Question

ORDER TO CASH PROCESS

Sales Department

Customers send their orders by mail or fax to the sales department. Upon receiving an order, a sales clerk checks the credit worthiness via a terminal the customer record in Money Talk’s Customer Master file to review the available credit before creating a Sales Invoice record. For customers with no or insufficient available credit, the clerk submits the order to the credit manager for approval. If granted, the credit manager verbally authorizes and instruct the clerk to offer or increase the customer’s line of credit accordingly. For approved sales, a record is added to the Sales Invoice file in Money Talk’s O2C system which automatically assigns an Invoice Number, which is the primary key for the record. The clerk manually enters the remainder of the order data.

Chai Wan Warehouse

Based on input from the sales invoice, the computer terminal at Chai Wan Warehouse retrieves from Money Talk’s O2C system and automatically prints a Stock Release, which the Chai Wan Warehouse staff uses to pick the goods. The goods are sent to the Shipping Department along with the Stock Release. Once the goods have left the Chai Wan Warehouse, the clerk at the warehouse update the Money Talk to confirms to the system the quantity sold and the system automatically updates the Quantity on Hand field in the respective inventory record in the Inventory Subsidiary Ledger.

Shipping Department

The Shipping Department upon receiving the goods from the warehouse, checks and prepares them for shipment, selects a carrier and prepares the Packing Slip and Bill Of Lading (BOL). Once the goods are shipped, the clerk update Money Talk to record the shipment to the Shipping Log file.

Billing Department

At the end of the day Money Talk automatically searches the Sales Invoice and Shipping Log files for items shipped and prepares a hard copy Customer Invoice, which is mailed to the customer the next day.

Cash Receipts

Tiffany, the cash receipts clerk, receives the customer cheques and Remittance Advices directly from the customer. She records this transaction by entering the Invoice Number (taken from the Remittance Advice) into Money Talk. The system automatically creates a Cash Receipts record. Tiffany then manually adds the customer number, amount, and payment date to the Cash Receipts record. At the end of the day she prepares a deposit slip and sends the cheques to the bank. She files customers’ Remittance Advices in her office.

CASE REQUIREMENTS

1. Prepare an As-Is Data Flow Diagram for the Order to Cash and identify at least 3 exposures, circle and number the exposure where the exposure is.

2. In tabular form, against each numbered exposure as indicated in A, describe ONE possible risk and suggest ONE control procedure that can mitigate the exposure identified.

3. Prepare a To-Be System Flowcharts for the process that incorporate your recommendations in A above.

Answer 1

Answer:-

A.

Revenue Cycle Procedures.

An internal control systems consists of all the policies and procedures (internal controls) adopted by management of an entity to assist in achieving management’s objective.

Transaction Authorization: Transactions that commit the organizations resources should be subject to authorization and approval by a responsible official. The limits for authorization should also be specified.

The method of approving the transactions is poor since for customers with insufficient available credit, the clerk submits the order to the credit manager for approval and if granted manager authorizes the clerk to increase the customer’s line of credit accordingly verbally instead of approving the increase in customers line of credit in writing to create evidence that he actually authorized a transaction. The clerk may be tempted to increase the customer’s credit line if there is a collision between the customer and the clerk without the approval of the manager since the clerk may say the manager approved verbally as usual which may create losses if the action is not identified.

Based on input from the sales invoice, the warehouse terminal automatically prints a stock release document, which the warehouse staff uses for picking the goods thereby showing there is no authorization for stock release by any top manager which may be risky since there may be a collision between the person creating the invoice and the person recording the stock release.

Mary the cash receipts clerk receives the checks and the remittance advises from the customer directly. There is no authorization by a higher manager for the transaction to be recorded. A collision between the person creating the sales invoice and the accounting clerk may cause losses to the firm since the invoice may be inflated in order to get extra money (illegal)from the customer if the manager does not approve the transitions .

The company does not have good segregation of duties since one clerk is in charge of many duties. For example;

For approved sales, a record is added to the Sales Invoice file. The system automatically assigns an Invoice Number, which is the primary key for the record. The clerk manually enters the remainder of the order data. this should not be the case since the person adding the sales invoice should not be the same person entering the remaining order data to avoid manipulation of the sales invoice.

Mary then manually adds the customer number, amount, and payment date to the Cash Receipts record. At the end of the day she prepares a deposit slip and sends the checks to the bank. She files the remittance advice in her office. In such an event the person in charge of preparing deposit slips should not be the same person sending the checks to the bank to avoid manipulation of records.The remittance records should also be held by another person for accountability purposes.

On the other hand the company may be seen to have some segregation of duties since there are different departments involved e.g. the sales department in charge of preparing the sales invoices, there is the ware house in charge of stock release, there is the shipment department in charge of transporting the goods est.

EXPENDITURE CYCLES PROCEDURE.

There should be authorization of the goods needing replenishing after Walker identifies the goods by a top manager in order to avoid purchase of any unnecessary goods by the purchasing department.

The purchase orders are printed on Walker’s terminal, signed by him which should not be allowed since by allowing Walker to sign the document, he will be authorizing his own transaction. Walker is identifies the goods needed for replenishing, selects the vendor and record the order in the purchases order file thus making this transaction to be termed as his own transaction.

Sean O’Connell in the Cash Disbursements department reviews the Voucher Payable file for items due to be paid that day then after some recordings the system automatically places the check number in the appropriate Voucher Payable record to indicate that payment has been made. Instead there should be proper authorization for payment by a senior manager to avoid payments that were already settled.

The person identifying the goods to be replenished i.e. James Walker should not be the same person identifying the vendor to provide the gods to avoid ordering goods which are in the store since there may be a collision between the person asking for replenishing and the vendor where the vendor may be offering some offers to the person identifying the goods to be replenished for the vendor to provide goods in the company.

After Mr. Walker has reviewed the receipts he manually adds the system-assigned RR Number to the corresponding Purchase Order record to indicate that the product has been received, this should not be the case since he signed the purchase order therefore he should not be in charge of approving that the goods have been received to avoid loss of goods. Walker may approve that the goods were received yet they are not complete thus causing loss of goods.

Sybil Johnson, the Accounts Payable clerk, receives the vendor’s invoices while O’Connell in the Cash Disbursements department reviews the Voucher Payable file for items due to be paid that day. This a good sign of segregation of duties as an internal control since, if the person receiving the vendorsinvoice is in charge of vendors payment, there could be fraudulent activities that could not be identified.

Most of the documents are automatically generated hence it may be difficult to identify the person responsible for a given error in the accounting records in the company. Measures to identify the source of the documents should be implemented to ensure that records are free from error.

Most of the data which is essential is manually entered which may be risky since the person entering the data may not be attentive to identify some errors which may take time to be identified by the company.The storage of the accounting document is not properly done since the person in charge of creating the data in the accounting record is the same person storing the records. This should not be the case since the person holding the documents may manipulate the data in order to suit their needs thus promoting fraudulent activities.