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Chapter 8 – Revenue and Cash Collection Processes And
Controls
Instructor Manual
➢ Introduction To Revenue Processes. A company must have systems and
processes in place to capture, record, summarize, and report the results of revenue
related transactions. The processes are the polices and procedures that employees
follow in completing sale, sales return, or cash collection, and then capturing
billing), sales returns processes, and cash collection processes.
➢ Sales Processes. In a company-to-company sale, the customer places an order,
providing the necessary information for the sales order. A price list establishes the
selling prices to charge the customer. Each customer’s credit limit should be
recorded in a sales journal.
➢ Controls And Risks In Sales Processes. Management should strive to achieve a
system of internal controls using both manual and programmed procedures to
minimize the chance of error or fraud. The common internal control procedures in
sales processes follow.
o Authorization Of Transactions. Specific individuals within the company
should have authoritative responsibility for establishing sales prices, payment
terms, credit limits, and guidelines for accepting new customers. These
specific people should have a recognized method of communicating when
o Segregation Of Duties. Within the revenue process, the accounting duties
related to order entry, credit approval, shipping, billing, information systems,
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inventory handling and preparing goods for shipment. Ideally, good internal
controls within the sales process require that accounting for inventory is
separate from inventory handling. Also, any person who maintains detailed
accounts receivable records should not also be responsible for maintaining
the general ledger or handling cash.
o Adequate Records And Documents. Those responsible for recording sales
should ensure that supporting documentation is retained and organized. As
o Security Of Assets And Documents. Inventory on hand should be
protected by using physical controls such as surveillance cameras, security
guards and/or alarm systems. Likewise, data files, production programs, and
accounting records should each be protected from unauthorized access.
Passwords, backup copies, and physical controls (such as locked file
cabinets) can protect a company’s records.
o Independent Checks And Reconciliations. Companies should implement
procedures whereby independent checks and record reconciliations are
performed on a regular basis. These procedures are most effective when
o Cost/Benefit Considerations. Companies tend to implement internal
controls only if they view the benefits of the control as being greater than the
costs of carrying out the task. Indications of risky situations that may require
strong controls include: Frequent changes are made to sales prices or
multiple locations.
➢ Sales Return Processes. When customers return goods, the company must have
procedures in place for receiving returned goods, crediting the customer’s account,
and placing the items back in inventory. Returned goods are handled by the
receiving department, and they are typically accompanied by documentation from
the customer, such as a bill of lading and packing slip. The goods should be
➢ Controls And Risks In Sales Return Processes. The following specific controls
could be implemented over the sales returns process.
o Authorization Of Transactions. Certain designated individuals within the
company should be assigned the authority to develop sales return policies,
authorize sales returns and approve credit memos. Others within the
organization should recognize that authorization from these specific
individuals is necessary in order to process returns.
o Segregation Of Duties. An effective system of internal controls segregates
individuals with authorization duties from those responsible for recording
o Adequate Records And Documents. The reports documenting movement
of the goods and the related notification to the customer should be issued
sequentially, organized and retained. In addition, it is important to match
o Security Of Assets And Documents. Data files, production programs, and
accounts receivable records should be restricted to those who are specifically
authorized to approve or record the related transactions. Custody of the
related assets should be controlled and limited to those specifically
designated to handle the receipts or move the goods.
o Independent Checks And Reconciliations. Independent checks include
comparing the receiving log with the credit memo listing; verifying recorded
arrangements not directly controlled by the company.
➢ Cash Collection Processes. Most company-to-company sales are made on
account and a time period is given for the customer to pay. Therefore the timing of a
cash collection will be some number of days between the invoice date and collection
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➢ Controls And Risks In Cash Collection Processes. The following specific
controls could be implemented over the cash collection process.
o Authorization Of Transactions. Appropriate individuals should be assigned
responsibility for opening and closing the company’s bank accounts and
approving bank deposits or electronic transfers of funds. This ensures that
records are updated only for authorized transactions.
o Segregation Of Duties. Responsibility for the bank reconciliation should be
segregated from the custody of cash. Separate custody of cash from
general accounting.
o Adequate Records And Documents. Cash receipts listings should be
prepared on a daily basis so the daily activity of collections should be
reconciled to supporting documentation from the bank deposit. Bank deposit
o Security Of Assets And Documents. Access to cash collections should be
limited to those who are expressly authorized to handle cash. Cash
collections should be deposited in the bank in a timely manner to prevent the
risk of theft. Also, related computerized data files and programs must be
protected from unauthorized use.
o Independent Checks And Reconciliations. A physical count of cash needs
to be conducted from time-to-time in order to compare actual cash on hand
Presence of cash collections denominated in foreign currencies.
➢ IT Enablement Of Revenue And Cash Processes. In many companies,
sophisticated, highly integrated IT systems capture, record and process revenue and
cash collection events. E-commerce systems incorporate electronic processing of
sales-related activities and generally, e-commerce sales processes are transacted
using the Internet. Electronic Data Interchange (EDI) systems communicate sales
documents electronically using a standard business format. Point of Sale (POS)
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change the audit trail and the internal controls.
➢ E-Business Systems And The Risks And Controls. B2C sales, also known as e-
commerce, are familiar to most people. This is the method used by most retail or
service firms to sell directly to consumers using a Web site. B2B sales, on the other
hand, involve companies using Web sites to sell products and services to each
other. In both B2B and B2C sales, the advantages of e-commerce include:
1. Reduced cost through lower marketing, employee, and paper-work costs.
4. Increased potential market for products and services.
However, the Internet connected nature of e-commerce sales includes several risks
that a company must manage.
o Security And Confidentiality Risks. To protect the security of the IT system
and the confidentiality of the data, it is important to insure that those
accessing the Web site and conducting sales transactions are valid and
authorized users. User authentication is an important control for Internet
o Processing Integrity Risks. As customers enter data on a Web site to place
an order, they can make data entry errors. Controls should be used to
minimize these errors. These are programmed data input checks that should
o Availability Risks. The company should put controls in place to minimize
service disruptions that make the system unavailable. These controls can
include redundant systems, data, and networks, disaster recovery plans,
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➢ Electronic Data Interchange (EDI) Systems and The Risks And Controls. EDI is
the inter-company, computer-to-computer transfer of business documents in a
standard business format. EDI data transmissions have three parts: header and
trailer data, labeling interchanges, and data segments. Header data identifies the
file or transmission being sent, including the beginning and end of a particular
transaction data set. Trailer data also includes data about the file or transmission
security, availability, processing integrity, and confidentiality risks.
➢ Point Of Sale (POS) Systems And Risks And Controls. POS systems capture all
relevant sales data at the point of sale, the cash register, in real time and this allows
managers or the home office to have daily summaries of sales by cash register or by
product. Many companies adopt POS systems because they enabling faster and
more accurate check outs, thus enhancing customer satisfaction. POS systems
➢ Ethical Issues Related To Revenue Processes. Intentional revenue inflation is
unethical and many types of revenue inflation are illegal. If top management is
intent on its actions, it can often find ways to misstate revenue that have nothing to
do with the accuracy of the accounting system. Accurate financial reports can only
channel. Leaving sales open is a term that refers to moving a period cut-off date
forward to include sales that rightly occur in a future period. The system that records
deceptions.
➢ Corporate Governance Of Revenue Processes. The systems, processes, and
internal controls described in this chapter are part of the corporate governance
structure. When management designs and implements processes for sales, sales
returns, and cash collections, they assign responsibility for executing those functions
to various managers and employees. As management assigns and oversees these
revenue processes, it is carrying out the corporate governance function of proper