Chapter 9

Auditing the
Revenue
Cycle
Assignments: Deadline – February 16, 2014
Chapter 9
• Please answer the Review Questions or
Discussion Questions according to your
number.
• Note: Include the question when you submit
your assignment.
• Chapter 9
– Review Questions 1 to 18
– Discussion Questions 1 to 15 ( students nos. 34 to
41---choose any number)
 LEARNING OBJECTIVES
• Understand the operational tasks associated
with the revenue cycle under different levels
of technology.
• Understand audit objectives related to the
revenue cycle.
• Be familiar with revenue cycle control issues
related to alternative technologies.
 Outline:
Auditing the Revenue Cycle
Revenue Cycle Activities and Revenue Cycle Audit Objectives,
Technologies Controls, and Tests of Controls

• Batch Processing Using • Input Controls

Sequential Files—Manual • Process controls
Procedures • Output Controls
• Batch Processing Using
Sequential Files—Automated Substantive Tests of Revenue Cycle
Procedures Accounts
• Batch Cash Receipts System with
Direct Access Files • Revenue Cycle Risks and Audit
Concerns
• Real-Time Sales Order Entry and
Cash Receipts • Understanding Data
• Point-of-Sale (POS) Systems • Testing the Accuracy and
Completeness Assertions
• Daily Procedures
• Testing the Existence Assertion
• End-of-day Procedures
• Testing the Valuation/Allocation
Assertion
This chapter is divided into three main
sections:
• Alternative technologies used in both legacy and
modern systems.
– The focus is on the key operational tasks performed under
each technological environment.
• Revenue cycle audit objectives, controls, and tests of
controls
– that an auditor would perform to gather evidence needed
to limit the scope, timing, and extent of substantive tests.
• Revenue cycle substantive tests in relation to audit
objectives.
– Specific procedures based on ACL software are illustrated.
 Traditional Revenue Cycle
Sales Order Procedures Cash Receipts Procedures
• 1) Sales Department: Receive • 1) Mailroom: Open Mail and
Order
• 2) Credit Department: Check
Prepare Remittance Advice
Credit • 2) Cash Receipts Department:
• 3) Warehouse: Pick Goods Record and Deposit Checks
• 4) Shipping Department: Ship
Goods • 3) AR Department: Update
• 5)Billing Department: Bill AR
Customer • 4) GL Department: Update GL
• 6) Inventory Department:
Update Inventory Records • 5) Controller: Reconcile Cash
• 7) AR Department: Update AR Receipts and Deposits
• 8) GL Department: Post to GL
Horizontal View Sales Order Process
1. Customer places order.
2. Sales order department
requests credit
approval from credit
department.
3. Credit department
informs sales order
department of
disposition of credit
request.
4. Sales order
department
acknowledges order to
the customer (4a), and
notifies the warehouse
(4b), shipping (4c) and
B/AR/CR process (4d)
of the sales order.
5. . Warehouse sends
completed picking
ticket to shipping.
6. Shipping department
informs carrier (6a),
B/AR/CR process (6b),
the general ledger
process (6c), and the
sales order department
7
(6d) of the shipment.
 Revenue Cycle:
Sales Order Processing System
The sales order
procedure
described a credit
transaction that
resulted in the
establishment
of an account
receivable.

Payment on the
account is due at
some future date,
which the terms of
trade determine.
- Cash receipts
procedures apply
to this future
event.
 Revenue Cycle:
Sales Order Processing System
• Receive Order
– Receives a customer order indicating the type and quantity of merchandise desired.
• not in a standard format and may or may not be a physical document. Orders may arrive by mail, by telephone, or from a field
representative who visited the customer.
• If a business entity, the order is often a copy of the customer’s PO.
– transcribes customer order into a formal sales order
– a copy of sales order is placed in the customer open order file for future reference.
• updated each time the status of the order changes such as credit approval, on back-order, and shipment
• Check Credit
– Receives from receive order task the sales order (credit copy) for approval
– Returns the approved sales order which then triggers the continuation of the sales process by releasing sales order information
simultaneously to various tasks.
• the stock release, packing slip, shipping notice, and sales invoice, are simply special-purpose copies of the sales order.
• Pick Goods (Warehouse)
– Receives the stock release document (also called the picking ticket) from the receive order activity.
• identifies the items of inventory that must be located and picked from the warehouse shelves.
• provides formal authorization for warehouse personnel to release the specified items.
– the goods and verified stock release document are sent to the ship goods task.
– prepares a back-order record, which stays on file until the inventories arrive from the supplier
– adjusts the stock records to reflect the reduction in inventory.
• not the formal accounting records for controlling inventory assets.
• are used for warehouse management purposes only.
• Ship Goods
– receives the packing slip and shipping notice from the receive order function.
– packing slip will ultimately travel with the goods to the customer to describe the contents of the order.
– shipping notice will later be forwarded to the billing function as evidence that the customer’s order was filled and shipped.
 Revenue Cycle:
Sales Order Processing System
• Bill Customer
– receives the sales order (invoice copy) from the receive order task. This document is placed in an S.O.
pending file until receipt of the shipping notice, which describes the products that were actually shipped to
the customer.
• Billing before shipment encourages inaccurate record keeping and inefficient operations.
• Billing for goods not shipped causes confusion, damages relations with customers, and requires additional work to make
adjustments to the accounting records.
• To prevent such problems, the billing function awaits notification from shipping before it bills.
– Prepares sales invoice which is the customer’s bill, which formally depicts the charges to the customer
– Records the sale in the sales journal.
– Forwards the ledger copy of the sales order to the “update accounts receivable” task.
– Sends the stock release document to the update inventory records task.
– entries are summarized into a sales journal voucher, which is sent to the GL task for posting and control
• Update Inventory Records
– updates inventory subsidiary ledger accounts from information contained in the stock release document
• Update Accounts Receivable
– AR subsidiary ledger are updated from information the sales order (ledger copy) provides
• Post to General Ledger
– journal vouchers from the billing and inventory control tasks and
– an account summary from the AR function – is used to verify the accuracy of the journal vouchers from
billing
Horizontal View B/AR/CR
1. Shipping department
informs the accounts
receivable department
(billing section) of
shipment.
2. AR dept. (billing) sends
invoice (2a) to customer,
accounts receivable
department (cash
applications [2b]), and
general ledger process
(2c).
3. Customer makes
payment on account.
4. Cashier sends deposit to
bank (4a) and informs
accounts receivable
department (cash
applications [4b]) and
general ledger process
(4c) of payment.
5. Accounts receivable
(cash applications)
informs general ledger
process of payment.

11
 Revenue Cycle:
Cash Receipts Procedure
It involves:
-receiving and
securing the cash;
-depositing the
cash in the bank;
-matching the
payment with the
customer and
adjusting the
correct account;
-Properly
accounting for
and reconciling
the financial
details of the
transaction.
 Revenue Cycle:
Cash Receipts Procedure
• Open Mail and Prepare Remittance Advice
– A mail room employee opens envelopes containing customers’ payments and remittance advices.
– Mail room personnel route the checks and remittance advices to an administrative clerk who endorses the
checks “For Deposit Only” and reconciles the amount on each remittance advice with the corresponding
check.
– The clerk then records each check on a form called a remittance list (or cash prelist), where all cash
received is logged. In this example, the clerk prepares three copies of the remittance list.
• The original copy is sent with the checks to the record and deposit checks function.
• The second copy goes with the remittance advices to the update AR function.
• The third goes to a reconciliation task.
• Record and Deposit Checks
– A cash receipts employee verifies the accuracy and completeness of the checks against the prelist.
• Any checks possibly lost or misdirected between the mail room and this function are thus identified.
– After reconciling the prelist to the checks, the employee records the check in the cash receipts journal.
– All cash receipts transactions, including cash sales, miscellaneous cash receipts, and cash received on
account, are recorded in the cash receipts journal.
– the clerk prepares a bank deposit slip showing the amount of the day’s receipts and forwards this along
with the checks to the bank. Upon deposit of the funds,
– the bank teller validates the deposit slip and returns it to the company for reconciliation.
– At the end of the day, the cash receipts employee summarizes the journal entries and sends the following
journal voucher entry to the general ledger function.
 Revenue Cycle:
Cash Receipts Procedure
• Update Accounts Receivable
– The remittance advices are used to post to the customers’ accounts in the AR
subsidiary ledger.
– Periodically, the changes in account balances are summarized and forwarded
to the GL function.
• Update General Ledger
– Upon receipt of the journal voucher and the account summary, the GL
function reconciles the figures, posts to the cash and AR control accounts, and
files the journal voucher.
• Reconcile Cash Receipts and Deposits
– Periodically (weekly or monthly), a clerk from the controller’s office (or an
employee not involved with the cash receipts procedures) reconciles cash
receipts by comparing the following documents:
– (1) a copy of the prelist,
– (2) deposit slips received from the bank, and
– (3) related journal vouchers.
Remittance Advice
Remittance advices contain information
needed to service individual customers’
accounts.
-This includes payment date, account number,
amount paid, and customer check number.
-Only the portion above the perforated line is
the remittance advice, which the customer
removes and returns with the payment.

-In some systems, the lower portion of the

document is a customer statement that the
billing department sends out periodically.

-In other cases, this could be the original

customer invoice, which was described in the
sales order procedures.
 Remittance Advice
• The remittance advice is most apparent in firms that
process large volumes of cash receipts daily.
– For example, processing a check from John Smith with no
supporting details would require a time-consuming and costly
search through perhaps thousands of records to find the correct
John Smith.
• This task is greatly simplified when the customer provides
necessary account number and posting information.
• Because of the possibility of transcription errors and
omissions, however, sellers do not rely on their customers
to provide this information directly on their checks.
• Errors are avoided and operational efficiency is greatly
improved when using remittance advices.
 REVENUE CYCLE ACTIVITIES AND
TECHNOLOGIES
• This section examines alternative information
technologies used to support revenue cycle
activities.
– Batch Processing Using Sequential Files—Manual
Procedures
– Batch Processing Using Sequential Files—Automated
Procedures
– Batch Cash Receipts System with Direct Access Files
– Real-time Sales Order Entry & Cash Receipts
– Point-of-Sale (POS) Systems
 Traditional Revenue Cycle
Sales Order Procedures Cash Receipts Procedures
• 1) Sales Department: Receive • 1) Mailroom: Open Mail and
Order
• 2) Credit Department: Check
Prepare Remittance Advice
Credit • 2) Cash Receipts Department:
• 3) Warehouse: Pick Goods Record and Deposit Checks
• 4) Shipping Department: Ship
Goods • 3) AR Department: Update
• 5)Billing Department: Bill AR
Customer • 4) GL Department: Update GL
• 6) Inventory Department:
Update Inventory Records • 5) Controller: Reconcile Cash
• 7) AR Department: Update AR Receipts and Deposits
• 8) GL Department: Post to GL
Batch Processing Using Sequential Files:
Manual & Automated Procedures
Manual Procedures Symbols
Computer Processes Symbols
 Batch Processing Using Sequential Files:
Manual & Automated Procedures
• Figure 9.1 illustrates an automated sales order
system that uses batch processing and
sequential files.
• In this basic system,
– Manual procedures
• order taking, credit checking, warehousing, and
shipping are performed manually.
– Computer programs
• process the accounting records.
 Batch Processing Using Sequential Files:
Manual & Automated Procedures
Automated Process (Accounting
Manual Process Records)
• 1) Sales Department: order • Data Processing Department:
taking - Receive Order – Keypunch/Data Entry (Keystroke)
– Edit Run
• 2) Credit Department:
– Sort Run
credit checking - Check
– AR Update and Billing Run:
Credit
• 5. Billing Department: Bill
• 3) Warehouse: Customer
Warehousing - Pick Goods • 6. AR Department: Update AR
– 7. Sort and Inventory Update
• 4) Shipping Department: Runs: Inventory Department –
Shipping - Ship Goods Update Inventory Records
– 8. GL Update Run: GL
Department - Post to GL
NOTE: No separation of function in automated system
 Batch Processing Using Sequential Files:
Manual Procedures
• 1) Sales Department: order taking - Receive Order
– Receives customer order: customer’s PO
– Prepares sales order (customer, credit, file copies)
– Prepares stock release (warehouse copy)
– Prepares packing slip & shipping notice (shipping & file copy)
• 2) Credit Department: credit checking - Check Credit
– Approved sales order (sales copy)
• 3) Warehouse: Warehousing - Pick Goods
– From sales: stock release (shipping copy)
– Pick goods and send to shipping: goods with stock release
• 4) Shipping Department: Shipping - Ship Goods
– From sales: shipping notice (keystroke to data processing), packing slip (carrier copy)
– From warehouse: goods & stock release (own copy)
– Reconcile documents and goods
– Sign shipping notice (keystroke to data processing)
– Prepare bill of lading (carrier - 2 copies, own file copy)
 Batch Processing Using Sequential Files:
Automated Procedures
• Data Processing Department:
• Keypunch/Data Entry (Keystroke)
– From shipping: shipping notice
• Converts shipping notices to magnetic media to produce a transaction file of sales orders (by data processing clerk)
– Prepares sales orders transaction files
• Edit Run
– validates transactions by testing each record for the existence of clerical or logical errors.
• Typical tests include field checks, limit tests, range tests, and price times quantity extensions.
– Input: sales order file
– Output:
• error file (back to keypunch/data entry)
• edited file (go to sort program)
• Sort Run
– physically arranges the sales order transaction file sequentially by Account Number
– the same sequence as the AR master file
– Output: sorted SO file
• AR Update and Billing Run:
– 5. Billing Department: Bill Customer
– 6. AR Department: Update AR
– Output: New AR file, sales orders, journal voucher (GL copy), sales journal, customer’s copy (hardcopy for customer)
• 7. Sort and Inventory Update Runs: Inventory Department - Update Inventory Records
– Master file update program
• Output: new inventory file, journal voucher (GL copy)
– Sort journal vouchers
• Output: sorted journal vouchers
• 8. GL Update Run: GL Department - Post to GL (end of day procedure)
– Output: new GL file & management’s reports (hardcopy to management)
 Batch Processing Using Sequential Files:
Manual & Automated Procedures
Manual Process Computer Process
• 1) Sales Department: order taking - • Data Processing Department:
Receive Order – Keypunch/Data Entry (Keystroke)
– Receives customer order: customer’s PO • From shipping: shipping notice
– Converts shipping notices to magnetic media to produce a transaction file of
– Prepares sales order (customer, credit, file sales orders (by data processing clerk)
copies) • Prepares sales orders transaction files
– Prepares stock release (warehouse copy) – Edit Run
– Prepares packing slip & shipping notice • validates transactions by testing each record for the existence of clerical or
logical errors.
(shipping & file copy) – Typical tests include field checks, limit tests, range tests, and price times
• 2) Credit Department: credit checking - quantity extensions.
• Input: sales order file
Check Credit • Output:
– Approved sales order (sales copy) – error file (back to keypunch/data entry)
• 3) Warehouse: Warehousing - Pick Goods – edited file (go to sort program)
– Sort Run
– From sales: stock release (shipping copy) • physically arranges the sales order transaction file sequentially by Account
– Pick goods and send to shipping: goods Number
with stock release • the same sequence as the AR master file
• 4) Shipping Department: Shipping - Ship • Output: sorted SO file
Goods – AR Update and Billing Run:
• 5. Bill Customer
– From sales: shipping notice (keystroke to • 6. Update AR
data processing), packing slip (carrier copy) • Output: New AR file, sales orders, journal voucher (GL copy), sales journal,
– From warehouse: goods & stock release customer’s copy (hardcopy for customer)
(own copy) – 7. Sort and Inventory Update Runs: Update Inventory Records
– Reconcile documents and goods • Master file update program
– Output: new inventory file, journal voucher (GL copy)
– Sign shipping notice (keystroke to data
• Sort journal vouchers
processing) – Output: sorted journal vouchers
– Prepare bill of lading (carrier - 2 copies, – 8. GL Update Run: Post to GL (end of day procedure)
own file copy) • Output: new GL file & management’s reports (hardcopy to management)

NOTE: No separation of function in automated system

 Batch Sales Processing System:
Sequential Files—Manual Procedures
• Outline:
• Obtaining and Recording the Customers’ Orders
– customer order, sales order, customer open order file
• Approving Credit
– credit authorization
• Processing Shipping Orders
– stock release (also called the picking ticket), packing
slip and shipping notice, bill of lading
 Batch Sales Processing System:
Sequential Files—Manual Procedures
• 1) Obtaining and Recording the Customers’
Orders
• Customer order
– Triggers the sales process in the sales department
with the receipt of a customer order indicating the
type and quantity of merchandise being requested.
– is not in a standard format.
– may not be a physical document.
• Orders may arrive by mail, by telephone, or from a field
representative who visited the customer’s place of business.
– is usually a copy of the customer’s PO, when the
customer is also a business entity.
 Batch Sales Processing System:
Sequential Files—Manual Procedures
• 1) Obtaining and Recording the Customers’ Orders
• Sales order
– Is the standard format that can be processed by the selling entity’s system.
– captures such vital information as the name and address of the customer; the
customer’s account number; the name, number, and description of the items
sold; the quantities and unit prices of each item sold; and other financial
information such as taxes, discounts, and freight charges.
– would be numbered or color-coded to signify their purpose and distribution.
Copies that are used for more than one purpose, and that go to several
locations, sometimes have routing information printed on them.
– The hypothetical system in Figure 9.1 uses sales order copies for:
• credit authorizations
• packing slips
• stock release documents
• shipping notices.
• Computer system
– Performs the Customer invoicing and ledger posting.
 Batch Sales Processing System:
Sequential Files—Manual Procedures
• 1) Obtaining and Recording the Customers’
Orders
• Customer open order file (Sales Order)
– Is received from credit department and kept by
the sales clerk for future reference.
– Is used to facilitate customer inquiries to check
the status of their orders (the status at this
moment is not served or undelivered)
• Filling the order and getting the product to the
customer may take days or even weeks.
 Batch Sales Processing System:
Sequential Files—Manual Procedures
• 2) Approving Credit
• Transaction authorization: Credit Authorization
– which involves verifying the customer’s creditworthiness.
– The circumstances of the sale will determine the nature of the credit
check.
• For new customer, establish a line of credit.
• For old customer, ensure that the current sale does not exceed the limit.
– Is a credit authorization by the credit department by approving the
sales order.
• The returned approval (Sales Order Approved by Credit
Department)
– triggers the release of the other sales order copies simultaneously to
various departments.
– The credit copy is filed in the customer open order file until the
transaction is completed.
 Batch Sales Processing System:
Sequential Files—Manual Procedures
• 3) Processing Shipping Orders
• Warehouse procedures:
• Sales department
– sends the stock release (also called the picking ticket) copy of the
sales order to the warehouse.
• Stock release or picking ticket
– identifies the items of inventory that must be located and picked from
the warehouse shelves.
– After picking the stock, the clerk initials the stock release copy to
indicate that the order is complete and accurate.
– Any out-of-stock items are noted on the stock release copy.
• Warehouse (Transaction Authorization)
– Stock release also provides formal authorization for the warehouse
clerk to release custody of the specified assets.
• Automated procedure:
– Updating the inventory accounting records.
 Batch Sales Processing System:
Sequential Files—Manual Procedures
• 3) Processing Shipping Orders
• Shipping department
– receives the packing slip and shipping notice copies from the sales
department, before the arrival of the goods and the stock release
copy.
• Packing slip
– travels with the goods to the customer to describe the contents of the
order.
• Contents are either placed inside the shipping container or attached to the
outside in a special plastic pouch.
• Shipping notice
– informs the billing department that the customer’s order has been
filled and shipped.
– contains such pertinent facts as the date of shipment, items and
quantities shipped, the carrier, and freight charges.
– In some systems, the shipping notice is a separate document prepared
by the shipping clerk.
 Batch Sales Processing System:
Sequential Files—Manual Procedures
• 3) Processing Shipping Orders
• Shipping department
– One copy of the stock release travels with the goods to the shipping
department.
– packages the goods
– attaches the packing slip to the container,
– completes the shipping notice
– prepares a bill of lading.
• Carrier
– Shipping clerk transfers custody of the goods, the packing slip, and two copies
of the bill of lading to the carrier.
• Shipping clerk
– performs the following tasks:
• 1. Records the shipment in the shipping log.
• 2. Sends the stock release document and the shipping notice to the billing department as
proof of shipment.
• 3. Files one copy each of the bill of lading and the shipping document.
 Batch Sales Processing System:
Sequential Files—Manual Procedures
• 3) Processing Shipping Orders
• Shipping clerk
– Performs an independent Verification
• Upon receiving the goods from the warehouse, the
shipping clerk reconciles the physical items with the
stock release documents, the packing slip, and the
shipping notice to verify the correctness of the order.
• This control is important because it is the last
opportunity to detect errors before shipment.
– Prepares the bill of lading and shipping log.
 Batch Sales Processing System:
Sequential Files—Manual Procedures
• 3) Processing Shipping Orders
• Warehouse
– One copy is filed in the warehouse to provide a record of
the transaction.
– The clerk then adjusts the stock records to reflect the
reduction in inventory.
– Assigning the warehouse clerk asset custody and record-
keeping responsibility would violate internal control.
• Stock records
– are not the formal accounting records for these assets.
• Automated procedure
– Updating the inventory accounting records.
 Batch Sales Processing System:
Sequential Files—Manual Procedures
• Manual operations – Sales Processing System:
– order taking
– credit checking
– Warehousing
– Shipping
• Automated operation:
– data processing.
• Computer system described here
– is an example of a legacy system that employs the
sequential file structure for its accounting records.
– Both tapes and disks can be used as the physical storage
medium for such systems.
 Batch Sales Processing System:
Sequential Files—Automated Procedures
Both tapes and disks can be used as the physical storage medium for such systems.

Tapes Disks
• The use of tapes has declined • The use of disks has increased
considerably in recent years.
• For day-to-day operations
due to the constant decline in
– inefficient because they must be the cost of disk storage.
physically mounted on a tape drive
and then dismounted when the job • Sequential files can be stored
ends. on disks
– This approach is labor intensive
and expensive. – that are permanently
• For backup devices and storing connected (online) to the
archive file computer system and
– efficient and effective storage – require no human intervention.
medium for large system

The operational features of sequential files described earlier are the same for both
tape and disk media.
 Batch Sales Processing System:
Sequential Files—Automated Procedures
• Keypunch/Data Entry
• Shipping notices (from Shipping department)
– The process begins with the arrival of batches of shipping notices from
the shipping department.
– are copies of the sales orders that contain accurate information about
the number of units shipped and information about the carrier.
• Data processing (DP) clerk
– converts the shipping notices to magnetic media to produce a
transaction file of sales orders.
• Typically, this process is continual.
• Throughout the day, the DP clerks receive and convert batches of shipping
notices to magnetic media.
• The resulting transaction file will thus contain many separate batches of sales
orders.
• Batch control totals are calculated for each batch on the file.
 Batch Sales Processing System:
Sequential Files—Automated Procedures
• Edit Run
• Sales order system (Sales Journal file)
– Periodically, the batch sales order system is executed.
– Depending on the volume of transaction and computer resource constraints, the process may
take place only once or several times each day.
• Edit program
– is the first run in the batch process.
– validates transactions by testing each record for the existence of clerical or logical errors.
• Typical tests include field checks, limit tests, range tests, and price times quantity extensions.
• Detected errors
– are removed from the batch and copied to a separate error file.
– Later, these are corrected by an authorized person and resubmitted for processing with the
next day’s business.
• Edit program
– recalculates the batch control totals to reflect changes due to the removal of error records.
• The “clean” transaction file
– is then passed to the next run in the process.
 Batch Sales Processing System:
Sequential Files—Automated Procedures
• Sort Run
• Sales order file
– At this point, the sales order file is in no useful
sequence.
– To process a sequential transaction file, it must be
placed in the same sequence as the master file that it
is updating.
– Since the first master file to be updated in the systems
is AR, the sort run physically arranges the sales order
transaction file sequentially by Account Number,
which is one of its secondary keys.
 Batch Sales Processing System:
Sequential Files—Automated Procedures
• AR Update and Billing Run
• AR update program
– posts to AR by sequentially matching the Account Number key in each
sales order record with the corresponding record in the ARSUB master
file.
– New AR_SUB master file
• This procedure creates a new AR-SUB master file that incorporates all the
changes to the customer accounts that are affected by transaction records.
– Original AR-SUB master file
• The original AR-SUB master file remains complete and unchanged by the
process.
– The creation of a new and separate master file is a characteristic of
sequential file processing.
– Benefit: The automatic creation of a backup version of the file being
updated.
 Batch Sales Processing System:
Sequential Files—Automated Procedures
• AR Update and Billing Run
• Sales journal file
– Each sales transaction record processed is added to the sales journal
file.
• Journal voucher file
– At the end of the run, these are summarized and an entry is made to
the journal voucher file to reflect total sales and total increases to
accounts receivable.
• Billing run (Cycle billing of the customers)
– To spread the billing task evenly over the month, some firms employ
cycle billing of their customers.
– The update program searches the billing date field in the AR-SUB
master file for those customers to be billed on that day of the month
and prepares statements for the selected accounts.
– The statements are then mailed to the customer.
 Batch Sales Processing System:
Sequential Files—Automated Procedures
• Sort and Inventory Update Runs
• Sort program
– sorts the sales order file on the other secondary key—Inventory
Number.
• Inventory update program
– reduces the Quantity-on-Hand field in the affected inventory
records by the Quantity Sold field in each sales order record.
• A new inventory master file is created in the process.
– compares values of the Quantity-on-Hand and the Reorder Point
fields to identify inventory items that need to be replenished.
• This information is sent to the purchasing department.
• Journal voucher
– is prepared to reflect cost of goods sold and the reduction in
inventory.
 Batch Sales Processing System:
Sequential Files—Automated Procedures
• General Ledger Update Run
• End of day procedures
– Under the sequential file approach, the GL master file
is not updated after each batch of transactions.
– To do so would result in the recreation of the entire
GL every time a batch of transactions (such as sales
orders, cash receipts, purchases, and cash
disbursements) is processed.
– Firms using sequential files typically employ separate
end-of-day procedures to update the general ledger
accounts.
– This technique is depicted in Figure 9.1.
 Batch Sales Processing System:
Sequential Files—Automated Procedures
• General Ledger Update Run
• End of day procedures
• Journal voucher file
– At the end of the day, the general ledger system accesses the journal voucher
file.
– contains journal vouchers reflecting all of the day’s transactions processed by
the organization.
– The journal vouchers are sorted by general ledger account number and posted
to general ledger in a single run, and a new general ledger is created.
• Management reports
– The end-of-day procedures will also generate a number of management
reports.
– may include sales summaries, inventory status reports, transaction listings,
journal voucher listings, and budget and performance reports.
– play a key role in helping management monitor operations to ensure that
controls are in place and functioning properly.
 Batch Cash Receipts System:
Direct Access Files
• Cash receipts procedures are natural batch systems.
– Checks and remittance advices arrive from the postal
service in batches.
– The deposit of cash receipts in the bank usually happens as
a single event at the end of the business day.
• Because of these characteristics, many firms see no
significant benefit from investing in costly real-time
cash procedures.
• The technology employed in this example is used to
automate traditional procedures.
 Batch Cash Receipts System:
Direct Access Files
Manual Process Automated Process
• 1) Mailroom: Open Mail and Prepare Remittance
Advice • 5) Data Processing
– From customer: check (Cash Receipts copy) & remittance
advice (AR copy) Department: Update GL (end
–
–
Reconciles the check with remittance advice
Prepares remittance lists (Cash Receipts, AR, Controller
of the day)
•
copies)
2) Cash Receipts Department: Record and Deposit
– From Journal voucher & Cash
Checks receipts transaction file
– From mailroom: check (bank)& remittance list (file copy)
– Record cash receipt –(encode to terminal to create cash – Master file update run
journal voucher)
• 3) AR Department: Update AR • AR Sub (terminal)
– From mailroom: remittance list (file copy) & remittance
advice (file copy) • GL – Cash & AR control
– From data processing: transaction listing of AR update (terminal)
(file copy – for review or for reconciliation with
remittance list) • Cash receipts journal
– Update AR ledger (based on the remittance advices,
encode to terminal to create Cash transaction file or cash (terminal)
receipts journal)
• 4) Controller Office: Reconcile Cash Receipts
• Transaction listing of AR
(remittance slip) and Deposits (deposit slip) update (AR)
– From mailroom: remittance list
– From bank: deposit slip
• Management report
(management)
 Batch Cash Receipts System:
Direct Access Files
• 1) Mailroom
• Mailroom
– separates the checks and remittance advices.
– prepares a remittance list.
– sends the checks and a copy of the remittance list to the
cash receipts department.
– Send the remittance advices and a copy of the remittance
list to the AR department.
• Cash receipts department
– Receives the checks and a remittance list
• AR Department
– Receives the remittance advices and a remittance list
 Batch Cash Receipts System:
Direct Access Files
• 2) Cash Receipts Department
• Cash receipts clerk
– reconciles the checks and the remittance list.
– prepares the deposit slips.
– Via terminal, the clerk creates a journal voucher record of total cash
received.
– files the remittance list and one copy of the deposit slip.
– At the end of the day, the clerk deposits the cash in the bank.
• Cash Journal voucher
– Is the summary of the total cash received.
– Is created through encoding made by the cash receipts clerk to be
given to the GL.
• Computer system
– Is used to create a journal voucher.
 Batch Cash Receipts System:
Direct Access Files
• 3) AR Department
• AR clerk
– receives and reconciles the remittance advices and
remittance list.
– Via terminal, the clerk creates the cash receipts
transaction file based on the individual remittance advices.
– then files the remittance advices and the remittance list.
• Cash transaction file or cash receipts journal
– Is created in the system by encoding made by the AR clerk
based on the individual remittance advices.
• Computer System
– Is used to create the cash receipts transaction file.
 Batch Cash Receipts System:
Direct Access Files
• 4) Data Processing Department
• Computer System: Batch Program
– reconciles the journal voucher with the transaction file of cash
receipts
– updates the AR-SUB and the GL control accounts (AR-Control and
Cash).
• Done at the end of the day, the batch program
– produces a transaction listing that the AR clerk will reconcile against
the remittance list.
• Transaction listing
– Is produced by the computer system.
– Is given to the AR clerk to reconcile it against the remittance list.
• AR Clerk
– Receives the transaction listing.
– Reconciles the transaction listing against the remittance list.
 Sales Order Entry & Cash Receipts:
Real Time (Database Technology)
• depicts a modern real-time sales order and cash receipts system
that uses database technology.
• are used by organizations that extend credit to their customers.
• Modern systems design
– embraces reengineering to radically reshape business processes and
workflow.
– Objective of reengineering:
• to reduce business-processing costs by identifying and eliminating non-value-
added tasks.
• This process involves replacing some traditional procedures with procedures
that are innovative and sometimes very different from those that previously
existed.
• Reengineering: The identification and elimination of nonvalue-
added tasks by replacing traditional procedures with those that are
innovative and different.
 Sales Order Entry & Cash Receipts:
Real Time (Database Technology)
• Figure 9.5 illustrates a reengineered sales order
system.
• Interactive computer terminals now replace many
of the manual procedures and physical
documents.
• This system provides real-time input and output
with batch updating of only some of the master
files.
• Note: Only transaction files are real time
processing, master files are updated by batch.
 Traditional Revenue Cycle
Sales Order Procedures Cash Receipts Procedures
• 1) Receiving Department: • 1) Mailroom: Open Mail and
Receive Order
• 2) Credit Department: Check
Prepare Remittance Advice
Credit • 2) Cash Receipts Department:
• 3) Warehouse: Pick Goods Record and Deposit Checks
• 4) Shipping Department: Ship
Goods • 3) AR Department: Update
• 5)Billing Department: Bill AR
Customer • 4) GL Department: Update GL
• 6) Inventory Department:
Update Inventory Records • 5) Controller: Reconcile Cash
• 7) AR Department: Update AR Receipts and Deposits
• 8) GL Department: Post to GL
 Real Time:
Sales Order Entry & Cash Receipts
 Sales Order Entry & Cash Receipts:
Real Time (Database Technology)
Order Entry Procedures Cash Receipts Procedures
• Sales Procedures (Sales Clerk) • Manual:
– 1) Receive Order (manual) – 1) Open Mail and Prepare
– 2) Check Credit (automated) Remittance Advice
• Performed by AR department
• Warehouse Procedures – no mailroom
– 3. Pick Goods (manual) – 2) Record and Deposit Checks
• Shipping and Billing (Shipping • Perform by DP department –
Clerk) no cash receipts dept.
– 4. Ship Goods (manual) • Cash is deposited to the bank
– 5. Bill Customer (automated) • Automated:
• Automated: – 3) Update AR
– 6. Update Inventory Records – 4) Update GL
– 7. Update AR – 5) Reconcile Cash Receipts and
Deposits
– 8. Post to GL

Elimination of credit and billing departments. Elimination of mailroom & cash receipts
department.
 Sales Order Entry & Cash Receipts:
Real Time (Database Technology)
• Order Entry Procedures: Sales Procedures
• Sales clerk
– Processes the transactions as they occur, separately
– performs the following tasks in real-time mode, using a computer
terminal connected to an edit/inquiry program, :
• 1. Credit check is performed online by the system (customer credit file)
• 2. If approved, system checks availability of inventory (inventory master
file)
• 3. If available, system:
– Transmits electronic stock release to warehouse dept
– Transmits electronic packing slip to shipping dept
– Updates inventory file records for depletion
– Records sale in open sales order computer file
• Open sales order file (system)
– is a temporary holding file for sales orders until they are shipped and
can then be billed.
 Sales Order Entry & Cash Receipts:
Real Time (Database Technology)
• Order Entry Procedures: Warehouse Procedures
• Computer system
– The warehouse clerk’s terminal immediately produces
a hard copy printout of the electronically transmitted
stock release document.
• Clerk
 picks goods.
 sends them with a copy of stock release to shipping dept.
 Shipping department
 Receives the goods and stock release document.
 Sales Order Entry & Cash Receipts:
Real Time (Database Technology)
• Order Entry Procedures: Shipping and Billing
 Shipping procedures
 Shipping clerk
 Reconciles goods, stock release, packing slip produced on the
terminal.
 Selects carrier and prepare goods for shipment, along with
packing slip and Bill of Lading
 transmits a shipping notice containing invoice, date, and carrier
information to create a shipping log record of the event, using a
terminal
 Billing procedures (Computer System)
 Record sales invoice and shipment in IS
 Print invoice to be sent to customer
 Update shipping log and sale invoice files
 Delete shipment from open sales order file and added to
the sales invoice file.
 Sales Order Entry & Cash Receipts:
Real Time (Database Technology)
• Cash Receipts Procedures
• In open invoice systems, such as this, each invoice is billed and paid
individually.
• Cash from customers
– may be received and processed as just described.
– may be sent directly to a bank lock-box.
• Remittance advices (and credit memos to reflect returns and
allowances)
– are sent to the AR department where the clerk enters them into the
system via a terminal.
– Each remittance record is assigned a unique remittance number and is
added to the remittance file.
– Placing the remittance number and the current date in the respective
fields then closes the corresponding open invoice record.
 Features of Real-Time Processing
 Events Database
 Traditional accounting does not have to exist in per se (in
traditional form)
 General Ledger can be derived at any time from a compilation from
the events database
 Advantages
 Greatly shortens the cash cycle of the firm
 Can give a firm a competitive advantage (e.g., managing inventory
better)
 Real-time editing permits the identification of many kinds of errors
as they occur, greatly reducing the efficiency and effectiveness of
business processes
 Reduces the amount of paper documents
 Electronic audit trails are possible in real-time computer-based
systems

Hall, 3e 62
 Traditional Revenue Cycle
Sales Order Procedures Cash Receipts Procedures
• 1) Receiving Department: • 1) Mailroom: Open Mail and
Receive Order
• 2) Credit Department: Check
Prepare Remittance Advice
Credit • 2) Cash Receipts Department:
• 3) Warehouse: Pick Goods Record and Deposit Checks
• 4) Shipping Department: Ship
Goods • 3) AR Department: Update
• 5)Billing Department: Bill AR
Customer • 4) GL Department: Update GL
• 6) Inventory Department:
Update Inventory Records • 5) Controller: Reconcile Cash
• 7) AR Department: Update AR Receipts and Deposits
• 8) GL Department: Post to GL
Point-of-Sale (POS) Systems: Cash Transactions

• POS systems like the one shown in Figure 9.6

– are used extensively in
• grocery stores
• department stores
• other types of retail organizations.
• Only cash, checks, and bank credit card sales are
valid.
• The organization maintains:
– no customer AR
– inventory that is kept on the store’s shelves, not in a
separate warehouse.
Point-of-Sale (POS) Systems: Cash
Transactions
Automated real time
transactions:
1) Credit approval
2) Update inventory
and record sale
(sales journal)
3) Record cash
receipts (cash
receipts journal)
 POS Systems: Cash Transactions
• Daily Procedures
• End-of-day Procedures
 POS Systems: Cash Transactions
Daily Procedures
• Customers
– personally pick the items they wish to buy and
carry them to the checkout location, where the
transaction begins.
• Sales clerk
– scans the universal product code (UPC), or
– enters the transaction into the POS system via the
register’s keypad, and a record of the sale is added
to the sales journal in real time.
 POS Systems: Cash Transactions
Daily Procedures
• Sales
– Is recorded in the sales journal in real time.
• The record contains the following key data: date, time, terminal number, total
amount of sale, cash or credit card sale, cost of items sold, sales tax, and
discounts taken.
– Is also recorded on a two-part paper tape.
• One copy is given to the customer as a receipt; the other is secured internally
within the register and the clerk cannot access it.
• This internal tape is later used to close out the register when the clerk’s shift is
over.
• POS system
– is connected to an inventory file, where the price and description are
retrieved. The inventory levels are updated and reorder needs can
immediately be detected.
– computes the amount due. Payment is either cash, check, ATM or
credit card in most cases. No AR.
– If checks, ATM or credit cards are used, an on-line link to receive
approval is necessary.
 POS Systems: Cash Transactions
End-of-day Procedures
• Clerk and supervisor
– At the end of the clerk’s shift, a supervisor unlocks the
register and retrieves the internal tape.
– The supervisor and the clerk whose shift has ended take
the cash drawer to the cash room (treasury), where the
contents are reconciled against the internal tape.
• Cash drawer
– should contain cash and credit card vouchers equal to the
amount recorded on the tape.
– is removed and replaced with a new cash drawer
containing a known amount of start-up cash (float) for the
next clerk.
– Cash over and under must be recorded.
 POS Systems: Cash Transactions
End-of-day Procedures
• Money, receipts, and cash register tape
– The money and receipts in the drawer are reconciled to the internal
cash register tape or a printout form the computer’s database.
• Cash receipts clerk
– prepares a cash reconciliation form and gives one copy to the sales
clerk as a receipt for cash remitted.
– records cash received and cash short/over in the cash receipts journal.
– files the credit card vouchers .
– secures the cash in the safe for deposit in the bank at the end of the
day.
– prepares a three-part deposit slip for the total amount of the cash
received.
• One copy is filed and the other two accompany the cash to the bank.
• Because cash is involved, armed guards are often used to escort the funds to
the bank repository.
 POS Systems: Cash Transactions
End-of-day Procedures
• Finally, a batch program
– summarizes the sales and cash receipts journals
– prepares a journal voucher
– posts to the general ledger accounts as follows:

• The accounting entry above may vary among businesses.

– Some companies will treat credit card sales as cash.
– Others will maintain an AR until the credit card issuer transfers
the funds into their account.
 Point-of-Sale (POS) Systems
Risk Control
• Often, small discrepancies • Organizational policy will specify
how cash discrepancies are
will exist because of errors handled.
in making change for – Some organizations require sales
customers. clerks to cover all cash shortages
via payroll deductions.
– Other organizations establish a
materiality threshold.
• Cash shortages within the
threshold are recorded but not
deducted from the employee’s
pay.
• Excess shortages, however,
should be reviewed for possible
disciplinary action.
 Sales Order Entry & Cash Receipts:
Batch System (SO: Sequential & CR: Direct Access)

Sales Order Procedures Cash Receipts Procedures

• Manual: • Manual:
– 1) Sales Department: order taking - Receive
Order – 1) Mailroom: Open Mail and
– 2) Credit Department: credit checking -
Check Credit Prepare Remittance Advice
– 3) Warehouse: Warehousing - Pick Goods – 2) Cash Receipts Department:
– 4) Shipping Department: Shipping - Ship
Goods Record and Deposit Checks
• Automated: – 3) AR Department: Update AR
– Keypunch/Data Entry: from shipping notice
to sales order – 4) Controller Office: Reconcile
– Edit Run: Sales Order (validation)
– Sort Run: Sales Order (AR Master)
Cash Receipts (remittance list)
– 5) Billing Department: Billing Run - Bill and Deposits (deposit slip)
Customer
– 6) AR Department: AR update - Update AR • Automated:
– 7) Inventory Department: Sort and Inventory
Update Runs - Update Inventory Records – 5) Data Processing Department:
– 8) GL Department: GL Update Run - Post to GL Department - Update GL
GL (end of day procedure)
(end of day)
 Sales Order Entry & Cash Receipts:
Real Time (Database Technology)
Order Entry Procedures Cash Receipts Procedures
• Manual: • Manual:
– Sales Procedures (Sales Clerk) – Open Mail and Prepare
• Receive Order
Remittance Advice
• Check Credit
– Warehouse Procedures
• AR department
• Pick Goods – Record and Deposit Checks
– Shipping and Billing (Shipping • AR department
Clerk)
• Ship Goods
• Automated:
• Bill Customer – Update AR
• Automated: – Update GL
– Update Inventory Records – Reconcile Cash Receipts and
– Update AR Deposits
– Post to GL

Elimination of receiving and billing functions. Elimination of mailroom function.

•The compensating control for non-separation of function (Billing, Inventory, AR, GL)
under batch system is management report (from GL).
•Error file (electronic) is applicable only to batch system, which is once corrected
subject to resubmission procedure.
 Summary
• sales order system that employs batch processing
– Early legacy-type system
– data ownership in which files were designed exclusively for the use of a single user.
• cash receipts system that employs batch processing
– natural batch systems
– uses direct access files
• offers operational advantages over sequential file processing
• permits limited data sharing
– found in both modern systems and late-era legacy systems
• real-time sales order and cash receipts system
– uses database technology
– Modern systems design embraces reengineering
– real-time input and output with batch updating of only some of the master files.
• In credit authorization,
– Batch system – manual
– Real time system – automated
– POS - validation of credit card charges