SALES ORDER PROCEDURE

Receive order
●​ First task- transcribe it to a formal sales order
●​ After creating the sales order, a
copy of it is placed in the customer open order file for future reference
Check credit
●​ The receive-order task sends the sales order (credit copy) to the check-credit task for
approval. The returned approved sales order then triggers the continuation of the sales
process
Pick goods
●​ Stock release document (also called
the picking ticket) - This document identifies the items of inventory that must be located
and picked from the warehouse shelves.
●​ After picking the stock, the order is verified for accuracy and the goods and verified
stock release document are sent to the ship goods task.
●​ Back-order record - which stays on file until the inventories arrive from the supplier
●​ Stock records - reflect the reduction in inventory; used for warehouse management
purposes only.
Ship Goods
●​ Packing slip and Shipping notice - This document conveys pertinent new facts such
as the date of shipment, the items and quantities actually shipped, the name of the
carrier, and freight charges.
●​ Bill of lading - formal contract between the seller and the shipping company (carrier) to
transport the goods to the customer. It establishes legal ownership and responsibility for
assets in transit.
Bill customer
●​ Billing function awaits notification from shipping before it bills.
●​ 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.
●​ The completed sales invoice is the customer’s bill, which formally depicts the charges
to the customer.

Sales journal - is a special journal used for recording completed sales transactions.

Journal voucher - represents a general

journal entry and indicates the general ledger accounts affected.

Update inventory records

●​ It updates inventory subsidiary ledger accounts from information contained in the stock
release document.

Update Accounts Receivable

Post to general ledger

SALES RETURN PROCEDURE

●​ Prepare return slip
●​ Prepare credit memo
●​ Approved credit memo
●​ Updates sales journal
●​ Update Inventory and AR Records
●​ Update General Ledger

CASH RECEIPT PROCEDURE

●​ Open Mail and Prepare Remittance Advice
○​ Remittance advice - contain information needed to service individual customers’
accounts. This includes payment date, account number, amount paid, and
customer check number; form of a turnaround document
> Only the portion above the perforated line is the remittance advice, which the
customer removes
and returns with the payment.
○​ Remittance list (or cash prelist) - where all cash received is logged; they
prepare 3 copies of these

●​ Record and Deposit Checks

○​ After reconciling the prelist to the checks, the employee records the check 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.

●​ Updates account receivable

●​ Updates general ledger
●​ Reconcile Cash Receipts and Deposits
○​ reconciles cash receipts by comparing the following documents:
(1) a copy of the prelist
(2) deposit slips received from the bank
(3) related journal vouchers

REVENUE CYCLE CONTROLS

Transaction Authorization
●​ Credit Check
●​ Return Policy
○​ Remittance List (Cash Prelist) - provides a means for verifying that customer
checks and remittance advices match in amount.

Segregation of duties
 1.​ Transaction authorization should be separate from transaction processing.
2.​ Asset custody should be separate from the task of asset record keeping.
3.​ The organization should be structured so that the perpetration 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.

Accounting Records
●​ Prenumbered Documents - are sequentially numbered by the printer and allow every
transaction to be identified uniquely.
●​ Special Journals - By grouping similar transactions together into special journals, the
system provides a concise record of an entire class of events.
●​ Subsidiary Ledgers - Two subsidiary ledgers are used for capturing transaction event
details in the revenue cycle: the inventory and AR subsidiary ledgers.
●​ General ledger
●​ Files
○​ Open sales order file shows the status of customer orders.
○​ Shipping log specifies orders shipped during the period.
○​ Credit records file provides customer credit data.
○​ Sales order pending file contains open orders not yet shipped or billed.
○​ Back-order file contains customer orders for out-of-stock items.
○​ Journal voucher file is a compilation of all journal vouchers posted to the
general ledger.

Access control
●​ prevent and detect unauthorized and illegal access to the firm’s assets.

Independent verification
●​ verify the accuracy and completeness of tasks that other functions in the process
perform.

PHYSICAL SYSTEM
Manual System:
SALES ORDER PROCESSING
●​ Sales Department
●​ Credit Department Approval
●​ Warehouse Procedure
●​ The Shipping Department
●​ Billing Department
○​ Shipping notice - is proof that the product has been shipped and is the trigger
document that initiates the billing process.
 ●​ Ledger Department

SALES RETURN PROCEDURE

●​ Receiving Department
○​ The receiving clerk prepares a return slip, which is forwarded to the sales
department for processing.
●​ Sales Department
●​ Processing the Credit Memo

CASH RECEIPT PROCEDURE

●​ Mail Room
●​ Cash Receipt
●​ Accounts Receivable
●​ General Ledger Department

COMPUTER-BASED ACCOUNTING SYSTEM

Automation - involves using technology to improve the efficiency and effectiveness of a task

Re-engineering - improve operational performance and reduce costs by identifying and

eliminating nonvalue-added tasks.

●​ Sales Department
●​ Credit Department Approval
●​ Shipping Department

Keystroke - converts the hard-copy shipping notices to digital form to produce a transaction file
of sales orders.

Edit run - validates all transaction records in the batch by performing clerical and logical tests
on the data.

Transaction Processing Procedures

●​ Sales Procedures
●​ Warehouse Procedure
●​ Shipping Department

Re-engineered Cash Receipt Procedure

●​ POS System (Point of Sale)
○​ Universal Product Code (UPC) - label on the items being purchased with a laser
light scanner.
○​ real time
Re-engineering using EDI (Electronic Data Interchange)
●​ The customer’s computer is connected directly to the seller’s computer via telephone
lines.
●​ When the customer’s computer detects the need to order inventory, it automatically
transmits an order to the seller.

Re-engineering using the Internet

●​ By entering the seller’s home page address into the Internet communication program
from a personal computer (PC), a potential customer can access the seller’s product list,
scan the product line, and place an order.

Control Considerations for Computer-Based Systems

Authorization
●​ concerned about the correctness of the computer-programmed decision rules and the
quality of the data used in this decision.
●​ In POS systems, the authorization process involves validating credit card charges and
establishing that the customer is the valid user of the card.
Segregation of Duties
●​ Tasks that would need to be segregated in manual systems are often consolidated within
computer programs.
Supervision
●​ Customers have direct access to inventory in the POS system, and the
crime of shoplifting is of great concern to management. Surveillance cameras and shop
floor security personnel can reduce the risk.
Access Control
●​ Without physical source documents for backup, the destruction of computer files can
leave a firm with inadequate accounting record.
Accounting records
●​ Digital Journals and Ledgers - The reliability of hard-copy documents for auditing rests
directly on the quality of the controls that protect them from unauthorized manipulation.
●​ File backup - The data processing department should perform separate file-backup
procedures.
Independent Verification
●​ By performing batch control balancing after each run and by producing management
reports and summaries for end users to review.

PC Control Issues
Segregation of duties
●​ A single employee may be responsible for entering all transaction data.
Access controls
●​ PC systems generally provide inadequate control over access to data files.
Accounting Records
●​ Data losses that threaten accounting records and audit trails plague the PC
environment.
CHAPTER 5: The Expenditure Cycle Part I: Purchases and Cash Disbursements Procedures

Purchases Processing Procedure

●​ Monitor Inventory Records
○​ 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.
●​ Prepare purchase order
○​ Purchase order (PO) - is prepared for each vendor; copy is sent to the set up
accounts payable (AP)
●​ Received goods
○​ Upon completion of the physical count and inspection, the receiving clerk
prepares
a receiving report.
●​ Update inventory records
○​ Standard cost system - carry their inventories at a predetermined standard
value regardless of the price actually paid to the vendor.

Voucher Payable System

●​ Cash disbursement voucher
○​ Each voucher is recorded in the voucher register.

●​ Post to General Ledger

Cash Disbursement System

●​ Identify Liabilities Due
○​ sends payment approval in the form of a voucher packet (the voucher and/or
supporting documents) to the cash disbursements
department.
●​ Prepare Cash Disbursement
○​ Check register - also called the cash disbursements journal

●​ Update AP record
○​ The voucher packet is filed in the closed voucher file, and an account summary
is prepared and sent to the general ledger function.

●​ Post to General Ledger

EXPENDITURE CYCLE CONTROL

Transaction Authorization
●​ Purchases Subsystem
○​ As inventory levels drop to their predetermined reorder points, inventory control
 formally authorizes replenishment with a purchase requisition.
●​ Cash Disbursement Subsystem
○​ cash disbursements function should not write checks without this explicit
authorization.
Segregation of duties
●​ Segregation of Inventory Control from the Warehouse
●​ Segregation of the General Ledger and Accounts Payable from Cash Disbursements
Supervision
●​ Two types of exposure:
○​ Inspection of Assets
○​ Theft of Assets
●​ Packing slip - containing quantity information that could be used to circumvent the
inspection process often accompanies incoming goods.
Accounting records
●​ The control objective of accounting records is to maintain an audit trail adequate for
tracing a transaction from its source document to the financial statements.
Access Control
●​ Direct Access - 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.
Independent Verification