CHAPTER 8 SUMMARY

 Introduction to Revenue Processes. A company must have systems and processes in place to capture, record,
summarize, and report the results of revenue related transactions. The processes are the policies and procedures
that employees follow in completing sale, sales return, or cash collection, and then capturing customer data and
sales quantities, and routing the resulting information to the right departments within the company. The accounting
system uses this flow of information to various departments to record, summarize and report the results of the sales
transactions. In IT accounting systems, these recording and processing systems are called Transaction Processing
Systems (TPS). Revenue processes are divided into the following groups: sales processes (including ordering,
delivery, and billing), sales returns processes, and cash collection processes.
 Sales Processes. In a company-to-company sale, the customer places an order, providing the necessary information
for the sales order. A price list establishes the selling prices to charge the customer. Each customer’s credit limit
should be established and checked before the sale is approved. A pick list indicates which items are to be removed
from the warehouse and shipped to customers. The packing slip accompanies the shipment and provides the list of
items shipped. The agreement with the common carrier that will ship the goods is called a bill of lading. The
shipping log is a chronological listing of all shipments. After shipping the goods, a sales invoice is prepared and sent
to the customer, and the sale would be recorded in a sales journal.
 Controls and Risks In Sales Processes. Management should strive to achieve a system of internal controls using both
manual and programmed procedures to minimize the chance of error or fraud. The common internal control
procedures in sales processes follow.
o Authorization of Transactions. Specific individuals within the company should have authoritative
responsibility for establishing sales prices, payment terms, credit limits, and guidelines for accepting new
customers. These specific people should have a recognized method of communicating when revenue
transactions have been authorized. Once a sales order has been filled, established procedures should be in
place to verify that the shipment represents items ordered. Thus, proper sales authorization control includes
obtaining approval prior to processing an order and again before the order is shipped.
o Segregation of Duties. Within the revenue process, the accounting duties related to order entry, credit
approval, shipping, billing, information systems, and general accounting need to be separated in order to
meet the objectives of internal controls. In addition to authorization responsibilities, certain information
systems duties are included in the revenue process, such as data entry, programming, IT operations and
security. The custody function includes inventory handling and preparing goods for shipment. Ideally, good
internal controls within the sales process require that accounting for inventory is separate from inventory
handling. Also, any person who maintains detailed accounts receivable records should not also be
responsible for maintaining the general ledger or handling cash.
o Adequate Records and Documents. Those responsible for recording sales should ensure that supporting
documentation is retained and organized. As records are prepared, they should be compared with
supporting information to make sure they are accurate and to prevent duplication. Sales orders, shipping
logs, invoices, customer account statements, and other related documents should be saved and filed.
Maintaining good records also facilitates the performance of independent checks and reconciliations.
o Security of Assets and Documents. Inventory on hand should be protected by using physical controls such
as surveillance cameras, security guards and/or alarm systems. Likewise, data files, production programs,
and accounting records should each be protected from unauthorized access. Passwords, backup copies, and
physical controls (such as locked file cabinets) can protect a company’s records.
o Independent Checks and Reconciliations. Companies should implement procedures whereby independent
checks and record reconciliations are performed on a regular basis. These procedures are most effective
when they are conducted by someone independent of the related authority, recording, and custody
functions. The most common types of independent checks include the verification of information in the
sales journal and on sales invoices, the reconciliation of accounts receivable detail with invoices and with the
general ledger, and the reconciliation of inventory records with actual (counted) quantities on hand.

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 oCost/Benefit Considerations. Companies tend to implement internal controls only if they view the benefits
of the control as being greater than the costs of carrying out the task. Indications of risky situations that may
require strong controls include: Frequent changes are made to sales prices or customers; The pricing
structure is complex or based on estimates; A large volume of transactions is carried out; The company
depends on a single or very few key customers; Shipments are made by consignees or are under other
arrangements not controlled directly by the company; The product mix is difficult to differentiate; Shipping
and/or recordkeeping are performed at multiple locations.
 Sales Return Processes. When customers return goods, the company must have procedures in place for receiving
returned goods, crediting the customer’s account, and placing the items back in inventory. Returned goods are
handled by the receiving department, and they are typically accompanied by documentation from the customer,
such as a bill of lading and packing slip. The goods should be inspected for possible damage and a copy of the
original sales invoice should confirm the historical sale of the goods. A receiving log is prepared that lists the
chronological sequence of all returned items, and a receiving report records the quantity received. A receiving
report is a source document completed by personnel in the receiving dock that documents the quantity and
condition of items received. If the returned goods are accepted, they are placed back in the proper location in the
warehouse and the inventory records are updated to reflect the increase in inventory. A credit memorandum is
prepared to document the return and to adjust the amount of the customer’s credit status. A journal of credit
memos should be maintained in order to provide a complete listing of all credits issued.
 Controls and Risks In Sales Return Processes. The following specific controls could be implemented over the sales
returns process.
o Authorization of Transactions. Certain designated individuals within the company should be assigned the
authority to develop sales return policies, authorize sales returns and approve credit memos. Others within
the organization should recognize that authorization from these specific individuals is necessary in order to
process returns.
o Segregation of Duties. An effective system of internal controls segregates individuals with authorization
duties from those responsible for recording transactions and custody of the related assets. Ideally, anyone
who performs a credit memo activity should not also be responsible for data entry, credit approval, shipping,
billing, information systems or general accounting.
o Adequate Records and Documents. The reports documenting movement of the goods and the related
notification to the customer should be issued sequentially, organized and retained. In addition, it is
important to match receiving reports for returns with the respective credit memos in order to ensure that
the company issues credit for all returns and for the proper amounts. Returns are also matched with the
original sales invoice in order to verify quantities, prices, and item descriptions. Credits for returned goods
should also be included in customers’ account statements.
o Security of Assets And Documents. Data files, production programs, and accounts receivable records should
be restricted to those who are specifically authorized to approve or record the related transactions. Custody
of the related assets should be controlled and limited to those specifically designated to handle the receipts
or move the goods.
o Independent Checks and Reconciliations. Independent checks include comparing the receiving log with the
credit memo listing; verifying recorded descriptions, quantities, dates, prices, and accuracy; comparing credit
memo listing to accounts receivable subsidiary ledger and general ledger posting.
o Cost/Benefit Considerations. Circumstances may exist within a company that indicate a high level of risk,
such as: Quantities of products returned are often difficult to determine; A high volume of credit memo
activity; Product prices change frequently or the pricing structure is otherwise complex; Returns are received
at various locations or the issuance of credit memos occurs at different locations; The company depends on a
single or very few key customers; Returns are received by consignees or under other arrangements not
directly controlled by the company.
 Cash Collection Processes. Most company-to-company sales are made on account and a time period is given for the
customer to pay. Therefore, the timing of a cash collection will be some number of days between the invoice date
and collection of the cash. When the customer sends a check, the company must have processes in place to properly
handle the receipt. It should match the check with the related sales invoice, deposit the funds in a timely manner,
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 and update customer and cash records. Collections from customers typically include a remittance advice, which is
the documentation accompanying payment that identifies the customer account number and invoice to which the
payment applies. A list of all cash collections is prepared and the checks received are recorded in the cash receipts
journal. A cash receipts journal is a special journal that records cash collections.
 Controls and Risks In Cash Collection Processes. The following specific controls could be implemented over the cash
collection process.
o Authorization of Transactions. Appropriate individuals should be assigned responsibility for opening and
closing the company’s bank accounts and approving bank deposits or electronic transfers of funds. This
ensures that records are updated only for authorized transactions.
o Segregation of Duties. Responsibility for the bank reconciliation should be segregated from the custody of
cash. Separate custody of cash from accounts receivable record keeping. Separate cash receipts journal
preparation, credit approval, inventory handling, information systems, and general accounting.
o Adequate Records and Documents. Cash receipts listings should be prepared on a daily basis so the daily
activity of collections should be reconciled to supporting documentation from the bank deposit. Bank
deposit receipts should be retained and filed chronologically, and regular, timely bank reconciliations should
be prepared and retained. Detailed customer accounts should also be maintained and reconciled with
customer statements regularly.
o Security of Assets and Documents. Access to cash collections should be limited to those who are expressly
authorized to handle cash. Cash collections should be deposited in the bank in a timely manner to prevent
the risk of theft. Also, related computerized data files and programs must be protected from unauthorized
use.
o Independent Checks and Reconciliations. A physical count of cash needs to be conducted from time-to-time
in order to compare actual cash on hand with the amounts in the accounting records. Daily bank deposits
should also be compared with the detail on the related remittance advice and in the cash receipts journal. In
addition, it is important that companies regularly reconcile their cash accounts with the respective bank
statements.
o Cost/Benefit Considerations. Circumstances may indicate risks related to cash collections, including: 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.
 IT Enablement of Revenue and Cash Processes. In many companies, sophisticated, highly integrated IT systems
capture, record and process revenue and cash collection events. E-commerce systems incorporate electronic
processing of sales-related activities and generally, e-commerce sales processes are transacted using the Internet.
Electronic Data Interchange (EDI) systems communicate sales documents electronically using a standard business
format. Point of Sale (POS) systems process sales at a cash register in retail stores. As companies redesign processes
to align with their software systems, they conduct business process reengineering to improve the efficiency and
effectiveness of their processes. There are two kinds of efficiency improvements: (1) The underlying processes are
reengineered so as to be conducted more efficiently; (2) The IT systems improve the efficiency of the underlying
processes. Despite these improvements, companies must consider that the elimination of paper within their
processes will completely change the audit trail and the internal controls.
 E-Business Systems and the Risks And Controls. B2C sales, also known as e-commerce, are familiar to most people.
This is the method used by most retail or service firms to sell directly to consumers using a Web site. B2B sales, on
the other hand, involve companies using Web sites to sell products and services to each other. In both B2B and B2C
sales, the advantages of e-commerce include:
1. Reduced cost through lower marketing, employee, and paper-work costs.
2. Shorter sales cycles due to reduced time to place an order, deliver the order and collect payment.
3. Increased accuracy and reliability of sales data.
4. Increased potential market for products and services.
However, the Internet connected nature of e-commerce sales includes several risks that a company must manage.
o Security and Confidentiality Risks. To protect the security of the IT system and the confidentiality of the
data, it is important to insure that those accessing the Web site and conducting sales transactions are valid
and authorized users. User authentication is an important control for Internet sales; however, it is not
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 always possible to use it. In the case of retail sales to end-user consumers, user authentication may not be
appropriate. It is important that a company has controls in place to assure that the transaction is with a valid
customer, with valid payment authorization, and that an audit trail is maintained to avoid repudiation.
Customer authentication through user ID and password should be used. Transactions should be logged and
data trails maintained to avoid repudiation.
o Processing Integrity Risks. As customers enter data on a Web site to place an order, they can make data
entry errors. Controls should be used to minimize these errors. These are programmed data input checks
that should be built into any Web based sale systems. The programmed checks should include field checks,
validity checks, limit checks, range checks, reasonableness checks, and sign checks. Logging transactions can
help establish an audit trail in an electronic environment. A company must develop a method to integrate
the data captured into the back end processes and applications. An example of a back end process is one
that actually pulls items from warehouses and ships to customers. Controls such as reconciliations and
verifications must exist to ensure the accuracy of data as it is integrated across back end processes.
o Availability Risks. The company should put controls in place to minimize service disruptions that make the
system unavailable. These controls can include redundant systems, data, and networks, disaster recovery
plans, testing of software changes, and capacity planning and testing. Redundancy is needed for servers,
data, and networks. Managers must also properly plan for sufficient capacity in the e-commerce system and
servers to ensure that the system is not overwhelmed by the number of users accessing it. Managers should
consistently monitor, test, and adjust the capacity of the system to meet its needs.
 Electronic Data Interchange (EDI) Systems and The Risks And Controls. EDI is the inter-company, computer-to-
computer transfer of business documents in a standard business format. EDI data transmissions have three parts:
header and trailer data, labeling interchanges, and data segments. Header data identifies the file or transmission
being sent, including the beginning and end of a particular transaction data set. Trailer data also includes data about
the file or transmission and identifies the end of a particular transaction data set. Labeling interchanges identify the
type of transactions in the set, such as a set of sales invoices. Data segments include the actual data within the
invoices, such as quantities and prices. Many companies using EDI communicate with trading partners using third-
party networks called Value Added Networks. Newer EDI systems that use the Internet to communicate are called
Internet EDI. There are many advantages of EDI, including the elimination of keying, keying errors, postage cost, and
mail delays; reduced order cycle time; and competitive advantage. The network connected nature of EDI sales
includes several risks that a company must manage. These risks include security, availability, processing integrity, and
confidentiality risks.
 Point Of Sale (POS) Systems and Risks and Controls. POS systems capture all relevant sales data at the point of sale,
the cash register, in real time and this allows managers or the home office to have daily summaries of sales by cash
register or by product. Many companies adopt POS systems because they enabling faster and more accurate check
outs, thus enhancing customer satisfaction. POS systems have many features that assist accountants and managers
in the company as well, including the following: Touch screen menus for easy training and use by employees; Bar
code scanning; Real time access to inventory and price data; Credit card authorizations; Real time update of cash,
sales, and inventory records; Immediate summaries and analyses; Integration with the company’s general ledger
system to post sales, cost of goods sold, inventory, and receivables accounts. There are fewer security and
confidentiality risks because the POS is an internal network. However, processing integrity and availability risks are
similar to other complex IT systems.
 Ethical Issues Related to Revenue Processes. Intentional revenue inflation is unethical and many types of revenue
inflation are illegal. If top management is intent on its actions, it can often find ways to misstate revenue that have
nothing to do with the accuracy of the accounting system. Accurate financial reports can only be an output of an
accounting system if management desires accurate financial reports. Unethical managers can cause fictitious or
inflated sales revenues to be recorded, although it requires the assistance of those who work for the top managers.
Two popular approaches are “channel stuffing” and “leaving sales open” beyond the end of the fiscal period.
Channel stuffing is intentionally forcing a buyer company to buy more than needed, thereby “stuffing” more product
into the sales channel. Leaving sales open is a term that refers to moving a period cut-off date forward to include
sales that rightly occur in a future period. The system that records revenue transactions must be designed so that it
only includes in current period revenues those items that were actually shipped before year-end. The system should
be tested to make sure that it handles this sales revenue cut-off correctly. Accountants throughout an organization
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 should try to assure that the department, area, or division they work in does not overstate revenues. If any
department or subunit within the company overstates revenue, it can mislead investors. Therefore, accountants
must make sure that the accounting systems used to record revenue are accurate. Secondly, accountants must not
allow managers to coerce them into assisting in the overstatement of revenue through the use of accounting tricks
or deceptions.
 Corporate Governance of Revenue Processes. The systems, processes, and internal controls described in this
chapter are part of the corporate governance structure. When management designs and implements processes for
sales, sales returns, and cash collections, they assign responsibility for executing those functions to various managers
and employees. As management assigns and oversees these revenue processes, it is carrying out the corporate
governance function of proper management oversight. Management should also establish appropriate internal
controls for revenue processes. These internal controls are also part of the corporate governance structure. When
management has designed, implemented, and continually manages processes and internal controls, it is helping to
insure proper stewardship of the company’s assets. Finally, good corporate governance requires ethical conduct.
This chapter described some of the ethical issues that management must consider and address within the revenue
processes.

48. Advantages of web ordering system and risks it reduces.

The Web ordering system provides the advantages of cost savings through lower marketing, employee, and paperwork
costs; shorter sales cycles due to reduced time to place an order, increased accuracy and reliability of the order data; and
increased potential market for the company’s products. Accordingly, Romano’s Web ordering system reduces the risks of
misplacing an order, filling an order incorrectly, losing a sale due to a long wait time, and recording erroneous data due to
errors in manual paperwork processing. Although some of these advantages and risk reductions are also realized through
the company’s centralized phone ordering system, that phone system still involves manual processes to input customer
orders, so there remain some costs and risks associated with employees, accuracy, and wait times.

56. Internal controls for related problems.

_d__ A customer ordered 12 boxes of your product (total of 144 items) for express shipment. Your data entry clerk
inadvertently entered 12 individual items.
d. 100% check for matching of customer orders and sales orders
__q__ You enter sales and accounts receivable data in batches at the end of each week. Several problems have
resulted recently as a result of recording invoices to the wrong customer account.
q. Periodic confirmation of customer account balances
__f__ In an effort to boost sales, you obtain some of the stock of unissued shipping reports and create a dozen
fictitious shipments. You submit these documents to the billing department for invoicing.
f. 100% check for matching of sales orders and invoices.
__g__ Checks are received by the mailroom and then forwarded to the accounts receivable department for recording.
The accounts receivable clerk holds the checks until the proper customer account has been identified and reconciled.
g. 100% check for matching of deposit slip and customer check.
__p__ Several shipping reports have been misplaced en route to the billing department from the shipping
department.
p. Sequence verification
__h__ Several sales transactions were not invoiced within the same month as the related shipment.
. h. Prompt data entry immediately upon receipt of customer order.

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 __c__ A salesclerk entered a non-existent date in the computer system. The system rejected the data and the sales
were not recorded.
c. Programmed edit checks
__a__ Upon entering sales orders in your new computer system, a salesclerk mistakenly omitted customer numbers
from the entries.
a. Pre-formatted data entry screens
__o___ A computer programmer altered the electronic credit authorization function for a customer company owned
by the programmer’s cousin.
o. Program change controls
__n__ Customer orders were lost in the mail en route from the sales office to the accounting department (located at
the company’s headquarters).
n. Data back-up procedures

51 ) Identify an internal control procedure that would reduce each of the risks that follow in
a manual system. Also describe how (or if) an IT system could reduce these risks:

a. Revenues may be recorded before the related shipment occurs.

Shipping documentation should be matched with sales order data and presented to the billing department as the
basis for recording the sale and preparing the bill. The IT system can perform an automatic match whereby shipping
data is required as a basis for recording the revenue.
b. Employees responsible for shipping and accounts receivable may collude to steal goods and cover up the theft
by recording fictitious sales.
✓ To prevent this type of problem, sales orders should be reviewed for proper customer and authorized by an
independent member of management prior to shipment. The IT system can include validity checks or other controls
that require a valid customer in order for the transaction to be recorded. In addition, reconciliation procedures can
compare manual documentation with system records to determine that valid transactions are recorded. If the
collusion involves recording the fictitious sale in the account of a valid, existing customer, the process of sending
sales invoices and customer statements, and the subsequent reconciliation procedures, would be important for
uncovering this type of fraud.
c. Credit memos may be issued at full price, when the goods were originally sold at a discount.
Original sales documentation, including key information such as original sales price, must be required as a basis for
preparing credit memos. An IT system could automatically match credit memo authorizations with the original sales
data so that the credit would be issued at amounts that are consistent with the original sale pricing.
d. Sales invoices may contain mathematical errors.
Independent checks of sales invoices should occur before the customer is billed. This includes verification of
mathematical accuracy. If an automated system is in place, the IT system can perform mathematical computations at
a great time savings.
e. Amounts collected on accounts receivable may be applied to the wrong customer.
Customer account statements should be sent on a regular basis so that customer records can be reconciled to the
company’s records. This is likely to detect a misapplication of a customer collection. An IT system could enhance the
process by requiring cash receipts to be entered along with a customer account number as well as an invoice number
to ensure that the receipt is applied properly.
f. Duplicate credit memos may be issued for a single sales return.
A comparison of the receiving log with the credit memo listing would indicate if duplicate credit memos have been
issued for a single sales return. An IT system could also prevent this risk by requiring that credit memos be generated
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 only upon entering key information from the original sale and blocking the issuance of another credit memo for an
item for which credit had already been issued.
g. Sales invoices may not be prepared for all shipments.
Shipping records should be compared with the sales invoice’s records. This may be done through the verification of
the sequence of shipping documents to ensure that an invoice was prepared for each item shipped. An IT system
may enhance this process by matching shipping document numbers with invoices and preparing a warning report for
any instances of unmatched shipping documents.
h. Shipments may contain the wrong goods.
Companies should require the matching of key information on related documents prior to shipment. This includes
inventory quantities and descriptions on approved sales orders and packing lists. An IT system may make this process
more efficient by performing the match automatically; it can verify whether product numbers and quantities on the
sales orders match those on the shipping documentation.
i. All sales transactions may not be included in the general ledger.
A regular reconciliation should be performed to compare the sales journal with the amounts recorded in the general
ledger. An IT system may perform a periodic automatic post of the sales journal to the general ledger, thereby
eliminating the potential for missing sales transactions.

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