Question

Q 1) Recommend internal control procedure(s) that can provide protection against the following threats?

1. An employee issues credit memos to write-off account balances for friends

2. Workers on the shipping dock steal goods, claiming that the inventory shortages reflect errors in the inventory records.

3. An employee fails to bill customers for the goods which are shipped to them, which results in the loss of assets and erroneous data about sales, inventory, and accounts receivable.

4. An employee uses the same sales order twice to authorize another shipment of the same goods to the same customer.

5. Customers are billed for the quantity ordered, but the quantity shipped is actually less because some items have been back ordered.

6. The cashier steals funds by cashing several checks from customers.

Q 2) Summarize the major processes in sales and revenue cycle.

Answer 1

Internal controls for employee issues credit memos to write-off account balance for friends

1. Credit notes issue policy should be drafted and documented. The policy should include the authorised personnel to raise credit note and approvals required for issue of credit memos.
2. All credit memos should be numbered, dated, name of the customer and reason for issue of credit note.
3. Ensure documented process are developed to review of revenue and receivables to ensure all the employees are well known the process need to be followed.
4. Ensure the person raising the invoice, collection of amount receivable from debtor, issuer of credit note shall not be same. There shall be segregation of duties among employees.
5. Ensure the reason for issue of credit memos reviewed by the person authorising the issue to confirm the correctness or accuracy of issue of credit note.

Internal controls over workers on the shipping dock steal goods:

1. Ensure the review of job application of workers before deploying for the work. Background checks also conducted to ensure no irregularities done by the employee previous work place.
2. Proper physical controls placed on physical inventory like security check, Deployment of supervisors.
3. Periodical review of physical inventory with books inventory to ensure inventory not lost or correcting the errors in the books of accounts.
4. Maintenance of inventory tracking sheets to ensure all the inventory listed are available physically.
5. Periodical conducting of audits of physical inventory.
6. Creating awareness among the employees about loss of inventory so that those employees who are not involved in pilferage of goods may report about those employees who involved in pilferage.
7. Ensure inventory is insured against theft and fire etc.,

Controls over non-billing to customers.

1. All sales ordered are properly numbered and documented to ensure all sales ordered are delivered and recorder as sales, inventory adjustments are made accordingly.
2. Despatches of goods are made with supporting of GRN Note and the same is attached along with the invoice to ensure billing is done at the actual quantity sent to customers.
3. Ensure all sales invoices are pre-numbered and all the numbers are accounted.
4. Tally with the actual quantity of goods sent and actual quantity of goods billed to customer’s differences if any has to be corrected immediately.
5. Sales quantity are correlated and reconciled with the purchases and closing stock in hand.
6. Sales ledger are periodically tally with the general ledgers.

Controls over delivery of another shipment of goods against same sales order

1. Ensure all sales orders are pre numbered, Dated, Name of customer written and documented.
2. Sales ordered completed sales are properly attached with invoice to ensure all the sales are billed against sales ordered.

Delivery of goods at lesser quantity then actually billed in invoice

1. Ensure all the goods delivered should be supported by GRN note and ensure the cross checking of quantity of goods billed and quantity mentioned are matched.
2. Ensure controls placed on the weighment of goods has been done before delivery to customers.
3. Controls over transit loss of goods sent to customers and necessary precautions taken to reduce transit loss.
4. Attachment of weighment slips with GRN and send it to sales department to ensure the correct quantity and value has been billed to customers.

Misappropriation of amount collected from customers

1. Ensure internal check is placed to ensure cash is properly safeguarded.
2. System of periodical cross checking of cash book and pass book.
3. Ensure all cheques are raised by the customers are account payee cheques.
4. Ensure the person collecting cheques and depositing into bank is different from the person passing the sales entries and receivable entries.
5. Obtain periodically customer account confirmation from customers to ensure balance as per our books and customer books are tallied.
6. Ensure all the counter foils of cheques deposited are documented and periodical cross checking with the realisation.

Major process in sales and revenue cycle:

1. Initially sales ordered received by sales and marketing department from the customers and informing to inventory department about the requirement of goods for sales.
2. Accordingly inventory department shall purchase or manufacture the goods to deliver on time.
3. Inventory department at the time of despatch of goods will raise goods deliver note and send it to accounts department for recording sales.
4. Sales department upon completion of sales accordingly book the sales entry and inform to the receivable department or cashier in order to realise the amount accordingly from the customer.
5. Revenue department shall prepare the Annual revenue budget and compares the budgets with the actuals.