SU 6: Internal Control -- Sales, Receivables, Cash Receipts Cylce Flashcards
Match Department with S-R-CR cycle: Inventory Warehouse
D, Maintains physical custody of products. The inventory warehouse maintains custody of assets
Match Department with S-R-CR cycle: Shipping Department
E, prepares shipping documents.
Match Department with S-R-CR cycle: Credit Manager
B, Authorizes credit
Match Department with S-R-CR cycle: Sales Department
A, prepares sales orders
Match Department with S-R-CR cycle: General Ledger
J, maintains the A/R control account
Match Department with S-R-CR cycle: Cash Receipts
I, Safeguards and deposits cash receipts
Match Department with S-R-CR cycle: Mail Room
H, receives initial customer receipts
Match Department with S-R-CR cycle: A/R clerk
G, maintains A/R subsidiary ledger
Match Department with S-R-CR cycle: Billing Department
F, Prepares customer invoices
Controls match department or person with related control: Inventory Warehouse
l, releases goods only upon receipt of a valid copy of sales order.
Controls match department or person with related control: Shipping Department
Q, goods are sent to customers based only on authorized sales orders
Controls match department or person with related control: Credit Manager
S, investigates potential customers and their likelihood of payment
Controls match department or person with related control: Sales Department
P, approved customer orders are required before sales orders are released for processing
Controls match department or person with related control: General Ledger
T, provides check balance for the sum of the A/R
Controls match department or person with related control: Cash Receipts
K, safeguards cash and check prior to deposit in the bank
Controls match department or person with related control: Mail Room
checks are immediately stamped “for deposit only” when received
Controls match department or person with related control: A/R clerk
O, only remittance advices are forwarded here for posting to customer accounts
Controls match department or person with related control: Billing Department
M, matches copies of documents to ensure all customers are invoiced.
Strength or Weakness: the sales clerk accepts orders and prepares multi-part sales order
Strength - the sales clerk should accept customer orders and prepare sales orders for internal processing
Strength or Weakness: The credit department is responsible for approving customer credit
Strength - the credit department should be responsible for approving customer credit
Strength or Weakness: Products are shipped by the warehouse clerk based on sales order received directly from sales clerk
Weakness - products may be shipped to customers before credit approval. There is no communication between Credit and the Warehouse clerk
Strength or Weakness: Invoices are prepared by the credit department
Weakness - Invoices should be prepared by the billing department
Strength or Weakness: Invoices are prepared based on the approved sales order
Weakness - invoices should be prepared based on products shipped, not ordered
Strength or Weakness: sales order, shipping advices, and invoices are matched by the billing department
Strength - Matching by the billing department for sales orders, shipping advices, and invoices assures that the order was completed and the customer was billed.
Strength or Weakness: The accounting clerk records the sales transaction in the sales journal
Strength - Recording is an accounting function and should be separate from authorization and custody
Strength or Weakness: the accounting clerk posts the sales transaction in the GL and the sub-ledger A/R
Weakness - although posting is an accounting function, ideally the GL and A/R sub-ledger should be maintained by different individuals. The two records should be reconciled periodically
Strength or Weakness: The collection department stamps “for deposit only” on checks as they are received by the customer
Strength - stamping “for deposit only” on checks would help ensure that checks could not be stolen and cashed
Strength or Weakness: Checks are deposited weekly by the collection clerk
Weakness - receipts should be deposited intact daily
Personnel Responsibility - Sales
Prepares orders based on customer orders
Personnel Responsibility - Credit Manager
authorizes customer credit and initiates write-offs of bad debts. Should report to CFO
Personnel Responsibility - Inventory Warehouse
maintains physical custody of products
Personnel Responsibility - Shipping
Prepares shipping documents and ships products based on authorized sales orders
Personnel Responsibility - Billing
Prepares customer invoices based on products shipped
Personnel Responsibility - AR
Maintains AR sub-ledger
Personnel Responsibility - Mail Room
Receives mail and prepares initial cash receipt records
Personnel Responsibility - Cash Receipts
Safeguards and promptly deposits cash receipts
Personnel Responsibility - GL
maintains AR control account and records sales. Daily summaries of sales are recorded in sales journal. Totals of details of sales are generally posted monthly
Personnel Responsibility - Receiving
Prepares receiving reports and handles all receipts of goods materials, including sales returns
Validity Check
A validity check test the relationship among input items and other parts of the system. Such as, customer number on sales order is included in customer file
Field Check
Used to test the characters in a field to verify they are an appropriate type for that field
Reasonableness test
Tests that are used to test inventory quantities and billing amounts to determine if they appear out of line with expectations
Preformatted Screen
Used to avoid data entry errors. Sales entry for orders. Shipping entry for shipments
Sales controls frequently missed
(1) Credit granted by a credit department
(2) Sales orders and invoices prenumbered and controlled
(3) Sales returns are presented to receiving clerk who prepares a receiving report which supports
prenumbered sales return credit memoranda
AR Controls Frequently Missed
(1) Subsidiary ledger reconciled to control ledger regularly
(2) Individual independent of receivable posting reviews statements before sending to
customers
(3) Monthly statements sent to all customers
(4) Write-offs approved by management official independent of recordkeeping responsibility
(e.g., the treasurer is appropriate)
Cash Receipts Controls Frequently Missed
1) Cash receipts received in mail listed by individuals with no recordkeeping responsibility
(a) Cash goes to cashier
(b) Remittance advices go to accounting
(2) Over-the counter cash receipts controlled (cash register tapes)
(3) Cash deposited daily
(4) Employees handling cash are bonded
(5) Lockbox, a post office box controlled by the company’s bank at which cash remittances
from customers are received. The bank collects customer remittances, immediately credits
the cash to the company’s bank account, and forwards the remittance advices to the
company. A lockbox system is considered an extremely effective control because company
employees have no access to cash and bank employees have no access to the company’s
accounting records.
(6) Bank reconciliation prepared by individuals independent of cash receipts recordkeeping
Controls most likely to ensure all credit sales are recorded
Billing department supervisor matches prenumbered ship docs with entries in sales journal.
tests of controls for completeness of revenue cycle
An invoice is prepared for each shipping document
When shipping document does not have matching invoice, the relevant revenue is not recorded. The invoice is used to prepare necessary JE
Under effective internal control the sales department should be responsible for
Approval of return for defective merchandise.
This is a part of the segregation of duties that ensures the sales returns and allowances function is effective.
To determine whether internal control operated effectively to minimize failures to post invoices to A/R ledger the auditor should select a sample from the population of
Sales invoice file.
The auditor should trace sales according to sales invoices to the A/R ledger. Sales invoices in sales invoice file w/o corresponding entries represent unposted transactions
Proper authorization for revenue cycle for the approval of bad debt write-off
CFO
The credit manager who reports to the CFO, will approve write-offs based on aging reports produced by CM
A control to prevent a misposting error
Using predetermined totals to control posting routines. A control total should be generated for the transaction to be posted. It should then be compared to the total items posted to accounts.
Per sound internal control polices an employee receiving check payments by mail should
Prepare duplicate listing of checks received. The mail room receives all customer receipts separates checks from remittance advices, and prepares a daily listing of checks received. The daily remittance list ordinarily is prepared in duplicate
Internal control activity that would most likely deter lapping
Separation of duties between receiving cash and posting to A/R
Tests of controls are used to determine
- ) How controls were applied at relevant times
- ) The consistency of application
- ) by whom and by what means they were applied.
The best procedure for determining if credit limits are being exceed
Develop a program to compare credit limits with acct balances and print out details of any account exceeding limits.
Inadequate control for sales invoices and posting to perpetual inventory records would cause
Understatement of revenues and receivables and overstatement of inventory
Receipts misappropriated is defalcation and would least likely be detected by the auditor if
Understating sales journal
Evidence regarding Inventory in public warehouse can be most efficiently acquired thru
Confirmation
Testing the control of obtaining credit approval before goods are shipped supports which assertion
Valuation - the proper authorization of credit provides assurance that account is collectible.
