Chapter 6 -- Internal Control -- Sales-Receivables-Cash Receipts Cycle

Question 1

Section 6.1: Sales Responsibilities/Organizational Structure/Flowcharts

What is the objective of obtaining credit approval before shipping goods to a customer?

Answer 1

• Confirms valuation, accuracy and allocation
• The credit approval provides proof that the account receivable is collectible.

Question 2

Section 6.1: Sales Responsibilities/Organizational Structure/Flowcharts

What is included in the transaction cycle of Sales/Receivables/Cash Receipts?

Answer 2

• Cash
• Trade Receivables
• Other Receivables
• Allowance for Credit Losses
• Sales
• Sales Returns
• Credit Loss Expense

Question 3

Section 6.1: Sales Responsibilities/Organizational Structure/Flowcharts

What internal control activities would be designed to reduce the risk of errors in the billing process?

Answer 3

• Using a computer program to control pricing and accuracy of the sales invoices
• Matching shipping documents with the approved sales order before the invoice is created
• Comparing shipping document control totals with the totals for sales invoices.

Question 4

Section 6.1: Sales Responsibilities/Organizational Structure/Flowcharts

What internal control activity would be used to assure that all billed sales are correctly posted to the A/R ledger?

Answer 4

• Daily sales summaries are compared with the daily posting to the A/R Ledger.
• Reconciliation with the postings to the A/R ledger would provide assurance that billed sales were posted.

Question 5

Section 6.1: Sales Responsibilities/Organizational Structure/Flowcharts

What is lapping?

Answer 5

Lapping is delaying the recording of a cash receipt to cover a cash shortage.

Question 6

Section 6.1: Sales Responsibilities/Organizational Structure/Flowcharts

What are the best methods to prevent lapping?

Answer 6

• A lockbox system at a bank
• Segration of duties from those receiving cash to those posting in the A/R ledger
• The A/R clerk has no access to the cash received by the mailroom

Question 7

Section 6.1: Sales Responsibilities/Organizational Structure/Flowcharts

What is one way for cash receipts to be misappropriated?

Answer 7

• Understating the sales journal. While the accounts will be incomplete, they will balance.
• Procedures applied to the accounting records will not detect the misappropriation.

Question 8

Section 6.1: Sales Responsibilities/Organizational Structure/Flowcharts

What is the Flowchart in Sales-Receivables?

Answer 8

1. Customer: Places Order
2. Sales: Sends order for credit approval
3. Credit Department: Approves credit for order
4. Sales: Sends acknowledgement of approved order to customer
5. Inventory Warehouse: After receiving approved credit, sends goods to shipping.
6. Shipping: After receiving approved credit order, ships the product, with a BOL and packing slip to the customer.
7. Billing: After receiving the approved credit order, BOL and packing slip, creates an invoice.
8. Accounts Receivable: Records the invoice in the A/R file
9. General Ledger: The invoice is recorded in the Daily Invoice Summary and posts the General Ledger File
10. General Ledger is reconciled with the A/R file and inventory records.

Question 9

Section 6.1: Sales Responsibilities/Organizational Structure/Flowcharts

What is the flowchart for Cash Receipts

Answer 9

1. Customer: Sends a check for payment with the remittance advice.
2. Mailroom: Creates a remittance listing
3. Cash Receipts: Receives the remittance listing and checks and prepares the deposit slips and deposits the checks at the bank.
4. Accounts Receivable: Receives the remittance listing and records in the A/R file.
5. Controller: Receives the remittance listing and updates the General Ledger File.
6. Bank: Deposits the checks and provides a validated deposit slip.
7. Controller: Compares the remittance listing with the validated deposit slip

Question 10

Section 6.2: Controls in a Cash Sale Environment

What is the existence assertion for cash receipts?

Answer 10

Whether all cash receipts are kept and recorded.

Question 11

Section 6.2: Controls in a Cash Sale Environment

What are the controls to confirm the existence assertion of cash receipts?

Answer 11

• Bank lockbox system
• Daily reconciliation of cash discounts and cash receipts
• Surveillance system over the cashier

Question 12

Section 6.2: Controls in a Cash Sale Environment

What is are compensating controls in a cash sales envrionment when segregation duties is not feasible?

Answer 12

• Using a cash register or sales terminal to record the sale.
• Increased supervision
• The customer reviewing the receipt to confirm the purchase

Question 13

Section 6.3: Other Sales-Receivables Related Transactions

What is the proper approval and processing for returned goods?

Answer 13

• Sales would authorize the return
• Receiving would receive the returned goods
• Receiving would create a receipt for the returned goods and prepare a receiving report.

Question 14

Section 6.4: Technology Considerations

How is the total reduction for an A/R account calculated?

Answer 14

Cash Deposit
+Discount taken by Customer

Question 15

Section 6.4: Technology Considerations

What is a validity check

Answer 15

• A validity check tests the relationships among input items and other parts of the system.
• An example would be that customer number 1727 is included in the customer file.

Question 16

Section 6.4: Technology Considerations

What is a field check?

Answer 16

A field check tests the characters to verify that the information is in the appropriate field.