Question

Subject : Accounting Information System

Question : 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

1) Sales to customers with poor credit -What good sales can do if they are not able to generate cash flows and all the more turn Bad, the company would'nt able to materialise any revenue if the client has a poor track record and isunable to pay Controls: Having an independent credit approval function and maintaining good customer accounting can help to prevent problems.

2)Stockouts, carrying costs, and markdowns are a threat in the sales order entry process. The problem with stockouts is that when goods are not available to ship to customers, the business risks losing the sale to a competitor that can provide the goods in a timely manner. The opposite problem can also occur where excess inventory increases carrying costs, with the result that markdowns may be necessary in order to sell the inventory. Two controls can be implemented to cope with this threat. One control that can be put into place is to establish accurate inventory control.Periodic physical counts of inventory will also verify the perpetual amounts recorded by the AIS. Another important control in this situation is that of accurate sales forecasting. Proper marketing efforts should be made in conjunction with regularly reviewing sales forecasts for accuracy.  

3)Failure to bill customers & Billing errors -Making sales without issuing a sales receipt or issuing a sale receipt with an amount less than the amount purchased ,etc. are indications of fraud in thecompany.the revenues get affeted this way Controls: Separating shipping and billing and pre-numbering of shipping documents helps along with reconciliation of all sales documents , Reconciliation of picking tickets and bills of lading with sales orders; data entry edit controls; and price lists may prevent billing errors.

4) Theft of cash - Segregation of duties is essential to prevent this serious problem (the following duties should be separate: handling cash and posting to customer accounts; handling cash and authorizing credit memos and adjustments; issuing credit memos and maintaining customer accounts); use of lockboxes for receipts and EFT for disbursements; mailing customer statements monthly; use cash registers in retail operations where cash payments are received; deposit cash daily in the bank; and have the bank reconciliation function performed by independent third parties.

5) Posting errors in updating accounts receivable - Hiring of professional for maintenance and updating the accounts is important because a company should know its debtors for proper receovery and reconcilitation of accounts Controls: Use of editing and batch totals is essential here.