Ch. 12: The Revenue Cycle: Sales and Cash Collections
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. (CPA Examination, adapted)
1. Weakness: The employees who perform services are permitted to approve credit
without an external credit check.
Threat: Sales could be made that turn out to be uncollectible.
2. Weakness: The physician who approves credit also approves the write-off of
uncollectible accounts.
Threat: Accounts receivable could be understated and bad debts expense overstated
because write-offs of accounts could be approved for accounts that are, in fact,
3. Weakness: The employee who initially handles cash receipts also prepares billings
and maintains accounts receivable.
Threat: Theft by lapping could occur. Fees earned and cash receipts or accounts
receivable could be understated because of omitted or inaccurate billing.
4. Weakness: The employee who makes bank deposits also reconciles bank statements.
Threat: The cash balance per books may be overstated because all cash is not
deposited (i.e. theft).
5. Weakness: The employee who makes bank deposits also issues credit memos.
Accounting Information Systems
Threat: The office manager could steal cash and cover up the shortage by issuing a
credit memo for the amount stolen.
6. Weakness: Trial balances of the accounts receivable subsidiary ledger are not
prepared independently of, or verified and reconciled to, the accounts receivable
control account in the general ledger.
Threat: Any of fees earned, cash receipts, and uncollectible accounts expense could
be either understated or overstated because of undetected differences between the
Ch. 12: The Revenue Cycle: Sales and Cash Collections
12.9 Figure 12-18 depicts the activities performed in the revenue cycle by the Newton
Hardware Company. (CPA Examination, adapted)
a. Identify at least 7 weaknesses in Newton Hardware’s revenue cycle. Explain the
resulting threat and suggest methods to correct the weakness.
Weakness
Threat/Problem
Recommendation
Credit approval by bookkeeper
A has no effect on shipping.
Uncollectible sales.
Credit approval must occur
prior to shipping merchandise to
Warehouse clerk does not
retain copy of the shipping
advice.
Cannot easily identify
loss if the carrier has
accident.
Use a 4-copy shipping advice
and retain one copy in the
warehouse.
Bookkeeper A authorizes
customer credit and prepares
source documents for posting
to customer accounts.
Sales to friends that
exceed credit limit.
Credit manager should approve
all credit.
Bookkeeper A prepares
invoices without notification
about what was shipped and
when.
Billing mistakes.
Prepare invoice only after
receipt of a copy of the shipping
advice indicating the quantities
shipped and the date.
Bookkeeper A authorizes
write-offs of customer
accounts and approves credit.
Can approve sales to
friends and later write
them off.
Someone else should authorize
the write-off of customer
accounts.
Verify that all sales orders and
shipping advices have been
invoiced.
inventory) initiates posting to
inventory records by preparing
shipping advice.
result in inaccurate
inventory records; could
release goods to friends
with no invoice.
sales are approved.
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12-37
Collections Clerk does not
deliver postdated checks and
checks with errors to an
employee independent of the
bank deposit for review and
disposition.
Possible theft of checks.
Deliver all checks not deposited
to another employee who has no
bank deposit/reconciliation
duties.
Collection Clerk initiates
posting of receipts to
subsidiary accounts receivable
ledger and has initial access to
cash receipts.
Theft by lapping.
Checks should be opened by
someone who does not have
bookkeeping or accounting
duties. That person should then
send a list of cash receipts to the
collections clerk to be used to
record cash receipts.
Cash collection clerk does not
deposit checks promptly.
loss of interest.
Deposit all receipts promptly.
Cash collection clerk
reconciles bank statement and
has initial access to cash
receipts.
Can cover up theft by
reconciliation.
Have bank reconciliation
performed by an employee with
no other involvement in cash
receipts processing.
Bookkeeper C does not
reconcile the subsidiary A/R
with the general ledger.
Potential imbalances
due to posting errors.
Reconcile the subsidiary A/R
ledger with the general ledger.
process.
to ledgers.
Ch. 12: The Revenue Cycle: Sales and Cash Collections
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
customers as well as check inventory availability
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12-39
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:
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.
1. Weakness – Sarah opens all mail and prepares a list of donations (cash and
checks). Sarah could misappropriate anonymous cash donations.
Ch. 12: The Revenue Cycle: Sales and Cash Collections
2. Weakness – The donations and donation list are sent to the accountant for
recording and to prepare the bank deposit. Therefore, the accountant has custody
of the donation and records the donation.
3. Weakness – Each employee has full access (create, read, update, delete) to the
accounting system.
Control – Only the accountant and the office manager should have full access to
the accounting system.
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.
Accounting Information Systems
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.
3. __o_ Crediting customer
account.
2. _g,i__ Mistakes in shipping
b. Encrypt customer information while in
5. _e,j,k__ Theft of inventory
by employees.
e. Physical access controls on inventory
6. __l_ Excess inventory.
f. Segregation of duties of handling cash
and maintaining accounts receivable.
7. _a__ Reduced prices for sales
to friends.
g. Reconciliation of packing lists with sales
orders.
placing them.
8. _d__ Orders later repudiated
h. Reconciliation of invoices with packing
9. _h,q__ Failure to bill
customers.
i. Use of bar-codes or RFID tags.
10. _h__ Errors in customer
invoices
j. Periodic physical counts of inventory
11. _m,n_ Cash flow problems
k. Perpetual inventory system.
12. _c__ Loss of accounts
receivable data
l. Use of either EOQ, MRP, or JIT
inventory control system.
personal information.
13. __a,b_ Unauthorized
m. Lockboxes or electronic lockboxes.
14. _g,r__ Failure to ship orders
to customers.
n. Cash flow budget
o. Mail monthly statements to customers.
q. Segregation of duties of shipping and
billing.
documents.
Ch. 12: The Revenue Cycle: Sales and Cash Collections
12.12 EXCEL PROBLEM
Use EXCEL’s regression tools to analyze and forecast future sales.
(Hint: The article “Forecasting with Excel,” by James A. Weisel in the February
2009 issue of the Journal of Accountancy (available at www.aicpa.org) explains how
to perform the following tasks using either Excel 2003 or Excel 2007).
a. Create a spreadsheet with the following data about targeted emails, click ads,
and unit sales:
Clicks
Unit Sales
100
12000
105
12500
75
10000
150
14000
125
12500
100
10000
125
10900
135
11500
110
12500
95
10500
75
10750
100
10000
80
9500
130
13500
110
11500
125
13000
85
12000
100
9000
135
10000
140
13500
125
13400
115
12750
105
12750
95
10000
145
9000
150
15000
120
12000
100
13500
95
11000
140
13500
b. Create a scattergraph to illustrate the relationship between targeted emails and
unit sales. Display the regression equation and the R2 between the two variables
on the chart.
c. Create a scattergraph to illustrate the relationship between click ads and unit
sales. Display the regression equation and the R2 between the two variables on
the chart.
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12-45
d. Which variable (targeted emails or click ads) has the greater influence on unit
sales? How do you know?
Targeted emails have a greater effect on unit sales than do click ads as shown by the
higher R2 for the regression formula.
e. Use the “ =Forecast “function to display the forecasted sales for 200,000 targeted
emails and for 200 click ads.
12.13 Give two specific examples of nonroutine transactions that may occur in processing
cash receipts and updating accounts receivable. Also specify the control procedures
that should be in place to ensure the accuracy, completeness, and validity of those
transactions.
Nonroutine Transaction
Control Procedure
1. Change of customer name or
address
1. Log of who initiated change and date.
2. Credit memos for sales
2. Approval by credit manager
3. Adjustments to customer credit
rating or credit limit.
3. Review and approval by credit manager
both prior to event and after recording.
4. Correction of errors in amounts,
dates, etc.
4. Review and approval by department
manager prior to resubmission.
5. New customers added to master
file.
5. Review and approval by credit manager
prior to submission.
6. Account write-offs (bad debts).
6. Review and approval by credit manager
both before event and after recording.
Ch. 12: The Revenue Cycle: Sales and Cash Collections
SUGGESTED ANSWERS TO THE CASES
Case 12.1: RESEARCH PROJECT: IMPACT OF IT ON REVENUE
CYCLE ACTIVITIES, THREATS, AND CONTROLS
Search popular business and technology magazines (Business Week, Forbes,
Fortune, CIO, etc.) to find an article about an innovative use of IT that can be used
to improve one or more activities in the revenue cycle. Write a report that:
a. Explains how IT can be used to change revenue cycle activities
b. Discusses the control implications. Refer to Table 12-1 and explain how the new
procedure changes the threats and appropriate control procedures for
mitigating those threats.