Chapter 4

Accounts Receivable, Accounts

Payable & Cash
 The Revenue Cycle
The revenue cycle relates to the exchange of
goods and/or services with customers and the
collection of revenue generated by this
activity.
To design internal controls we need to
understand the flow of information in this
cycle and the characteristics of the financial
information needed by management.
The Revenue Cycle
 A Computerised Revenue Cycle

Technology can lead to Input typically comes

automation of human from a hard copy Processes store data in
tasks, increasing document and goes files or prepare data in
efficiency and through one or more the form of a report.
reducing paperwork processes.
 A Computerised Revenue Cycle
Internet Sales require no prior planning or
agreements.
However there are new risks for both the seller
and the buyer; hackers, viruses and
transaction fraud.
Some internal controls that can be implemented
to minimise this include passwords, message
encryption and firewalls
 Revenue Cycle Outputs
The main objective in processing sales revenue is to record the
earning of income and to achieve timely collection of it in order
to pay bills of the organisation. Must produce outputs to help
achieve this objective.
Monthly Reports
1. Customer billing statement.
2. Aging report.
3. Bad debts report.
4. Cash receipts forecast.
5. Customer listing.
6. Sales commission reports.
 Revenue Cycle Outputs
Performance Reports
1. Time analysis reports:
–Customer order to delivery.
–Invoicing to cash receipts.
2. Comparison analysis reports:
–Salesperson expenses to sales amounts.
–Bad debts to credit sales.
–Sales to advertising and promotion spending.
 The Internal Control Objectives
for the Revenue Cycle
The internal control objectives for the revenue
cycle are to ensure that information for the
period:
• is complete.
• is valid.
• is accurate.
• is safeguarded.
• can be used for reporting.
 Segregation of Duties

Segregation of duties and responsibilities is an integral

part of an internal control system. The fundamental
requirement is the separation of:

•Custodial responsibilities (responsible for assets).

•Record-keeping responsibility.
•Authorisation responsibility.
 Segregation of Duties
The following duties should be segregated:

• Segregation of custody and recordkeeping

• Segregation of authorisation and
recordkeeping
• Segregation of custodial duties and
authorisation
Internal Controls the for Revenue Cycle
Controls over records and documents
•Credit investigation and approval procedures
•Sequentially pre-numbered documents
•Authorisation procedures for bad debts
•Shipping documents, sales orders, customer orders
and sales invoices should be reconciled
•Accounts Receivable should have control and
subsidiary ledger
•Limited employee access to documents and records
Internal Controls the for Revenue Cycle

Segregation of Duties
• Credit authorisation function separate from
handling cash receipts, sales and billing
functions
• Specific authorisation for non-standard
transactions
• Formal procedures for assigning customer
credit limits
 Accounts Receivable Controls
Basic Controls

• Completeness – Record all transactions using prenumbered and

sequential documents and match them against each other.
• Safeguarding – Secure storage of debtor records. A/R staff should
not handle cash
• Accuracy – Invoices checked and sent quickly
• Validity – Approval of sales orders and credit given. Standard price
list, approval for returns, bad debt approval.
• Accountability – Staff accountable for reconciling control and
subsidiary ledgers and follow up of slow payers.
• Valuation – Monthly review of aged debtors reports and check on
adequacy of Allowance for Doubtful Debts
 Cash Receipts Subsystem
Basic Controls
• Completeness – All receipts should be journalised. Mail should
be entered on a prelist, cash counted and banked daily.
• Accuracy – Receipts classified accurately, cash register tapes
checked daily, reconcile cash counted to receipt summaries
daily, mail opened by 2 staff, check EFTs.
• Validity – All discounts need to be authorised.
• Safeguarding – Daily banking, cash held in safe.
• Accountability – Set procedures for staff to follow, bank
reconciliations done monthly.
• Valuation – Debtors balances need to reflect A/R receipts
Summary of the Internal Control System Revenue Cycle
 Mailed Cash Receipts
High inherent risk of mistakes or fraudulent activities

Internal Control Objectives for Mail

To ensure that items received in the mail are:
• safeguarded.
• accounted for accurately.
• treated promptly.
• recorded correctly.
 Mailed Cash Receipts
Internal Control Procedures for Mail

Segregation of Duties

Persons opening the mail should not have duties of:

• Banking.
• Preparation of cash receipts.
• Accounts receivable entry.
• Mail opened in presence of two persons.
– One a responsible officer.
– Mail duties rotated.
 Mailed Cash Receipts
Safeguarding assets
•Cheques received should be endorsed and immediately
stamped ‘not negotiable’ and ‘account payee only’

Proper documents and records

•Cheques should be listed to establish a control total. The name
of payer and amount remitted.
•Cheque list should be signed when handed to cashier and a
copy sent to accounts receivable with remittance advice.
Another copy should be sent to general accounting.
 Mailed Cash Receipts
Independent reconciliations and verifications

•Control list used to reconcile:

• Daily banking deposits.
• Credits to customer accounts.
•Bank totals should be independently verified.
Summary of Controls for Cash Receipts
 Internal Control Systems and the
Expenditure Cycle

The expenditure cycle relates to the purchase

and payment of goods and services and other
assets.
The Accounts Payable and cash payments
subsystem are major parts of the expenditure
cycle.
The Expenditure Cycle
 Computer-based systems in the expenditure
cycle
Many purchasing systems are now computerised.

Benefits of the automated system include:

•Greater control over inventory.

•Better record keeping of inventory levels.
•Enhanced purchasing department efficiency and effectiveness.
•Cash management is enhanced as the computer keeps tabs on
when invoices come due.
•Real-time data input improves controls by shortening lag time,
eliminating manual procedures and dimishing paperwork.
 Expenditure Cycle Outputs
Monthly Reports
•Financial statement information.
•Vendor checks.
•Cheque register.
•Discrepancy reports.
•Cash requirements forecast.
•Purchase analysis reports.
 Expenditure Cycle Outputs
Performance Reports
•Purchase discounts lost.
•Time analysis reports:
• Inventory request to order placed.
• Order placed to goods received.
• Goods received to invoice recorded.
 Internal Control Objectives for the Expenditure Cycle

The internal control objectives for the expenditure cycle

are to ensure information for the period :

•is complete – all transactions recorded

•is valid – transactions properly authorised, fair price paid
•is accurate – goods ordered are what is received and
reflected in invoice
•is safeguarded – creditor records restricted to authorised
staff
•can be used for reporting – accountability purposes
Segregation of Duties and Responsibilities

The following duties should be segregated:

•Segregation of custodial and record-keeping
duties
•Segregation of authorisation and record
keeping duties
•Segregation of custodial and authorisation
duties.
 Internal Control for the Expenditure Cycle

Adequate controls over records and documents

• Authorisation of purchase requisitions
• Sequentially pre-numbered documents
• Authorisation procedures for the payment of
invoices
• Purchase orders, delivery dockets and invoices
should be reconciled
• Accounts Payable should have a control and
subsidiary ledger
• Limited employee access to goods received
Internal Control for the Expenditure Cycle

Segregation of Duties
The duties that must be segregated are:

• Authorisation of purchase requisitions

• Recording of goods received
• Custody of stock
 Accounts Payable
Basic Controls
• Completeness – All purchase orders and receiving
reports should be sequentially prenumbered.
Invoices and receiving reports should be checked
against these order
• Accuracy – Invoices checked against order and
receiving report
• Validity – Purchase orders, received items and
invoices need to be approved, vouchers stamped
PAID immediately, all payments authorised.
 Accounts Payable
Basic Controls
• Safeguarding – Secure storage of A/P records. No
A/P staff to handle cash.
• Accountability – Staff need to be accountable for
the reconciliation of control and subsidiary
accounts, ensure creditors are paid within 30
days.
• Valuation – Monthly review of aged creditors
report
 Cash Payments Subsystem
Basic Controls
• Completeness – all payments should be journalised.
• Accuracy – Check cash payments daily, Classify payments
accurately, check payments against summaries
• Validity – all discounts authorised
• Safeguarding – daily banking, cash held in safe
• Accountability – set procedures to follow to make cash
payments, reconciliation done monthly
• Valuation – Creditor balance needs to reflect A/P payments