COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-
Western are trademarks used herein under license 1

 Tasks performed in the revenue cycle, regardless of whether manual or computerized
 Functional departments in the revenue cycle and the flow of revenue transactions through the organization
 Documents, journals, and accounts needed for audit trails, the maintenance of records, decision making, and financial reporting
 Risks associated with the revenue cycle and the controls that reduce these risks
 The operational and control implications of technology used to automate and reengineer the revenue cycle

Credit / Customer
Service
2
Sales Order
1
REVENUE CYCLE
(SUBSYSTEMS)
Customer
Purchase Order
Cash Receipts/
Collections
6
Shipping
3
Billing/ Accounts
Receivable
4/5

Revenue Cycle (Subsystem)
Databases
 Master files
 Customer master file
 Accounts Receivable master file
 Inventory master file
 Transaction Files
 Sales Order transaction file
 Open Sales Order transaction file
 Sales Invoice transaction file
 Cash Receipts transaction file
 Other Files
 Tax Details reference file
 Shipping and Price Data reference file
 Credit reference file
 Sales history file
 Cash Receipts history file
4

Manual Sales Order Processing
– Sales & Credit Departments
 Begins with customer placing order
 Sales department captures essential details on sales order form.
 Transaction is authorized by credit department; returned to Sales Dept.
 Sales information is released to:
 Billing
 Warehouse
 Shipping
See next slide for flowchart

6

Manual Sales Order Processing
- Warehouse
 Merchandise is picked from Warehouse and sent to
Shipping, with SO.
 Memo to Inventory Control.
 Other SO filed in Warehouse.
See next slide for flowchart
(yellow symbols)

8

Manual Sales Order
Processing - Shipping
 Shipping reconciles merchandise received from
Warehouse with sales information on packing slip.
 Merchandise, packing slip (PS), and bill of lading
(BOL) are prepared by Shipping and sent to
Customer.
 Copy of BOL and SO are filed in Shipping.
See next slide for flowchart
9

10

Manual Sales Order Processing
– Billing
 Shipping information is also sent to
Billing. Billing compiles and reconciles relevant facts and issues invoice to
Customer and updates sales journal.
See next slide for flowchart
(blue symbols)
11

12

Manual Sales Order Processing
– Accounts Receivable
 A/R records information in customer’s account in accounts receivable subsidiary ledger and files invoice.
See next slide for flowchart
(purple symbols)

14

Manual Sales Order Processing
– Inventory Control
 Inventory Control adjusts inventory subsidiary ledger and files Memo.
See next slide for flowchart
15

16

Manual Sales Order Processing
– General Ledger
(not flowcharted)
 Billing, A/R, and Inventory Control submits summary information to General
Ledger dept., which then reconciles data and posts to control accounts in G/L.
17

Manual Cash Receipts Processes
– Mail Room & Cash Receipts
 Customer checks and remittance advices are received in the Mail Room.
 A mail room clerk prepares a list of checks (Cash Prelist) and sends the prelist and the checks to Cash Receipts.
 The Remittance Advices are sent to A/R.
 Cash Receipts:
 verifies the accuracy and completeness of the checks
 updates the cash receipts journal
 prepares a deposit slip, which is sent to Bank with checks
 files Prelist by date
 prepares a journal voucher to send to G/L (not flowcharted)

19

Manual Cash Receipts Processes
– Accounts Receivable
 A/R posts from the remittance advices to the accounts receivable subsidiary ledger.
 Remittance advices are filed alphabetically.
 Periodically, a summary of the postings is sent to
G/L. (not flowcharted)
 G/L department: (not flowcharted)
 reconciles the journal voucher from Cash Receipts with the summaries from A/R
 updates the general ledger control accounts

21

22

 Computer Controls
 General
 Application
Physical controls are
GENERAL
 Physical Controls
 Access Control
 Accounting Records
 Authorization
 Independent
Verification
 Segregation of Duties
 Supervision
(compensating control)
23

Examples of Access Controls
(Revenue Cycle)
 Limit access to assets
 Within revenue cycle, assets to protect are cash and inventories; to records such as restrict access accounts receivable subsidiary ledger and cash journal .
Manual or CBIS
24

Examples of Accounting
Records (Revenue Cycle)
 With properly maintained audit trail, possible to track transactions through systems and find when & where errors were made:
 pre-numbered source documents (e.g., sales orders)
 special journals (Sales, Cash Receipts)
 subsidiary ledgers (A/R)
 general ledger
 files
Manual or CBIS
25

 Proper authorization of transactions
(documentation) should occur so that only valid
transactions get processed.
Watch for difference between General
Authorization and
Specific Authorization
 Examples of authorization in revenue cycle:
 sale is made on credit (authorization)
 cash refund is requested (authorization)
 posting a cash payment received to a customer’s account (cash pre-list)
Manual or CBIS
26

Examples of Independent
Verification (Revenue Cycle)
 Physical procedures & recordkeeping should be independently reviewed at various points in system to check for accuracy and completeness:
 Shipping verifies goods sent from Warehouse are correct in type and quantity
 Billing reconciles shipping notice with sales order
 General Ledger reconciles journal vouchers from Billing, Inventory Control, Cash Receipts, and Accounts Receivable
Manual or CBIS
27

1.
Transaction authorization should be separate from transaction processing.
2.
Asset custody should be separate from asset recordkeeping .
3.
The organization should be structured so that fraud requires collusion between two or more individuals.
Manual
28

Examples of Segregation of
Functions (Revenue Cycle)
 Sales Order Processing
 credit authorization separate from SO processing
 inventory control separate from warehouse
 accounts receivable sub-ledger separate from general ledger control account
 Cash Receipts Processing
 cash receipts separate from accounting records
 accounts receivable sub-ledger separate from general ledger
Manual
29

Examples of Supervision
(Revenue Cycle)
 Supervision of employees serves as deterrent to
dishonest acts particularly important in mailroom .
Manual or CBIS
30

Supervision in Revenue Cycle
 Supervision of employees serves as deterrent to dishonest acts particularly important in mailroom .
 Mailroom is first point-of-contact in organization for customer payments
Manual or CBIS
31

32

Characteristics of Automated
Revenue Cycle
 Authorizations and data access can be performed through computer screens.
 Reduced paper documents.
 Manual journals and ledgers are changed to electronic transaction and master files.
 Input is still frequently from hard copy documents and goes through one or more computerized processes.
 Processes store data in electronic files or prepare data in the form of a printed report.
33

 Shortens cash cycle of firm by reducing time between order date and billing date
 Fewer clerical errors, reducing incorrect items being shipped and bill discrepancies
 Reduces amount of expensive paper documents and storage costs
 Better inventory management - can lead to competitive advantage
34

Example of Reengineered Sales
Order/Invoice Processing in Revenue Cycle
 Manual procedures & physical documents replaced by interactive computer terminals .
 Real time input/output occurs, with some master files still being updated using batches.
 real-time entry of customer order, printout of stock release, packing slip and bill of lading ; update of credit file, inventory file, and open sales orders file
 batch printout of invoice , update of closed sales order (journal), accounts receivable and general ledger control account
35

 Mail room is frequent target for reengineering.
 Companies send customers preprinted envelopes and remittance advices.
 Upon receipt, preprinted envelopes are set aside and information on envelope is scanned – providing control procedure against theft.
 Machines are also available to open envelopes, scan remittance advices and checks, and separate checks.
36

 Point of sale systems are used extensively in retail establishments.
 Customers pick inventory from shelves and take to cashier .
 Clerk scans universal product code (UPC). POS system is connected to inventory file, where price and description are retrieved.
 Inventory levels are updated and reorder needs can immediately be detected .

 System computes amount due. Payment is either cash, check, debit or credit card in most cases.
 No accounts receivables
 If checks, debit or credit cards are used, on-line link to receive approval is necessary.
 At end of day or cashier’s shift, money and receipts in drawer are reconciled to internal cash register tape or printout from computer’s database.
 Cash over and under must be recorded

Author’s Example of Computerized POS

Reengineering Using Electronic
Data Interchange (EDI)
 EDI helps to expedite transactions.
 The customer’s computer:
 Determines inventory is needed
 Selects supplier with whom business has a formal business agreement
 Dials supplier’s computer and places order
 Exchange is completely automated.
 No human intervention or management

Wal-Mart
Application
Software
Purchases
System
Our Company
Sales Order
System
Application
Software
EDI
Translation
Software
Communications
Software
Wal-
Mart’s mailbox
EDI
Translation
Software
Direct Connection
Communications
Software
Other
Mailbox
VAN
Other
Mailbox
Our Company’s mailbox
Many
Transactions
Few
Transactions

 Typically, no formal business agreements
 Unlike EDI, where formal agreements exist
 Most orders require credit cards.
 Mainly done with e-mail systems, and thus some turnaround time is necessary
 “Intelligent agents” needed to eliminate this time lag.
 Security and control over data is big concern with Internet transactions.

 Access Control - magnetic records are vulnerable to both authorized/ unauthorized exposure and should be protected.
 Must limit access to data files
 Must limit access to computer programs
43

 Accounting Records - rest on reliability and security of magnetically stored data.
Accountant/auditor should be skeptical about accepting accuracy of printouts of journals and ledgers.
 Backup is concern for direct access files;
 system must ensure backup of all files is continuously kept because of “destructive backup” issues with direct access files *
* Destructive backup means newer files write over the older files.
44

 Authorization - in real-time systems, authorizations are automated: programmed decision rules must be closely monitored.
45

 Independent Verification – consolidating accounting tasks under one computer program can remove traditional independent verification controls. These controls help:
 perform batch control balancing after each computer run
 Produce reports and summaries for end users and management to review
46

 Segregation of Functions - some consolidation of tasks by computer; protect computer programs--coding, processing and maintenance should be separated (internally developed systems).
 Supervision - in POS systems, cash register’s internal tape or database is a type of supervision.
47

 Used by small firms & some large, decentralized firms
 Frequently, one (or few) individuals perform entire accounting function
 Most systems are divided into modules controlled by menu-driven program:
 general ledger
 inventory control
 payroll
 cash disbursements
 purchases and accounts payable
 cash receipts
 sales order/invoicing
48

 Access Control - access controls to data tend to be weak; consider encryption and/or disk locking devices to compensate
 Accounting Records - computer disk failures cause data losses; maintain periodic backups and off-site storage
 Segregation of Duties –
 tend to be inadequate
 should be compensated for with increased supervision , detailed management reports , frequent independent verification
49

50