectible and
communicates the write-off approval to the office manager. The
office manager then issues a write-off memo that clerk #2
processes.
The office manager supervises the clerks, issues write-off
memos, schedules appointments for the doctors, makes bank deposits,
reconciles bank statements, and performs general correspondence
duties.
Additional services are performed monthly by a local accountant
who posts summaries prepared by the clerks to the general ledger,
prepares income statements, and files the appropriate payroll forms
and tax returns. The accountant reports directly to the parent
corporation.
Required:
Based only on the information in the narrative, describe the
reportable conditions and one resulting misstatement that could
occur and not be prevented or detected by Parktowns internal
controls concerning the cash receipts and billing function. Do not
describe how to correct the reportable conditions and potential
misstatements. Use the format illustrated below.Reportable
conditionPotential misstatement
There is no control to verify that fees are recorded and billed
at authorized rates and terms.Accounts receivable could be
overstated and uncollectible accounts understated because of the
lack of controls.
CPA ESSAY ANSWER #4
The reportable conditions and resulting misstatements, in
addition to the example that could occur and not be prevented or
detected by Parktowns internal controls concerning the cash
receipts and billing functions include the following:
Reportable conditionPotential misstatement
The employees who perform services also are permitted to approve
credit without an external credit check.Uncollectible accounts
expense could be understated and accounts receivable could be
overstated because of the lack of an appropriate credit check.
There is no independent verification of the billing process.Fees
earned and accounts receivable may be understated because not all
services performed might be reported for billing.
or
Fees earned and accounts receivable may be either overstated or
understated because of the use of incorrect price or service data
or because of mathematical errors.
The employees who approve credit also approve write-offs of
uncollectible accounts.Accounts receivable could be understated and
uncollectible accounts expense overstated because write-offs of
accounts receivable could be approved for accounts that are, in
fact, collectible.
or
Accounts receivable could be overstated and uncollectible
accounts expense understated because write-offs of accounts
receivable might not be initiated for accounts that are
uncollectible.
Credit is not granted on the basis of established
limits.Uncollectible accounts expense could be either
understated or overstated because the lack of established credit
limits may make it more difficult to identify uncollectible
amounts.
The employee who initially handles cash receipts also prepares
billings.Fees earned and cash receipts or accounts receivable could
be understated because of omitted or inaccurate billing.
The employee who makes bank deposits also reconciles bank
statements.The cash balance per books may be overstated because not
all cash is deposited.
Uncollectible accounts are not determined on the basis of
established criteria.Uncollectible accounts expense could be either
understated or overstated because of the lack of established
write-off criteria.
Trial balances of the accounts receivable subsidiary ledger are
not prepared independently of, or verified and reconciled to, the
accounts receivable control account in the general ledger.Any of
fees earned, cash receipts, and uncollectible accounts expense
could be either understated or overstated because of undetected
differences between the subsidiary ledger and the general
ledger.
or Fees earned and cash receipts or accounts receivable could be
understated because of failure to record billing, cash receipts, or
write-offs accurately.
SMALLCO LUMBER ANSWERThe Weaknesses in Smallco Lumbers internal
controls are:
Warehouse ClerkA - Releases lumber prior to
authorization, for example, approval
of customers credit.
D - Copies of shipping advice should be
prepared and forwarded to
Bookkeeper #1.
D - Lacks documentation that lumber
was given to the carrier.
Bookkeeper #2S - Bookkeeper who maintains general
ledger should not be responsible for
footing and crossfooting of journals,
that is, sales and cash receipts
journals.
I - Subsidiary accounts receivable
ledger should be reconciled to
general ledger.
Bookkeeper #1A - Credit authorized by bookkeeper and
not a responsible officer.
I - Prepares and mails invoice without
knowledge of what was shipped.Collection ClerkS - Collection
clerk should not maintain
sales journal.
S - Collection clerk should not maintain
accounts receivable subsidiary
ledger.
D - Remittance advice not used as the
basis for posting collections.
A - Checks are not promptly endorsed by
the mail clerk.
A - Cash receipts are not promptly
deposited.
I - Deposit slips are not reconciled to
cash receipts journal or debits to
general ledger.
CHARTINGCharting, Inc. processes its sales and cash receipts
documents as follows:
Payment on account: The mail is opened each morning by a mail
clerk in the sales department. The mail clerk prepares a remittance
advice showing customer and amount paid if one is not received. The
checks and remittance advices are then forwarded to the sales
department supervisor who reviews each check and forwards the
checks and remittance advices to the accounting department
supervisor.
The accounting department supervisor, who also functions as
credit manager approving new credit and all credit limits, reviews
all checks for payments on past due accounts and then forwards the
checks and remittance advices to the A/R clerk, who arranges the
advices in alphabetical order. The remittance advices are posted
directly on the A/R ledger cards. The checks are endorsed by stamp
and totaled. The total is posted to the cash receipts journal. The
remittance advices are filed chronologically.
After receiving the cash from the previous days cash sales, the
A/R clerk prepares the daily deposit slip in triplicate. The third
copy of the deposit slip is filed by date, and the second copy and
the original accompany the bank deposit.
Sales: Sales clerks prepare sales invoices in triplicate. The
original & second copy go to the cashier. The third copy is
retained by the sales clerk in the sales book. For cash sales, the
customer pays the sales clerk, who presents the money to the
cashier with the invoice copies.
A credit sale is approved by the cashier from an approved credit
list after the sales clerk prepares the three-part invoice. After
receiving the cash or approving the invoice, the cashier validates
the original copy of the sales invoice and gives it to the
customer. At the end of each day, the cashier recaps the sales and
cash received and forwards the cash and the second copy of all
sales invoices to the accounts receivable clerk.
The A/R clerk balances the cash received with cash sales
invoices and prepares a daily sales summary. The sales invoices are
sent to the inventory control clerk in the sales department for
posting to the inventory control cards. After posting, the
inventory control clerk files all invoices numerically. The A/R
clerk posts the daily sales summary to the cash receipts journal
and sales journal and files the sales summaries by date. The clerk
also post the credit sales to the accounts receivable subsidiary
ledger account.
The cash sales and cash received on account make up the daily
bank deposit.
Bank deposits: The bank validates the deposit slip and returns
the second copy to the accounting department where it is filed by
date by the accounts receivable clerk.Monthly bank statements are
reconciled promptly by the accounting department supervisor and
filed by date.
REQUIRED:
1.Complete the flowchart on the following page by labeling the
appropriate symbols and indicating information flows. The chart is
complete as to symbols and document flows.
2.Identify weaknesses in Chartings internal controls.
CONTROL RISK ASSESSMENT CONSIDERATIONSCREDIT SALES
TRANSACTIONS
Potential
MisstatementNecessary
ControlPotential Testof Control
Sales may be made to un-authorized customers.Determination that
customer is on approved customer list.
Approved sales order form for each sale.Reperform procedure.
Examine approved sales order forms.
Sales may be made without credit approval.Credit department
credit check on all new customers.
Check on customers credit limit prior to each sale.Inquire about
procedures for checking credit on new customers.
Examine evidence of credit limit check prior to each sale.
Goods may be released from warehouse for unauthorized
orders.Approved sales order for all goods released to
shipping.Observe warehouse personnel filing orders.
Goods shipped may not agree with goods ordered.Independent check
by shipping clerks of agreement of goods received from warehouse
with approved sales order.Examine evidence of performance of
independent check.
Unauthorized shipments may be made.Segregation of duties filling
and shipping orders.
Preparation of shipping document for each shipment.Observe
segregation of duties.
Inspect shipping documents.
Billings may be made for fictitious transactions or duplicate
billings may be made.Matching shipping document and approved sales
order for each invoice.Vouch invoices to shipping documents and
approved sales orders.
Some shipments may not be billed.Matching sales invoice for each
shipping document.Trace shipping documents to sales invoices.
Sales invoices may have incorrect prices.Independent check on
pricing of invoices.Reperform check on accuracy of pricing.
Invoices may not be journalized or posted to customer
accounts.Independent check of agreement of sales journal entries
and amounts posted to customer accounts with control totals of
invoices.Review evidence of independent checks; re-perform
checks.
Invoices may be posted to wrong customer account.Mailing of
monthly statement to customers.Observe mailing of monthly
statements.
CONTROL RISK ASSESSMENT CONSIDERATIONCASH RECEIPTS
TRANSACTIONS
Potential
MisstatementNecessary
ControlPotential Test
of Control
Cash sales may not be registered.Use of cash registers or
point-of-sale devices.
Periodic surveillance of cash sales procedures.Observe cash
sales procedures.
Inquire of supervisors about results of surveillance.
Mail receipts may be lost or misappropriated after
receipt.Restrictive endorsement of checks immediately on
receipt.
Immediate preparation of prelist of mail receipts.Examine checks
for restrictive endorsement.
Observe preparation of prelists.
Cash and checks received for deposit may not agree with cash
count sheets and prelist.Independent check of agreement of cash and
checks with cash count sheets and prelist.Examine evidence of
independent check.
Cash may not be deposited intact daily.Independent check of
agreement of validated deposit slip with daily cash
summary.Reperform independent check.
Remittance advices may not agree with prelist.Independent check
of agreement or remittance advices with prelist.Examine evidence of
independent check.
Some receipts may not be recorded.Independent check of agreement
of amounts journalized and posted with daily cash summary.Reperform
independent check.
Errors may be made in journalizing receipts.Preparation of
periodic independent bank reconciliations.Examine bank
reconciliations.
Receipts may be posted to the wrong customer account.
Mailing of monthly statements to customers.Observe mailing of
monthly statements.
OOF QUESTION 2 (CPA, adapted) 15-25 minutes
Field, CPA, is auditing the financial statements of Miller
Mailorder, Inc. (MMI) for the year ended January 31, 1996. Field
has compiled a list of possible errors and fraud that may result in
the misstatement of MMI's financial statements and a corresponding
list of internal control activities that, if properly designed and
implemented, could assist MMI in preventing or detecting errors and
fraud.
Required
For each possible error and fraud numbered 1 through 15, select
one internal control activity from the answer list at right that,
if properly designed and implemented, most likely could assist MMI
in preventing or detecting the errors and fraud. Each response in
the list of internal control activities may be selected once, more
than once, or not at all.
Possible Errors and Frauds
1. Invoices for goods sold are posted to incorrect customer
accounts.
2. Goods ordered by customers are shipped but are not billed to
anyone.
3. Invoices are sent for shipped goods but are not recorded in
the sales journal.
4. Invoices are sent for shipped goods and are recorded in the
sales journal but are not posted to any customer account.
5. Credit sales are made to individuals with unsatisfactory
credit ratings.
6. Good are removed from inventory for unauthorized orders.
7. Goods shipped to customers do not agree with goods ordered by
customers.
8. Invoices are sent to allies in a fraudulent scheme, and sales
are recorded for fictitious transactions.
9. Customers' checks are received for less than the customers'
full account balances, but the customers full account balances are
credited.
10. Customers' checks are misappropriated before being forwarded
to the cashier for deposit.
11. Customers' checks are credited to incorrect customer
accounts.
12. Different customer accounts are each credited for the same
cash receipt.
13. Customers' checks are properly credited to customer accounts
and are properly deposited, but errors are made in recording
receipts in cash receipts journal.
14. Customers' checks are misappropriated after being forwarded
to the cashier for deposit.
15. Invalid transactions granting credit for sales returns are
recorded.
Internal Control ActivitiesA. Shipping clerks compare goods
received from the warehouse with the details on the shipping
documents.
B. Approved sales orders are required for goods to be released
from the warehouse.
C. Monthly statements are mailed to all customers with
outstanding balances.
D. Shipping clerks compare goods received from the warehouse
with approved sales orders.
E. Customer orders are compared with the inventory master file
to determine whether items ordered are in stock.
F. Daily sales summaries are compared with control totals of
invoices.
G. Shipping documents are compared with sales invoices when
goods are shipped.
H. Sales invoices are compared with the master price file.
I. Customer orders are compared with an approved customer
list.
J. Sales orders are prepared for each customer order.
K. Control amounts posted to the accounts receivable ledger are
compared with control totals of invoices.
L. Sales invoices are compared with shipping documents and
approved customer orders before invoices are mailed.
M. Prenumbered credit memos are used for granting credit for
goods returned.
N. Goods returned for credit are approved by the supervisor of
the Sales Department.
O. Remittance advices are separated from the checks in the mail
room and forwarded to the Accounting Department.
P. Total amounts posted to the accounts receivable ledger from
remittance advices are compared with the validated bank deposit
slip.
Q. The cashier examines each check for proper endorsement.
R. Validated deposit slips are compared with the cashier's daily
cash summaries.
S. An employee, other than the bookkeeper, periodically prepares
a bank reconciliation.
T. Sales returns are approved by the same employee who issues
receiving reports evidencing actual return of goods.
1. The correct answer is (C).DISCUSSION:Mailing monthly
statements to customers with outstanding accounts will detect
invoices posted to the wrong accounts. Customers whose accounts
were misposted for goods not ordered will contest the
statements.
2. The correct answer is (G).DISCUSSION:Each shipping document
should have a corresponding invoice when the goods are shipped. The
appropriate direction of testing is from the shipping documents to
the sales invoices.
3. The correct answer is (F).DISCUSSION:Daily sales summaries
are from the book of original entry--the sales journal. Comparing
the summaries with the total of invoices will detect failure to
record all invoices.
4. The correct answer is (K).DISCUSSION:Comparing control total
amounts posted to the accounts receivable (subsidiary) ledger with
the control total of all invoices for the same period should detect
invoices not posted.
5. The correct answer is (I).DISCUSSION:Credit approval should
be received before sales are made. Thus, shipping to customers on
an approved list should reduce the risk of sales to customers with
unsatisfactory credit.
6. The correct answer is (B).DISCUSSION:An approved sales order
should be presented to the storekeeper before release of goods from
the warehouse to prevent goods from being removed for unauthorized
orders.
7. The correct answer is (D).DISCUSSION:Requiring shipping
clerks to compare the amounts and type of goods received from the
warehouse with approved sales orders assures that goods shipped
agree with those ordered by customers.
8. The correct answer is (L).DISCUSSION:Comparing sales invoices
with shipping documents will assure that each invoice is supported
by a shipment. Fictitious sales, i.e., those for which no shipment
was made, should be detected.
9. The correct answer is (P).DISCUSSION: The total receipts
credited to customer accounts in the subsidiary ledger should equal
the total receipts deposited, given that daily receipts are
deposited intact.
10. The correct answer is (C).DISCUSSION:Checks misappropriated
(stolen) prior to forwarding to the cashier are not posted to
customer accounts (assuming that the remittance advices were stolen
as well). Thus, customers will complain when their payments fail to
be reflected in the balances on the monthly statements.
11. The correct answer is (C).DISCUSSION:Mailing monthly
statements to customers with outstanding accounts will detect
receipts posted to the wrong accounts. Customers whose accounts
were misposted will contest the statements.
12. The correct answer is (P).DISCUSSION:If more than one
customer account is credited for the same cash receipt, the error
will be detected when the total of the amounts posted to the
accounts receivable ledger is compared with the total cash
receipts.
13. The correct answer is (S).DISCUSSION:The bank reconciliation
will detect errors in recording cash receipts (and disbursements).
The balance in the ledger will not reconcile with the amount in the
bank statement.
14. The correct answer is (P).DISCUSSION- If the checks are
misappropriated (stolen) prior to deposit, the total of the amounts
posted to the accounts receivable ledger will be greater than the
validated bank deposit slip.
15. The correct answer is (N).DISCUSSION:Invalid sales returns
are prevented by requiring approval of returns by the Sales
Department supervisor.
REVENUE CYCLE MULTIPLE CHOICE
1.For effective internal control, the billing function should be
performed by the
a.Accounting department.
c.Shipping department.
b.Sales department.
d.Credit & collection department.
2.For good internal control, which of the following functions
should not be the
responsibility of the treasurers department?
a.Data processing.
c.Custody of securities.
b.Handling of cash.
d.Establishing credit policies.
3.When a customer fails to include a remittance advice with a
payment, it is
common practice for the person opening the mail to prepare
one.
Consequently, mail should be opened by which of the following
four company
employees?
a.Credit manager.
c.Sales manager.
b.Receptionist.
d.Account receivable clerk.
4.Which one of the following is not a universal rule for
achieving strong internal
control over cash?
a.Separate cash handling and the record keeping functions.
b.Decentralize the receiving of cash as much as possible.
c.Deposit each days cash receipts by the end of the day.
d.Have bank reconciliations performed by employees independent
with respect to handling cash.
5.The least crucial element of internal control over cash is
a.Separation of cash record keeping from custody of cash.
b.Preparation of the monthly bank reconciliation.
c.Batch processing of checks.
d.Separation of cash receipts from cash disbursements.
6.Which of the following sets of duties would ordinarily be
considered basically
incompatible in terms of good internal control?
a.Preparation of monthly statements to customers and maintenance
of the
accounts receivable subsidiary ledger.
b.Posting to the general ledger and approval of additions and
terminations
relating to the payroll.
c.Custody of unmailed signed checks and maintenance of expense
subsidiary
ledgers.
d.Collection of receipts on account and maintaining accounts
receivable
records.
7.Internal control over cash receipts is weakened when an
employee who
receives customer mail receipts also
a.Prepares initial cash receipts records.
b.Records credits to individual accounts receivable.
c.Prepares bank deposit slips for all mail receipts.
d.Maintains a petty cash fund.
8.Which of the following is an effective internal control over
accounts receivable?
a.Only persons who handle cash receipts should be responsible
for the
preparation of documents that reduce accounts receivable.
b.Responsibility for approval of the write-off of uncollectible
accounts should lie with sales personnel.
c.Balances in the subsidiary accounts receivable ledger should
be reconciled
to the G/L control account once a year, preferably at the year
end.
d.The billing function should be assigned to persons other than
those
responsible for maintaining accounts receivable subsidiary
records.
9.Smith Manufacturing Companys accounts receivable clerk has a
friend who is
also Smiths customer. The accounts receivable clerk, on
occasion, has issued
fictitious credit memorandums to his friend for goods supposedly
returned. The
most effective procedure for preventing this activity is to
a.Prenumber and account for all credit memorandums.
b.Require receiving reports to support all credit
memorandums.
c.Have the sales department independent of the A/R
department.
d.Mail monthly statements.
10.Salesmens commissions are based on gross sales. Sales
continue to increase; but uncollectible A/R are also increasing at
an alarming rate. The most effective procedure for preventing the
increase in uncollectible A/R is to
a.Have the sales manager review activity of individual
salesmen.
b.Age accounts receivable regularly.
c.Have the write-off of accounts properly approved.
d.Have the credit dept approve credit to customers before
shipment.
11.The sales department bookkeeper has been crediting
house-account sales to
her brother-in-law, an outside salesman. Commissions are paid on
outside
sales but not on house-account sales. This might have been
prevented by
requiring that
a.Sales order forms be prenumbered and accounted for by the
sales department bookkeeper.
b.Sales commission statements be supported by sales order forms
and
approved by the sales manager.
c.Aggregate sales entries be prepared by the general accounting
department.
d.Disbursement vouchers for sales commissions be reviewed by the
internal
audit department and checked to commission statements.
12.Which of the following control procedures may prevent the
failure to bill
customers for some shipments?
a.Each shipment should be supported by a prenumbered sales
invoice.
b.Each sales order should be approved by authorized
personnel.
c.Sales journal entries should be reconciled to daily sales
summaries.
d.Each sales invoice should be supported by a shipping
document.
13.To achieve good I/C which department should match shipping
documents with
sales orders and prepare daily sales summaries?
a.Billing.
c. Credit.
b.Shipping. d. Sales.
CPA ESSAY ON A COMPUTERIZED REVENUE CYCLE FLOWCHART
Required:The flowchart on the following page depicts part of a
revenue cycle. Some of the flowchart symbols are labeled to
indicate control procedures and records. For each symbol numbered 1
through 13, select one response from the answer lists below. Each
response in the lists may be selected once or not at all.
Operations and control procedures
A.Enter shipping data
B.Verify agreement of sales order and shipping document
C.Write off accounts receivable 1.
D.To warehouse and shipping department 2.
E.Authorize account receivable write-off 3.
F.Prepare aged trial balance 4.
G.To sales department 5.
H.Release goods for shipment 6.
I.To accounts receivable department 7.
J.Enter price data 8.
K.Determine that customer exists 9.
L.Match customer purchase order with sales order10.
M.Perform customer credit check11.
N.Prepare sales journal12.
O.Prepare sales invoice13.
Documents, journals, ledgers, and files
P.Shipping document
Q.General ledger master file
R.General journal
S.Master price file
T.Sales journal
U.Sales invoice
V.Cash receipts journal
W.Uncollectible accounts file
X.Shipping file
Y.Aged trial balance
Z.Open order file
CPA COMPUTERIZED REVENUE CYCLE FLOWCHART
DESCRIPTION OF ON-LINE ENTRY/BATCH PROCESSING FOR REVENUE
APPLICATION
Figure 1 shows a flowchart of an on-line batch entry processing
system that incorporates most of the controls discussed in the
preceding sections.
In the illustrated system, as orders are received sales order
clerks use on-line terminals and an order program to determine that
the customer has been approved, and that the order will not cause
the customer's balance to exceed the customer's authorized credit
limit. The program also checks the inventory master file to
determine that goods are on hand to fill the order. If the order is
accepted, the computer enters it into an open order file and a
multicopy sales order form is produced on a printer in the sales
order department. When an order is, not accepted, a message is
displayed on the terminal indicating the reason for rejection.
Copies of the approved sales order are forwarded to the
warehouse as authorization to release goods to shipping. In
shipping, personnel first makes an independent check on agreement
of the goods received with the accompanying sales order form. They
then use their on-line terminals and a shipping program to retrieve
the corresponding sales order from the open order file and add
appropriate shipping data. Next the computer transfers the
transaction from the open order file to a shipping file and
produces a shipping document on the printer in the shipping
department.
As matching shipping documents and sales order forms are
received in the billing department, they are batched and batch
totals are manually compared. Using their on-line terminals and a
billing program, billing department personnel first enter the
manually prepared batch totals. Next the previously entered order
and shipping data for each transaction is retrieved from the
shipping file and a sales invoice is generated using prices from
the master price file. As each billing is completed, the computer
enters it into a sales transactions file. After all the
transactions in a batch have been processed in this manner, the
billing program compares a computer generated batch total with the
manual batch total previously entered by the billing clerk.
Discrepancies are displayed on the terminal and corrected by the
billing clerks before processing continues. Finally, sales invoices
for the batch are printed in the EDP department and distributed as
shown in the flowchart.
The recording of sales transactions is completed at the end of
each day when the EDP department runs the master file update
program. As shown, this program updates three master files and
produces a sales journal and general ledger transaction summary
which are sent to accounting. The use of a separate program to
produce monthly customer statements is not shown in the
flowchart.
PAGE 1
_935322661.doc
Cash
Document
Cash Sales
Invoice
Supervisor
reading of
register daily
and
reconciliation
with cash
Supervisor
preparation of
Cash Count
Sheet
Document
Document
Cash
Document
Document
Register
Reading
Remittance Advice
Checks From
Customers
Remittance Advice
Checks
Prelist
Prelist
Prelist of
Mail Receipts
Register Reading
Count Sheet
Cash
Checks
Prelist
Cash and Checks
Prelist
Register Reading
Cash Count Sheet
Deposit Slip
Daily Cash Summary
Prelist
Daily Cash
Summary
Register Reading
Count Sheet
Deposit Slip
Daily Cash
Summary
Register Reading
Prelist
Prelist
Register Reading
Count Sheet
Deposit Slip
Daily Cash
Summary
1
2
1
2
1
2
To
Treasurer
1
2
3
To
Accounting
2
3
1
2
2
2
3
To Bank
To General
Accounting
1
2
2
2
2
3
2
2
1
2
3
2
SALES
CASHIER
CASH RECEIPTS FLOWCHART
A
_969213270.doc
Open
Mail
Write
Invoice For
Cust. Order
Checks
Remittance
Advice
Sales
Invoice
Sales
Invoice
Cash
Sales
Invoice
Post
Checks
Remittance
Advice
Prepare Remittance
Advice if Needed
2
1
2
3
Mail
Mail Clerk
Retained
In Sales
Book
From Customer
Customer
Inventory Control Clerk
File
N
1
2
Checks
Remittance
Advice
Accounts
Receivable
Ledger
Post
Checks
Remittance
Advice
Sales
Journal
Post
Sales Invoice
Cash
Post
Check
Total
Daily Sales
Summary
Endorse
Checks Total
Cash and
Prepare
Deposit Slip
2
File
D
To Bank
Validated
Deposit Slip
Monthly Bank
Statement
From
Bank
CLERKS
CASHIER
SALES SUPER.
A/R SUPER
ACCOUNTING DEPARTMENT/ACCOUNTS RECEIVABLE CLERK
SALES AND CASH RECEIPTS FOR CHARTING, INC.
Filed Third
Copy of
Deposit
Slip
Sales Clerks
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
_921582673.doc
FIGURE 1
EXAMPLE OF ON-LINE ENTRY/BATCH PROCESSING FOR A REVENUE
APPLICATION
WAREHOUSE
BILLING
SHIPPING
EDP
SALES ORDER
N
N
To Customer
To Accounting
N
N
To Customer
2
3
4
2
3
2
1
2
1
Sales
Trans.
File
Shipping
File
Master
Price
File
Open
Order
File
General
Ledger
Master
File
Inventory
Master
File
Accts.
Rec.
Master
File
3
2
4
3
2
1
Shipping
Document
Sales Order
Enter Batch
Total; Prepare
Billing
Prepare
Batch
Total
Shipping
Document
Shipping Doc.
Shipping Doc.
Sales Order
Shipping Doc.
Enter
Shipping
Date
Check Agreement
of Goods and
Sales Order
Sales
Invoice
Sales Invoice
General Ledger
Transaction
Summary
Sales Journal
Retrieve Shipped Order Data;
Prepare Invoice; Accumulate
and Compare Batch Total;
Enter in Sales Transactions
File; Print Invoices
BILLING PROGRAM
Retrieve Open Orders;
Add Shipping Data;
Transfer to Shipping File;
Print Shipping Documents
SHIPPING PROGRAM
Update Master Files;
Print Sales Journal and
General Ledger
Transaction Summary
MASTER FILE
UPDATE PROGRAM
To
Shipping
with
Goods
Sales
Order
Sales Order
Release
Goods to
Shipping
Sales
Orders
Sales Order
Sales Order
Sales Order
Customer Order
From
Warehouse
Perform Edit and
Credit Checks;
Print Sales Orders
ORDER PROGRAM
Enter
Order
Data
Customer's
Order