Chapter
8-1

Chapter
8-2
Accounting Information Systems, 1 st Edition

Study Objectives
1.
An overview of revenue processes within an organization
2.
Sales processes and the risks and controls in sales processes
3.
Sales return processes and the risks and controls in sales return processes
4.
Cash collection processes and the risks and controls in cash collection processes
5.
An overview of IT systems of revenue and cash collection that enhance the efficiency of revenue processes
6.
E-business systems and the related risks and controls
7.
Electronic data interchange (EDI) systems and the related risks and controls
8.
Point of sale (POS) systems and the related risks and controls
9.
Ethical issues related to revenue processes
10.
Corporate governance of revenue processes
Chapter
8-3

Introduction to Revenue Processes
Companies sell products and/or services.
Examples:
Retailers :
 Record the sale,
 collect cash,
 update inventory status all at the time of the sale.
Manufacturers :
 Sell product to other companies.
 Deliver goods and bill customer at a later date.
 Collect payment.
Chapter
8-4
SO 1 An overview of revenue processes within an organization

Introduction to Revenue Processes
Systems and processes must be in place to capture, record, summarize, and report sales transactions.
Processes include:
Polices and procedures employees follow in completing the sale.
Capturing customer data and sales quantities.
Routing sales documents to the right departments.
The Accounting System uses this flow of sales documents to various departments to record, summarize, and report the results of the sales transactions.
Chapter
8-5
SO 1 An overview of revenue processes within an organization

Chapter
8-6
Introduction to Revenue
Processes
Exhibit 8-1
Revenue Processes within the Overall System
SO 1 An overview of revenue processes within an organization

Introduction to Revenue Processes
Business processes common in company-to-company sales are:
1. Collect order data from customer.
2. Deliver goods.
3. Record receivable and bill customer.
4. Handle product returns.
5. Collect the cash.
6. Update records, such as
 accounts receivable,
 cash,
 inventory,
 revenue, and
 cost of goods sold.
Chapter
8-7
SO 1 An overview of revenue processes within an organization

Sales Processes
 Purchase Order
 Sales Order
 Price List
 Credit Limit
 Pick List
 Packing Slip
 Bill of Lading.
 Shipping Log
 Sales Invoice (Bill)
 Sales Journal
Chapter
8-8
SO 2 Sales processes and the risks and controls in sales processes

Sales Processes
Exhibit 8-2
Sales Process Map
See next slide for larger image.
Chapter
8-9
SO 2 Sales processes and the risks and controls in sales processes

Sales Processes Exhibit 8-2
Sales Process Map
Chapter
8-10
SO 2 Sales processes and the risks and controls in sales processes

Sales Processes Exhibit 8-2
Sales Process Map
Chapter
8-11
SO 2 Sales processes and the risks and controls in sales processes

Controls and Risks in Sales Processes
 Authorization of transactions
 Segregation of duties
 Adequate records and documents
 Security of assets and documents
 Independent checks and reconciliation
Chapter
8-12
SO 2 Sales processes and the risks and controls in sales processes

Controls and Risks in Sales Processes
Characteristics indicating risk with respect to revenue processes:
 Frequent changes made to sales prices or customers.
 Pricing structure is complex or based on estimates.
 Large volume of transactions.
 One or few key customers.
 Shipments not controlled directly by the company.
 Product mix is difficult to differentiate.
 Shipping and/or recordkeeping at multiple locations.
Chapter
8-13
SO 2 Sales processes and the risks and controls in sales processes

Controls and Risks in Sales Processes
Quick Review
The purpose of tracing shipping documents to prenumbered sales invoices would be to provide evidence that a. shipments to customers were properly invoiced.
b. no duplicate shipments or billings occurred.
c. goods billed to customers were shipped.
d. all prenumbered sales invoices were accounted for.
Chapter
8-14
SO 2 Sales processes and the risks and controls in sales processes

Controls and Risks in Sales Processes
Quick Review
The purpose of tracing sales invoices to shipping documents would be to provide evidence that a. shipments to customers were properly invoiced.
b. no duplicate shipments or billings occurred.
c. goods billed to customers were shipped.
d. all prenumbered sales invoices were accounted for.
Chapter
8-15
SO 2 Sales processes and the risks and controls in sales processes

Sales Returns Processes
Company must have procedures for receiving returned goods, crediting customer’s account, and placing items back in inventory.
Terminology:
 Receiving log
 Receiving report
 Credit memorandum
Chapter
8-16
SO 3 Sales return processes and the risks and controls in sales return processes

Sales Returns Processes
Exhibit 8-8
Sales Returns Process Map
See next slide for larger image.
Chapter
8-17
SO 3 Sales return processes and the risks and controls in sales return processes

Sales Returns Processes Exhibit 8-8
Sales Returns Process Map
Chapter
8-18
SO 3 Sales return processes and the risks and controls in sales return processes

Sales Returns Processes Exhibit 8-8
Sales Returns Process Map
Chapter
8-19
SO 3 Sales return processes and the risks and controls in sales return processes

Controls and Risks Associated with the Sales
Returns Process
 Authorization of transactions
 Segregation of duties
 Adequate records and documents
 Security of assets and documents
 Independent checks and reconciliation
Chapter
8-20
SO 3 Sales return processes and the risks and controls in sales return processes

Controls and Risks Associated with the Sales
Returns Process
 Quantities of returns are difficult to determine.
 High volume of credit memo activity.
 Product prices change frequently, or pricing structure is otherwise complex.
 Returns are received at various locations, or issuance of credit memos may occur at different locations.
 One or few key customers.
 Returns not controlled directly by the company.
Chapter
8-21
SO 3 Sales return processes and the risks and controls in sales return processes

Controls and Risks Associated with the Sales
Returns Process
Quick Review
Under a system of sound internal controls, if a company sold defective goods, the return of those goods from the customer should be accepted by the a. receiving clerk.
b. sales clerk.
c. purchasing clerk.
d. inventory control clerk.
Chapter
8-22
SO 3 Sales return processes and the risks and controls in sales return processes

Cash Collection Processes
Company-to-company sales are typically made on account, and a time span is given for the customer to pay.
Terminology:
 Remittance advice
 Cash receipts journal
Chapter
8-23
SO 4 Cash collection processes and the risks and controls in cash collection processes

Cash Collection Processes
Exhibit 8-12
Cash Receipts Process Map
See next slide for larger image.
Chapter
8-24
SO 4 Cash collection processes and the risks and controls in cash collection processes

Cash Collection Processes Exhibit 8-12
Cash Receipts Process Map
Chapter
8-25
SO 4 Cash collection processes and the risks and controls in cash collection processes

Cash Collection Processes Exhibit 8-12
Cash Receipts Process Map
Chapter
8-26
SO 4 Cash collection processes and the risks and controls in cash collection processes

Cash Collection Processes
Quick Review
Which of the following is not a document that is part of the cash collection process?
a. Remittance advice b. Cash receipts journal c. Bank deposit slip d. Packing slip
Chapter
8-27
SO 4 Cash collection processes and the risks and controls in cash collection processes

Controls and Risks Associated with the Cash
Collection Process
 Authorization of transactions
 Segregation of duties
 Adequate records and documents
 Security of assets and documents
 Independent checks and reconciliation
Chapter
8-28
SO 4 Cash collection processes and the risks and controls in cash collection processes

Controls and Risks Associated with the Cash
Collection Process
 High volume of cash collections.
 Decentralized cash collections.
 Lack of consistency in the volume or source of collections.
 Presence of cash collections denominated in foreign currencies.
Chapter
8-29
SO 4 Cash collection processes and the risks and controls in cash collection processes

Cash Collection Processes
Quick Review
Which of the following would represent proper segregation of duties?
Chapter
8-30 a. The employee who has custody of cash also does accounts receivable record keeping.
b. The employee who has custody of cash completes the bank reconciliation.
c. The employee who opens mail containing checks prepares a list of checks received.
d. The employee who opens mail containing checks records transactions in the general ledger.
SO 4 Cash collection processes and the risks and controls in cash collection processes

IT Enabled Systems of Revenue and Cash
Collection Processes
 Fewer manual processes
 More computerized processes
Chapter
8-31
SO 5 An overview of IT systems of revenue and cash collection that enhance the efficiency of revenue processes

IT Enabled
Systems of
Revenue and
Cash Collection
Processes
Exhibit 8-17 is a system flowchart of a generic version of revenue system with some paper documents.
Chapter
8-32
Exhibit 8-17
Revenue Processes
System Flowchart

IT Enabled Systems of Revenue and Cash
Collection Processes
Such systems include:
 E-commerce systems.
 Electronic Data Interchange (EDI) systems.
 Point of Sale (POS) systems.
Chapter
8-33
SO 5 An overview of IT systems of revenue and cash collection that enhance the efficiency of revenue processes

IT Enabled Systems of Revenue and Cash
Collection Processes
 First, underlying processes are reengineered
(BPR) so as to be conducted more efficiently.
 Second, IT systems improve the efficiency of the underlying processes.
Chapter
8-34
SO 5 An overview of IT systems of revenue and cash collection that enhance the efficiency of revenue processes

E-Business Systems and the Risks and Controls
Business to Business (B2B)
Business to Consumer (B2C)
Chapter
8-35
SO 6 E-business systems and the related risks and controls

E-Business Systems and the Risks and Controls
1. Reduced cost
2. Shorter sales cycles
3. Increased accuracy and reliability of sales data
4. Increased potential market for products and services
Chapter
8-36
SO 6 E-business systems and the related risks and controls

E-Business Systems and the Risks and Controls
Security and Confidentiality
1. Unauthorized access.
2. Hackers or other network break-ins.
3. Repudiation of sales transactions.
Processing Integrity
4. Invalid data entered by customers.
5. Incomplete audit trail.
6. Errors when integrating data into back end systems.
Chapter
8-37
SO 6 E-business systems and the related risks and controls

E-Business Systems and the Risks and Controls
Availability
7. Hardware and software system failures that block customers from access to the website.
8. Virus and worm attacks.
9. Denial-of-service attacks by hackers.
In addition, there are many online privacy risks to customers.
Chapter
8-38
SO 6 E-business systems and the related risks and controls

E-Business Systems and the Risks and Controls
Quick Review
When a company sells items over the Internet, it is usually called e-commerce. There are many IT risks related to Internet sales. The risk of invalid data entered by a customer would be a(n) a. availability risk.
b. processing integrity risk.
c. security risk d. confidentiality risk
Chapter
8-39
SO 6 E-business systems and the related risks and controls

E-Business Systems and the Risks and Controls
Quick Review
When a company sells items over the Internet, there are many IT risks. The risk of hardware and software failures that prevent website sales would be a(n) a. availability risk.
b. processing integrity risk.
c. security risk d. confidentiality risk
Chapter
8-40
SO 6 E-business systems and the related risks and controls

Electronic Data Interchange and the Risks and
Controls
Electronic data interchange is the inter-company, computer-to-computer transfer of business documents in a standard business format.
ANSI X.12 standards divide EDI data transmissions into three parts:
 Header data
 Trailer data
 Labeling interchanges
 Data segments
Chapter
8-41
SO 7 Electronic data interchange (EDI) systems and the related risks and controls

Electronic Data Interchange and the Risks and
Controls
Value
Added
Networks
(VANs)
Exhibit 8-18
EDI Using a Third-
Party Network
Chapter
8-42

Electronic Data Interchange and the Risks and
Controls
Advantages to an EDI system within the revenue and cash collection processes:
1.
Reduction or elimination of data keying.
2.
Elimination of keying errors.
3.
Elimination of costs related to keying errors.
4.
Elimination of time needed to key in orders.
5.
Elimination of mail delays.
Chapter
8-43
SO 7 Electronic data interchange (EDI) systems and the related risks and controls

Electronic Data Interchange and the Risks and
Controls
Advantages to an EDI system within the revenue and cash collection processes:
6.
Elimination of postage costs.
7.
Reduction in inventory levels.
8.
Competitive advantage through better customer service.
9.
Preservation of business with existing customers who have adopted EDI.
Chapter
8-44
SO 7 Electronic data interchange (EDI) systems and the related risks and controls

Electronic Data Interchange and the Risks and
Controls
Security and Confidentiality
1. Unauthorized access.
2. Trading partners gaining access to unauthorized data.
3. Hackers or other network break-ins.
4. Repudiation of sales transactions.
Processing Integrity
5. Invalid data entered by trading partners.
6. Incomplete audit trail.
7. Errors when integrating data into back end systems.
Chapter
8-45
SO 7 Electronic data interchange (EDI) systems and the related risks and controls

Electronic Data Interchange and the Risks and
Controls
Availability
8. Hardware and software system failures that block customers from access to the EDI system.
IT controls can lessen these risks. Controls are:
 Authentication
 Encryption
 Transaction logging
 Control totals
 Acknowledgment
Chapter
8-46
SO 7 Electronic data interchange (EDI) systems and the related risks and controls

Electronic Data Interchange and the Risks and
Controls
Quick Review
When The use of electronic data interchange (EDI) to conduct sales electronically has both risks and benefits. Which of the following is a benefit of EDI, rather than a risk?
a. Incomplete audit trail.
b. Repudiation of sales transactions.
c. Unauthorized access.
d. Shorter inventory cycle time.
Chapter
8-47
SO 7 Electronic data interchange (EDI) systems and the related risks and controls

Point of Sale Systems and the Risks and
Controls
Chapter
8-48
Point of Sale systems, features that assist accountants and managers:
1.
Touch screen menus.
2.
Bar code scanning.
3.
Real-time access to inventory and price data.
4.
Credit card authorizations during the sale.
5.
Real-time update of cash, sales, and inventory records.
6.
Immediate summaries and analyses.
7.
Integration with the company’s general ledger system.
SO 8 Point of sale (POS) systems and the related risks and controls

Point of Sale Systems and the Risks and
Controls
Point of Sale systems can reduce some processing integrity risks within revenue and cash collection:
1.
Pricing errors for products sold.
2.
Cash overage shortage errors.
3.
Errors in inventory changes—less chance of an incorrect product number.
4.
Erroneous or invalid sales voids or deletions.
Chapter
8-49
SO 8 Point of sale (POS) systems and the related risks and controls

Point of Sale Systems and the Risks and
Controls
Quick Review
When An IT system that uses touch screens, bar coded products, and credit card authorization during the sale is called a(n) a. electronic data interchange system.
b. e-commerce system.
c. point of sale system.
d. e-payables system.
Chapter
8-50
SO 8 Point of sale (POS) systems and the related risks and controls

Ethical
Intentional revenue inflation is unethical, and many types of revenue inflation are illegal.
Two ways to inflate revenue:
 Channel stuffing
 Leaving sales open http://www.sec.gov/ litigation/litreleases
/lr17001.htm
Chapter
8-51 http://www.usdoj.go
v/opa/pr/2003/July
/03_crm_436.htm
SO 9 Ethical issues related to revenue processes

Four primary functions of the corporate governance process:
 Management oversight.
 Internal controls and compliance.
 Financial stewardship.
 Ethical conduct.
Chapter
8-52
Establishing proper processes, internal controls, and ethical guidelines leads to better corporate governance and, therefore, good financial stewardship.
SO 10 Corporate governance of revenue processes

Quick Review
Which of the following is not a method of unethically inflating sales revenue?
a. Electronic data interchange system.
b. E-commerce system.
c. Point of sale system.
d. E-payables system.
Chapter
8-53
SO 10 Corporate governance of revenue processes

Chapter
8-54
Copyright
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