Question

For this week's discussion, I want you to find a term or control within the Revenue Cycle (from The Order Entry/Sales (OE/S) Process and The Billing/Accounts Receivable/Cash Receipts (B/AR/CR) Process). I want you to explain to the class what the term/control is. Then I want you to provide an example of it (preferably with a real company.)

Answer 1

The sales and collections cycle in a business refers to the set of processes that begin when a customer purchases goods or services and ends when your business receives payment in full

Order Processing

• Sales recorded only with approved sales order form

• An open-order files is maintained and reviewed regularly (e.g. unfilled orders, aged orders)

• Assure Free of charge / sample of sales orders for properly approved, classified

• No manual sales transactions

• Contractual return and warranty provisions that are clearly spelled out in the sales contract

• Record returns on pre-numbered documents that are monitored to assure they are all recorded promptly

• Credits / Debits / Returns fully authorized Credit

Credit Controls

• Formal Credit Policy (Written, taught, monitored)

• Periodic review of the credit policy by key executives

• New Customer policy, standard credit default setngs. Orders not accepted unless credit limits reviewed first

• Automated credit checks on all orders, orders on hold if not.

• Special approval for large and/or unusual transactions

• Periodic review of all standing credit data. Authorization by senior staff required for changes in Pricing

Price Controls

• Authorized price lists and specified terms of trade in place

• Price setting and price change policy (Written, taught, monitored)

• Compare prices and terms on a sample of sales invoices to the authorized price list and terms of trade

• Limited / no manual pricing of orders

General / Other

• Segregation of duties

• Limiting access to the files to authorized individuals

Controls in The Billing/Accounts Receivable/Cash Receipts (B/AR/CR) Process)

• Require credit approval prior to shipment. You will have problems collecting accounts receivable if an order is shipped to a customer with a bad credit rating. Therefore, require the signed approval of the credit department on all sales orders over a certain dollar amount.
• Verify contract terms. If there are unusual payment terms, verify them before creating an invoice. Otherwise, accounts receivable will contain invoices that customers refuse to pay.
• Proofread invoices. If an invoice for a large-dollar amount contains an error, the customer may hold up payment until you send a revised invoice. Consider requiring the proofreading of larger invoices to mitigate this problem.
• Authorize credit memos. People who have access to incoming customer payments could intercept incoming cash and then create a credit memo to cover their tracks. One step in the prevention of this problem is to require the formal approval of a manager for credit memos, which are then verified at a later date by the internal audit staff. Do not take this control to extremes and require approval for extremely small credit memos - allow the accounting staff to create small ones without approval, just to clean up small remaining account balances.
• Restrict access to the billing software. As just noted, someone could intercept incoming payments from customers and hide the theft with a credit memo. You should password-protect access to the billing software to prevent the illicit generation of credit memos.
• Segregate duties. As just noted, no one should be able to handle incoming customer payments and create credit memos, or else they will be able to take the money and cover their tracks with credit memos. Therefore, assign these tasks to different people.
• Review accounts receivable journal entries. Accounts receivable transactions almost always go through a sales journal in the accounting software that generates its own accounting entries. Therefore, there should almost never be a manual journal entry in the accounts receivable account. You should investigate these entries carefully.
• Audit invoice packets. After invoices are completed, there should be a packet on file that contains the sales order, credit authorization, bill of lading, and an invoice copy. The internal audit staff should review a selection of these packets to verify that the billing clerk properly reviewed all of the supporting paperwork and correctly generated an invoice.
• Match billings to shipping log. It is possible that items will be shipped without a corresponding invoice, or vice versa. To detect these situations, have the internal audit staff compare billings to the shipping log, and investigate any differences.
• Audit the application of cash receipts. The accounting staff may incorrectly apply cash receipts to open invoices, perhaps not even applying them to the accounts of the correct customers. Have the internal audit staff periodically trace a selection of cash receipts to customer invoices to verify proper cash application.

Lets take segregation of duties as an example

1. Customer Master Data Management

Those responsible for an organization’s customer master file play an important role, as they are tasked with ensuring their company’s customer information is accurate, up to date and accessible. The information contained within an organization’s customer master file is a veritable goldmine. Those records come in handy during sales efforts, plans for expansion, merger or acquisition discussions, or to properly forecast for the upcoming year.

Companies should ensure personnel in this area do not also have direct oversight in areas that process customer invoices. This can increase the risk of unauthorized charges made against the customer master file resulting in phantom invoices, improper terms and fraudulent payments.

1. Sales and Order Management

Sales are the lifeblood of any organization. Ensuring those transactions are carried through to their proper conclusion and customer orders are properly fulfilled can often mean the difference between profit and loss.

Though their roles are critically important, sales and order management staff should not also oversee customer delivery. This can lead to falsifying sales records to non-existing customers and siphoning valuable inventory from the company. Sales and order management should also not have direct oversight of invoicing and customer payment areas, as it could easily lead to falsifying records as well.

1. Credit Management

If sales are the lifeblood of an organization, then credit management represent the nutrients that ensure a company remain financially healthy. Determining the best terms for each customer is critical to ensuring companies do not expose themselves to unnecessary risk.

Credit Management staff should not be directly responsible for tasks involving cash receipts and application. This can easily lead to unauthorized credit approval for high-risk customers, resulting in the possibility of manipulating incoming cash and its application in the general ledger.

1. Invoice Management

Proper invoicing procedures can help ensure customers pay on time (or early), mitigate errors and exception handling, and reduce delayed payments.

While an organization will want their invoice management team to understand their role in the Order-to-Cash process, they will likely not want them authorizing sales orders and involved in cash application. Both instances introduce the risk of falsifying records and creating a discrepancy between orders and invoices. It can also lead to cash payments that may never show in the general ledger. There are safeguards in place at the customer level – correlating sales orders with POs and ultimately with invoices – but by the time the customer notices, the damage to your company’s reputation is already done.

1. Cash Application Management

With the advent of automated cash application and other efficient solutions, many organizations have reduced both risk and error in cash application management. Nevertheless, many organizations are far from automating this segment of the Order-to-Cash process.

There should be a clear distinction between those with close proximity to and responsibility for handling cash receipts and those applying the cash. Automation, whether it’s in the form of software or off-site, third-party lockbox solutions, provides some safeguard and helps reduce risk, but these areas still require some form of manual oversight. Ensuring that oversight is properly segregated from other duties goes hand-in-hand with strengthening internal controls and helping safeguard the company’s cash flow.