Accounting information systems controls and process 2nd tunnwe weickgenannt chapter 08

Chapter 8-14 Characteristics indicating risk with respect to sales processes: Frequent changes made to sales prices or customers Pricing structure is complex or based on estimates La

Chapter

8-1

Prepared by Coby Harmon University of California, Santa Barbara

Westmont College

Chapter

8-2

Revenue and Cash Collection Processes and Controls

Chapter

8-3

1 An introduction to revenue processes

2 Sales processes and the related risks and controls

3 Sales return processes and the related risks and controls

4 Cash collection processes and the related risks and controls

5 An overview of IT systems of revenue and cash collection that enhance

the efficiency of revenue processes

6 E-business systems and the related risks and controls

7 Electronic data interchange (EDI) systems and the related risks and

controls

8 Point of sale (POS) systems and the related risks and controls

9 Ethical issues related to revenue processes

10 Corporate governance in revenue processes

Study Objectives

Study Objectives

Chapter

8-4

Staples®, the large office supply company, sells not only

in retail stores, but also to other large corporations Top management at Staples realizes that these corporate sales are dependent upon customers’ satisfaction with their buying experience Staples must have sales processes that maximize customer satisfaction, because the sales processes are what make up the buying experience However, customer satisfaction depends on the whole range of activities from ordering, to product delivery, to efficient billing and collection, and facilitation of product returns Staples must have, monitor, and improve all of the internal processes that generate the sale, deliver to the

customer, and collect the payment These processes must be able to handle

walk-in sales, telephone orders, and web orders To improve performance in filling customer orders and collecting the cash, Staples

monitors the following performance measures:

• Order entry accuracy • Order fill rate versus unit fill rate

• Percent of items mispicked • Percent of orders delivered next day

• Products delivered undamaged

To perform efficiently in these areas, Staples must have processes within the company to enter customer orders, pick the correct items from the warehouse shelves, package and ship the items correctly, bill the customer

correctly, and collect the payment as quickly as possible If these processes are

inefficient or poorly managed, the result may be unhappy customers and reduced

sales This chapter describes these types of revenue processes and the internal

controls within those processes.

Real World

Real World

Chapter

8-5

Companies sell products and/or services

Examples:

SO 1 An introduction to revenue processes

Introduction to Revenue Processes

Introduction to Revenue Processes

Retailers :

 Record the sale,

 collect cash,

 update inventory status

all at the time of the sale

Manufacturers :

 Sell product to other

companies

 Deliver goods and bill

customer at a later date

 Collect payment

Chapter

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Systems and processes must be in place to capture, record,

summarize, and report sales transactions.

Processes include:

 Polices and procedures employees follow in completing the

sale

 Capturing customer data and sales quantities

 Routing sales documents to the right departments

Introduction to Revenue Processes

Introduction to Revenue Processes

The Accounting System uses this flow of sales documents to

various departments to record, summarize, and report the results

of the sales transactions

SO 1 An introduction to revenue processes

Chapter

8-7

Introduction

to Revenue Processes

Introduction

to Revenue Processes

Chapter

8-8

Business processes common in company-to-company sales

transactions are:

Introduction to Revenue Processes

Introduction to Revenue Processes

1 Collect order data from customer

2 Deliver goods

3 Record receivable and bill customer

4 Handle product returns

5 Collect the cash

6 Update records, such as

 accounts receivable,

 cash,

 inventory,

 revenue, and

 cost of goods sold.

SO 1 An introduction to revenue processes

Sales Process Map

See next slide for larger image

SO 2 Sales processes and the related risks and controls

Adequate records and documents

Security of assets and documents

Independent checks and reconciliation

Cost-benefit considerations

Controls and Risks in Sales Processes

Controls and Risks in Sales Processes

SO 2 Sales processes and the related risks and controls

Chapter

8-14

Characteristics indicating risk with respect to sales

processes:

Frequent changes made to sales prices or customers

Pricing structure is complex or based on estimates

Large volume of transactions

One or few key customers

Shipments not controlled directly by the company

Product mix is difficult to differentiate

Shipping and/or recordkeeping at multiple locations

Controls and Risks in Sales Processes

Controls and Risks in Sales Processes

SO 2 Sales processes and the related risks and controls

Chapter

8-15

The purpose of tracing shipping documents to

prenumbered sales invoices would be to provide

evidence that

a shipments to customers were properly invoiced.

b no duplicate shipments or billings occurred.

c goods billed to customers were shipped.

d all prenumbered sales invoices were accounted

for.

Controls and Risks in Sales Processes

Controls and Risks in Sales Processes

SO 2 Sales processes and the related risks and controls

Concept Check

Chapter

8-16

Controls and Risks in Sales Processes

Controls and Risks in Sales Processes

SO 2 Sales processes and the related risks and controls

Concept Check

The purpose of tracing sales invoices to shipping

documents would be to provide evidence that

a shipments to customers were properly invoiced.

b no duplicate shipments or billings occurred.

c goods billed to customers were shipped.

d all prenumbered sales invoices were accounted

for.

Chapter

Company must have procedures for receiving returned goods, crediting customer’s account, and placing items back in

inventory.

Terminology:

Sales Return Processes

Sales Return Processes

 Receiving log

 Receiving report

 Credit memorandum

Chapter

8-18

Exhibit 8-8

Sales Returns Process Map

See next slide for larger image

Sales Return Processes

Sales Return Processes

SO 3 Sales return processes and the related risks and controls

Chapter

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Sales Return Processes

Sales Returns Process Map

SO 3 Sales return processes and the related risks and controls

Chapter

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Sales Return Processes

Sales Return Processes

SO 3 Sales return processes and the related risks and controls

Exhibit 8-8

Sales Returns Process Map

Adequate records and documents

Security of assets and documents

Independent checks and reconciliation

Chapter

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Circumstances which may indicate high level of risk.

Quantities of returns are difficult to determine

High volume of credit memo activity

Product prices change frequently, or pricing structure is

otherwise complex

Returns are received at various locations, or issuance of credit

memos may occur at different locations

One or few key customers

Returns not controlled directly by the company

Chapter

8-23

Concept Check

SO 3 Sales return processes and the related risks and controls

Risks and Controls in the Sales Return

Processes

Risks and Controls in the Sales Return

Processes

Under a system of sound internal controls, if a company

sold defective goods, the return of those goods from the

customer should be accepted by the

Chapter

8-24

Company-to-company sales are typically made on account,

and a time span is given for the customer to pay.

Terminology:

SO 4 Cash collection processes and the related risks and controls

Cash Collection Processes

Cash Collection Processes

 Remittance advice

 Cash receipts journal

Chapter

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Exhibit 8-12

Cash Receipts Process Map

See next slide for larger image

Cash Collection Processes

Cash Collection Processes

SO 4 Cash collection processes and the related risks and controls

Chapter

8-26

Cash Collection Processes

Cash Collection Processes

SO 4 Cash collection processes and the related risks and controls

Exhibit 8-12

Cash Receipts Process Map

Chapter

8-27

Cash Collection Processes

Cash Collection Processes

SO 4 Cash collection processes and the related risks and controls

Exhibit 8-12

Cash Receipts Process Map

Chapter

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Cash Collection Processes

Cash Collection Processes

Concept Check

SO 4 Cash collection processes and the related risks and controls

Which of the following is not a document that is part of the

cash collection process?

a Remittance advice

b Cash receipts journal

c Bank deposit slip

d Packing slip

Chapter

8-29 SO 4 Cash collection processes and the related risks and controls

Risks and Controls in the Cash Collection

Adequate records and documents

Security of assets and documents

Independent checks and reconciliation

Cost-benefit considerations

Chapter

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Circumstances that may indicate risks to cash collections.

High volume of cash collections

Decentralized cash collections

Lack of consistency in the volume or source of collections

Presence of cash collections denominated in foreign currencies

SO 4 Cash collection processes and the related risks and controls

Risks and Controls in the Cash Collection

Processes

Risks and Controls in the Cash Collection

Processes

Chapter

8-31

Cash Collection Processes

Cash Collection Processes

Concept Check

SO 4

Which of the following would represent proper segregation of

duties?

a.The employee who has custody of cash also does accounts

receivable record keeping

b.The employee who has custody of cash completes the bank

reconciliation

c.The employee who opens mail containing checks prepares a list of checks received

d The employee who opens mail containing checks records

transactions in the general ledger

Chapter

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Larger IT systems generally have:

Fewer manual processes

More computerized processes

SO 5 An overview of IT systems of revenue and cash collection

that enhance the efficiency of revenue processes

IT Enabled Systems of Revenue and Cash

Collection Processes

IT Enabled Systems of Revenue and Cash

Collection Processes

Chapter

8-34

Sophisticated, highly integrated IT systems capture, record,

and process revenue and cash collection events.

Such systems include:

 E-commerce systems

 Electronic Data Interchange (EDI) systems

 Point of Sale (POS) systems

SO 5 An overview of IT systems of revenue and cash collection

that enhance the efficiency of revenue processes

IT Enabled Systems of Revenue and Cash

Collection Processes

IT Enabled Systems of Revenue and Cash

Collection Processes

Chapter

8-35

Sophisticated IT systems usually lead to:

 First, underlying processes are reengineered (BPR) so as to

be conducted more efficiently

 Second, IT systems improve the efficiency of the related

information

SO 5 An overview of IT systems of revenue and cash collection

that enhance the efficiency of revenue processes

IT Enabled Systems of Revenue and Cash

Collection Processes

IT Enabled Systems of Revenue and Cash

Collection Processes

SO 6 E-business systems and the related risks and controls

E-Business Systems and the Related Risks and Controls

E-Business Systems and the Related Risks and Controls

Chapter

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Advantages of e-commerce include:

1 Reduced cost

2 Shorter sales cycles

3 Increased accuracy and reliability of sales data

4 Increased potential market for products and services

SO 6 E-business systems and the related risks and controls

E-Business Systems and the Related Risks and Controls

E-Business Systems and the Related Risks and Controls

Chapter

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Many large corporations sell to other companies Staples® is

an example of a company selling to other companies via

websites Regarding sales of office supplies to other large

corporations, management at Staples realizes that it must

support orders in the manner the customer prefers Jay Baitler,

the senior vice president of the Staples Contract Division, said,

“Offering based transactions is now critical.”2

Internet-based sales accounted for 70 percent of the revenue in the

contract division.

SO 6 E-business systems and the related risks and controls

Real World

Real World

Chapter

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SO 6 E-business systems and the related risks and controls

Security and Confidentiality

1 Unauthorized access

2 Hackers or other network break-ins

3 Repudiation of sales transactions

Processing Integrity

4 Invalid data entered by customers

5 Incomplete audit trail

6 Errors when integrating data into back end systems

E-Business Systems and the Related Risks and Controls

E-Business Systems and the Related Risks and Controls

Chapter

Controls should be in place to reduce the security,

availability, processing integrity, and confidentiality risks.

E-Business Systems and the Related Risks and Controls

E-Business Systems and the Related Risks and Controls

Availability

7 Hardware and software system failures that block customers

from access to the website

8 Virus and worm attacks

9 Denial-of-service attacks by hackers

When a company sells items over the Internet, it is usually

called e-commerce There are many IT risks related to Internet sales The risk of invalid data entered by a customer would be

Chapter

E-Business Systems and the Related Risks and Controls

E-Business Systems and the Related Risks and Controls

Concept Check

When a company sells items over the Internet, there are many

IT risks The risk of hardware and software failures that

prevent Website sales would be a(n)

a.availability risk.

b.processing integrity risk.

c.security risk.

d.confidentiality risk.

Chapter

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Electronic data interchange is the inter-company,

computer-to-computer transfer of business documents in a standard

business format.

SO 7 Electronic data interchange (EDI) systems

and the related risks and controls

ANSI X.12 standards divide EDI data transmissions into

Electronic Data Interchange (EDI) Systems

Electronic Data Interchange (EDI) Systems

SO 7

Chapter

and the related risks and controls

Advantages to an EDI system within the revenue and cash

collection processes:

1 Reduction or elimination of data keying

2 Elimination of keying errors

3 Elimination of costs related to keying errors

4 Elimination of time needed to key in orders

5 Elimination of mail delays

Electronic Data Interchange (EDI) Systems and The Risks and Controls

Electronic Data Interchange (EDI) Systems and The Risks and Controls

Chapter

and the related risks and controls

Advantages to an EDI system within the revenue and cash

collection processes:

6 Elimination of postage costs

7 Reduction in inventory levels

8 Competitive advantage through better customer service

9 Preservation of business with existing customers who have

Chapter

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Northern Telecom (Nortel) switched to an Internet EDI system in the late

1990s Nortel has customers all over the globe, and the use of the

Internet by Nortel customers to transmit purchase orders is a low-cost

transmission option for those customers This was especially beneficial to Nortel in expanding its customer base in Europe and Asia As Nortel

works to gain new customers, a low-cost way to order is an enticement to those customers There are also other benefits to Nortel The use of

Internet EDI eliminated the need for customers to fax purchase orders or

supplier information to Nortel Michael Keef, the senior manager of

electronic business solutions at Nortel, said, “Errors occur when people

fax things We won’t have to rekey shipment notices.”3 Details of Internet

EDI are described in a later chapter on e-commerce.

Real World

Real World

SO 7 Electronic data interchange (EDI) systems

and the related risks and controls