BP Chapter 4

2 types of independence:

"independent in fact" not having a financial interest in a client "independent in appearance" people should not question whether you are independent by your actions

IT Controls

1) general controls- not specific to a particular cycle or subsystem; do not apply to revenue cycle directly; entity-wide 2) application controls -input controls -processing controls -output controls

Basic Technology - Cash Receipts System

1) mail room - customer payments and remittance advices arrive at the mail room, where a clerk opens the envelopes, reconciles the checks and remittance advices, endorses the checks, gathers remittance advices and checks into batches, and prepares a remittance list ---sends checks and a copy of remittance list to the cashier in the cash receipts department ---remittance advices and a copy of the remittance list are sent to the AR department ---anytime cash is entering the business, controls are super important (possibility of skimming) 2) cash receipts - cashier records the checks in the cash receipts journal and promptly sends them to the bank ---periodically prepares a journal voucher and sends it to the general ledger 3) accounts receivable - AR department uses the remittance advices to reduce customers' account balances ---summary of changes is sent to GL department 4) GL department - upon receipt of the journal voucher and account summary from cash receipts and AR, respectively, the CR clerk reconciles the info and posts to the control accounts 5) controller's office - because cash is a liquid asset and subject to misappropriation, someone from the controller's office periodically performs a bank reconciliation by comparing deposits slips returned from bank, account summaries and journal vouchers

Integrated Cash Receipts System

1) mail room- mail room clerk opens the envelopes containing the checks and remittance advices and endorses the checks for deposit only ; reconciles checks and remittance advices; prepares remittance list; checks, remittance advices, and remittance list are sent to CR department 2) cash receipts department- clerk reconciles the checks and remittance advices with the remittance list; prepares deposit slips; via terminal, clerk accesses the cash receipts system and creates a record in the remittance file (CR journal); files remittance list, remittance advices, and one copy of the deposit slip; at the end of the day, a member of the security group deposits the checks in the bank 3) automatic data processing procedures- when CR data entry is complete, the system automatically performs the following tasks: ---close the sales invoices that are covered by customer checks by placing the customer check number and payment date in the invoice record ---posts to the GL accounts ---prepares and distributes various management reports (transaction listings, discrepancy -out of balance- reports, GL change reports) 4) controller's office- finally, a clerk in controller's office periodically performs a reconciliation of remittance lists, bank deposit slips, CR journal, and the GL cash account

Basic Technology - Sales Order Processing

1) sales department - begins with a customer contacting the sales department by telephone, mail, e-mail, fax or in person ---essential details of the sales order are recorded ---multipart document will trigger many tasks ---for now, filed while one copy is sent to the credit department for approval 2) credit department approval - to provide independence, the credit department is organizationally and physically segregated form the sales department ---examines the Customer Records file to verify credit worthiness; for new customers, an online credit bureau may be accessed ---once credit is approved, the sales department clerk pulls the various copies of the sales order from the pending file and releases them to the billing, warehouse and shipping departments ---the Customer Order and Credit Approval are placed in the Customer Order file 3) warehouse procedures - clerk receives the stock release copy of the sales order and uses this to locate inventory ---inventory items and stock release are then sent to shipping ---finally, warehouse clerk uses the department PC to record the inventory reduction in the Stock Records file 4) shipping department - clerk reconciles the products received from the warehouse with the Shipping Notice copy of the sales order received earlier ---this reconciliation is an important control point, which ensures the firm sends the correct products and quantities to the customer ---when order is determined correct, Bill of Lading is prepared, and the products are packaged and shipped via common carrier ---clerk then uses department PC to record the transaction in the Shipping Log and sends the shipping notice and stock release document to the billing department 5) billing department - SHIPPING NOTICE provides proof that the product has been shipped and is the trigger document that initiates the billing process ---upon receipt of the shipping notice and stock release, the billing clerk uses the department PC to compile the relevant facts about the transaction (product prices, handling charges, freight, taxes, discounts) and bills the customer ---billing clerk then enters the transaction into the sales journal file and distributes (1) stock release and (2) ledger copies of the sales order to the inventory control and AR departments, respectively ---shipping notice is sent to sales department where it is filed in the customer order file ---periodically, clerk prints out a hard-copy journal voucher reflecting total sales and sends it to the GL department ---you do NOT want to bill before you ship the goods (time lag, damaged goods, rude) 6) AR, inventory control, GL departments - AR and inventory control update their respective sub ledgers ---clerks search their respective files for the correct records by entering primary key data from the sales order into their computer systems (customer number-AR, inventory number-INV) ---as each inventory item is updated, the inventory control clerk's system automatically checks to see if the quantity on hand has fallen below the reorder point ---if it is below reorder point, it is flagged "ON ORDER" to prevent it from being ordered again before the inventory is replaced (EOQ) ---next, a record is added to the purchase requisition file, which triggers the purchase procedures ---periodically, AR and inventory clerks prepare hard-copy journal vouchers and account summaries

Revenue Cycle Primary Risks

1) selling to un-creditworthy customers ---more apparent in organizations whose sales staff are compensated on a commission basis ---sales staff have an incentive to maximize sales volume and thus may not adequately consider the credit-worthiness of prospective customers 2) shipping customers the wrong items or incorrect quantities ---damaged customer relations, excessive sales returns, lost future sales, and accounting errors ---due to human error or STOCK-OUTS: unanticipated inventory shortages 3) inaccurately recording sales and cash receipts transactions in journals and accounts; EX: ---sales to customers are incorrectly calculated ---sales are recorded in the wrong period ---customers are billed for items they did not receive (back ordered) ---customers cash receipts are inaccurately posted to accounts or are posted to the wrong customer accounts ---summaries of sales, AR, cash receipts, and inventory levels are incorrectly posted to their respective GL accounts 4) misappropriation of cash receipts and inventory ---cash from customer payments is at risk of being "skimmed" before it is recorded or "EMBEZZLED" after it has been received and recorded ---inventory in warehouse can be stolen or sold for cash 5) unauthorized access to accounting records and confidential reports ---outsiders as well as employees MOTIVES: ---attempts to perpetrate a fraud such as creating a false sales order or wiping our an AR balance ---theft of data such as stealing customer list for competitor, or downloading customer credit card numbers/PINs to be sold online ---malicious acts such as corrupting or deleting financial data

Sales Order Procedures

1. Receive order 2. Check credit 3. Pick goods 4. Ship goods 5. Bill customer 6. Update inventory records 7. Update AR records 8. Post to GL

Subsidiary Ledgers - Physical Control

2 sub ledges are used for capturing transaction even details in the revenue cycle: INVENTORY sub ledgers & AR sub ledgers provide links back to journal entries and source documents that captured the events

Discussion Board - what to worry about

3 main control issues: hackers getting ripped off; employees efficiency --- auditor's need to get all of the information look for deficiencies being able to understand and document these processes; they are only getting more and more popular --- 3 main controls: 1) accurate financial reporting 2) safeguarding assets 3) efficiency

Quantity on Hand: 5000 reorder if drops below 1000

=IF(B5<1000, "reorder", 0) ---just to make the cell default to the word "reorder" if it is less than 1000 =IF((B5<1000),(1000-B5),0) ---if the quantity on hand is less than 1000, then 1000-quantity on hand = COGS. if it is NOT less than 1000, your COGS is 0 because you have not sold any of your quantity on hand

Stock Release

AKA "picking ticket" receive order activity forwards the _____ _____ to the pick goods function in the warehouse identifies the items of inventory that must be located and picked from the shelves provides formal authorization for warehouse personnel to release the specified items

POS Control Issues

Authorization: Clerk should match customer signature with credit card. Supervision: Surveillance cameras and floor security help prevent shoplifting and employee theft. Access Control: Separate cash drawers, locked showcases and magnetic tags attached to merchandise help control theft. ---when clerks need to share registers, responsibility for asset custody is split amount them and accountability is reduced Accounting records: Only supervisors should access internal cash register tapes. Independent verification: Cash drawers should be reconciled to internal register tapes.

Three additional IT control techniques are specific to the advanced technology system:

Automated Credit Checking Multilevel Security Automated Posting

Receive Order - SOP

Begins with receipt of CUSTOMER ORDER which is transcribed into a formal SALES ORDER which is placed in the customer order file for future reference Process of filing an order and getting the product to the customer may take days or weeks

Sales Order Procedures CONTROLS

Controls ---recording and custody of cash receipts should be separate functions ---verification: before shipping occurs, items better match the stock release, which matches the customer order (ordered, picked and boxed up must match) ---pre-number documents

Computer Based Accounting System

Controls: -Authorization -Separation of duties -Supervision -Access Controls -Verification can be lost Compensating Control SOD - in computer environment; SOD between the programmers and users (programmers know the ins and outs of the system) (programmer might leave a bug in the system and then enter the system and exploit it)

POS End of Day Procedures

DEBIT- cash DEBIT- cash over/short DEBIT- AR (credit card company) DEBIT- cogs CREDIT - sales CREDIT - inventory

Point-of-Sale (POS) Systems

EX: groceries do NOT extend credit to their customers; department stores, retail type organizations such businesses exchange goods directly for cash in a transaction that is consummated at the _____ __ _____ no customer AR; all transactions are for cash, checks, or bank credit/debit cards inventory is kept on the store's shelves, not in a separate warehouse customers personally pick up the items they wish to buy and carry them to the checkout location where the transaction begins

Pre-numbered Documents - Physical Control

EX: sales orders, shipping notices, remittance advices sequentially numbered by the printer and allow every transaction to be identified uniquely permits the isolation and tracking of a single event verifying financial data and tracing transactions would be impossible without this

PC-based accounting

QuickBooks - designed for ONE person to do everything From a control perspective, this is problematic Absolutely NO SOD Passwords are OPTIONAL - most people use the word password You should put it on a desktop because laptops can be stolen or misplaced You have to remember to do your own backup - this sucks ---you can't just backup to your C drive ---use dropbox; Amazon owns

Discussion Board

SQUARE: turns your cellphone into a small point-of-sale system ---little physical square that plugs into your cellphone ---people who used to be cash-only, can now charge credit ---linked to your bank account ---of course there are fees, but you would rather get 96% of a sale instead 0% Apply Pay: wallet on cellphone, use a finger print ---just like chip on credit card, each transaction has a code Alli-Pay: facial recognition pay Sam's Club: pay as you go on the app; at the end you just show your receipt; do not have to go to cashier ---if you can get rid of employee, awesome. human error, problems ---expedites Amazon store in Seattle: you just walk in, grab your stuff, and go

Revenue Cycle 2 Major Subsystems

Sales Order Processing Subsystem Cash Receipts Subsystem

Re-eingineering Using the Internet

Typically, no formal business agreements exist as they do in EDI. Most orders are made with credit cards. Mainly done with e-mail systems, and thus a turnaround time is necessary Intelligent agents are needed to eliminate this time lag. Security and control over data is a concern with Internet transactions.

POS Daily Procedures

Universal Product Code (UPC) - label on the items being purchased that get scanned with a laser light scanner Scanner - primary input device in the POS system; may be handheld or mounter on the checkout counter POS system is connected online to the inventory file from which it retrieves product price data, and it displays the data on the clerk's terminal inventory quantity on hand is reduced in real-time to reflect the items sold as items fall to minimum levels, they are automatically reordered when all UPCs are scanned, the system automatically calculated taxes, discounts, and the total for the transaction in the case of a credit card transaction, the sales clerk obtains transaction approval from credit card issuer via online connection ---when approval is returned, the clerk prepares a credit card voucher for the amount of the sale, which the customer signs ---customer copy, merchant copy the clerk enters the transaction into the POS system via the register's keypad, and a record of the sale is added to the sales journal in real-time ---sale is also recorded on 2-part paper tape (one copy given to customer; other copy stored in register where the clerk CANNOT access it) ---internal tape is later used to close out the register when the shift is over at the end of a clerk's shift, a SUPERVISOR unlocks the register and retrieves the internal tape the cash drawer is removed, and a new drawer is put in containing a known amount of start-up cash (FLOAT) for the next clerk supervisor and old cash clerk take the drawer to the cash room (treasury), where the contents are reconciled against the internal tape ---should contain cash and credit card vouchers equal to the amount recorded on the tape often, small discrepancies exist b/c of errors in making change for customers ---individual organizations specify how to handle these; EX: all cash shortages are deducted form clerk's payroll; EX: materiality threshold once the contents have been reconciled, clerk prepares a cash reconciliation form ---one copy goes to sales clerk as receipt of cash remitted ---from a computer terminal, the clerk records cash received and cash short/over in the cash receipts journal clerk files the credit card vouchers and secures the cash in the safe for deposit in the bank at the end of the day

Physical Systems

_____ accounting information systems are a combination of computer technology and human activity technology/human mix creates a continuum of alternative design options ---the nature of this mix has a direct bearing on the nature of internal controls one end: minimal technology and rely heavily on human involvement other end: advanced technology systems that replace human activity with automated processes ---large companies

Bill Customer - SOP

_____ function awaits notification from shipping before it bills upon credit approval, the bill-customer function is received the sales order (invoice copy) from the receive order task ---this document is place in a SALES ORDER PENDING FILE until receipt of the shipping notice ---upon arrival, the items shipped (shipping notice) are reconciles with the items ordered (sales order invoice copy) and unit prices, taxes and freight charges are added to the invoice copy of the sales order done after shipment by sending a completed SALES INVOICE billing record-keeping includes (1) recording the sale in the sales journal, (2) sending the stock release to the update inventory records tasks & (3) forwarding the ledger copy of the sales order to the update AR task the SALES JOURNAL is a special journal used for recording completed sales transactions entries are summarized in a sales JOURNAL VOUCHER used to update the GL control account

Data Input Edits - IT Controls

a basic assumption in transaction processing system design is that master files are "CLEAN" - error free transaction data, in contrast, are assumed to be "DIRTY" - contain various errors (transposed digits, invalid part numbers of items sold, clerical errors) if not detected before being processed, these errors will corrupt the master files input controls that minimize risk: -checks for missing data, numeric-alphabetic data, valid data values -check digit edits: provide control over accessing the wrong accounts when posting customer sales and cash receipts transactions (long numbers are prone to transposition errors)

Record and Deposit Checks - CRP

a cash receipts employee verifies the accuracy and completeness of the checks against the prelist any checks lost or misdirected between the mailroom and this function are thus identified checks are recorded in the CASH RECEIPTS JOURNAL by an employee clerk prepares a bank DEPOSIT SLIP bank teller validates deposit and returns deposit slip to company cash receipts employee summarizes the journal entries and sends journal voucher to the GL function: DEBIT - cash CREDIT - AR control

Open Mail and Prepare Remittance List - CRP

a mailroom employee opens envelopes containing customers' payments and remittance advices

Verified Stock Release

after picking the stock, the order is verified for accuracy and the goods, along with the _____ _____ _____ are sent to the ship goods task

Sales Return Procedures

an organization can expect that a certain percentage of sales will be returned -wrong items shipped -items were defective -items were damaged in shipping -buyer refused delivery because items took too long 1. prepare return slip 2. prepare credit memo 3. approve credit memo 4. update sales journal 5. update inventory and AR records 6. update GL

Role

assigned access privileges to specific data procedures, such as the right to add a record to CR journal once a _____ is created, individuals are assigned to it individuals may be easily added or deleted from roles as their job responsibilities change limited to program procedures and data that specified by that _____

Journal Voucher

at the end of each period, the items in the sales journal are summarized in the _____ _____ sent to the general ledger task for posting to the following accounts: ---DEBIT AR-control ---CREDIT sales each represents a general journal entry and indicates the general ledger accounts affected summaries of transactions, adjusting entries and closing entries are all entered into the GL via this method when properly approved, _____ _____ are an effective control against unauthorized entries to the GL _____ _____ system eliminated the need for a formal general journal, which replaced by a JOURNAL VOUCHER FILE

Inquiry

auditors are client-facing ask the client for the info you need; sometimes people do not tell you the complete truth tax returns, you also have to ask the client questions its important to be able to tell when people are telling you the whole truth

General Ledgers -Physical Control

basis for financial statement preparation revenue cycle transactions affect the following GL accounts: sales, inventory, COGS, AR, cash journal vouchers that summarize activity captured in journals and sub ledgers flow into the GL to update these accounts complete audit trail from the financial statements to the source documents via the GL, sub ledgers, and special journals

Sales Order

because the customer order is not in the standard format that the seller's order processing system needs, the first task is to transcribe it into _____ captures customer name, address, account number; name, number, description of items sold; quantities, unit prices financial info such as taxes, discounts and freight charges may or may not be included copy is places in the CUSTOMER ORDER FILE for future reference

Check Credit - SOP

before processing order, creditworthiness must be established the circumstances of the sale will determine the nature and degree of the credit check authorization control should be performed as a function separate from the sales activity the receive-order task sends the sales order (CREDIT COPY) to the check-credit for approval - the returned APPROVED SALES ORDER triggers the continuation of the sales process

Packing Slip and Shipping Notice

before the arrival of the goods and the verified stock release document, the shipping department receives the _____ _____ and _____ _____

Special Journals - Physical Control

by grouping similar transactions together into _____ _____, the system provides a concise record of an entire class of events revenue cycle uses sales journal and cash receipts journal for this reason

Post to GL - SOP

by the close of the transaction processing period, the GL function has received *journal vouchers* from the billing and inventory control tasks and an account summary from the AR function DEBIT - AR DEBIT - cogs CREDIT - inventory CREDIT - sales important verification control; can detect many errors - verifies the accuracy of the journal vouchers from billing (EX: AR summary figures should equal the total debits to AR reflected in the journal vouchers)

Remittance Advices

contain info needed to service individual customers' accounts includes payment date, account number, amount paid, customer check number only the portion above the perforated line is the _____ _____ in figure 4-10 the lower portion is the CUSTOMER STATEMENT, which the billing department sends out periodically in other cases, the CUSTOMER INVOICES, serves as the remittance and statement customer removes this and returns it with the payment TURNAROUND DOCUMENT (product document for one entity, source document for another) most apparent in firms that process large volumes of cash receipts daily - task is greatly simplified when customer already provides account number and posting info because of the chance of transcription errors, companies do not require customers to write this info on their checks - remittance advices help avoid errors and improve operational efficiency mail room clerks send the checks and remittance advices to an ADMINISTRATIVE clerk who endorse the checks "For Deposit Only" and reconciles check amount to remittance amount admin clerk then records the check on a REMITTANCE LIST (CASH PRE-LIST) - where all cash received in logged

Automated Credit Checking - IT Control

credit checking may be performed by the system as a programmed process control the system logic, not a human being, makes the decision to grant or deny credit based on the customer's credit history contained in the credit history file if credit is denied, the sales clerk should not be able to force the transaction to continue to allow for operational flexibility in unusual circumstances, however, systems will provide a management override option that may only be performed by a supervisor ---should be fully documented in the credit history record AND in management reports

Update AR Records - SOP

customer records in the accounts receivable (AR) subsidiary ledger are updated from the sales order (ledger copy) periodically, the individual account balances are summarized in a report that is sent to the GL ---GL accounts are used to prepare financial statements, so they contain only summary figures

Passwords - IT Control

digital accounting records are vulnerable to unauthorized and undetected access management should implement a robust _____ control _____ should be changed periodically and not allow simple, easy-to-guess _____ 6-8 characters, letters and numbers -strong

Lockbox System

done by bank - they process the cash receipt when you make a payment ---pay your utilities (FPL) but actually sending it whatever bank FPL uses for their lockbox ---bank makes the deposit and electronically emails the company everyday ---bank has to deal with the employee; FPL subcontracts the bank ---bank is accepting the risk, charges a fee, has immediate access to the funds

Customer Order File

enables customer service employees to respond promptly and accurately to customer questions AKA "open order file" if a customer calls to see what's up, this is the file the company looks at to see where the customer's order is

Stock Records

finally, the warehouse employee adjusts _____ _____ to reflect the reduction inventory assets NOT the formal accounting records for controlling inventory assets; used for warehouse management purposes only ---assigning asset custody and record-keeping the warehouse custody would violate a key principle of internal control ---the inventory control function maintains the formal accounting inventory records

Accounting Records - Physical Control

firm's source documents, journals and ledgers form an audit trail that allows independent auditors to trace transactions through various stages of processing

Processing Controls

focus on the logic of the application Revenue cycle examples: ---Error messages ---Low stock flag ---Passwords ---File backup

Bill of Lading

formal contract between the seller and the shipping company (carrier) to transport goofs to the customer establishes legal ownership and responsibility for assets in transit

Articles

https://www.usatoday.com/story/news/nation-now/2017/10/16/1-2-m-stolen-fajitas-prompts-employees-arrest-texas-juvenile-center/768257001/ -theft totaling $1.2 million -Texas juvenile center employee confessed to stealing shipments of fajitas over nine years -800-pound delivery of fajitas arrived at the Cameron County Juvenile Justice Department -There was only one problem, a kitchen staffer told the delivery driver: The department didn't serve fajitas. That's when the driver said he had been delivering fajitas to the center for nearly a decade -He would deliver them to customers he had already lined up ----- http://www.gainesville.com/news/20170616/worse-than-we-knew-uf-reports-check-fraud-totaled-351k?rssfeed=true -Tiffany Nichole Robinson, who was a fiscal assistant at UF's Transportation and Parking Services department -created fake parking decal numbers and issued fraudulent checks to herself and others as refunds for those decal -approached individuals and asked them to cash the fraudulent checks and give the money back to them, allowing the subjects to keep some of the money themselves -She was able to add people to the refund list AND authorize the refund -Names on checks were similar to hers -They barely considered refunds to be significant in the annual report - should have b/c abnormal # of checks -over 1100 individual checks that were fraudulent -she had a history of petit theft amongst other things -her evaluation said she was good with refunds and that the refunds procedure were streamlined with a good audit trail - signed by herself, Alyassin, and Fox ----- http://www.gainesville.com/news/20170615/gainesville-audit-report-finds-lax-fiscal-controls-in-parks-department?rssfeed=true -Natwaina Clark managed to take funds from city-issued credit cards — two of which belonged to her superiors - little oversight for a 15-month period, allowing the funds to be easily stolen -She has awful credit report, but on her first day of work they gave her a credit card -The person approving expense reports had an automatic signature, because LAZY ---submit expense information without review for at least 15 months ---wasn't until the department was projected to go over its budget for the year that Clark's fraud was discovered -fired while on a cruise and arrested seven days later -used some of it for a Brazilian butt lift worth $8,500 -report found Clark charged her own card for at least $61,000, her boss' cards for $31,000 and another employee's card almost $900, totaling 177 transactions worth $93,000 between November 2015 and March 2017 -why do 16 PRCA employees have Sam's Club cards? -SOLUTIONS: holding Etling and the PCRA department director, Steve Phillips, accountable for failing to provide oversight during the alleged theft, conduct retraining of card procedures, setting up email notifications for all card transactions and forcing human resources to conduct enhanced background screenings for applicants, including criminal and credit checks for card holders ----- http://www.gainesville.com/news/20170620/more-than-49k-missing-from-airport?rssfeed=true -3 keys, no one should have more than one -Prob will not get resolved b/c the surveillance expired and GPD is incompetent -as soon as someone got wind of this, it stopped (meaning it was prob someone in the inner circle) -cash deposits totaling $49,090 went missing from the airport's HUB parking system over a period of about 10 months -the parking system tracks how much money should be in the "safe," which is a small black metal box where the cash is collected and stored in the machine ---when the safe is opened and a "pull" is made, the system records the time and date, but zeroes out the safe, which allowed the missing cash to go unnoticed until records were reviewed. ----- http://www.gainesville.com/news/20170918/uf-housing-director-suspected-of-180k-in-credit-card-fraud -He made big purchases -He was in charge of buying stuff for dorms, but instead he would buy stuff for his house (electricity bills, meals, furniture) -His wife posted pics on FB of stuff that was bought with UF money ----- https://www.usatoday.com/story/news/nation-now/2017/09/22/payroll-services-firm-owner-defrauded-small-businesses/692036001/ -owner of a payroll services firm -took money from small businesses to cover payroll taxes and workers' compensation insurance that she instead pocketed -used to maintain a lavish and self-indulgent lifestyle -over $15 mil -the investigation began in 2013 when a California worker was killed on the job -his employer subsequently discovered HR Comp had faked insurance papers, leading authorities to raid the business and seize documents in 2014 -paid for the lobbying services of the Ingram Group

Back-Order Records

if inventory levels are insufficient to fill the order, a warehouse employee adjusts the VERIFIED stock release to reflect the amount actually going to the customer the employee then prepares a _____ _____ _____ which stays on file until the inventories arrive from the supplier back-ordered items are shipped before new sales are processes

New Technologies in Revenue

in Canada, like in Latin America, they bring the little credit card machine to the table so that the customer can see the transaction take place

Multilevel Security - IT Controls

in a basic technology environment, SOD is accomplished by physically separating individuals and the data over which they have custody in an integrated data processing environment, however, computer processes and data are highly concentrated and accessible through a common central application ---SOD accomplished through multilevel security procedures limit an individual's access to authorized processes and data employs programmed techniques that permit simultaneous access to a central system by many users with different access privileges, but prevents them from obtaining info for which they lack authorization 2 methods: 1) access control list (ACL) -privileges assigned directly to an individual; in large organizations this can be a significant burden 2) role-based access control (RBAC) - creates standard tasks (ex: cash receipts processing); AKA roles

Cash Receipts Journal

includes all cash receipts - cash sales, miscellaneous cash receipts, cash received on account each check received from customer is a separate line item

Customer Order

indicates the type and quantity of merchandise desired may or may not be in standard format may or may not be physical document ---mail, telephone, field representative who visited customer when the customer is also a business entity, the order is often a copy of the customer's PURCHASE ORDER - expenditure cycle document

Forensic

legal aspects of evidence; very tricky - searching person's workspace can you look through someone's bag? nope, not without a warrant ---if you search without a warrant and find evidence, it is not admissible in court

Sales Return System - Appendix

most organizations have specific rules for granting cash refunds and credits to customers based on the materiality of the transaction and the circumstances of the return 1) receiving department- personnel receive, count, inspect for damage, and send returned products to warehouse ---clerk manually prepares a return slip, which is forwarded to sales dept. 2) sales department- upon receipt of the return slip, the clerk manually prepares a credit memo (credit department approval is required if amount is material or special circumstances) 3) processing a credit memo-objective: reverse the effects of the sales transaction DEBIT inventory CREDIT cogs DEBIT sales return and allowances CREDIT allowance for sales return and allowances --- all department periodically prepare hard-copy journal vouchers and account summaries; sent to GL dept. for reconciliation and posting to GL accounts

Advanced Technology - Revenue Cycle

objective - to improve operational performance and reduce costs by identifying and eliminating nonvalue-adding tasks involves replacing traditional procedures with procedures that are very different common information system

Independent Verification - Physical Control

objective: to verify the accuracy and completeness of tasks performed by other functions in the process must occur at key points in the process where errors can be detected quickly and corrected in the revenue cycle, independent verification exists at the following points: 1) shipping dept. reconciles goods being shipped against packing slip 2) billing function reconciles the original sales order with the shipping notice to ensure that customers are billed for only the quantities shipped and that sales are recorded in the sales journal only after the goods have been shipped/in correct period 3) prior to posting to control accounts, the GL function reconciles journal vouchers and summary reports prepared independently in different functional areas ---billing function summarizes the sales journal ---inventory control summarizes changes in inventory sub ledger ---cash receipts function summarizes CR jounral ---AR summarizes AR sub ledger

Shipping Log

once the goods are transferred to the carrier, the shipping clerk records the shipment in the _____ _____, forwards the shipping notice and the stock release to the bill-customer function as proof of shipment, and updates the customer order file to reflect the "shipped" status of the transaction

Reconcile Cash Receipts and Deposits - CRP

periodically, a clerk form the CONTROLLER'S OFFICE (employee involved with cash receipts procedures) reconciles cash receipts by company: 1. copy of prelist 2. deposit slips received from bank 3. related journal vouchers

2 major internal control activities:

physical controls IT controls

2 phases of a revenue cycle that processes sales on credit:

physical phase - involving the transfer of assets or services from the seller to the buyer financial phase - when buyer pays off accounts receivable

Scanner Technology - IT Control

product code scanners in the warehouse are shipping department will reduce the risk of human error in picking and shipping incorrect products when scanned by warehouse and/or shipping clerk the system will verify that the items selected match those on the sales order

P-Card

purchasing card; company credit card; expediency; necessary for daily functioning; obviously potential for fraud ---for UF, 2 million transactions per year; hard to detect ---holidays are the time when most people steal control: ---run queries (i.e. search for vendors like Victoria's Secret) ---theatre department actually orders from here

Physical Controls

purpose is to control the physical actions of the people 1) transaction authorization -objective: ensure that only valid transactions are processes -authorization is NOT approval ---EXAMPLE 1: -in the sales function, the authorization process is a credit check (done by credit department) -complexity of credit procedures depends on the organization, its relationship with customer, and the materiality of the transaction -credit approval for first-time customers may take more time and require consultation of an outside credit bureau (in contrast, credit approval of long-time customers can be very quick) ---EXAMPLE 2: -remittance list provides a means for verifying that customer checks and remittance advices match in amount and represent valid transactions -discrepancies should be noted when the documents are logged in the remittance list -remittance list also provides a control against lost checks 2) segregation of duties -separate transaction authorization from transaction processing -to provide independence to the credit authorization process, the credit function should be separate from the sales function -cash receipts function should be separated from the AR function that records the payment (LAPPING could occur) -cash receipts and general ledger cash functions should be separated (cash could be removed from the firm and fraudster could adjust the cash account to cover the act) -inventory warehouse personnel who have physical custody of inventory should not be responsible for the accounting task of updating inventory records -SOD should be so strong that perpetration of fraud REQUIRES collusion between 2 or more people -sub ledgers, journals, and GL should all be maintained separately -SOD does not eliminate collusion, but reduces chances of it happening 3) supervision -compensating control in small firms -mail room is a point of risk in most cash receipts systems; clerk has access to asset (check) and the record of the transaction (remittance advice) -SHIPPING POINT, RECEIVING POINT, MAILROOM 4) accounting records -warehouse security (fences, alarms, guards) -depositing cash daily in the bank -using a safe or night deposit box for cash -locking cash drawers and safes in the cash receipts department 5) access control -source docs and accounting records need to be physically protected -secure areas, access should be restricted on a need-to-know basis 6) independent verification -shipping function verifies that goods sent from the warehouse are correct in type and quantity -stock release document and packing slip should be reconciled before the goods are sent to the customer

Electronic Data Interchange (EDI)

re-engineering using EDI (many organizations have done this for their sales order process) devised to expedite routine transactions between manufacturers and wholesalers, and wholesalers and retailers customer's computer is linked to seller's computer via a private network or the internet when customer needs more inventory, a purchase order is automatically sent to the seller seller receives customer order and processes it automatically - little or no human interaction more than technology; strategic business arrangement terms specified in TRADING PARTNER AGREEMENT and are legally binding ---agree in advance on selling price, quantities, guaranteed delivery times, payment terms, methods of handling disputes in its purest form, completely automated B2B ONLY Developed by Walmart this system has to be on ABSOLUTE lockdown in 2 minutes a disgruntled employee can order 50000000 lawn chairs instead of milk legal contract (when Walmart's inventory is low and shoots an email to supplier)

Output Controls

reduce the risk of documents that will be misdirected or lost in transit Revenue cycle examples: ---Email of digital copies to secure mail boxes ---Documents physically collected by authorized personnel or a security officer ----- You could have the best controls ever for processing payments, but if you print the check and put it on a hopper for the mailman, someone can steal the signed check Leaving stuff on the printer Shredding and destroying

Update AR Records - CRP

remittance advices are used to post to the customers' accounts in the AR sub ledger

Benefits of automating the revenue cycle:

remove of hardcopy documents; why are hardcopies not ideal? 1. Costs of obtaining (printing) 2. Storage costs 3. Inefficiency of moving paper documents - someone has to be paid to walk the 10 sales order copies to the different departments

Files - Physical Control

revenue cycle employs several temporary and permanent files that contribute to the audit trail EX: -customer order file -shipping log -customer records file (customer credit data) -back-order file -journal voucher file (compilation of all journal vouchers posted to GL)

Basic Technology Revenue Cycle

revenue cycle with independent, non-networked PCs information flows between departments are communicated via hard-copy documents maintaining physical files of source documents is critical to the audit trail after individuals complete their tasks, documents are filed as evidence that the tasks were performed

3 procedures that constitute the revenue cycle: (for most retail, wholesale and manufacturing companies)

sales order procedures sales return procedures cash receipts procedures --- services companies (hospitals, insurance companies, banks) would have industry-specific methods

Automated posting to sub and GL accounts - IT Control

segregation of duties between the users and the programmers programmers know the ins and outs of the system programmer might leave a bug in the system and then enter the system and exploit it COMPUTER-BASED ACCOUNTING SYSTEM (CBAS) in the advanced technology system, a computer application, which is not influenced by the situational pressures, opportunities, and ethical shortcomings discussed in earlier chapters, determines which accounts to update/by how much potential for errors and fraud are reduced by eliminating human element improves efficiency b/c these are labor-intensive activities

Ship Goods - SOP

shipping department uses the PACKING SLIP and SHIPPING NOTICE to reconcile goods received from the warehouse ---upon receiving the goods form the warehouse, the shipping clerk reconciles the physical items with the stock release, packing slip and shipping notice goods are packaged, BILL OF LADING is prepared, goods are given to carrier, and shipment is recorded in the SHIPPING LOG important verification control point - last chance to detect errors before shipment

Deposit Slip

shows the amount of the day's receipts and forwards this along with the checks to the bank upon deposit of the funds, the bank teller validates the deposit slip and returns it to the COMPANY for reconciliation

Sales Journal

special journal used for recording completed sales transactions details of the sales invoices are entered individually

Special purpose copies of the sales order - examples

stock release packing slip shipping notice sales invoice

Pick Goods - SOP

the STOCK RELEASE or picking ticket provides authorization to warehouse personnel to release goods which are sent to shipping along with the VERIFIED STOCK RELEASE warehouse employees adjust STOCK RECORDS to reflect inventory reduction and prepares BACK-ORDER RECORDS if insufficient goods.

Shipping Notice

the _____ _____ will later be forwarded to the billing function as evidence that the customer's order was filled and shipped conveys important info such as the date of shipment, items and quantities actually shipped, name of carrier, freight charges in some systems, the _____ _____ is a separate document prepared within the shipping function

Packing Slip

the _____ _____ will ultimately travel with the goods to the customer to describe the contents of the order

Sales Invoice

the completed _____ _____ is the customer's bill, which formally depicts the charges to the customer creation of _____ _____ results in the recording of a sale

Approve Credit Memo - SRP

the credit manager evaluates the circumstances of the return and makes a judgement to grant (or disapprove) credit the manager then returns the _____ _____ _____ to the sales department

The Revenue Cycle - simplest form

the direct exchange of goods or services for cash in a single transaction between a seller and a buyer -more complex revenue cycles process sales on credit

Integrated Sales Order Processing System

the functions of credit checking, accounts receivable updating, customer billing, inventory updating and posting to the GL are performed automatically by the central computer these labor intensive activities add greatly to operating costs and contribute to human error advanced technology system perform these tasks - cheaper, reduces likelihood of error ***these traditional departments still exist in the advanced environment, but their responsibilities are refocused on exception-based problem-solving, rather than day-to-day clerical tasks departments: Customer, Sales, Computer Operations, Warehouse, Shipping smaller, more efficient departments --- Sales Procedures 1) sales clerk receives electronic or hard-copy customer order and, using a computer terminal connected to a central sales order system, enters the SO and initiates the following tasks: 2) system accesses the inventory sub file and checks the availability of the inventory items requested --- then performs a credit check by reviewing the customer's credit record; based on programmed criteria, request gets approved or denied 3) if approved, system adds a record to the sales invoice file, transmits a digital stock release to warehouse, and sends a digital copy of the packing slip to the shipping department 4) warehouse clerk's terminal immediately produces a hard-copy printout of the electronically transmitted stock release; clerk sends stock release and items to the shipping department 5) shipping department reconciles the goods with the packing slip, prepares them for shipment, and selects carrier; once shipped, shipping clerk accesses the system and transmits a digital shipping notice to signal that the transaction is complete 6) upon receipt of the shipping notice, the system automatically performs the following accounting tasks: -updates customer's credit history record to reflect the sale -reduces the quantity-on-hand field in the inventory sub records -determines if inventory has fall below reorder point; if so, adds a record to the purchase requisition file --- places an "on-order" flag in the inventory record 7) inserts a shipped date sales invoice record to indicate the order's status [many B2B transactions use the SALES INVOICE FILE - sub for traditional sales journal and AR sub ledger; shipped sales invoices provide a chronological record of total sales for the period and unpaid shipped invoices constitute the AR] 8) updates GL accounts; can be real-time or batch 9) system produces and distributes various management reports, such as sales summaries, inventory status reports, and GL change reports

Update Inventory and AR Records - SRP

the inventory control function adjusts the inventory records and forwards the credit memo to AR, where the customer's account periodically, the inventory and AR controls send journal vouchers summarizing the accounts to the GL function

Update Inventory Records - SOP

the inventory control function updates INVENTORY SUBSIDIARY LEDGER accounts from the stock release document information

Restrictive Endorsement

the last thing you want to do is sign the check write FOR DEPOSIT ONLY on back ***Order paper - unsigned check ***Bearer paper - once it is signed, anyone can cash it

File Backup - IT Control

the physical loss, destruction or corruption of digital account records are serious concerns _____ procedures need to be in place to reduce the risk of data loss behind the scenes activities accountants should verify that such procedures are performed for all sub and general ledger files

Cash Receipts Procedures

the sales order procedure described a credit transaction that resulted in the establishment of an AR - payment on the account is due at some future date _____ _____ _____ apply to this future event 1. open mail and prepare remittance list 2. record and deposit checks 3. update AR records 4. update GL 5. reconcile cash receipts and deposits

Re-engineering using the Internet

thousands of organizations worldwide have home pages on the internet to promote their products and solicit sales typically, internet sales are credit card transactions that get sent to seller's e-mail file turnaround time is sometimes longer because of the need to review the e-mail file B2B and B2C threats to hackers, viruses, and transaction fraud controls to minimize risks: firewalls, passwords, message encryption

Update the Sales Journal - SRP

upon receipt of the approved credit memo, the transaction is recorded in the _____ _____ as a contra entry the credit memo is then forwarded to the inventory control function for posting at the end of the period, total sales returns are summarized in a journal voucher and sent to the GL department

Update GL - SRP

upon receipt of the journal voucher and account summary info, the GL function reconciles the figures and posts to: DEBIT - inventory DEBIT - sales returns and allowances CREDIT - cost of goods sold CREDIT - AR-control

Update GL - CRP

upon receipt of the journal voucher and the account summary, the GL function reconciles the figures, posts tot he cash and AR control accounts and files the journal voucher

Prepare Credit Memo - SRP

upon receipt of the return slip, the sales employee prepares a _____ _____ this document is the authorization for the customer to receive credit for the merchandise returned similar in appearance to a sales order (some companies just change the name of document) sometimes the _____ _____ must go to the credit manager for approval if the clerk has sufficient authority to approve the return, the _____ _____ is sent directly to the billing function, where the sales transaction is reversed

Automated Inventory Ordering - IT Control

when an inventory record is updated to reflect a sale, the computer logic should check to determine if the reduction in inventory drops the inventory quantity on hand to a point below the reorder point if this is the case, the organization needs to reorder inventory to avoid a stock out system logic should create a purchase requisition record, which is added to the purchase requisition file once an item is on order, however, a control should be in place to ensure that it is not order again until the original order has been received from the supplier flag inventory item "on order" by entering a value in the on-order field of the inventory record ---this field has a value of 0 when the item in question is not on order if quantity on hand < reorder point AND on-order field = 0 ---then create a purchase requisition record and place the quantity in the inventory on-order field ---else do nothing as the inventory item in question continues to be sold, the system will continue to test for low stock and will determine that the quantity on hand is below the reorder point; however, b/c the on-order field contains a nonzero value, the "AND" condition is not met ---NO ADDITIONAL PURCHASE REQUISITIONS ARE CREATED flag control is super important, as it prevents significant financial losses for the organization by unintentionally ordering large quantities of unneeded inventory

Prepare Return Slip - SRP

when items are returned, the receiving department counts, inspects prepares a _____ _____ describing the items the goods, along with a copy of the _____ _____ , go back to the warehouse to be restocked second copy is sent to the sales function to prepare a credit memo

Purchase Requisition File

when the quantity on hand falls below the reorder point, a record is added to the _____ _____ _____ this triggers the reordering process periodically, the financial value of the total reduction in inventory is summarized in a journal voucher and sent to the GL function for posting to: ---DEBIT cogs ---CREDIT inventory-control

Remittance List (cash prelist)

where all cash received in logged 3 copies: original sent with checks to the record and deposit checks function ... 2nd goes with remittance advices to the update AR function ... 3rd goes to reconciliation task