Question

Question 3

The revenue cycle affects the bottom line of the business critically. Hence, there are many threats that could derail a successful cycle. Describe 5 threats that may hinder this sequence and its compensating controls for each threat.

Answer 1

REVENUE CYCLE

[Sales order entry—Shipping—Billing & A/R—Cash collections]

AIS must provide adequate controls so that the following objects are met:

(1) Transactions are properly authorized.

(2) Recorded transactions are valid.

(3) All valid, authorized transactions are accurately recorded.

(4) Assets are safeguarded from loss or theft.

(5) Business activities are performed efficiently and effectively.

The following help achieve the above:

• Simple, easy-to-complete documents with clear instructions.

• Appropriate application controls (e.g., validity or field checks).

• Signature space for persons responsible for completion and review of documents.

• Prenumbering of the documents.

Revenue Cycle—Major threats & control

(1) Sales to customers with poor credit—(uncollectable sales and losses due to bad debts). Prevention—independent credit approval function and good customer accounting.

(2) Shipping errors—wrong quantities, items, or address: mad customers. Prevention—reconcile shipping notices and picking tickets, bar code scanners, data entry controls.

(3) Theft of inventory—loss of assets ----> inaccurate records. Prevention—Secure inventory and document transfers, good accountability for picking and shipping, and frequently reconcile records with physical count.

(4) Failure to bill customers—loss of inventory, and erroneous data about: sales, inventory, and receivables. Prevention—Separate shipping and billing. Prenumber of shipping documents and reconciliation of all sales documents.

(5) Billing errors—pricing mistakes, overbilling for items not shipped or back ordered—loss assets and mad customers. Prevention—reconciliation of picking tickets and bills of lading with sales orders, data entry edit controls, and price lists.

(6) Theft of cash—loss of assets and overstated A/R. Prevention—separation of duties: handling cash and posting to customer accounts; handling cash and authorizing credit memos & adjustments; issuing credit memos and maintaining customer accounts. Use lockboxes and EFT. Mail customer statements monthly. Use cash registers in retail. Deposit cash intact daily in the bank. Bank reconciliation done by noncash handler.

(7) A/R incorrectly posted—mad customers, incorrect records, and poor decisions. Prevention—reconcile sub. A/R ledgers with general ledger, monthly stmts. to customers, and edit and batch totals.

(8) Loss of data—loss of confidential info., and poor decision making. Prevention—regular on-site & off-site backup, logical and physical access controls to prevent leakage to competitors.

(9) Poor performance—inefficient and ineffective operations. Prevention—sales and profitability analysis, A/R aging, and cash budgets to track operations.

REVENUE CYCLE INFROMATION NEEDS & DATA MODEL

AIS needs to provide useful information about:

• Customer inquiries about account balances and order status.

• Extension of credit to specific customers.

• Inventory availability.

• Credit terms.

• Prices

• Sales returns and warranty policies.

• Alternative merchandise delivery methods.

• Strategic and performance evaluation information.

..................this is valuable stuff.

    Response time to customer inquires.

    Time to fill & deliver orders.

    % of backorders.

    Customer satisfaction.

Overall revenue cycle performance measure =

    Revenue Margin = GM – all selling costs

REA revenue cycle data model:

• Resources—cash and inventory.

• Events—orders, shipments, billing, and cash collections.

• Agents—primary external agent is the customer, various internal agents.

A/R in the data model: balance is the difference between sales and cash collections for sales. No need for an A/R account (file).

Benefits of the data model:

• Integration of traditional accounting data and operational data.

• Additional data such as the time of day of a sale can be collected, analyzed and used in decision making.

• Links of internal and external information (e.g., credit ratings) is possible.

• Flexible/powerful query by SQL if relational DB.

• Data mining for target marketing.

RDB allows you to slice and dice data in any way that you want. This was not possible with a non-RDB.

Internal control and databases:

• Foreign key and referential integrity ensures the existence of primary key records in related tables.

• Effective access controls are very important in a database environment.

• REA diagrams highlight incompatible functions and system can be programmed to reject any attempt to perform incompatible functions by a single employee. When multiple roles are performed, auditors can check for compensating controls.

• Use of DBMS makes backup and disaster recovery procedures essential.