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CHAPTER 14 master data, Review of all changes

to master data
THE REVENUE CYCLE:
SALES TO CASH  Threat: Unauthorized disclosure
of sensitive information
COLLECTIONS
Control: Access controls
Encryption, Tokenization of
customer personal information

 Threat: Loss or destruction of

data
Control: Backup and disaster
recovery procedures

The revenue cycle is a recurring set of

 Threat: Poor performance
business activities and related
Control: Managerial Reports
information processing operations
associated with providing goods and
services to customers and collecting cash
SALES ORDER ENTRY
in payment for those sales.

The sales order entry process involves

REVENUE CYCLE BUSINESS
four steps:
ACTIVITIES
1. Taking the customer’s order
1. Sales order entry
2. Approving customer credit
2. Shipping
3. Checking inventory availability
3. Billing
4. Respond to customer inquiries
4. Cash collections

1. Taking Customer Orders

The revenue cycle’s primary objective is
to provide the right product in the right Normally, this order document is
place at the right time for the right electronically displayed on a computer
price. monitor screen.

General Threats and Controls Orders can be received in the store, by

General threats and controls throughout mail, by phone, over a website, or by a
the revenue cycle include: salesperson in the field.

 Threat: Inaccurate or invalid Websites provide another way to

master data automate sales order entry. Online order
information can be automatically routed
Control: Data processing integrity to the warehouse to generate picking and
control, Restriction of access to shipping instructions.

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2. Credit Approval The goal of CRM is to retain customers.

Most business-to-business sales are This is important because a general

made on credit. Credit sales should marketing rule of thumb is that it costs
be approved before they are at least five times as much to attract and
processed. make a sale to a new customer as it does
to make a repeat sale to an existing
Each customer will have a credit customer.
limit. Credit limit is the maximum
allowable account balance for each Transaction processing technology can
customer based on the customer’s also be used to improve customer
past credit history and ability to pay. relationships. For example, many
commercial POS systems (point of sale)
3. Checking Inventory Availability can link not only with the inventory file
but also with the customer master file.
The next step is to determine if
there is sufficient inventory This not only automatically updates
available to fill the order. accounts receivable balances but provides
an opportunity to print customized
When there are not sufficient items coupons and personal messages on each
on hand to fill the customer’s order, sales receipt, such as <Thank you.=
a back order is created.
Information technology can be used to
Once the item(s) become available, a automate responses to many customer
picking ticket is created. routine inquiries.

The picking ticket authorizes the Websites provide a cost-effective

inventory control function to release alternative to traditional toll-free
merchandise to the shipping telephone customer support, automating
department. that process with a list of frequently
asked questions (FAQs).
The accuracy of inventory records is
important because customers may Discussion boards can also be provided so
become justifiably upset when that customers can share information and
unexpected delays occur in filling useful tips with one another.
their orders.
Websites also enable customers to use
4. Responding to Customer Inquiries personal identification numbers (PINs)
to directly access their account
Customer service is so important information and to check on the status of
that many companies use special orders.
software packages, called Customer
Relationship Management (CRM)
systems, to support this vital
process.

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Sales Order Entry Threats and Threat: Stockouts or Excess Inventory

Controls
Sales could be lost due to stock outs.
The primary objectives of the sales Excess inventory means additional
order entry process are to accurately carrying costs and potential markdowns.
and efficiently process customer orders,
ensure that the company gets paid for all Control: Perpetual inventory control
credit sales and that all sales are system, Use bar codes or RFID, Training,
legitimate, and to minimize the loss of Periodic physical counts of inventory,
revenue arising from poor inventory Sales forecasts and activity reports
management.
Threat: Loss of Customers
Threat: Incomplete or Inaccurate
Customer Orders Control: CRM systems, self-help websites,
and proper evaluation of customer service
Incomplete or inaccurate information ratings
about the customer and their order
could prove embarrassing because most
likely you will need to call that customer Shipping
to get the correct information.
The primary objective of the shipping
Control: Data entry edit controls, function is to fill customer orders
Restriction of access to master data efficiently and accurately, and to
safeguard inventory.
Threat: Invalid Orders
Shipping consists of the following two
Sales orders must be properly steps:
authorized from the customer (this is
usually a signature if on a written 1. Picking and packing the order
contract, or can be digitized for online
orders authorizing the order). 2. Shipping the goods

Control: Digital signatures or written Pick and Pack the Order

signatures
The picking ticket printed by sales order
Threat: Uncollectible Accounts entry triggers the pick and pack process.

Another threat in sales order entry is Some of the investments companies have
the possibility of making sales that later made are in an automated warehouse
turn out to be uncollectible. system that includes computers, bar-code
scanners, conveyer belts, and
Control: Use credit limits communications technology.
Specific authorization to approve sales
to new customers or sales that exceed Radio-Frequency Identification (RFID)
customer's credit limit replaces the bar codes. The RFID tag
Management review of accounts eliminates the need to align items with
receivable aging report scanners; instead, the tags can be read as

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the inventory moves throughout the Threats to the shipping activity and
warehouse. controls:

Ship the Order Threat: Picking the Wrong Items or

Wrong Quantity
The shipping department compares the
physical count of inventory with the Customers want what they ordered and
quantities indicated on the picking ticket do not want a surprise and hassle of
and with the quantities indicated on the returning something they did not order.
copy of the sales order that was sent
directly to shipping from sales order Control: Bar-code and RFID technology
entry. Reconciliation of picking lists to sales
order details
The packing slip lists the quantity and
description of each item included in the Threat: Theft of Inventory
shipment.
This is the threat that an employee or
The bill of lading is a legal contract that customer could steal the merchandise.
defines responsibility for the goods in Also, inventory can be stolen in transit.
transit.
Control: Restrict physical access to
If the customer is to pay the shipping inventory, All inventory transfers should
charges, the copy of the bill of lading be documented, RFID and bar-code
may serve as a freight bill, to indicate technology, Periodic physical counts of
the amount the customer should pay to inventory and reconciliation to recorded
the carrier. quantities

One major decision that needs to be made Threat: Shipping Errors

when filling and shipping customer orders
concerns the choice of delivery method as Shipping the wrong items or quantities of
this can be a major cost factor. merchandise and shipping to the wrong
locations are serious errors because they
Another important decision concerns the can significantly reduce customer
location of distribution centers. satisfaction and thus future sales.

RFID systems can provide real-time Control: Reconciliation of shipping

information on shipping status and thus documents with sales orders, picking
provide additional value to customers. lists, and packing slips. Use RFID
systems to identify delays, Data entry
via bar-code scanners and RFID, Data
entry edit controls , Configuration of
ERP system to prevent duplicate
shipments

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Billing A disadvantage of the open-invoice

method is the added complexity required
to maintain information about the status
The primary objectives of the billing and
of each individual invoice for each
accounts receivable functions are to
customer.
ensure that customers are billed for all
sales, that invoices are accurate, and
Under cycle billing, monthly statements
that customer accounts are accurately
are prepared for subsets of customers
maintained.
at different times. For example, the
customer master file might be divided
Invoicing
into four parts, and each week monthly
statements would be prepared for one-
The document created in the billing
fourth of the customers.
process is the sales invoice, which
notifies customers of the amount to be
Exceptions: Account Adjustments and
paid and where to send payment.
Write-offs
Maintain Accounts Receivable
This involves either the return of
merchandise by customers for credit or
The accounts receivable function uses
the write-off of customers who do not
the information on the invoice to debit
pay their bill.
the customers’ accounts for credit
purchases and credit the customers’
After repeated attempts to collect
accounts when payment is received.
payment have failed, it may be necessary
to write-off a customer’s account. In
Under the open-invoice method,
such cases, the credit manager issues a
customers normally pay according to
credit memo to authorize the write-off.
each invoice.

Threats to the Billing activity and

The customer is asked to return a copy
controls:
of the invoice when mailing in their
payment. This return copy is referred to
Threat: Failure to Bill Customers
as the remittance advice.

Failure to bill customers for items

Under the balance-forward method,
shipped results in the loss of assets and
customers typically pay according to the
erroneous data about sales, inventory,
amount shown on a monthly statement.
and accounts receivable.
A monthly statement lists all
Control: Segregating the shipping and
transactions, including both sales and
billing functions
payments.
Periodic reconciliation of invoices with
sales orders, picking tickets, and shipping
One advantage of the open-invoice
documents
method is that it is conducive to offering
discounts for prompt payment, as
invoices are individually tracked and
aged.

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Threat: Billing Errors Cash Collection

Billing errors, such as pricing mistakes
The primary objective of the cash
and billing customers for items not
collections function is to safeguard
shipped or on back order, represent
customer remittances.
another potential threat.
The cashier handles customer
Controls:
remittances and deposits them in the
Configuration of system to automatically
bank.
enter pricing data
Restrict access to pricing master data
A remittance list provides the names and
Data entry edit controls
amounts of all customer remittances, and
Reconciling shipping documents to the
sends it to accounts receivable.
sales order
A lockbox is a postal address to which
Threat: Posting Errors in Accounts
customers send their remittances. The
Receivable
participating bank picks up the checks
from the post office box and deposits
Control: Data entry controls such as the
them to the company’s account.
following edit checks should be used to
ensure accuracy in updating customer
Under an electronic lockbox arrangement,
accounts:
the bank electronically sends the company
information about the customer account
1. Validity checks on the customer and
number and the amount remitted as soon
invoice numbers.
as it receives and scans those checks.

2. Closed-loop verification to ensure that

With electronic funds transfer (EFT),
the proper account is being credited.
customers send their remittances
electronically to the company’s bank and
3. A field check to ensure that only
thus eliminate the delay associated with
numeric values are entered for payment
the time the remittance is in the mail
amounts.
system.

Reconciliation of batch totals

EFT is usually accomplished through the
Mailing of monthly statements to
banking system’s Automated Clearing
customers
House (ACH) network.
Reconciliation of subsidiary accounts to
general ledger
EFT involves only the transfer of funds.
Although every bank can do EFT through
Threat: Inaccurate or Invalid Credit
the ACH system, not every bank
Memos
possesses the EDI capabilities necessary
to process the related remittance data.
Control: Segregation of duties of credit
Electronic data interchange (EDI) is the
memo authorization. Returns must have
use of computerized communication to
proper authorization from management
exchange business data electronically in
order to process transactions.

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Financial electronic data interchange Discounts for prompt payment by

(FEDI) integrates the exchange of EFT customers, Cash flow budgets
with the exchange of the remittance
data; electronic data interchange (EDI).

When dealing with customers who are not

FEDI capable, or with individual
consumers, companies can also speed the
collection process by accepting credit
cards or procurement cards

Threats to the cash collection activity

and controls:

Threat: Theft of Cash

Control:
The following segregation of duties
should be used to reduce this risk. The
person who handles (deposits) should not
also:

 post remittances to customer accounts

 create or authorize credit memos
 reconcile the bank account

In general, the handling of money and

checks within the organization should be
minimized.

The optimal methods are a bank lockbox

arrangement or the use of EFT or FEDI
for customer payments.

Immediately upon opening mail, create a

list of all customer payments received.

Prompt, restrictive endorsement of all

customer checks, 2 people open mail
Use cash registers, Daily deposits

Threat: Cash Flow Problems

Control: Lockbox can help increase the

posting of cash in a bank account. This is
helpful when the organization has many
transactions in a month.

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