KEY TERMS two general areas of responsibility are performed packing slip - document that travels with the

independently. goods to the customer to describe the contents of

access control list (ACL) - lists containing the order.
information that defines the access privileges for credit memo - document used to authorize the
all valid users of the resource. An access control customer to receive credit for the merchandise point-of-sale (POS) systems - revenue system in
list assigned to each resource controls access to returned. which no customer accounts receivable are
system resources such as directories, files, maintained and inventory is kept on the store’s
programs, and printers. customer order - document indicating the type and shelves, not in a separate warehouse.
quantity of merchandise being requested.
accounts receivable (AR) subsidiary ledger - Prenumbered documents - Documents (sales
account record that shows activity by detail for deposit slip - written notification accompanying a orders, shipping notices, remittance advices, and
each account type, and containing, at minimum: bank deposit that specifies and categorizes the so on) sequentially numbered by the printer that
customer name; customer address; current funds (such as checks, bills, and coins) being allow every transaction to be identified uniquely.
balance; available credit; transaction dates; deposited.
invoice numbers; and credits for payments, Remittance advice - Source document that
returns, and allowances. electronic data interchange (EDI) - intercompany contains key information required to service the
exchange of computer-processible business customer’s account.
approved credit memo - the credit manager information in standard format.
evaluates the circumstances of the return and Remittance list - Cash prelist, where all cash
makes a judgment to grant (or disapprove) credit. inventory subsidiary ledger - ledger with inventory received is logged.
records updated from the stock release copy by Return slip - Document recording the counting
approved sales order - contains sales order the inventory control system. and inspect of items returned, prepared by the
information for the sales manager to review once receiving department employee.
the sales order is approved. journal voucher - accounting journal entries into an
accounting system for the purposes of making Role - Formal technique for grouping users
back-order - records that stay on file until the corrections or adjustments to the accounting data. according to the system resources they require to
inventories arrive from the supplier. Back-ordered For control purposes, all JVs should be approved perform their assigned tasks.
items are shipped before new sales are by the appropriate designated authority.
processed. Role-based access control (RBAC) - is a
journal voucher file - compilation of all journal method of restricting network access based on the
bill of lading - formal contract between the seller vouchers posted to the general ledger. roles of individual users within an enterprise.
and the shipping company that transports the
goods to the customer. ledger copy - copy of the sales order received S.O. pending file - It is where the sales order
along with the customer sales invoice by the billing (invoice copy) is placed until receipt of the sipping
cash receipts journal - records that include details department clerk from the sales department. notice, which describes the products that were
of all cash receipts transactions, including cash actually shipped to the customer.
sales, miscellaneous cash receipts, and cash multilevel security - it employs programmed
received. techniques that permit simultaneous access to a Sales invoice - Document that formally depicts
controller’s - the cash receipts department central system by many users with different the charges to the customer.
typically reports to the treasurer, who has access privileges but prevent them from obtaining Sales journal - Document that formally depicts the
responsibility for financial assets. Accounting information fo which they lack authorization charges to the customer.
functions report to the controller. Normally these
Sales order - Source document that captures REVIEW QUESTIONS General ledger clerk receives an accounts
such vital information as the name and address of receivable summary from accounts receivable
the customer making the purchase; the customer’s 1. What document initiates the sales department and a journal voucher summary from
account number; the name, number, and process? Cash receipt department.
description of the product; the quantities and unit A customer order usually in the form of a purchase
price of the items sold; and other financial order initiates the sales process
information. 5. What are the three authorization controls
2. Distinguish between a packing slip, a The three authorization controls are the following:
Sales order (credit copy) - Copy of sales order shipping notice, and a bill of lading. 1. Credit check
sent by the receive-order task to the check-credit The packing slip is the document that travels with 2. Return policy
task. It is used to check the credit-worthiness of a the goods to the customer to describe the contents 3. Remittance list
customer. of the order. The shipping notice is another
document which is forwarded to the billing function 6. What are the three rules that ensure that
Sales order (invoice copy) - Copy of sales order as evidence of that the customer’s order was filled no single employee or department
to be reconciled with the shipping notice,. It and shipped and it conveys pertinent new facts processes a transaction in its entirety?
describes the products that were actually shipped such as the date of shipment, the items and a. Transaction authorization should be
to the customer. quantities actually shipped, the name of the separate from transaction
carrier, and freight charges. The bill of lading is a processing.
Shipping log - Specifies orders shipped during formal contract between the seller and the b. Asset custody should be separate
the period. shipping company(carrier) to transport the goods from the task of asset record
to the customer and it establishes legal ownership keeping.
Shipping notice - Document that informs the and responsibility for asset in transit. c. The organization should be
billing department that the customer’s order has structured so that the perpetration of
been filled and shipped. 3. What function does the receiving a fraud requires collusion between
department serve in the revenue cycle? two or more individuals.
Stock records - Formal accounting records for When items are returned, the receiving
controlling inventory assets. department employee counts, inspects, and 7. At which points in the revenue cycle are
prepares a return slip describing the items. The independent verification controls
Stock release - Document that identifies which goods, along with a copy of the return slip, go to necessary?
items of inventory must be located and picked the warehouse to be restocked. The employee Independent verification controls in the revenue
from the warehouse shelves. then sends the second copy of the return slip to cycle exist at the following points:
the sales function to prepare a credit memo. 1. The shipping function verifies that
Universal product code (UPC) - Label containing The sales return process begins in the receiving the goods sent from the
price information (and other data) that is attached department, where personnel receive, count, warehouse are correct in type and
to items purchased in a point-of-sale system. inspect for damage, and send returned products to quantity. Before the goods are
the warehouse. The receiving clerk prepares a sent to the customer, the stock
Verified stock release - After stock is picked, return slip, which is forwarded to the sales release document and the packing
verification of the order for accuracy and release of department for processing. slip are reconciled.
the goods. 2. The billing function reconciles the
4. The general ledger clerk receives original sales order with the
summary data from which department? shipping notice to ensure that
What form of summary data?
 customers are billed for only the An edit run is the first run; it detects most data decisions about existing customers that involve
quantities shipped. entry errors. Only "clean" data progresses to the ensuring only that the current transaction does not
3. Prior to posting to control sort run. The sort run sequences the transaction exceed the customer's credit limit may be dealt
accounts, the general ledger records according to its primary key field and with very quickly.
function reconciles journal possibly a secondary key field. Once the data is
vouchers and summary reports sorted, the update program posts the transactions 13. What is multilevel security?
prepared independently in to the appropriate corresponding records in the Multilevel security employs programmed
different function areas. The billing master file. During a sequential update, each techniques that permit simultaneous access to a
function summarizes the sales record is copied from the original master file to the central system by many users with different
journal, inventory control new master file regardless of whether the balance access privileges but prevents them from obtaining
summarizes the changes in the is affected information for which they lack authorization
inventory subsidiary ledger, the
cash receipts function summarizes 11. What are the key features of a POS 14. Why does billing receive a copy of the
the cash receipts journal, and system? sales order when the order is approved but
accounts receivable summarizes A point of sale system immediately does not bill until the goods are shipped?
the AR subsidiary ledger. records both cash and credit transactions and The billing department's receipt of the
inventory information. The sales journal, accounts sales order occurs in most instances before the
8. What is the purpose of physical controls? receivable, and inventory accounts may be goods are actually shipped; thus, the economic
Purpose of this section is to support the system updated in real-time, or a transaction file may be event is not complete. Some of the goods may not
concepts presented in the previous section with used to later update a master file. be available to ship; thus, the customer should not
models depicting people, organizational units, and be billed until the goods are shipped and the
physical documents and files. This helps you 12. How is a credit check in the advanced economic event is complete.
envision the segregation of duties and technology systems fundamentally different
independent verifications, which are essential to from a credit check in the basic technology 15. Why was EDI devised?
effective internal control regardless of the system? EDI technology was devised to expedite
technology in place. In addition, it highlights In the advanced technology system, the routine transactions between manufacturers and
inefficiencies intrinsic to manual systems, which system logic, not a human being, makes the wholesalers and between wholesalers and
gave rise to modern systems using improved decision to grant or deny credit based on the retailers. The customer’s computer is connected
technologies. customer's credit history contained in the credit directly to the seller’s computer via telephone
history file. If credit is denied, the sales clerk lines. When the customer’s computer detects the
9. How can we prevent inventory from being should not be able to force the transaction to need to order inventory, it automatically transmits
reordered automatically each time the continue. an order to the seller. The seller’s system receives
system detects a low inventory level? In the basic technology system, credit the order and processes it automatically. This
The on-order information will prevent items from checking of prospective customers is a function of system requires little or no human involvement.
being accidentally reordered and will assist the credit department, which has responsibility for
customer service clerks in advising customers as ensuring the proper application of the firm's credit 16. What assets are at greatest risk in a POS
to the status of inventory and expected due dates policies. The complexity of credit procedures will system?
for out-of-stock items. vary depending on the organization, its Inventory and cash. Customers have direct
relationship with the customer, and the materiality access to inventory in the POS system.
10. Distinguish between an edit run, a sort of the transaction. Credit approval for first-time
run, and an update run. customers may take time and involve consultation 17. In a manual system, after which event is the
with an outside credit bureau. In contrast, credit sales process should the customer be billed?
 Shipment of goods marks the completion of functions over two departments for the custody of receipt of the shipping notice and the stock release
the economic event and the point at which the the assets during two distinct phases of the documents, the billing department prepares the
customer should be billed. Upon receipt of the revenue cycle. The warehouse attendants have sales invoice, which is the customer's bill reflecting
shipping notice and stock release, the billing clerk custody over the finished goods until they receive charges for items shipped, which may be different
compiles the relevant facts about the transaction a stock release form from the sales department. from items ordered, taxes and freight, and any
(product prices, handling charges, freight, taxes, The warehouse clerks pick the inventory items discounts offered. The sales order department
and discount terms) and bills the customer. from the warehouse and send them to shipping should not prepare the bills because the
along with a copy of the stock release form. The salespeople may bill their favorite clients less than
18. What is bill of lading? shipping department is only able to ship goods that they should be billed. The salespeople place the
A bill of lading is a formal contract it receives from the warehouse personnel. Further, order, and thus start the wheels in motion for
between the seller and the shipping company that it must match the goods with a packing slip and inventory to be shipped. Further, the salespeople
transports the goods to the customer. It also shipping notice that originates from the sales should not be allowed to determine how much the
serves as a shipment receipt when the carrier department. Thus, warehouse personnel are not customers pay for their inventory, because they
delivers the goods at a predetermined destination. allowed to ship out any unauthorized inventory may be tempted to charge lower prices and
This document must accompany the shipped items because the shipping personnel would not receive kickbacks. The accounts receivable
products, no matter the form of transportation, and have the corresponding paperwork. The additional department receives the sales orders and posts
must be signed by an authorized representative paperwork required is considered a necessary them to the accounts receivable subsidiary ledger.
from the carrier, shipper, and receiver. cost for the added benefit of control over inventory. As remittance advices are received, they are
The warehouse personnel do not keep the posted to the customer's account in the accounts
19. What documents initiates the billing formal accounting records. The asset custodial receivable subsidiary ledger. The accounts
process? tasks must be kept separate from the formal receivable department should not be allowed to
The shipping notice is proof that the product record-keeping tasks. The inventory control keeps prepare the bills since this department has custody
has been shipped and is the trigger document that the formal accounting records of inventory stock over the accounts receivable assets. Accounts
initiates the billing process. items. receivable personnel record customer payments
and track unpaid bills by customers. If they were
20. Where in the cash receipts process does allowed to prepare the bills, they might not bill
supervision play an important role? 2. Distinguish between the sales order, certain customers and receive a kickback from the
Supervision plays an important role in the billing, and AR departments. Why can’t the customers for the free goods.
mail room where both the check (asset) and sales order or AR departments prepare the
remittance advice (accounting records) are in the bills?
hands of one person. Mail room fraud can result, The sales order department (included in the 3. Explain the purpose of having mail room
which involves stealing the check and destroying sales department in the text) is responsible for procedures.
the remittance advice to cover the theft. taking the customer order and placing it into a The checks received in payment for accounts
standard format. This department records receivable are a crucial asset for the firm. These
DISCUSSION QUESTIONS information such as the customer's name, checks must be protected from individuals who
address, account number, quantities and units of might try to deposit these checks into their own
1. Why do firms have separate departments each item, discounts, freight preferences, etc. The accounts. The process of having a member of the
for warehousing and shipping? What about sales order processing may, in some instances, mailroom personnel open the mail and record all
warehousing and inventory control? play a role in verifying or determining the promised checks received before they are routed to the
Doesn’t this just create more paperwork? shipping date. cashier or the accounts receivable department is
The separation of the warehouse and the The billing department receives a copy of the to ensure that the accounts receivable personnel
shipping department allows for segregation of sales order from the sales department. Upon
do not engage in such activities as lapping the in many ways like over evaluation of assets and
accounts receivable accounts. under evaluation of liabilities.
7. Why is access control over revenue cycle Credit policy implies that the terms at
documents just as important as the which credits are forwarded to the organization's
4. Explain how segregation of duties is physical control devices over cash and customer. Inconsistently applied credit policies
accomplished in an integrated data inventory? may result in an overstatement of accounts
processing environment. Access control to the billing and accounts receivable. Nonstandard or substandard
In this environment, segregation of duties is receivable records that are part of the revenue customers having long dues can be provided with
accomplished through multilevel security cycle is just as important as the physical control further credits, this would result in an
procedures. Multilevel security employs devices over cash and inventory because these overstatement of accounts receivable
programmed techniques that permit simultaneous records affect the collectability of an asset—
access to a central system by many users with accounts receivable—which should eventually be 10. Give three examples of access control in a
different access privileges but prevents them from converted into cash. If these records are not POS system.
obtaining information for which they lack adequately controlled, inventory may not be A. Assign each clerk to a separate cash
authorization. ultimately converted into the cash amount register for an entire shift. When the clerk
deserved by the firm. leaves the register to take a break, the
cash drawer should be locked to prevent
5. How could an employee embezzle funds by 8. How can reengineering of the sales order unauthorized access.
issuing an unauthorized sales credit memo processing subsystem be accomplished B. Magnetic tags are attached to
if the appropriate segregation of duties and using the Internet? merchandise, which will sound an alarm
authorization controls were not in place? In the past decade, the Internet has become when removed from the store.
An employee who has access to incoming an integral part of our everyday lives, its ability to C. Locked showcases are used to display
payments, either cash or check, as well as the quickly gather the data we need in a matter of jewelry and costly electronic equipment.
authorization to issue credit memos may pocket seconds vastly improve a company's margin of
the cash or check of a payment for goods error. With the Internet's ability to quickly process 11. Discuss the trade-off in choosing to update
received. This employee could then issue a credit and gather data, it would greatly improve sales the general ledger accounts in real time versus
memo to this person's account so that the order processing subsystem by automating much batch.
customer does not show a balance due. of the data processing and ensuring the margin In real-time processing, changes are
profit is high through lower rate of error. With the updated in real-time as and when such changes
6. What task can the AR department engage ability to quickly determine the inventory level, it occur; whereas, in batch processing changes are
in to verify that all customer’s checks have will reduce extra cost a company may incur due to grouped and each group is processed in a single
been appropriately deposited and backorder items and will prevent a company from batch.
recorded? over selling items causing customers to lose faith In choosing between real-time or batch
The company should periodically, perhaps in the company. update, the following points could be taken into
monthly, send an account summary to each consideration. If the basis is updating method, in
customer listing invoices and amounts paid by 9. What financial statement misrepresentations real-time processing changes are made at the time
check number and date. This form allows the may result from an inconsistently applied such changes occur while in batch processing,
customer to verify the accuracy of the records. If credit policy? Be specific. updates are accumulated and are processed in
any payments are not recorded, they will notify the Financial misinterpretations are made by batches. If the basis is staffing requirements, in
company of the discrepancy. These reports should showing the financial figures in such a way that the real-time processing it increases while batch
not be handled by the accounts receivable clerk or overall financial position of the company looks processing does not require the recruitment of
the cashier. healthier than what is in real life. This can be done additional staff.
 department stores, and other types of retail place, no individual in either the buying or selling
12. If an automated credit checking function organizations. Generally, only cash, checks, and company actually authorizes or approves a
denies a customer credit, should the sales bank credit card sales are valid. Unlike particular EDI transaction. In its purest form, the
clerk ever be authorized to override the manufacturing firms, the organization maintains no exchange is completely automated.
decision? If so when? customer accounts receivable. Unlike some EDI poses unique control problems for an
The sales clerk is not authorized to manufacturing firms, inventory is kept on the organization. One problem is ensuring that, in the
override the decision because within the revenue store's shelves, not in a separate warehouse. The absence of explicit authorization, only valid
cycle, the credit department is segregated from the customers personally pick the items they wish to transactions are processed. Another risk is that a
rest of the process so formal authorization of a buy and carry them to the checkout location, trading partner, or someone masquerading as a
transaction is an independent event. where the transaction begins. Shipping, packing, trading partner, will access the firm’s accounting
Often, compensation for sales staff is bills of lading, etc. are not relevant to POS records in a way that is unauthorized by the
based on their individual sales performance. In systems. trading partner agreement.
such cases, sales staff have an incentive to
maximize sales volume and thus may not 15. Is a POS system that uses bar coding and a 17. Discuss the two common methods of
adequately consider the creditworthiness of laser light scanner foolproof against achieving multilevel security in a system.
prospective customers. By acting in an inaccurate updates? Discuss. Two methods for achieving multilevel
independent capacity, the credit department may First, the checkout clerk scans the security are the access control list (ACL) and role-
objectively detect risky customers and disallow universal product code (UPC) label on the items based access control (RBAC). Through these
poor and irresponsible sales decisions. being purchased with a laser light scanner. The techniques, purchasing, receiving, AP, cash
scanner, which is the primary input device of the disbursement and general ledger are limited in
13. How can advanced technology transaction POS system, may be handheld or mounted on the their access based on the privileges assigned to
processing systems reduce fraud? checkout table. The POS system is connected them.
Advanced technology transaction online to the inventory file from which it retrieves
processing systems reduce fraud in such a way product price data and displays this on the clerk’s
that there is authorization of transactions. The terminal. The inventory quantity on hand is MULTIPLE CHOICE QUESTION
objective of this is to ensure that only valid reduced in real time to reflect the items sold. As 1. Which function or department records
transactions are being processed and thus items fall to minimum levels, they are automatically a sale in the sales journal?
reducing the occurrence of fraud. reordered. When all the UPCs are scanned, the C. sales department
system automatically calculates taxes, discounts, In accounting system, one of the special
14. What makes POS systems different from and the total for the transaction. journals is sales journal. In this, only sales
revenue cycles of manufacturing firms? made by a company on account are
In point-of-sale systems, the customer 16. How is EDI more than technology? What recorded. Credit sales of inventory and
literally has possession of the items purchased, unique control problems may it pose? merchandise are recorded in this journal.
thus the inventory is in hand. Typically, for EDI is more than just a technology. It
manufacturing firms, the order is placed and the represents a business arrangement between the 2. Which functions should be
good is shipped to the customer at some later time buyer and seller in which they agree, in advance, segregated?
period. Thus, updating inventory at the time of sale to the terms of their relationship. For example, B. Picking goods from the warehouse
is necessary in point-of-sale systems since the they agree to the selling price, the quantities to be shelves and updating the inventory
inventory is changing hands, while it is not sold, guaranteed delivery times, payment terms, subsidiary ledger
necessary in manufacturing firms until the goods and methods of handling disputes. These terms The function segregated is opening the
are actually shipped to the customer. Also, POS are specified in a trading partner agreement and mail and recording the cash receipts in the
systems are used extensively in grocery stores, are legally binding. Once the agreement is in journal. Segregation duties are very
 important to the internal control structure reconciliation of stock release document legal ownership and responsibility for
as it founds the faults in the system. Its with the packing slip. assets in transit.
main duties are approval, accounting and
asset custody. The above-mentioned 5. The bill of lading is prepared by 8. Which of the following sets of tasks
function is used in reconciling or C. Shipping clerk should not be separated?
accounting purpose. The shipping clerk packages to goods, E. All of the above tasks should be
The person who performs the above attaches the packing slip, completes the separated
function cannot make the deposit. In his shipping notice, and prepares a bill of As a part of independent verification
duties no person can perform the same lading. control, duties must be segregated
task. Different job assignments are between the employees to avoid fraud in
provided to different person according to 6. Which of the following is NOT an cash transactions.
shift wise. independent verification control?
D. The billing department reconciles 9. Which of the following is often called a
the shipping notice with the sales compensating control?
3. Which of the following is incompatible invoice to ensure that customers are A.Supervision
task? billed for only the quantities shipped. Implementing adequate segregation of
C. The AR clerk authorizes the write-off The cashier collects the cash receipts from duties requires that a firm employ a
of bad debts the customers and presents remittance sufficiently large number of employees.
Weak internal control structure: advices, to ensure that the amounts are Achieving adequate segregation of duties
Account receivable clerk authorizes the entered properly for reconciliation. As a often presents difficulties for small
write-off bad debts indicates the weak part of independent verification control, organizations. Obviously, it is impossible
internal control structure. The effective duties must be segregated between the to separate five incompatible tasks among
internal control structure is that all the employees to avoid fraud in cash three employees.
accounting records get matched when the transactions. In other words, cash Therefore, in small organizations or in
audit takes place. If there is no control on collections should be made by one functional areas that lack sufficient
the accounting records that means the employee and the remittances should be personnel, management must compensate
internal control structure is weak. Reduced made by another employee to avoid cash for the absence of segregation controls
records of transfers between warehouse have any falsification of information with close supervision. For this reason,
often results in the ineffective controls in In the present case, both the cash receipts supervision is often called a compensating
internal structure. and cash remittances are handled by a control.
single person only. It will lead to fraud by
4. Which control helps to ensure that the the employee and falsification of financial 10. Which document triggers the billing
inventory items shipped to the information. Therefore, it is not an function?
customer are the correct type and the independent verification control. A. Shipping notice
correct amount? The shipping notice provides proof that the
D. Reconcile stock release document 7. Which department defines terms for product has been shipped and is the
and packing slip shipped goods ownership? trigger document that initiates the billing
The effective control that helps ensuring a D. Bill of Lading process.
check of the inventory systems that The bill of lading is a formal contract
shipped to the customer are correct type between the seller and the shipping
and amount, a proper and effective company to transport the goods to the
customer. This ownership establishes