12.7 O’Brien Corporation is a midsize, privately owned, industrial instrument
manufacturer supplying precision equipment to manufacturers in the Midwest. The
corporation is 10 years old and uses an integrated ERP system. The administrative
offices are located in a downtown building and the production, shipping, and
receiving departments are housed in a renovated warehouse a few blocks away.
Customers place orders on the company’s website, by fax, or by telephone. All sales
are on credit, FOB destination. During the past year sales have increased
dramatically, but 15% of credit sales have had to written off as uncollectible,
including several large online orders to first-time customers who denied ordering or
receiving the merchandise.
Customer orders are picked and sent to the warehouse, where they are placed near
the loading dock in alphabetical sequence by customer name. The loading dock is
used both for outgoing shipments to customers and to receive incoming deliveries.
There are ten to twenty incoming deliveries every day, from a variety of sources.
The increased volume of sales has resulted in a number of errors in which customers
were sent the wrong items. There have also been some delays in shipping because
items that supposedly were in stock could not be found in the warehouse. Although a
perpetual inventory is maintained, there has not been a physical count of inventory
for two years. When an item is missing, the warehouse staff writes the information
down in log book. Once a week, the warehouse staff uses the log book to update the
inventory records.
The system is configured to prepare the sales invoice only after shipping employees
enter the actual quantities sent to a customer, thereby ensuring that customers are
billed only for items actually sent and not for anything on back order.
1
©2018 Pearson Education, Inc.
Accounting Information Systems
Required:
a. Identify at least three weaknesses in O’Brien Corporation’s revenue cycle procedures,
explain the associated problem, and propose a solution. Present your answer in a
three-column table with these headings: Weakness, Problem, Solution.
b. Draw a BPMN diagram to depict O’Brien Corporation’s revenue cycle revised to
incorporate your solutions to step a.
(CMA Examination, adapted)
Weaknesses and Potential Problem(s)
Recommendation(s) to Correct Weaknesses
1. Orders from new customers do not require
Require digital signatures on all online orders
2. Customer credit histories are not checked
Customers’ credit should be checked and no
3. Outgoing shipments are placed near the
receive incoming deliveries. This increases the
risk of theft, which may account for the
unexplained shortages in inventory.
Separate the shipping and receiving docks.
4. Physical counts of inventory are not made at
Physical counts of inventory should be made at
5. Shipments are not reconciled to sales orders,
The system should be configured to match
6. The perpetual inventory records are only
unanticipated shortages that result in delays in
filling customer orders.
The warehouse staff should enter information
2
©2018 Pearson Education, Inc.
Ch. 12: The Revenue Cycle: Sales to Cash Collections
Solutions to part b will vary depending upon which weaknesses the students identified and corrected. The following corrects all six weaknesses
listed above.
Employee Activity Performed (sequential, left-to-right across all rows)
Sales Clerk
3
©2018 Pearson Education, Inc.
Accounting Information Systems
12.8 Parktown Medical Center, Inc. is a small health care provider owned by a publicly
held corporation. It employs seven salaried physicians, ten nurses, three support
staff, and three clerical workers. The clerical workers perform such tasks as
reception, correspondence, cash receipts, billing, and appointment scheduling. All
are adequately bonded.
Most patients pay for services rendered by cash or check on the day of their visit.
Sometimes, however, the physician who is to perform the respective services
approves credit based on an interview. When credit is approved, the physician files a
memo with one of the clerks to set up the receivable using data the physician
generates.
The servicing physician prepares a charge slip that is given to one of the clerks for
pricing and preparation of the patient’s bill. At the end of the day, one of the clerks
uses the bills to prepare a revenue summary and, in cases of credit sales, to update
the accounts receivable subsidiary ledger.
The front office clerks receive cash and checks directly from patients and give each
patient a prenumbered receipt. The clerks take turns opening the mail. The clerk
who opens that day’s mail immediately stamps all checks “for deposit only.” Each
day, just before lunch, one of the clerks prepares a list of all cash and checks to be
deposited in Parktown’s bank account. The office is closed from 12 noon until 2:00
p.m. for lunch. During that time, the office manager takes the daily deposit to the
bank. During the lunch hour, the clerk who opened the mail that day uses the list of
cash receipts and checks to update patient accounts.
The clerks take turns preparing and mailing monthly statements to patients with
unpaid balances. One of the clerks writes off uncollectible accounts only after the
physician who performed the respective services believes the account will not pay
and communicates that belief to the office manager. The office manager then issues
a credit memo to write off the account, which the clerk processes.
The office manager supervises the clerks, issues write-off memos, schedules
appointments for the doctors, makes bank deposits, reconciles bank statements, and
performs general correspondence duties.
Additional services are performed monthly by a local accountant who posts
summaries prepared by the clerks to the general ledger, prepares income
statements, and files the appropriate payroll forms and tax returns.
4
©2018 Pearson Education, Inc.
Accounting Information Systems
Required:
a. Identify at least three control weaknesses at Parktown. Describe the potential
threat and exposure associated with each weakness, and recommend how to best
correct them.
1. Weakness: The employees who perform services are permitted to approve credit
Control: Someone other than the physician performing the services (probably the
2. Weakness: The physician who approves credit also approves the write-off of
Threat: Accounts receivable could be understated and bad debts expense overstated
Control: Separate the duties of approving credit and approving the write-off of
3. Weakness: The employee who initially handles cash receipts also prepares billings
Threat: Theft by lapping could occur. Fees earned and cash receipts or accounts
Control: Segregate the functions of cash receipts handling and billing/accounts
4. Weakness: The employee who makes bank deposits also reconciles bank statements.
5. Weakness: The employee who makes bank deposits also issues credit memos.
Threat: The office manager could steal cash and cover up the shortage by issuing a
Control: Cash deposits should be made by an employee who does not have authority
6. Weakness: Trial balances of the accounts receivable subsidiary ledger are not
Threat: Any of fees earned, cash receipts, and uncollectible accounts expense could
Control: Periodic reconciliation of the subsidiary accounts receivable ledger to the
5
©2018 Pearson Education, Inc.
Accounting Information Systems
b. Draw a BPMN diagram to depict Parktown’s revenue cycle revised to incorporate your solutions to step a.
(CPA Examination, adapted)
Actual solution will depend upon which weaknesses were corrected: this figure addresses all weaknesses listed in part a.
Employee Activity Performed (sequential, left-to-right across all rows)
Physician
Front Office
Clerk 2
Office Manager
Front Office
Clerk 3
6
©2018 Pearson Education, Inc.
Open Mail
with another
Office Clerk
Prepare
No
Customer
Remittances
Endorse
Checks &
Prepare
Remittance
List
Monthly
Decide
whether to
grant credit
Review Past
Due A/R &
Issue Credit
Memo
Remittance
List
Monthly
Ch. 12: The Revenue Cycle: Sales to Cash Collections
12.9 Figure 12-20 depicts the activities performed in the revenue cycle by the Newton
Hardware Company. (CPA Examination, adapted)
a. Identify at least 3 weaknesses in Newton Hardware’s revenue cycle. Explain the
resulting threat and suggest methods to correct the weakness.
Weakness Threat/Problem Recommendation
Sales clerk issues credit memos. Sales to customers with
Credit manager should approve
Accountant receives customer
Fraud (lapping). Cash collections clerk should
Cash collections clerk handles
Theft and cover up by
Someone not involved in handling
7
©2018 Pearson Education, Inc.
Accounting Information Systems
b. Identify ways to use IT to streamline Newton’s revenue cycle activities. Describe
the control procedures required in the new system.
Some ways that Newton could use IT to improve efficiency include:
On-line data entry by sales staff. The system should include credit checks on
Controls that should be implemented in the new system include:
Passwords to limit access to authorized users, and to restrict the duties each
employee may perform and which files they may access
8
©2018 Pearson Education, Inc.