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1 Chapter 4 The Revenue Cycle COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South- Western are.

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Presentation on theme: "1 Chapter 4 The Revenue Cycle COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South- Western are."— Presentation transcript:

1 1 Chapter 4 The Revenue Cycle COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South- Western are trademarks used herein under license

2 Objectives for Chapter 4 Tasks performed in the revenue cycle, regardless of whether manual or computerized Functional departments in the revenue cycle and the flow of revenue transactions through the organization Documents, journals, and accounts needed for audit trails, the maintenance of records, decision making, and financial reporting Risks associated with the revenue cycle and the controls that reduce these risks The operational and control implications of technology used to automate and reengineer the revenue cycle

3 REVENUE CYCLE (SUBSYSTEMS) Sales Order Billing/ Accounts Receivable Cash Receipts/ Collections Shipping 1 6 4/5 3 Credit / Customer Service 2 Customer Purchase Order Customer Purchase Order Start here.

4 4 Revenue Cycle (Subsystem) Databases zMaster files yCustomer master file yAccounts Receivable master file yInventory master file zTransaction Files ySales Order transaction file xOpen Sales Order transaction file ySales Invoice transaction file yCash Receipts transaction file zOther Files yTax Details reference file yShipping and Price Data reference file yCredit reference file ySales history file yCash Receipts history file

5 Manual Sales Order Processing – Sales & Credit Departments zBegins with customer placing order ySales department captures essential details on sales order form. zTransaction is authorized by credit department; returned to Sales Dept. zSales information is released to: yBilling yWarehouse yShipping See next slide for flowchart

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7 zMerchandise is picked from Warehouse and sent to Shipping, with SO. zMemo to Inventory Control. zOther SO filed in Warehouse. Manual Sales Order Processing - Warehouse See next slide for flowchart (yellow symbols)

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9 Manual Sales Order Processing - Shipping zShipping reconciles merchandise received from Warehouse with sales information on packing slip. zMerchandise, packing slip (PS), and bill of lading (BOL) are prepared by Shipping and sent to Customer. zCopy of BOL and SO are filed in Shipping. 9 See next slide for flowchart

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11 Manual Sales Order Processing – Billing zShipping information is also sent to Billing. Billing compiles and reconciles relevant facts and issues invoice to Customer and updates sales journal. 11 See next slide for flowchart (blue symbols)

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13 zA/R records information in customers account in accounts receivable subsidiary ledger and files invoice. Manual Sales Order Processing – Accounts Receivable See next slide for flowchart (purple symbols)

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15 Manual Sales Order Processing – Inventory Control zInventory Control adjusts inventory subsidiary ledger and files Memo. 15 See next slide for flowchart

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17 Manual Sales Order Processing – General Ledger (not flowcharted) zBilling, A/R, and Inventory Control submits summary information to General Ledger dept., which then reconciles data and posts to control accounts in G/L. 17

18 Manual Cash Receipts Processes – Mail Room & Cash Receipts zCustomer checks and remittance advices are received in the Mail Room. yA mail room clerk prepares a list of checks (Cash Prelist) and sends the prelist and the checks to Cash Receipts. yThe Remittance Advices are sent to A/R. zCash Receipts: yverifies the accuracy and completeness of the checks yupdates the cash receipts journal yprepares a deposit slip, which is sent to Bank with checks yfiles Prelist by date yprepares a journal voucher to send to G/L (not flowcharted)

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20 zA/R posts from the remittance advices to the accounts receivable subsidiary ledger. zRemittance advices are filed alphabetically. yPeriodically, a summary of the postings is sent to G/L. (not flowcharted) zG/L department: (not flowcharted) yreconciles the journal voucher from Cash Receipts with the summaries from A/R yupdates the general ledger control accounts Manual Cash Receipts Processes – Accounts Receivable

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22 22 Control Activities

23 23 Two Broad Categories zComputer Controls yGeneral yApplication z Physical Controls yAccess Control yAccounting Records yAuthorization yIndependent Verification ySegregation of Duties ySupervision (compensating control) Physical controls are GENERAL

24 24 Examples of Access Controls (Revenue Cycle) zLimit access to assets zWithin revenue cycle, assets to protect are cash and inventories; restrict access to records such as accounts receivable subsidiary ledger and cash journal. Manual or CBIS

25 25 Examples of Accounting Records (Revenue Cycle) zWith properly maintained audit trail, possible to track transactions through systems and find when & where errors were made: ypre-numbered source documents (e.g., sales orders) yspecial journals (Sales, Cash Receipts) ysubsidiary ledgers (A/R) ygeneral ledger yfiles Manual or CBIS

26 26 Authorization Controls zProper authorization of transactions (documentation) should occur so that only valid transactions get processed. zExamples of authorization in revenue cycle: ysale is made on credit (authorization) ycash refund is requested (authorization) yposting a cash payment received to a customers account (cash pre-list) Watch for difference between General Authorization and Specific Authorization Watch for difference between General Authorization and Specific Authorization Manual or CBIS

27 27 Examples of Independent Verification (Revenue Cycle) zPhysical procedures & recordkeeping should be independently reviewed at various points in system to check for accuracy and completeness: yShipping verifies goods sent from Warehouse are correct in type and quantity yBilling reconciles shipping notice with sales order yGeneral Ledger reconciles journal vouchers from Billing, Inventory Control, Cash Receipts, and Accounts Receivable Manual or CBIS

28 28 Segregation of Functions Three Rules 1.Transaction authorization should be separate from transaction processing. 2.Asset custody should be separate from asset recordkeeping. 3.The organization should be structured so that fraud requires collusion between two or more individuals. Manual

29 29 Examples of Segregation of Functions (Revenue Cycle) zSales Order Processing ycredit authorization separate from SO processing yinventory control separate from warehouse yaccounts receivable sub-ledger separate from general ledger control account zCash Receipts Processing ycash receipts separate from accounting records yaccounts receivable sub-ledger separate from general ledger Manual

30 30 Examples of Supervision (Revenue Cycle) zSupervision of employees serves as deterrent to dishonest acts -particularly important in mailroom. Manual or CBIS

31 31 Supervision in Revenue Cycle zSupervision of employees serves as deterrent to dishonest acts - particularly important in mailroom. yMailroom is first point-of-contact in organization for customer payments Manual or CBIS

32 32 Automating Revenue Cycle

33 33 Characteristics of Automated Revenue Cycle zAuthorizations and data access can be performed through computer screens. zReduced paper documents. zManual journals and ledgers are changed to electronic transaction and master files. zInput is still frequently from hard copy documents and goes through one or more computerized processes. zProcesses store data in electronic files or prepare data in the form of a printed report.

34 34 Advantages of Real-Time Processing zShortens cash cycle of firm by reducing time between order date and billing date zFewer clerical errors, reducing incorrect items being shipped and bill discrepancies zReduces amount of expensive paper documents and storage costs zBetter inventory management - can lead to competitive advantage

35 35 Example of Reengineered Sales Order/Invoice Processing in Revenue Cycle zManual procedures & physical documents replaced by interactive computer terminals. zReal time input/output occurs, with some master files still being updated using batches. yreal-time - entry of customer order, printout of stock release, packing slip and bill of lading; update of credit file, inventory file, and open sales orders file ybatch - printout of invoice, update of closed sales order (journal), accounts receivable and general ledger control account

36 36 Reengineered Cash Receipts Process zMail room is frequent target for reengineering. yCompanies send customers preprinted envelopes and remittance advices. yUpon receipt, preprinted envelopes are set aside and information on envelope is scanned – providing control procedure against theft. yMachines are also available to open envelopes, scan remittance advices and checks, and separate checks.

37 Point-of-Sale Systems zPoint of sale systems are used extensively in retail establishments. yCustomers pick inventory from shelves and take to cashier. zClerk scans universal product code (UPC). POS system is connected to inventory file, where price and description are retrieved. yInventory levels are updated and reorder needs can immediately be detected.

38 Point-of-Sale Systems zSystem computes amount due. Payment is either cash, check, debit or credit card in most cases. yNo accounts receivables zIf checks, debit or credit cards are used, on-line link to receive approval is necessary. zAt end of day or cashiers shift, money and receipts in drawer are reconciled to internal cash register tape or printout from computers database. yCash over and under must be recorded

39 Authors Example of Computerized POS

40 Reengineering Using Electronic Data Interchange (EDI) zEDI helps to expedite transactions. zThe customers computer: yDetermines inventory is needed ySelects supplier with whom business has a formal business agreement yDials suppliers computer and places order zExchange is completely automated. yNo human intervention or management

41 EDI System Purchases System EDI Translation Software EDI Translation Software Communications Software Communications Software Other Mailbox Other Mailbox Wal-Marts mailbox Our Companys mailbox Sales Order System Application Software Application Software Direct Connection VAN Wal-Mart Our Company Many Transactions Few Transactions

42 Reengineering Using the Internet zTypically, no formal business agreements yUnlike EDI, where formal agreements exist zMost orders require credit cards. zMainly done with systems, and thus some turnaround time is necessary yIntelligent agents needed to eliminate this time lag. zSecurity and control over data is big concern with Internet transactions.

43 43 Control Considerations for CBISs zAccess Control - magnetic records are vulnerable to both authorized/ unauthorized exposure and should be protected. yMust limit access to data files yMust limit access to computer programs

44 44 * Destructive backup means newer files write over the older files. Control Considerations for CBISs zAccounting Records - rest on reliability and security of magnetically stored data. Accountant/auditor should be skeptical about accepting accuracy of printouts of journals and ledgers. yBackup is concern for direct access files; xsystem must ensure backup of all files is continuously kept because of destructive backup issues with direct access files *

45 Control Considerations for CBISs zAuthorization - in real-time systems, authorizations are automated: programmed decision rules must be closely monitored. 45

46 Control Considerations for CBISs zIndependent Verification – consolidating accounting tasks under one computer program can remove traditional independent verification controls. These controls help: yperform batch control balancing after each computer run yProduce reports and summaries for end users and management to review 46

47 47 Control Considerations for CBISs zSegregation of Functions - some consolidation of tasks by computer; protect computer programs--coding, processing and maintenance should be separated (internally developed systems). zSupervision - in POS systems, cash registers internal tape or database is a type of supervision.

48 48 Microcomputer-Based Accounting Systems zUsed by small firms & some large, decentralized firms zFrequently, one (or few) individuals perform entire accounting function zMost systems are divided into modules controlled by menu-driven program: ygeneral ledger yinventory control ypayroll ycash disbursements ypurchases and accounts payable ycash receipts ysales order/invoicing

49 49 Microcomputer Control Issues zAccess Control - access controls to data tend to be weak; consider encryption and/or disk locking devices to compensate zAccounting Records - computer disk failures cause data losses; maintain periodic backups and off-site storage zSegregation of Duties – ytend to be inadequate yshould be compensated for with increased supervision, detailed management reports, frequent independent verification

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