1 of 18

Chapter 12

The Revenue Cycle: Sales to Cash Collections

12-1

2 of 18

Learning Objectives

Describe the basic business activities and related information processing operations performed in the revenue cycle.
Discuss the key decisions that need to be made in the revenue cycle, and identify the information needed to make those decisions.
Identify major threats in the revenue cycle, and evaluate the adequacy of various control procedures for dealing with those threats.

12-2

3 of 18

The Revenue Cycle

12-3

4 of 18

The Revenue Cycle

Provides goods and services to customers
Collects cash in payment for those sales
Primary Objective:

Provide the right product
In the right place
At the right time for the right price

12-4

5 of 18

Revenue Cycle Activities

Sales order entry
Shipping
Billing
Cash collections

12-5

6 of 18

General Revenue Cycle Threats

Inaccurate or invalid master data
Unauthorized disclosure of sensitive information
Loss or destruction of master data
Poor performance

12-6

7 of 18

General Revenue Cycle Controls

Data processing integrity controls
Restriction of access to master data
Review of all changes to master data
Access controls
Encryption
Backup and disaster recovery procedures
Managerial reports

12-7

8 of 18

Sales Order Entry

Take order
Check and approve credit
Check inventory availability

12-8

9 of 18

Sales Order Threats

Incomplete/inaccurate orders
Invalid orders
Uncollectible accounts
Stockouts or excess inventory
Loss of customers

12-9

10 of 18

Sales Order Entry Controls

Data entry edit controls (see Chapter 10)
Restriction of access to master data
Digital signatures or written signatures
Credit limits
Specific authorization to approve sales to new customers or sales that exceed a customer’s credit limit
Aging of accounts receivable

Perpetual inventory control system
Use of bar-codes or RFID
Training
Periodic physical counts of inventory
Sales forecasts and activity reports
CRM systems, self-help Web sites, and proper evaluation of customer service ratings

12-10

11 of 18

Shipping

Picking and packing the order
Shipping the order

12-11

12 of 18

Shipping Threats

Picking the wrong items or the wrong quantity
Theft of inventory
Shipping errors (delay or failure to ship, wrong quantities, wrong items, wrong addresses, duplication)

12-12

13 of 18

Shipping Controls

Bar-code and RFID technology
Reconciliation of picking lists to sales order details
Restriction of physical access to inventory
Documentation of all inventory transfers
RFID and bar-code technology
Periodic physical counts of inventory and reconciliation to recorded quantities

Reconciliation of shipping documents with sales orders, picking lists, and packing slips
Use RFID systems to identify delays
Data entry via bar-code scanners and RFID
Data entry edit controls (if shipping data entered on terminals)
Configuration of ERP system to prevent duplicate shipments

12-13

14 of 18

Billing

Invoicing
Updating accounts receivable

12-14

15 of 18

Billing Threats

Failure to bill
Billing errors
Posting errors in accounts receivable
Inaccurate or invalid credit memos

12-15

16 of 18

Billing Controls

Separation of billing and shipping functions
Periodic reconciliation of invoices with sales orders, picking tickets, and shipping documents
Configuration of system to automatically enter pricing data
Restriction of access to pricing master data
Data entry edit controls
Reconciliation of shipping documents (picking tickets, bills of lading, and packing list) to sales orders

Data entry controls
Reconciliation of batch totals
Mailing of monthly statements to customers
Reconciliation of subsidiary accounts to general ledger
Segregation of duties of credit memo authorization from both sales order entry and customer account maintenance
Configuration of system to block credit memos unless there is either corresponding documentation of return of damaged goods or specific authorization by management

12-16

17 of 18

Cash Collections Threats

Theft of cash
Cash flow problems

12-17

18 of 18

Cash Collection Controls

Separation of cash handling function from accounts receivable and credit functions
Regular reconciliation of bank account with recorded amounts by someone independent of cash collections procedures
Use of EFT, FEDI, and lockboxes to minimize handling of customer payments by employees
Prompt, restrictive endorsement of all customer checks
Having two people open all mail likely to contain customer payments
Use of cash registers
Daily deposit of all cash receipts
Lockbox arrangements, EFT, or credit cards
Discounts for prompt payment by customers
Cash flow budgets

12-18