BP - Chapter 4 - Essays
4. What features of a reengineered cash receipts system contribute to improved control and reduced costs? What complicates the process?
A reengineered cash receipts system can include automated mail processing that opens envelopes and separates checks and remittance advices in a manner that limits access of the mail room clerk to the checks. Software can be used to read the amount of payment and compare to the amount due, verify that the check has been signed, etc. "Good" transactions continue through processing, exceptions are handled separately. Checks are sent to the cash receipts department for deposit, listings of transactions are sent to accounts receivable, cash receipts, and general ledger departments. This process is complicated when the organization receives many partial payments, single payments covering multiple invoices, or encounters many clerical errors on the part of customers.
9. For each of the following documents, describe its purpose, the functional area preparing it, and the key data included: remittance advice, remittance list, deposit slip.
A remittance advice is sent by the customer to accompany payment. However, it is often part of or a copy of the invoice previously sent by the billing department after the goods were shipped. A remittance list is often called a cash prelist and is prepared by the mail room clerk to record all cash received. It accompanies the checks to the cashier. A deposit slip is prepared by the cashier to accompany the checks to the bank. This is usually a preprinted bank form.
3. For each of the following documents, describe its purpose, the functional area preparing it, and the key data included: sales order, bill of lading, credit memo.
ANS: A sales order is used to collect information needed to initiate the sales process. It can be a copy of the customer's purchase order prepared by the customer or a document prepared by a member of the sales staff in response to mail, phone or personal contact with the customer. It contains information about the customer, the type and quantity of merchandise being requested, price information, shipping information, etc. The bill of lading is prepared by the shipping clerk. It is a formal contract between the seller and the carrier who will transport the goods to the customer. It contains information about the carrier, the customer, descriptions of the package(s) being shipped, declared value of the goods, and information on freight charges, including how much and who will pay. A credit memo is a document authorizing issuance of credit to a customer for returned goods. It is prepared in the sales department after receipt of a return slip from receiving. It shows the customer's name, reason for the return, a list of items and prices, and the total amount of credit. Many credit memos require additional authorization.
2. How may an employee embezzle funds by issuing an unauthorized sales credit memo if the appropriate segregation of functions and authorization controls were not in place?
An employee who has access to incoming payments, either cash or check, as well as the authorization to issue credit memos may pocket the cash or check of a payment for goods received. This employee could then issue a credit memo to this person's account so that the customer does not show a balance due.
7. With regard to segregation of duties, rule two is that asset custody and record keeping should be separated. What does this require in the revenue cycle?
In the revenue cycle, the warehouse has custody of physical assets while accounting (especially general ledger and inventory control) maintains the records. Also, in the cash receipts subsystem, cash receipts has custody of the asset (cash) while general ledger and accounts receivable keep the records.
10. How is independent verification carried out in a manual revenue system?
Independent verification occurs in several departments as part of the sales order processing system. The shipping department verifies that the goods released by the warehouse for shipment, as shown on the stock release document, match the packing slip. Billing compares the shipping notice with the invoice to be sure customers are billed only for goods shipped. And general ledger reconciles the journal vouchers prepared by billing, inventory control, cash receipts, and accounts receivable. This reconciliation focuses on a match between what was ordered, what was removed from the stockroom, what was shipped, what was billed, cash received, and credit to the customer account.
8. What role does each of the following departments play in the cash receipts subsystem: mail room, cash receipts, accounts receivable, and general ledger? Be complete.
The mail room receives the customer's payment-usually a check accompanied by a document called a remittance advice (which may be a copy of the invoice sent to the customer). Mail clerks separate the two, prepare a cash prelist or remittance list which lists all the payments received and sends the checks to the cashier and remittance advices to accounts receivable. In cash receipts someone (e.g., cashier) restrictively endorses the checks and records the payments in the cash receipts journal. A deposit slip is prepared which accompanies the checks to the bank. The accounts receivable department posts from the remittance advices to the customer accounts in the AR subsidiary ledger. The general ledger department records cash receipts to the cash and AR control accounts based on the list from the mailroom and the summary report of posting from A/R.
5. What role does each of the following departments play in the sales order processing subsystem: sales, credit, and shipping? Be complete.
The sales department receives the order information from the customer, either by mail, phone, or in person. Information is captured on a sales order form which includes customer name, account number, name, number and description of items ordered, quantities and unit prices plus taxes, shipping info, discounts, freight terms. This form is usually prepared in multiple copies that are used for credit approval, packing, stock release, shipping, and billing. The credit department provides transaction authorization by approving the customer for a credit sale and returns and allowances. The shipping department receives information from the sales department in the form of packing slip and shipping notice. When the goods arrive from the warehouse, the documents are reconciled with the stock release papers. The goods are packed and labeled. The packing slip is included. The shipping notice is sent to billing. A bill of lading is prepared to accompany the shipment.
6. With regard to segregation of duties, rule one is that transaction authorization and transaction processing should be separated. What does this require in the revenue cycle?
Within the revenue cycle, the credit department is separate from the rest of the process. Hence, the authorization of the transaction (granting of credit) is independent. If other people, e.g., sales staff, were able to authorize credit sales, there would be the temptation to approve sales to any customer, even those known to not be credit worthy.
1. When Clipper Mail Order Co. receives telephone and fax orders, the billing department prepares an invoice. The invoice is mailed immediately. A copy of the invoice serves as a shipping notice. The shipping department removes inventory from the warehouse and prepares the shipment. When the order is complete, the goods are shipped. The clerk checks the customer's credit before recording the sale in the general journal and the account receivable subsidiary ledger. The receptionist opens the mail and lists all payments. The receptionist also handles all customer complaints and prepares sales return forms for defective merchandise. The cashier records all cash receipts in the general journal and makes the appropriate entry in the accounts receivable subsidiary ledger. The cashier prepares the daily bank deposit. Describe at least four internal control weaknesses at Clipper Mail Order Co.
no sales order is prepared; credit should be checked before shipping the items; invoices are mailed before the goods are shipped; shipping has access to the warehouse; record keeping duties are not segregated (general ledger from subsidiary ledger); only one person opens the mail; sales return forms are not authorized by management; custody and record keeping duties are not separated; the cashier has custody of cash, makes journal entries, and maintains A/R ledger; Cashier has custody of cash and handles customer complaints (e.g., about unrecorded payments).