Sales and Cash Receipts

Transactions

The Revenue Receipt Cycle

The revenue receipt cycle encompasses both the sale of goods (revenue) and the collection of cash (receipt). The cycle is related to each of the other three transaction cycles, since it:

Receives resources and information provided by the financing and conversion cycles.

Provides resources and information to the expenditure/ disbursement cycle.

Scope of the Revenue/Receipt CycleBusiness Functions:Resources are sold to customers

in exchange for promises for future payments.

Cash is collected from customers for resources sold to them.

Common Activities:Customer orders (order entry)Credit approvalInventory controlShippingBillingRecordingCash collection (and deposits)Sales returns

Common Entries:SalesSales discountsSales returns and allowancesCash receiptsAllowance for uncollectible

accountsWrite-off of specific uncollectible

accounts

Common Forms:Customer order – a request from a

customer to purchase goods. Sales order – identifies goods

ordered by a customer, including relevant information about price, quantity, payment terms, etc.

Shipping document – identifies goods shipped, and represents a contract between the seller and carrier; a shipping document is often in the form of a bill of lading.

Sales invoice – identifies goods sold and represents formal notice to a customer about the amount and terms of payment.

Customer remittance advice – accompanies a sales invoice but is intended to be returned with a customer’s payment (remittance); a returned remittance advice indicates the purpose of cash payment, facilitating handling and recording.

Factors that influence revenue/receipt cycle activities and controls:Nature of an entity’s industryThe entity’s size and

organizational structureThe extent to which accounting

information is processed by computer

Summary of Credit Sales ActivitiesCustomer Order DepartmentAccept Customer Order.Prepare sales order, distribute copies,

and retain copy in unfilled order file.Credit DepartmentReview sales order and investigate

customer credit information.Initial copy of sales order if credit is

approved and forward the order to inventory control. If credit is denied, notify the Customer Order Department.

Inventory ControlReview sales order.Initial copy of sales order to

authorize release of goods from warehouse.

Forward goods and copy of sales order to Shipping, and retain a file copy of sales order.

ShippingCompare sales order from

Inventory Control with sales order from Customer Order.

Examine goods from warehouse and compare with sales order.

Prepare goods for shipment and complete shipping documents.

Release goods to carrier and obtain receipt.

Notify Customer Order department that goods have been shipped.

Forward copy of sales order and shipping documents to Billing; retain file copy of sales order and shipping documents.

BillingCompare documents from Shipping with

sales order from Customer Order.Prepare sales invoice, send copy to

customer and to Inventory Accounting along with the copy of sales order and shipping documents, and retain file copy.

Prepare daily sales summary, send copy to General Accounting, and retain file copy.

RecordingInventory Accounting: Enter cost

information on sales invoice, update inventory records, and forward sales invoice and related documents to General Accounting.

General Accounting: Record sale and forward sales invoice and related documents to Account Receivable.

Accounts Receivable: Post sale to customer’s account and file sales invoice and related documents.

Cash Collection ProcessWhen cash remittances are

received by mail, all incoming checks are listed immediately and endorsed restrictively by Mail Room personnel.

One copy of the list of incoming checks (and returned remittance advice, if applicable) is forwarded to accounts receivable for posting to individual customer accounts.

All incoming checks and another copy of the list of checks are forwarded to the Cash Receipts department.

Separate lists of totals are forwarded to General Accounting for recording in the cash receipts journal and posting to the general ledger.

Sales Returns and AllowancesCustomer requests for

adjustments on returned goods should be reviewed by personnel independent of cash collection and recording.

An approved request is documented as a credit memorandum, copies of which are forwarded to Accounts Receivable for posting and to Inventory Control.

Control totals are forwarded to General Accounting for recording and posting.

Returned goods are handled through the Receiving department and returned to the warehouse along with a receiving report.

Inventory Control match the receiving report with a copy of credit memorandum.

Uncollected AccountsAccounts Receivable personnel

should review individual customer accounts periodically as a check against unauthorized credit limits and prepare monthly accounts receivable trial balances for reconciliation with general ledger control accounts.

Accounts receivable balances are aged periodically and reviewed by personnel independent of the Credit department.

Delinquent accounts should be reviewed periodically by personnel who report to the treasurer and are independent of recording functions.

When an individual customer account is judged uncollectible, written authorization to write off the account is sent to Accounts Receivable and General Accounting.

Revenue/Receipt Cycle: Control Objectives, Potential Errors or Frauds, and Control Activities

Control Objectives

Types Of Errors Of Frauds That Could Occur If Objective Is Not Met

Control Activities Designed To Prevent Or Detect Errors Of Frauds

Transaction Authorization

•Customers’ credit should be approved prior to shipping goods.

Shipments could be made to unauthorized parties , potentially resulting in uncollectible accounts receivable.

Perform a credit check for all new customers.Prepare and periodically update lists of authorized customers, indicating a maximum credit limit for each customer.

•Unit prices and sales terms should be established for all products or services.

•Sales related deductions and adjustments should be made in accordance with management’s authorization.

Orders could be accepted at unauthorized prices or unfavorable sales terms, potentially resulting in reduced revenues or inadequate cash flows.

Unauthorized deductions or adjustments could be granted to undeserving customers. Potentially resulting to uncollectible receivables.Otherwise collectible accounts receivable could be written off, potentially resulting in failure to realize the service potential of an asset .

Maintain updated lists of authorized prices and sales terms.Establish procedures for reviewing and approving prices and sales terms before shipment.

Establish written criteria and policies for granting sales deductions and adjustments.Prenumber and control credit memoranda or other related forms.

Transaction Execution

•Approved orders should be shipped in accordance with customer specifications and on a timely basis.

•All shipments should be followed by prompt billing.

Shipments could be delivered to the wrong party, potentially resulting in uncollectible accounts receivables.Shipments could be delivered too late, potentially resulting in returned goods and cancelled sales.Incorrect shipments could be delivered, potentially resulting in returned goods and cancelled sales.

Shipments could go unbilled, potentially resulting in loss of revenue.Shipments could be billed late, resulting in delayed cash payments from customers.

Verify that ordered products are in stock and therefore can be shipped on a timely basis.Limit access to shipping documents to authorized personnel.Document policies and procedures for scheduling shipments.

Prenumber bills of lading and assure that related billings are made on a periodic basis.Establish procedures for prompt reporting and investigation of shipments not billed.

Recording

•Sales, cash receipts and related transactions should be recorded at the correct amounts, in the proper period, and should be properly classified.

•Billings, collections, and related adjustment transactions should be posted accurately to individual customer accounts.

General ledger account balances could be inaccurate, potentially resulting in misstated financial statements.

Summaries of detailed records may not agree with control accounts, potentially resulting in adjusting journal entries prompted by inaccurate information.

Require prompt delivery of bills of lading (and related sales order) to the billing department.

Total input documents and reconcile appropriate journals and ledgers.Establish processing and recording procedures.Compare actual and planned results, and analyze variances.

Reconcile totals of individual customer accounts with control totals.Promptly investigate correspondence from customers.

•Recorded accounts receivable balances (and related transactions) should fairly reflect underlying transactions and events.

Transactions may be posted to improper customer accounts, potentially resulting in improper billings.

Accounts may include errors or frauds, potentially resulting in materially misstated financial statements.Management decisions may be based on erroneous data, potentially resulting in improper decisions.

Reconcile input totals with processed and output totals.Review customer statements for accuracy and follow up on discrepancies.

Periodically substantiate and evaluate recorded account balances.Reconcile subsidiary ledgers with general ledger control accounts.Establish policy and procedure manuals, organization charts and supporting documentations (e.g., compare selected customer balances with underlying documents).Follow up promptly on customer complaints.

Access to Assets

•Access to cash and cash related records should be restricted to personnel authorized by management.

Cash receipts on credit sales could be lost or diverted, potentially resulting in overstated accounts receivable and unrecorded cash.Cash receipts on noncredit sales could be unreported, potentially resulting to unrecorded cash.Cash shortages could go undetected, potentially resulting in lost cash and overstated cash balances.

Establish cash receipts function in a centralized location.Require daily reconciliation of cash receipts records with bank deposit slips.Prenumber and control cash remittance advices.Prepare separate lists of incoming cash receipts in the mailroom.Separate responsibility for handling and recording cash.Establish periodic procedures for reconciling cash records with bank statements.Establish physical barriers over cash and unused checks.

•Access to shipping, billing, inventory control, and accounting records should be restricted to personnel authorized by management.

Records or assets may be misused, potentially resulting in misappropriated assets.

Maintain insurance and fidelity bonds for personnel handling.Maintain listingsand signature samplesof authorized signatories. Inform the bank that no checks payable to the company are to be cashed.Restrictively endorse checks received from customers.

Segregate responsibilities for authorization, execution and recording functions.Prenumber and control custody of forms and documents.

Segregation of Duties

AuthorizationExecutionRecordingAccess to Assets

System DocumentationFlowchart – provides concise, informative and unambiguous description of internal controls and are used when an entity’s system is complex and processes large volumes of transactions.Questionnaire – is designed to detect control deficiencies and typically require one of three responses for each question: yes, no, or N/A.Narrative - describes in prose one or more phases of management controls.

Tests of Controls: Shipping1. Randomly select a sample of

shipping documents from Shipping department files.

2. Examine each shipping document to determine whether the document:a. Is accompanied by a sales order bearing Credit and Inventory Control authorization.b. Agrees with the sales order as to description of goods, quantity, destination, etc.

3. Trace details of sampled shipping documents to copies of shipping documents and their related sales invoices in Billing department files.

4. Trace details of the related sales invoices to entries in the sales journal and accounts receivable subsidiary ledger.

5. Trace sales invoices to inventory records in Inventory Accounting.

Tests of Controls: Billing1. Randomly select a sample of

sales invoices from Billing department files.

2. For each sampled invoice, verify unit prices and clerical accuracy.

3. Trace details of sampled sales invoices to Shipping documents.

4. Trace details of sampled sales invoices to entries to sales journal and accounts receivable subsidiary ledger.

5. Trace sales invoices to inventory records in Inventory Accounting.

Tests of Controls: Recording1.Review evidence of internal procedures

for:a. Reconciliation of daily sales summaries with sales journal totals by General Accounting personnel.b. Periodic reconciliation of accounts receivable trial balances with general ledger control balances.

2. Scan the sales journal for unusual transactions or unusually large amounts.

3. Verify the clerical accuracy of the sales journal for selected periods and trace totals to postings in the general ledger.

Tests of Controls: Cash collection and depositsCash collection:1. On a surprise basis, take control of

bank deposits just prior to delivery by client personnel to bank.

2. Compare the total dollar amount of checks to the total recorded on the deposit slip.

3. Compare checks to details in cash receipts records and the accounts receivable subsidiary ledger and determine that the lapse of time between cash receipt and deposit is reasonable.

Deposits:4. For an interim month (months):

a. Compare entries in the cash receipts journal with deposits listed on the monthly bank statement.b. Determine that cash receipts not listed on the bank statement are listed as deposits in transit in the bank reconciliation and are included with deposits in the subsequent month’s bank statement.

5. Trace totals in the cash receipts journal to postings in the general ledger.

Tests of Controls: Sales Returns and Allowances

1. Obtain a random sample of credit memoranda from the files of the issuing department.

2. Trace details of sampled credit memoranda to:a. Receiving reportsb. Perpetual inventory recordsc. Entries in the accounts receivable subsidiary ledger and general ledger.

3. Review the credit register for unusual items, such as credits for very large amounts or an unusually large number of credits for the same customer, and investigate.

Tests of Controls: Uncollectible Accounts

1. Select a sample of write-off entries.2. Trace each entry to the related write-

off authorization memo; examine the memo for appropriate authorization and compare the authorized amount with the recorded amount.

3. Trace each entry to a posting in the general ledger.

4. Review all write-off entries for unusual items, such as very large amounts or multiple write-offs for the same customer, and investigate.

Tests of Controls: Deduction Management

1. From posting to accounts receivable and cash receipts, select a sample of entries for which customers took deductions.

2. Trace each entry in the sample to a deduction inquiry; examine notation indicating Account Operations’ approval or disapproval.a. Trace approved inquiries to charge authorizations and to entries in Accounts Receivable.

b. Trace disapproved inquiries to rebill notices, and to supplemental sales invoice.

3. Inspect for evidence of senior management review.