Question

Identify major threats in the revenue cycle and evaluate the adequacy of various control procedures for dealing with those threats.

Explain each one and give example.

Answer 1

Threats to Revenue Cycle include

1.Theft of Inventory and Cash

2.Sale to Customers who have poor credit

3.Incorrect posting of Accounts receivable

4.Failure to Bill Properly

5.Stock outs or Excess Inventory

6.Failure to Deliver goods properly in time

Control Procedures to minimize the threats are

1.Regarding Inventory there should be separate book to record Orders received with quantity mentioned .Inventory In and Out register need to be maintained for every movement of stock and control over inventory and its registers should be divided among many people.No one person should have full control over all Inventory issues.

Regarding Cash received from customers it is better to have it credited in bank rather than dealing in cash.When cash comes in the Customer account should stand credited and matched with the Invoice issued to the customer.

Cash loss is a major threat.It should be in hands of a trust worthy person and collection of checks/Cash and deposit and recording the transaction in books have to be made by different people.No Single person should have control over all these from beginning to end

2. It is better to check Credit rating of Customer before making a sale to avoid bad debts

3.Incorrect Posting of Accounts receivable:Mistakes are bound to happen for every human.Cross check is the only key to avoid errors.If it is just an error it can be rectified but if Incorrect posting is a Fraud (made purposely to deceive) then Controls need to be strengthened to avoid teeming and lading which is a way to allocate one customers money to another customer's Account

4.Failure to Bill Properly will lead to huge revenue losses and it would affect inventory too which cannot be traced back and customer may not accept the mistake and pay for those that were left unbilled.So it is better to deploy two or more people to check if all items are billed before it leaves the godown and arrive at counter check with closing balance of inventory on the end of the day

5.Stock outs or Excess Inventory are threats because in case of stock outs delivery gets delayed and revenue cycle gets extended and customers may be unwilling to pay for late delivery and in case of Excess inventory funds are locked in Inventory which if not sold cannot be converted into money and hence a threat

So adequate Inventory Management system and FIFO method and EOQ (Economic order quantity) can be calculated frequently to calculate the re order level and this can help in having a balanced inventory to meet demand and supply

6.Failure to deliver Properly in time

If goods get damaged during delivery or if there is unusual delay in delivering goods ,revenue cycle will be seriously affected.So its better to have due dates for every sales order received and a software is created to record the same and if monitored regularly can help

Internal COntrol and Seggregation of Duties can help in solving most of the threats associated with revenue cycle

Automated Softwares are available to monitor all leakages and threats that may arise in revenue cycle.Following up and Monitoring it is the Key.