Controls –Revenue Cycle

Control Activities Description

Transaction Credit Check Credit checking of prospective customers is a
Authorization credit department function. This department
ensures the proper application of the firm’s
credit policies
Return Policy Because credit approval is generally a credit
department function, that department authorizes
the processing of sales returns as well. An
approval determination is based on the nature
of the sale and the circumstances of the return.
Remittance List The cash prelist provides a means for verifying
that customer checks and remittance advices
match in amount

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 Segregation of Transaction The importance of this separation is clear when
Duties Authorization one considers the potential conflict in objectives
must be separate between the individual salesperson and the
from transaction organization. Often, compensation for sales
processing staff is based on their individual sales
performance. In such cases, sales staff have an
incentive to maximize sales volume and thus
may not adequately consider the
creditworthiness of prospective customers.
Asset custody A person with combined responsibility could
should be steal or lose inventory and adjust the inventory
separate from the records to conceal the event.
task of asset
record keeping.
The organization An individual with total record-keeping
should be responsibility, in collusion with someone with
structured so that asset custody, is in a position to perpetrate
the perpetration fraud.
of a fraud
requires collusion
between two or
more individuals.
Supervision Some firms have too few employees to achieve
an adequate separation of functions. These
firms must rely on supervision as a form of
compensating control.

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Controls
Accounting Prenumbered This permits the isolation and tracking of a
Records Documents. single event (among many thousands) through
the accounting system.
Special Journals. By grouping similar transactions together into
special journals, the system provides a concise
record of an entire class of events. For this
purpose, revenue cycle systems use the sales
journal and the cash receipts journal.
Subsidiary These subsidiary records provide links back to
Ledgers journal entries and to the source documents that
captured the events.
General Ledgers The general ledger control accounts are the
basis for financial statement preparation.

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Controls
Access Controls Access controls prevent and detect
unauthorized and illegal access to the firm’s
assets. The physical assets at risk in the
revenue cycle are inventories and cash. Limiting
access to these items includes:
● Warehouse security, such as fences,
alarms, and guards.
● Depositing cash daily in the bank.
● Using a safe or night deposit box for
cash.
● Locking cash drawers and safes in the
cash receipts department.

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 Controls

Independent The shipping function verifies that the goods

Verification sent from the warehouse are correct in type and
quantity. Before the goods are sent to the
customer, the stock release document and the
packing slip are reconciled.
The billing function reconciles the original sales
order with the shipping notice to ensure that
customers are billed for only the quantities
shipped.
Prior to posting to control accounts, the general
ledger function reconciles journal vouchers and
summary reports prepared independently in
different function areas

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 PURCHASES CYCLE

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Step 1 : Purchase Requisition
When inventories drop to a
predetermined reorder point, a
purchase requisition is prepared and
sent to the prepare
purchase order function to initiate the
purchase process.

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Step 1 : Purchase Requisition
A purchase requisition form should be
authorized by a designated member of
management

If approved, it will be forwarded to the

purchasing department

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Step 2 : Prepare purchase order
Next, a purchase order (PO) is prepared for
each vendor

• A copy of the PO is sent to the vendor.

• A copy is sent to the set up accounts payable
(AP) function
• A blind copy is sent to the receive goods
function, where it is held until the
inventories arrive.
• The last copy is filed in the open/closed
purchase order file.

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Step 3 : Receive Goods
Goods arriving from the vendor are
reconciled with the blind copy of the PO

A blind copy of purchase order contains

no quantity or price information about
the products being received.

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Step 3 : Receive goods
Upon completion of the physical count
and inspection, the receiving clerk
prepares a receiving report stating the
quantity and condition of the
inventories.

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Step 4 : Update Accounts Payable Records
At this point in the process, however,
the firm has not received the supplier’s
invoice containing the financial
information needed to record the
transaction. The firm will thus
defer recording (recognizing) the
liability until the invoice arrives.

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Step 4 : Update Accounts Payable Records
This common situation
creates a slight lag (a few days) in the
recording process, during which time
the firm’s liabilities are technically
understated.

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Step 4 : Update Accounts Payable Records
When the invoice arrives, the AP clerk
reconciles the financial information
with the receiving report and PO in the
pending file. This is called a three-way
match, which verifies that what was
ordered was received and is fairly
priced.

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Step 4 : Update Accounts Payable Records
Once the reconciliation is complete, the
transaction is recorded in the
purchases journal and posted to the
supplier’s account in the AP subsidiary
ledger.

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Step 5 : Post to general ledger

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Cash Disbursement Cycle

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Step 1 : Identify Liabilities Due
Begins in the AP department
by identifying items that have come
due. Each day, the AP function reviews
the open AP file (or vouchers payable
file) for such items and sends payment
approval in the form of a voucher
packet (the voucher and/or supporting
documents) to the cash disbursements
department
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Step 2 : Prepare Cash Disbursement
The cash disbursements clerk receives the
voucher packet and reviews the documents
for completeness and clerical accuracy. For
each disbursement, the clerk prepares a
check and records the check number, dollar
amount, voucher number, and other
pertinent data in the check register, which is
also called the cash disbursements Journal.

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Step 2 : Prepare Cash Disbursement
Depending on the organization’s materiality
threshold, the check may require
additional approval by the cash
disbursements department manager or
treasurer.

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Step 3 : Update AP Record
Update AP Record. Upon receipt of the
voucher packet, the AP clerk removes the
liability by debiting the AP subsidiary
account or by recording the check number
and payment date in the voucher register.
The voucher packet is filed in the closed
voucher file

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Step 4 : Post to General Ledger
The general ledger function receives the
journal voucher from cash disbursements
and the account summary from AP. The
voucher shows the total reductions in the
firm’s obligations and cash account as a
result of payments to suppliers. These
numbers are reconciled with the AP
summary, and the AP control and cash
accounts in the general ledger are updated
accordingly.
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 Control – Expenditure Cycle
Transaction Purchases The inventory control function continually
Authorization Subsystem monitors inventory levels. As inventory levels
drop to their predetermined reorder points,
inventory control formally authorizes
replenishment with a purchase requisition.
Cash The AP function authorizes cash disbursements
Disbursements via the cash disbursement voucher. To provide
Subsystem effective control over the flow of cash from the
firm, the cash disbursements function should
not write checks without this explicit
authorization

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Segregation of Segregation of Within the purchases subsystem, the primary
Duties Inventory Control physical asset is inventory. Inventory control
from the keeps the detailed records of the asset, while
Warehouse. the warehouse has custody.
Segregation of the An individual with the combined responsibilities
General Ledger of writing checks, posting to the cash account,
and Accounts and maintaining AP could perpetrate fraud
Payable from Cash against the firm. For instance, an individual with
Disbursements. such access could withdraw cash and then
adjust the cash account accordingly to hide the
transaction. Also, he or she could establish
fraudulent AP (to an associate in a nonexistent
vendor company) and then write checks to
discharge the phony obligations

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 Supervision In the expenditure cycle, the area that most
benefits from supervision is the receiving
department. Large quantities of valuable assets
flow through this area on their way to the
warehouse. Close supervision here reduces the
chances of two types of exposure: (1) failure to
properly inspect the assets and (2) the theft of
assets.
Accounting The control objective of accounting records is to
Records maintain an audit trail adequate for tracing a
transaction from its source document to the
financial statements.

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Access Controls Direct Access A firm must control access to physical assets
such as cash and inventory. These control
concerns are essentially the same as in the
revenue cycle. Direct access controls include
locks, alarms, and restricted access to areas
that contain inventories and cash.
Indirect Access A firm must limit access to documents that
control its physical assets. For example, an
individual with access to purchase requisitions,
purchase orders, and receiving reports has the
ingredients to construct a fraudulent purchase
transaction.

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Independent The AP function plays a vital role in the
Verification verification of the work others in this system
have done. Copies of key source documents
flow into this department for review and
comparison. Each document contains unique
facts about the purchase transaction, which the
AP clerk must reconcile before the firm
recognizes an obligation.
The general ledger function provides an
important independent verification in the
system. It receives journal vouchers and
summary reports from inventory control, AP,
and cash disbursements

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