Term
| accounts considered in the sales-receivables-cash receipts (SRC) cycle |
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Definition
| cash, trade receivables, other receivables, allowance for bad debts, sales, sales returns, and bed debt expense. |
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Term
| Why is understanding business cycles so important for auditors? |
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Definition
| Understanding how information and documents flow through a particular cycle enables an auditor to determine what controls are in place and whether they are effective in safeguarding assets and preventing or detecting and correcting errors and fraud. Auditors must obtain and document an understanding of IC sufficient for planning the audit. |
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Term
| management's responsibility for establishing controls over the SRC cycle are to ensure... |
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Definition
Proper acceptance of the customer order
Granting of credit approval in accordance with credit limits
Safeguarding of assets associate with the sale
Timely shipment of goods to customers
Billing for shipments at authorized prices
Accounting for and collection of receivables
Recording, safeguarding, and depositing intact of cash (checks) received. |
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Term
| separation of duties in the SRC cycle |
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Definition
| Separate authorization of transactions (specific for unusual credit approvals and general for most transactions), recording of transactions and custody of the assets associated with the transactions. |
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Term
| What if complete separation of duties is not possible according to a cost-benefit analysis? |
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Definition
| Compensating controls- including more supervision or owner involvement in the process- are used. |
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Term
| sales dept. responsibility |
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Definition
| prepares sales orders based on customer orders. |
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Term
| credit mgr. responsibility |
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Definition
| authorizes customer credit and initiates write-off of bad debts. Credit manager should report to CFO. |
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Term
| inventory warehouse responsibility |
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Definition
| maintains physical custody of assets. |
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Term
| shipping dept. responsiblity |
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Definition
| prepares shipping documents and ships products based on authorized sales orders. |
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Term
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Definition
| prepares customers invoices based on goods shipped. |
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Term
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Definition
| maintains the A/R subsidiary ledger. |
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Term
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Definition
| receives mail and prepares initial cash receipts records. |
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Term
| cash receipts responsibility |
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Definition
| safeguards and promptly deposits cash receipts. |
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Term
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Definition
| maintains the A/R control account and records sales. Daily summaries of sales are recorded in the sales journal. Totals of details from the sales journal are usu. posted monthly to the G/L. |
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Term
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Definition
| prepares receiving reports and handles all receipts of goods or materials, including sales returns. |
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Term
| document flow for sales-receivables flowchart |
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Definition
START
customer order
sales order by sales dept.
credit mgr. does credit check, authorizes order, and gives copies (6 copies) to sales dept. and customer.
Invoice and A/R copies sent to Billing awaiting notification of shipment.
A copy sent to Shipping pending arrival of goods to inventory warehouse.
A copy sent to inventory warehouse to authorize releasing goods to shipping.
When goods are sent to shipping, goods are matched to sales order and shipping documents are prepared.
Billing then pulls the matching invoice and A/R copies and the invoice is mailed to the customer.
Billing prepares a journal entry to be posted by G/L.
A/R copy sent to A/R subsidiary ledger dept.
Shipping copy sent to inventory control |
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Term
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Definition
copy 1- Inventory warehouse to send goods to shipping dept., then sent to inventory control at end of process
copy 2- sent to credit manager to authorize order
copy 3- sent to shipping pending arrival of goods from inventory warehouse
copy 4- invoice first sent to billing, then mailed to customer
copy 5- A/R copy; used for posting into A/R sub. ledger
copy 6- sent to customer |
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Term
| routing SO copy through credit manager (sales-receivables control activity) |
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Definition
| assures that goods are shipped only to customers who are likely to pay. |
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Term
| Routing the shipping copy through the Inventory Warehouse (sales-receivables control activity) |
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Definition
| helps assure that goods are safeguarded and released only upon proper approval of the order. |
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Term
| Matching of the packing slip copy held by Shipping (copies 3 and 1) (sales-receivables control activity) |
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Definition
| can assure that all goods released from the Inventory Warehouse are received by Shipping on a timely basis. |
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Term
| Matching of the copies held by the Billing department (sales-receivables control activity) |
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Definition
| assure that all goods shipping are invoiced to customers. |
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Term
| prenumbering of documents (sales-receivables control activity) |
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Definition
| permits detection of unrecorded or unauthorized transactions. For example, sales invoices are prenumbered and accounted for to ensure that all orders are billed. |
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Term
| periodic reconciliation of the A/R S/L (sales-receivables control activity) |
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Definition
| can assure that all invoices are recorded in customers' accounts. |
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Term
| document flow for cash receipts flowchart |
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Definition
START
Mail room receives all customer receipts, open the mail, separates the checks from the remittance advices, and prepares a daily listing of the checks received.
A copy of the daily remittance list is sent to the Controller.
Receipts are deposited daily by Cash Receipts. The validated (by the bank) deposit ticket is returned to the Controller. The Controller reconciles the validated deposit ticket ticket with the daily remittance list of cash received from the mail room.
A journal voucher (entry) prepared by Cash Receipts indicating the debit to cash and credit to A/R is sent to the G/L.
The remittance advices are sent to A/R for positing the reductions in A/R to the individual customers' accounts. |
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Term
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Definition
| part of or a copy of the sales invoice sent to a customer and intended to be returned with the payment. It contains the customer's name, invoice number and amount. |
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Term
| How many clerks should be present in the mail room during the opening and recording of the receipts? (cash receipts control activity) |
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Definition
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Term
| How are checks endorsed? (cash receipts control activity) |
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Definition
| Checks are endorsed For Deposit Only into Account Number XXXX immediately upon opening the mail. |
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Term
| How is cash deposited? (cash receipts control activity) |
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Definition
| All cash is deposited intact daily. This procedure assures that the cash received and recorded on the daily remittance list can be reconciled with the deposit ticket validated by the bank. |
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Term
| Periodic reconciliation of the A/R subsidiary ledger and the A/R control account (cash receipts control activity) |
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Definition
| establishes agreement of the total amounts posted, but not that amounts were posted to the correct S/Ls |
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Term
| monthly statements are sent to customers (cash receipts control activity) |
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Definition
| assure that failure to receive and/or record payments made by customers is detected. |
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Term
| lockbox system (cash receipts control activity) |
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Definition
| assures that cash receipts are not abstracted by mail clerks or other employees. This system provides for customer payments to be sent to a post office box and collected directly by the bank. |
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Term
| lapping (prevented by a lockbox system, as well as by requiring employee vacations) |
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Definition
when an employee with access to both the A/R subsidiary ledger and customer payments steals a portion of the receipts w/out recording them in the customer accounts.
To conceal the theft, subsequent receipts are posted to the accounts of customers whose payments were stolen. This process of using new receipts to a cover a recent theft must continue indefinitely to avoid detection. |
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Term
| Do cash sales cycles usually have adequate separation of duties? |
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Definition
| No. Cash sales cycles often lack the separation of duties necessary for the proper framework of control, as the sales clerk often authorizes and records the transaction, as well as has custody of the assets related to the sale. |
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Term
| compensating controls for cash sales cycle |
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Definition
Use of a cash register or sales terminal to record the sale. The terminal makes a permanent record of the event that the clerk cannot erase.
Assignment of one clerk to be responsible for sales recording and cash receipts during a work period. The cash drawer can be reconciled with the record of sales and accountability assigned to the clerk.
Increased supervision.
Customer audit of the transaction.
Bonding of employees responsible for handling cash. |
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Term
| key controls for sales returns and allowances |
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Definition
Approval by the sales department to return goods
Receipt of the returned goods by the receiving department and preparation of a receiving report
The separate approval of the credit memo related to a sales return or allowance, that is, approval by someone not in the sales department |
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Term
| key controls for the write-off of bad debts (which requires strong controls) |
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Definition
Initiation of the write-off by the credit manager and approval by the CFO or other officer. The credit manager will be evaluated, in part, on the amount of bad debts written off and will require significant evidence before initiating a write-off.
Maintenance of a separate accounting ledger for accounts written off. |
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Term
| technology considerations for controls |
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Definition
Computer processing typically replaces the activities of clerks performing recording functions, updating the inventory file to reflect goods sold, and recording customer receipts by posting the amounts to the A/R subsidiary file.
Periodic reconciliations of the A/R subsidiary file and G/Ls are usually replaced by daily reconciliations.
Sophisticated systems may replace the paper flow with computer control over authorization of the release of goods for packing and shipping.
The use of online systems expedites the response to customer orders.
Batching transactions is useful for processing large volumes of data, especially when the transactions are sorted sequentially. Batch processing is appropriate when an immediate response is not necessary. |
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Term
| technology considerations for information flow |
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Definition
| Paper flow is replaced by electronic transmissions, and manual files and ledgers are replaced by computer disk files. The accounting departments of Billing, Inventory Control, and A/R are replaced by the Computer Processing department. Routine credit decisions are replaced by a computer program. |
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Term
| document flow for sales-receivables computer system |
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Definition
The SO department receives a customer order (START) and records it into the order acceptance program on a preformatted sales entry screen. Edit checks are used to assure proper entry. The A/R master file is checked for current customer information and credit limits. Inventory levels are checked for availability from the inventory master file. The accepted order, along with prices determined from the inventory master file, is entered into the sales order master file, and an acknowledgment is printed and sent to the customer.
Information is passed to the inventory and shipping program that sends a release authorization to the Inventory Warehouse via a computer workstation. Inventory levels are formally updated upon release of the goods from the Inventory Warehouse. An electronic shipping authorization is sent to the Shipping department. The communication also generates a packing slip and shipping documents printed in the Shipping department.
Shipping provides the billing program with the information concerning the shipment. The billing program access demographic and price data from the SO file and prepares and prints the invoice. The A/R master file is also updated. |
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Term
| access controls (sales-receivables computer system controls) |
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Definition
| Access controls (passwords), device authorization tables for sales and shipping personnel, and access logs, are used to prevent improper use or manipulation of data files. |
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Term
| preformatted screens (sales-receivables computer system controls) |
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Definition
| used to avoid data entry errors. The SO department completes all info about SO, while Shipping department enters all information concerning a shipment. |
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Term
| field checks (sales-receivables computer system controls) |
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Definition
| used to test the characters in a field to verify that they are of an appropriate type for that field. |
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Term
| validity checks (sales-receivables computer system controls) |
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Definition
| used to test the characters in a field to verify that they are of an appropriate type for that field. |
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Term
| reasonableness tests (sales-receivables computer system controls) |
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Definition
| used to test inventory quantities and billing amounts. The inventory reasonableness tests can be employed in conjunction with a validity check. |
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Term
| inventory number tests (sales-receivables computer system controls) |
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Definition
| Thus, the inventory number can be tested against known inventory items in the inventory master file and a reasonable number determined for the reasonableness. |
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Term
| error listings (sales-receivables computer system controls) |
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Definition
| Error listings are compiled and evaluated. Errors are corrected and reprocessed. |
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Term
| sales-receivables computer flowchart |
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Definition
| may be used to envision sales processing for a firm using an Internet website. Likely changes include direct entry of the order by the customer, elimination of the SO department, and payment by credit card. Thus, A/R will not be maintained. Acknowledgment of the order acceptance would be immediately communicated to the customer via an email or other Internet response. However, shipping department procedures and controls would be largely unaltered. |
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Term
| additional e-commerce controls |
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Definition
Firewall between the customer and internally stored client data.
Passwords for authorized or preferred customers.
Encryption procedures for transmission of sensitive information. |
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