Chapter 12

The Revenue Cycle: Sales to Cash Collections

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12-1

Learning Objectives
Describe the basic business activities and related
i f
information
ti
processing
i
operations
ti
performed
f
d in
i the
th
revenue cycle.
Discuss the key decisions that need to be made in the
revenue cycle, and identify the information needed to
make those decisions.
Identify major threats in the revenue cycle, and evaluate
the adequacy of various control procedures for dealing
with those threats.

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The Revenue Cycle

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12-3

The Revenue Cycle

Provides goods and services to customers
Collects cash in payment for those sales
Primary
y Objective:
j
Provide the right product
In the right place
At the right time for the right price

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12-4

Revenue Cycle Activities

1. Sales order entry
2. Shipping
3. Billing
g
4. Cash collections

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General Revenue Cycle Threats

Inaccurate or invalid master data
Unauthorized disclosure of sensitive information
Loss or destruction of master data
Poor performance

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12-6

General Revenue Cycle Controls

Data processing integrity controls
Restriction of access to master data
Review of all changes
g to master data
Access controls
Encryption
Backup and disaster recovery procedures
Managerial reports

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12-7

Sales Order Entry

1 Take order
1.
2. Check and approve credit
3 Check
3.
Ch k inventory
i
availability
il bili

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12-8

Sales Order Threats

Incomplete/inaccurate orders
Invalid orders
Uncollectible accounts
Stockouts or excess inventory
Loss of customers

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12-9

Sales Order Entry Controls

Data entry edit controls (see
Ch t 10)
Chapter

Perpetual inventory control

system
t

Restriction of access to
master data

Use of bar-codes or RFID

Digital signatures or written

signatures
Credit limits
Specific authorization to
approve sales to new
customers or sales that
exceed a customers
customer s credit
limit

Training
Periodic physical counts of
inventory
Sales forecasts and activity
reports
CRM systems, self-help Web
sites,
it
and
d proper evaluation
l ti
of customer service ratings

Aging of accounts
receivable
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12-10

Shipping

1. Picking and packing the order

2. Shipping
pp g the order

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Shipping Threats
Picking the wrong items or the wrong quantity
Theft of inventory
Shipping
pp g errors ((delay
y or failure to ship,
p, wrong
gq
quantities,,
wrong items, wrong addresses, duplication)

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Shipping Controls
Bar-code and RFID
technology
Reconciliation of picking lists
to sales order details
Restriction of physical
access to inventory
Documentation of all
inventory transfers

Reconciliation of shipping
documents with sales orders,
orders
picking lists, and packing
slips
Use RFID systems to identify
delays
Data entry via bar-code
scanners and RFID

RFID and bar-code

technology

Data entry edit controls (if

shipping data entered on
terminals)

Periodic physical counts of

inventory and reconciliation
to recorded quantities

Configuration of ERP system

to prevent duplicate
shipments

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Billing

1. Invoicing
2 Updating accounts receivable
2.

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Billing Threats
Failure to bill
Billing errors
Posting
g errors in accounts receivable
Inaccurate or invalid credit memos

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Billing Controls
Separation of billing and
shipping functions
Periodic reconciliation of
invoices with sales orders,
picking tickets, and shipping
documents
Configuration of system to
automatically enter pricing data
Restriction of access to pricing
master data
Data entry edit controls
Reconciliation of shipping
documents (picking tickets, bills
of lading, and packing list) to
sales orders

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Data entry controls

Reconciliation of batch totals
Mailing of monthly statements to
customers
Reconciliation of subsidiary
accounts to general ledger
Segregation of duties of credit
memo authorization from both
sales order entry and customer
account maintenance
Configuration of system to block
credit memos unless there is
either corresponding
documentation of return of
damaged goods or specific
authorization
au
o a o by management
a age e

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Cash Collections Threats

1. Theft of cash
2. Cash flow problems

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Cash Collection Controls

Separation of cash handling function from accounts receivable and credit functions

Regular reconciliation of bank account with recorded amounts by someone

independent of cash collections procedures

Use of EFT, FEDI, and lockboxes to minimize handling of customer payments by

employees

Prompt, restrictive endorsement of all customer checks

Having two people open all mail likely to contain customer payments

Use of cash registers

Daily deposit of all cash receipts

g
, EFT,, or credit cards
Lockbox arrangements,

Discounts for prompt payment by customers

Cash flow budgets

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