978-0134474021 Chapter 12 Solutions Manual Part 4

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Ch. 12: The Revenue Cycle: Sales to Cash Collections

12.10 The Family Support Center is a small charitable organization. It has only four

full-time employees: two staff, an accountant, and an office manager. The majority

of its funding comes from two campaign drives, one in the spring and one in the fall.

Donors make pledges over the telephone. Some donors pay their pledge by credit

card during the telephone campaign, but many prefer to pay in monthly

installments by check. In such cases, the donor pledges are recorded during the

telephone campaign and they are then mailed pledge cards. Donors mail their

contributions directly to the charity. Most donors send a check, but occasionally

some send cash. Most donors return their pledge card with their check or cash

donation, but occasionally the Family Support Center receives anonymous cash

donations. The procedures used to process donations are as follows:

Sarah, one of the staff members who has worked for the Family Support Center for

12 years, opens all mail. She sorts the donations from the other mail and prepares a

list of all donations, indicating the name of the donor (or anonymous), amount of the

donation, and the pledge number (if the donor returned the pledge card). Sarah

then sends the list, cash, and checks to the accountant.

The accountant enters the information from the list into the computer to update the

Family Support Center’s files. The accountant then prepares a deposit slip (in

duplicate) and deposits all cash and checks into the charity’s bank account at the

end of each day. No funds are left on the premises overnight. The validated deposit

slip is then filed by date. The accountant also mails an acknowledgment letter

thanking each donor. Monthly, the accountant retrieves all deposit slips and uses

them to reconcile the Family Support Center’s bank statement. At this time, the

accountant also reviews the pledge files and sends a follow-up letter to those people

who have not yet fulfilled their pledges.

Each employee has a computer workstation that is connected to the internal

network. Employees are permitted to surf the Web during lunch hours. Each

employee has full access to the charity’s accounting system, so that anyone

can fill in for someone else who is sick or on vacation. Each Friday, the

accountant makes a backup copy of all computer files. The backup copy is

stored in the office manager’s office.

a. Identify two major control weaknesses in the Family Support Center’s cash

receipts procedures. For each weakness you identify, suggest a method to correct

that weakness. Your solution must be specific—identify which specific employees

should do what. Assume that no new employees can be hired

1. Weakness – Sarah opens all mail and prepares a list of donations (cash and

2. Weakness – The donations and donation list are sent to the accountant for

3. Weakness – Each employee has full access (create, read, update, delete) to the

b. Describe the IT control procedures that should exist in order to protect the

Family Support Center from loss, alteration, or unauthorized disclosure of data.

The weekly back-up should be stored off-site, not in the manager’s office.

12.11 Match the threats in the first column to the appropriate control procedures in the

second column (more than one control may address the same threat).

Threat Applicable Control Procedures

1. _a,p__ Uncollectible sales a. Restrict access to master data.

14. _g,r__ Failure to ship orders to

customers.

n. Cash flow budget

o. Mail monthly statements to customers.

p. Credit approval by someone not involved

in sales.

q. Segregation of duties of shipping and

billing.

r. Periodic reconciliation of prenumbered

sales orders with prenumbered shipping

documents.

12.12 Answer all of the following multiple-choice questions.

1. Which of the following pairs of duties combines the functions of custody and

authorization in a manner that would allow an employee to conceal the theft of a

customer’s payment?

a. Handling cash receipts plus maintaining accounts receivable

b. Writing checks plus reconciling the bank statement

c. Handling cash receipts plus issuing credit memos

d. All of the combinations involve custody and authorization in a manner that

would enable an employee to conceal theft of a customer’s payment

e. None of the combinations involve the functions of custody and authorization

in a manner that would enable an employee to conceal theft of a customer’s

payment

2. Which of the following violates proper segregation of duties?

a. The same person maintains both accounts receivable and accounts payable.

b. The same person approves sales orders that exceed a customer’s credit limit

and processes and reconciles the bank account.

c. The same person handles customer payments and has access to blank checks.

d. All of the above combinations violate proper segregation of duties.

e. None of the above combinations violate proper segregation of duties.

3. Which of the following types of fraud requires access to the accounts receivable

master file?

a. Lapping

b. Kiting

c. Theft of inventory

d. None of the above

4. The CEO is concerned about the possibility of employees stealing inventory. In the

formal language used for risk analysis, theft of inventory is referred to as a(n):

a. risk

b. exposure

c. expected loss

d. threat

e. None of the above

5. For good internal control in an ERP system, sales staff should be permitted to:

a. Adjust customer credit limits

b. Issue credit memos

c. Both of the above

d. Neither of the above

6. Which of the following procedures, by itself, is most effective at preventing

employees from stealing cash?

a. Restrictively endorsing all checks from customers upon receipt

b. Having someone who has no access to cash reconcile the bank accounts

c. Sending monthly statements to customers

d. Using lockboxes for customer remittances

e. Creating invoices so that the bottom portion is to be returned as a remittance

advice

7. Which of the following combinations of duties can the same employee perform

without violating the principle of segregation of duties?

a. Shipping inventory and billing customers

b. Issuing credit memos and maintaining accounts receivable

c. Taking customer orders and checking inventory availability

d. All three of the listed combinations can be performed by the same person

without violating the principle of segregation of duties

e. None of the three listed combinations should be performed by the same

person because all three combinations violate the principle of segregation of

duties

8. Which of the following is an example of the type of fraud referred to as

misappropriation of assets?

a. embezzlement

b. lapping

c. inventory theft

d. all of the above

e. none of the above

9. Which of the following controls would be most effective in mitigating the risk of

inventory theft?

a. Reconciling shipping documents to sales orders, picking lists and packing

slips.

b. Separating the functions of shipping and billing

c. Documentation of all transfers of inventory between employees

d. Use of lockboxes

10. For effective internal control, which of the following duties can the person who

handles customer payments also perform?

a. Issue credit memos

b. Reconcile the bank account

c. Maintain accounts receivable

d. All of the above

e. None of the above

12.13 Excel Project

Required

a. Create a spreadsheet that contains the following data:

Salesperson Date Calls Made

Smith 07/03 100

Barnes 07/05 110

Martinez 07/13 95

Jackson 07/20 115

Hsu 07/28 120

Smith 08/01 125

Barnes 08/02 115

Hsu 08/10 110

Barnes 08/10 100

Martinez 08/14 135

Jackson 08/20 115

Smith 08/22 90

Barnes 08/23 85

Martinez 09/01 100

Jackson 09/02 90

Hsu 09/05 95

Jackson 09/11 140

Hsu 09/11 150

Smith 09/15 110

Barnes 09/20 120

Martinez 09/30 120

Jackson 09/30 90

Hsu 09/30 60

b. On the same worksheet, but to the right of the data above, create the following table

to show calls made by each salesperson this quarter. Use the sumproduct function to

create a formula that automatically calculates the total calls handled.

Calls Made by Salesperson This Quarter

July August September

Barnes

Hsu

Jackson

Martinez

Smith

(Hint: Read the article “Supercharge Your Excel Sum Operations: Add data by up to 30

criteria,” by J.D. Kern in the July 2009 issue of the Journal of Accountancy for an

explanation of the sumproduct function and the use of double dashes. The Journal of

Accountancy is available either in print or online at www.aicpa.org).

12.14 The following table presents the results of using a CAAT tool to interrogate the XYZ

Company’s ERP system for revenue cycle activities. It shows the number of times

each employee performed a specific task.

Take

Order

Approve

Credit

Ship

Inventory

Maintain

A/R

Issue

Credit

Memo

Bill

Customer

Deposit

Customer

Remittances

Reconcile

Bank

Account

Employee A 250 5 15

Employee B 305 100

Employee C 275 10

Employee D 85 10 5

Required: Identify five examples of improper segregation of duties and explain the nature

of each problem you find.

1. Employee A takes orders and approves credit. Employee may collude with a friend

to make sales that turn out to be uncollectible.

2. Employee A takes orders and bills customers. Employee may fail to bill sales made

to friends.

3. Employee B takes orders and bills customers. Employee may fail to bill sales made

to friends.

4. Employee D approves credit and issues credit memos. The employee could make

sales to friends on credit and then write those sales off.