Study Unit 6 - Internal Control - Sales-Receivables-Cash Receipts Cycle Flashcards
Identify the department/individual that (1) prepares sales orders, (2) approves credit, (3) prepares shipping documents, (4) prepares customer invoices, and (5) records accounts receivable subsidiary ledgers.
Duty - Department/Individual
Prepares sales orders (and packing slips) - Sales
Approves credit - Credit
Prepares shipping documents (e.g., bill of lading) - Shipping
Prepares customer invoices - Billing
Records accounts receivable subsidiary ledgers - Accounts receivable
Identify the department/individual that (1) prepares cash receipt records, (2) deposits cash receipts, (3) maintains accounts receivable control accounts, (4) records sales, (5) prepares receiving reports of goods and returns, and (6) approves write-off of credit losses.
Duty - Department/Individual
Prepares cash receipt records (e.g., daily remittance list) - Mail room
Deposits cash receipts - Cash receipts
Maintains accounts receivable control accounts - General Ledger
Records sales - General Ledger
Prepares receiving reports - Receiving
Approves write-off of credit losses - CFO
Which department should receive copies of sales orders from the sales order department?
- Credit
- Billing
- Accounts receivable
- Inventory warehouse
Name the document that customers return with their payment (with customer check).
Remittance advice
Describe a lockbox system.
A lockbox system provides for customer payments to be sent to a post office box and collected directly by the bank. This ensures that cash receipts are not stolen by mail clerks or other employees.
Describe lapping in cash receipts.
Lapping is the act of concealing cash embezzlement by posting subsequent cash receipts to the accounts of customers whose payments were stolen.
List some compensating controls in a cash sale environment.
Compensating controls include
- Using a cash register or sales terminal to record sales
- Assigning a single clerk to be responsible for recording sales and collecting cash
- Increased supervision
- Customer audit of the transaction
- Bonding those employees who are responsible for handling cash
How might the segregation of duties be violated in a cash sales cycle?
In a cash sales cycle, the sales clerk often
- Authorizes the sale
- Records the sale, and
- Has custody of the assets related to the sale.
What purpose is served by bonding employees who are responsible for handling cash?
The bonding company investigates the employees prior to providing the bond, thereby providing some assurance regarding the employee’s integrity. Additionally, the bond provides insurance against losses.
List some key controls that may be employed to assure the proper approval and processing of sales returns and allowances.
- Approval by the sales department to return goods
- Receipt of the returned goods by the receiving department and preparation of a receiving report
- Separate approval of the credit memo related to a sales return or allowance
List key controls that might be used in the write-off of credit losses.
- Initiation of the write-off by Credit and approval by the Treasurer or other officer
- Maintenance of a separate accounting ledger for accounts written off
List some ways in which technology may be implemented in the sales-receivables cycle.
- Computer processing may replace the activities of clears performing recoding functions.
- Reconciliation of files may be more frequent.
- Online systems may improve the response to customer orders.
List some of the major internal controls integrated within a computerized sales-receivable cycle.
- Access controls
- Pre-formatted screens
- Field checks
- Validity checks
- Reasonableness tests
- Error listings
Compare a computerized sales-receivable system with a traditional sales-receivables system.
Similarities
- Use of the same documents (e.g., shipping documents, bill of lading, invoices, etc.)
- A purchase order requires the sales types of approvals (e.g., customer credit approval, sufficient inventory etc.)
Differences
- Traditional departments are replaced by computer processing programs.
- Specialized controls are required in a computerized environment.
- Adjustment of the audit trail (i.e., physical documentation vs. digital documentation).
How might the sales-receivable cycle differ for an e-commerce company?
For an e-commerce company, likely changes to the sales-receivable cycle include
- Direct entry of the order by the customer
- Elimination of the sales order department
- Payment via credit card, resulting in no accounts receivable
- Communicating order acceptance confirmations immediately to the customer via email
