Question

Please list three tests of internal controls for each of the following: Revenue and cash receipts. Why do you think these controls are important?

Answer 1

Revenue: This is the product selling or service selling activity of a business, which generates income.

Cash receipt: This is the inflow of cash in business, which comes out of income generation, loan generation, etc.

Tests of control of revenues:

1) Taking sample data of revenues, making thorough checking of those, like authorization, invoices, and customer’s acknowledgement of receiving. This is important, because it may reveal certain mismatch; like material that is not shipped recorded as revenue.

2) Reconciliation should be done between the quantity and amount of material shipped and the quantity and amount of material invoiced. This is important because of finding any mistake; like quantity might be different in an invoice that is shipped.

3) Few selected customers should be called directly for understanding their existence, grievances, and reactions. This is important, since it may reveals company’s unfair practice; like customers may complain about the rate of discount.

Tests of control of cash receipts:

1) Sample entries should be taken from the cash receipts journal for finding their relevant documents, like invoices, supporting, etc. This is important because of finding any flaw.

2) Physical checking of cash with cashbook should be done time to time. This is important, because it restrict the cashier for taking cash from cash box for the personal use.

3) Cash receipt in bank should be reconciled with the cash book. This is important for finding the balance-difference reasons; like cash deposited in bank but not recorded in the cash book.