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Accounting Information Systems

Revenue and Cash Collection Processes and Controls. Accounting Information Systems. Study Objectives. An overview of revenue processes within an organization Sales processes and the risks and controls in sales processes

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Accounting Information Systems

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  1. Revenue and Cash Collection Processes and Controls Accounting Information Systems

  2. Study Objectives • An overview of revenue processes within an organization • Sales processes and the risks and controls in sales processes • Sales return processes and the risks and controls in sales return processes • Cash collection processes and the risks and controls in cash collection processes • An overview of IT systems of revenue and cash collection that enhance the efficiency of revenue processes • E-business systems and the related risks and controls • Electronic data interchange (EDI) systems and the related risks and controls • Point of sale (POS) systems and the related risks and controls • Ethical issues related to revenue processes • Corporate governance of revenue processes

  3. Introduction to Revenue Processes Companies sell products and/or services. Examples: • 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. SO 1 An overview of revenue processes within an organization

  4. Introduction to Revenue Processes • 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. 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 overview of revenue processes within an organization

  5. Introduction to Revenue Processes Exhibit 8-1 Revenue Processes within the Overall System SO 1 An overview of revenue processes within an organization

  6. Introduction to Revenue Processes Business processes common in company-to-company sales are: • Collect order data from customer. • Deliver goods. • Record receivable and bill customer. • Handle product returns. • Collect the cash. • Update records, such as • accounts receivable, • cash, • inventory, • revenue, and • cost of goods sold. SO 1 An overview of revenue processes within an organization

  7. Sales Processes Terminology • Purchase Order • Sales Order • Price List • Credit Limit • Pick List • Packing Slip • Bill of Lading. • Shipping Log • Sales Invoice (Bill) • Sales Journal SO 2 Sales processes and the risks and controls in sales processes

  8. Sales Processes Exhibit 8-2 Sales Process Map See next slide for larger image. SO 2 Sales processes and the risks and controls in sales processes

  9. Sales Processes Exhibit 8-2 Sales Process Map SO 2 Sales processes and the risks and controls in sales processes

  10. Sales Processes Exhibit 8-2 Sales Process Map SO 2 Sales processes and the risks and controls in sales processes

  11. Controls and Risks in Sales Processes Common procedures associated with the revenue process: • Authorization of transactions • Segregation of duties • Adequate records and documents • Security of assets and documents • Independent checks and reconciliation SO 2 Sales processes and the risks and controls in sales processes

  12. Controls and Risks in Sales Processes Characteristics indicating risk with respect to revenue 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. SO 2 Sales processes and the risks and controls in sales processes

  13. Controls and Risks in Sales Processes Quick Review The purpose of tracing shipping documents to prenumbered sales invoices would be to provide evidence that • 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. SO 2 Sales processes and the risks and controls in sales processes

  14. Controls and Risks in Sales Processes Quick Review The purpose of tracing sales invoices to shipping documents would be to provide evidence that • 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. SO 2 Sales processes and the risks and controls in sales processes

  15. Sales Returns Processes Company must have procedures for receiving returned goods, crediting customer’s account, and placing items back in inventory. Terminology: • Receiving log • Receiving report • Credit memorandum SO 3 Sales return processes and the risks and controls in sales return processes

  16. Sales Returns Processes Exhibit 8-8 Sales Returns Process Map See next slide for larger image. SO 3 Sales return processes and the risks and controls in sales return processes

  17. Sales Returns Processes Exhibit 8-8 Sales Returns Process Map SO 3 Sales return processes and the risks and controls in sales return processes

  18. Sales Returns Processes Exhibit 8-8 Sales Returns Process Map SO 3 Sales return processes and the risks and controls in sales return processes

  19. Controls and Risks Associated with the Sales Returns Process Specific controls over the sales returns process: • Authorization of transactions • Segregation of duties • Adequate records and documents • Security of assets and documents • Independent checks and reconciliation SO 3 Sales return processes and the risks and controls in sales return processes

  20. Controls and Risks Associated with the Sales Returns Process 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. SO 3 Sales return processes and the risks and controls in sales return processes

  21. Controls and Risks Associated with the Sales Returns Process Quick Review 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 • receiving clerk. • b. sales clerk. • c. purchasing clerk. • d. inventory control clerk. SO 3 Sales return processes and the risks and controls in sales return processes

  22. Cash Collection Processes Company-to-company sales are typically made on account, and a time span is given for the customer to pay. Terminology: • Remittance advice • Cash receipts journal SO 4 Cash collection processes and the risks and controls in cash collection processes

  23. Cash Collection Processes Exhibit 8-12 Cash Receipts Process Map See next slide for larger image. SO 4 Cash collection processes and the risks and controls in cash collection processes

  24. Cash Collection Processes Exhibit 8-12 Cash Receipts Process Map SO 4 Cash collection processes and the risks and controls in cash collection processes

  25. Cash Collection Processes Exhibit 8-12 Cash Receipts Process Map SO 4 Cash collection processes and the risks and controls in cash collection processes

  26. Cash Collection Processes Quick Review Which of the following is not a document that is part of the cash collection process? • Remittance advice • b. Cash receipts journal • c. Bank deposit slip • d. Packing slip SO 4 Cash collection processes and the risks and controls in cash collection processes

  27. Controls and Risks Associated with the Cash Collection Process Specific controls over the cash receipts process: • Authorization of transactions • Segregation of duties • Adequate records and documents • Security of assets and documents • Independent checks and reconciliation SO 4 Cash collection processes and the risks and controls in cash collection processes

  28. Controls and Risks Associated with the Cash Collection Process 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 risks and controls in cash collection processes

  29. Cash Collection Processes Quick Review Which of the following would represent proper segregation of duties? • 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. • The employee who opens mail containing checks prepares a list of checks received. • The employee who opens mail containing checks records transactions in the general ledger. SO 4 Cash collection processes and the risks and controls in cash collection processes

  30. IT Enabled Systems of Revenue and Cash Collection Processes 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

  31. Exhibit 8-17 Revenue Processes System Flowchart IT Enabled Systems of Revenue and Cash Collection Processes Exhibit 8-17 is a system flowchart of a generic version of revenue system with some paper documents.

  32. IT Enabled Systems of Revenue and Cash Collection Processes 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

  33. IT Enabled Systems of Revenue and Cash Collection Processes • 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 underlying processes. SO 5 An overview of IT systems of revenue and cash collection that enhance the efficiency of revenue processes

  34. E-Business Systems and the Risks and Controls • Two popular types of Internet sales: • Business to Business (B2B) • Business to Consumer (B2C) SO 6 E-business systems and the related risks and controls

  35. E-Business Systems and the Risks and Controls • Advantages of e-commerce include: • Reduced cost • Shorter sales cycles • Increased accuracy and reliability of sales data • Increased potential market for products and services SO 6 E-business systems and the related risks and controls

  36. E-Business Systems and the Risks and Controls Risks related to Internet Sales include: • Security and Confidentiality • Unauthorized access. • Hackers or other network break-ins. • Repudiation of sales transactions. • Processing Integrity • Invalid data entered by customers. • Incomplete audit trail. • Errors when integrating data into back end systems. SO 6 E-business systems and the related risks and controls

  37. E-Business Systems and the Risks and Controls Risks related to Internet Sales include: • Availability • Hardware and software system failures that block customers from access to the website. • Virus and worm attacks. • Denial-of-service attacks by hackers. In addition, there are many online privacy risks to customers. SO 6 E-business systems and the related risks and controls

  38. E-Business Systems and the Risks and Controls Quick Review 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 a(n) • availability risk. • b. processing integrity risk. • c. security risk • d. confidentiality risk SO 6 E-business systems and the related risks and controls

  39. E-Business Systems and the Risks and Controls Quick Review 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) • availability risk. • b. processing integrity risk. • c. security risk • d. confidentiality risk SO 6 E-business systems and the related risks and controls

  40. Electronic Data Interchange and the Risks and Controls Electronic data interchange is the inter-company, computer-to-computer transfer of business documents in a standard business format. • ANSI X.12 standards divide EDI data transmissions into three parts: • Header data • Trailer data • Labeling interchanges • Data segments SO 7 Electronic data interchange (EDI) systems and the related risks and controls

  41. Electronic Data Interchange and the Risks and Controls Value Added Networks (VANs) Exhibit 8-18 EDI Using a Third-Party Network

  42. Electronic Data Interchange and the Risks and Controls Advantages to an EDI system within the revenue and cash collection processes: • Reduction or elimination of data keying. • Elimination of keying errors. • Elimination of costs related to keying errors. • Elimination of time needed to key in orders. • Elimination of mail delays. SO 7 Electronic data interchange (EDI) systems and the related risks and controls

  43. Electronic Data Interchange and the Risks and Controls Advantages to an EDI system within the revenue and cash collection processes: • Elimination of postage costs. • Reduction in inventory levels. • Competitive advantage through better customer service. • Preservation of business with existing customers who have adopted EDI. SO 7 Electronic data interchange (EDI) systems and the related risks and controls

  44. Electronic Data Interchange and the Risks and Controls Risks in an EDI system include: • Security and Confidentiality • Unauthorized access. • Trading partners gaining access to unauthorized data. • Hackers or other network break-ins. • Repudiation of sales transactions. • Processing Integrity • Invalid data entered by trading partners. • Incomplete audit trail. • Errors when integrating data into back end systems. SO 7 Electronic data interchange (EDI) systems and the related risks and controls

  45. Electronic Data Interchange and the Risks and Controls Risks in an EDI system include: • Availability • Hardware and software system failures that block customers from access to the EDI system. • IT controls can lessen these risks. Controls are: • Authentication • Encryption • Transaction logging • Control totals • Acknowledgment SO 7 Electronic data interchange (EDI) systems and the related risks and controls

  46. Electronic Data Interchange and the Risks and Controls Quick Review When The use of electronic data interchange (EDI) to conduct sales electronically has both risks and benefits. Which of the following is a benefit of EDI, rather than a risk? • Incomplete audit trail. • b. Repudiation of sales transactions. • c. Unauthorized access. • d. Shorter inventory cycle time. SO 7 Electronic data interchange (EDI) systems and the related risks and controls

  47. Point of Sale Systems and the Risks and Controls • Point of Sale systems, features that assist accountants and managers: • Touch screen menus. • Bar code scanning. • Real-time access to inventory and price data. • Credit card authorizations during the sale. • Real-time update of cash, sales, and inventory records. • Immediate summaries and analyses. • Integration with the company’s general ledger system. SO 8 Point of sale (POS) systems and the related risks and controls

  48. Point of Sale Systems and the Risks and Controls • Point of Sale systems can reduce some processing integrity risks within revenue and cash collection: • Pricing errors for products sold. • Cash overage shortage errors. • Errors in inventory changes—less chance of an incorrect product number. • Erroneous or invalid sales voids or deletions. SO 8 Point of sale (POS) systems and the related risks and controls

  49. Point of Sale Systems and the Risks and Controls Quick Review When An IT system that uses touch screens, bar coded products, and credit card authorization during the sale is called a(n) • electronic data interchange system. • b. e-commerce system. • c. point of sale system. • d. e-payables system. SO 8 Point of sale (POS) systems and the related risks and controls

  50. Ethical Issues Related to Revenue Processes • Intentional revenue inflation is unethical, and many types of revenue inflation are illegal. • Two ways to inflate revenue: • Channel stuffing • Leaving sales open http://www.sec.gov/litigation/litreleases/lr17001.htm http://www.usdoj.gov/opa/pr/2003/July/03_crm_436.htm SO 9 Ethical issues related to revenue processes

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