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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.
SUGGESTED ANSWERS TO THE CASES
Case 12.1: RESEARCH PROJECT: Research Project: How CPA Firms Are
Leveraging New Developments in IT
Find articles from the past year in the Journal of Accountancy, The New Accountant, and
any other magazine suggested by your instructor that explain how CPA firms are using IT
developments (e.g., the cloud, BYOD, mobile, etc.). Write a report that explains the benefits
of the new technology (cost reduction, revenue increases, customer attraction and retention,
etc.) and how the firm mitigates any new threats associated with that technology.
