Chapter 6 - Revenue system

Question 1

What are the 4 stages in a revenue system?

Answer 1

1. Receipt of customer order
2. Dispatch of goods to the customer
3. Invoice the customer
4. Receipt of payment from customer

Question 2

If controls aren’t in place what do we need to do?

Answer 2

Need to conduct more substantive testing

Question 3

What is the internal control (3) and the control objective (3) in the first stage of the revenue system - Receipt of customer order

Answer 3

IC
A. Pre-numbered sequential standardised order forms created
B. Credit checks completed on new (and existing) customers
C. Credit limits set (and reviewed regularly)

CO
A. to ensure orders not lost
B. to prevent bad debts
c. to minimise impact of bad debts

Question 4

Why is it important to create pre-numbered, sequential sales invoices?

Answer 4

Pre-numbered invoices help ensure completeness and accuracy in revenue reporting.

Question 5

What is the internal control (2) and the control objective (2) in the second stage of the revenue system - Dispatch of goods to the customer

Answer 5

IC
A. Pre-numbered sequential goods dispatch notes (GDN) created as goods leave the warehouse to identify what was sent, customer could sign a copy to acknowledge receipt of goods
B. Checks on quality and quantity of good prior to dispatch to prevent later disputes

CO
A. to identify what was sent
B. to prevent later disputes

Question 6

What is the internal control (2) and the control objective (2) in the third stage of the revenue system - Invoice the customer

Answer 6

IC
A. Creation of a sequential pre-numbered sales invoice
B. Sales invoice matched to GDN to confirm units sent and match to order form

CO
A. to help ensure completeness
B. to confirm price to ensure correct invoicing.

Question 7

How does matching sales invoices to GDNs and order forms enhance control?

Answer 7

Matching ensures that only goods ordered and dispatched are invoiced, preventing errors in billing and ensuring accurate revenue recording.

Question 8

What is the purpose of sending regular statements to customers? What’s the IC and CO

Answer 8

Statements serve as reminders for payment, helping to ensure timely collection of receivables.

IC
Send out statements to customers

CO
to remind them to pay!

Question 9

What is the internal control (2) and the control objective (2) in the fourth and final stage of the revenue system - Receipt of payment from customer

Answer 9

IC
A. Match funds received against the invoice being paid. This will leave only unpaid invoices on the system
B. Record and bank any cash and cheques promptly to detect and prevent misappropriation

CO
A. leave only unpaid invoices on the system
B. to detect and prevent misappropriation

Question 10

Why is segregation of duties important in a revenue system?

Answer 10

Segregating duties among staff handling orders, invoicing, and cash receipt helps prevent fraud by reducing the risk of one individual controlling multiple steps.

Could lead to a self-review issue.

Question 11

What is a control objective, and why is it important?

Answer 11

A control objective is the aim or goal of an internal control, specifying what it is intended to achieve or prevent (e.g., ensuring creditworthiness of customers, accuracy in invoicing).

Question 12

Name some control objectives specific to sales systems (4) and what are the related internal controls (4)

Answer 12

CO
A. Ensuring sales are made only to creditworthy customers.
B. Confirming orders can be fulfilled before acceptance.
C. Ensuring accurate invoicing.
D. Recording sales in the correct period

IC
A. Credit check
B. Check stock before accepting order
C. Reviewing GDN and order form to create invoice
D. Recording sale once we receive GDN, as soon as goods are dispatched we can recognise the sales invoice

Question 13

Why is it essential to identify deficiencies in a sales system?

Answer 13

Identifying deficiencies helps in understanding weaknesses in controls that may lead to errors, fraud, or inefficiencies, enabling corrective actions.

Question 14

How could failing to track unfulfilled production notes affect the sales system?

Answer 14

Unfulfilled orders may be overlooked, leading to customer dissatisfaction and loss of revenue if they are not completed promptly.

Question 15

MC plc is a company that has had a number of inquiries from potential new customers in recent months. The sales director is excited at this potential sales growth, but the financial controller is concerned that the company could be exposed to the risk of increased bad debts.

Which two of the following internal controls will mitigate the risk of bad debts arising from new customers?
A Obtaining a credit reference for new customers
B Matching of customer orders with despatch notes
C Quoting the correct prices to customers making orders
D Authorisation of new customers by a senior staff member
E Authorisation for changes in customer data

Answer 15

A Obtaining a credit reference for new customers
D Authorisation of new customers by a senior staff member

Question 16

Which three of the following controls will help to mitigate the risk of goods being despatched but not invoiced?
A Pre-numbering of goods despatched notes and regular checks on sequence
B Pre-numbering of invoices and regular checks on sequence
C Matching of goods despatched notes with orders and invoices
D Regular review of despatch notes not matched with invoices

Answer 16

A Pre-numbering of goods despatched notes and regular checks on sequence
C Matching of goods despatched notes with orders and invoices
D Regular review of despatch notes not matched with invoices

Question 17

The auditor at Icy Limited, a wholesaler of frozen goods, has discovered that the receivables ledger clerk has not matched receipts with invoices when processing receipts onto the ledger.
Which two of the following are potential risks arising from this failure?
A The clerk could be siphoning off individual receipts and defrauding the company
B Old outstanding invoices could be left unpaid
C Sales might be recorded in the wrong supplier’s accounts
D Sales may not be recorded properly in the sales account

Answer 17

A The clerk could be siphoning off individual receipts and defrauding the company
B Old outstanding invoices could be left unpaid

Question 18

Which two of the following controls would help to ensure that money received is banked?
A Matching cash receipts with invoices
B Monthly bank reconciliations
C Daily banking of money received
D Investigation of shortages and surpluses of cash in the business

Answer 18

B Monthly bank reconciliations
C Daily banking of money received

Question 19

The following describes the sales system in operation at Jinbob Company. For each process indicate whether the process indicates a strength or a deficiency in the system.

a. Written orders are received in the sales office. Orders are processed into the sales system with no further action being taken.
b. The order generates a production note which is forwarded to the production department on the basis of which they fulfil the order. Completed goods are despatched with a delivery note, a copy of which is matched with the production note and sent to the invoicing department.
c. Unfulfilled production notes are placed in a pending file which is reviewed weekly and completed as soon as possible.

Answer 19

a. deficiency
b. strength
c. strength

Question 20

Which three of the following are risks associated with the sales system?
A Orders may be taken from customers who are not able to pay.
B Goods may be despatched but not invoiced.
C The full credit period offered might not be taken.
D Money might be received at the premises but not banked.

Answer 20

A Orders may be taken from customers who are not able to pay.
B Goods may be despatched but not invoiced.
D Money might be received at the premises but not banked.

Question 21

The following describes the processes which make up the sales system in operation at Sheraton and Co.
For each process, select whether it represents a strength or a deficiency of the system.
Orders are placed by telephone. When a call is received, the person receiving the order checks the customer’s credit status and that the customer’s current balance is below the maximum level, checks that the item is in inventory, and then immediately inputs the order into the system.
A Strength B Deficiency
The order automatically generates a message to the distribution centre which despatches the goods and to the accounts department, which immediately raises an invoice and sends it to the customer.
C Strength
D Deficiency
Customer queries are dealt with by reception staff.
E Strength
F Deficiency

Answer 21

A Strength
D Deficiency
F Deficiency

Question 22

Select whether each of the following statements is true or false. In the sales system, the following duties should be segregated: Recording sales and access to remittances from customers
A True
B False
Credit control and invoicing
C True
D False

Answer 22

A True
C True
The duties of authorisation, recording and custody of assets should be segregated.

Question 23

7 Bourne Ltd operates a number of control procedures in its sales system.
Assuming that all controls are operating effectively, which one of the following control procedures is
most likely to ensure that customers are invoiced for goods despatched? A Use of pre-printed sequentially numbered sales order documentation B Matching of sales orders with despatch records
C Matching of despatch records with sales invoices
D Requiring customers to sign for goods received

Answer 23

C Matching of despatch records with sales invoices
Despatch records are evidence of goods delivered. If there are sales invoices for each of these all sales will be invoiced. Options one and two are incorrect as they relate to the completeness of sales orders and ensure that all orders are subsequently despatched respectively. The fourth option is also incorrect as requiring customers to sign for goods confirms delivery only

Question 24

8 The following deficiencies have been identified in two separate sales systems.
For each deficiency, select the most likely consequence which might arise as a result of that deficiency.
LO 2f
Despatch documentation is not sequentially pre-numbered.
A Sales may be made to customers who cannot pay.
B Invoices may not be raised for all goods despatched.
C Customers may not pay promptly.
Customers are not required to evidence receipt of goods.
D Sales may be made to customers who cannot pay.
E Invoices may not be raised for all goods despatched.
F Customers may not pay promptly.

Answer 24

B Invoices may not be raised for all goods despatched.
F Customers may not pay promptly.

Question 25

11 Which one of the following is a control objective relating to the sales system?
A Credit notes are only issued for valid reasons.
B Sales invoices are checked to goods despatched records by accounts staff.
C Customer accounts are scrutinised to see if credit limits have been observed.
D Orders are made only to authorised suppliers.

Answer 25

A Credit notes are only issued for valid reasons.

Statement B is a control activity, not a control objective. Statement C is a test of controls, not a control objective. Statement D is a control objective relating to the purchases system, not the sales system.

Question 26

12 Which one of the following controls would provide the most positive assurance regarding the completeness of the sales figure recorded in the financial statements of a manufacturing company?
A Segregation of duties between the preparation of goods despatched records and the preparation of the sales invoices.
B The issue of pre-numbered sales invoices for every sales transaction and internal checking for completion of processing.
C The use of a pre-numbered goods despatched record for every sales transaction and internal checking for completeness of processing.
D Authorisation of all sales invoices by the sales manager before processing.

Answer 26

C The use of a pre-numbered goods despatched record for every sales transaction and internal checking for completeness of processing.

A sale should be recognised as soon as goods have been safely despatched to a customer and every despatch should be accompanied with a goods despatched record. Consequently, to obtain assurance about the completeness of sales, the auditor needs to be confident that all despatch records have been recorded in the accounting system (option C). Checking that all sales invoices have been processed merely confirms that ‘all sales invoices have been processed’ (option B) and similarly the existence of authorisation controls merely provides assurance as to whether transactions have been authorised (option D). The existence of segregation of duty controls (option A) does not in itself provide assurance as to completeness of recording of sales transactions.

Question 27

13 Which one of the following populations should the auditor start from when testing for the completeness of reported sales of a manufacturing company?
A Sales receipts
B Sales invoices
C Goods despatch records
D Receipts from customers

Answer 27

C Goods despatch records
Revenue is usually recognised when goods have been despatched to the customer as this is the point at which control transfers to the customer. In order to test for completeness of sales, auditors should therefore start from the goods despatched records.

Question 28

16 Which two of the following are risks directly associated with recording in the revenue system?
A Sales are included in the wrong customer accounts.
B Goods are recorded incorrectly.
C Goods may be despatched but not invoiced for.
D Credit notes might not be properly recorded.

Answer 28

A Sales are included in the wrong customer accounts.
D Credit notes might not be properly recorded.
If sales are included in the wrong customer accounts, or credit notes are not properly recorded, then this comes as a result of an error in recording.
Goods being recorded incorrectly is, logically, not a risk associated with recording. It might result from deficiencies with sales ordering, for example.