ACCT 4300 - Exam 2 Review, Part 1

(Module 4) What are the steps of the revenue cycle?

1.) Sales Order Entry

2.) Credit Approval

3.) Inventory and Shipping

4.) Billing

5.) Accounts Receivable and Collections

6.) Cash Receipts and Documents

(Module 4) When does the revenue cycle begin?

When a customer places an order for goods or services

(Module 4) Revenue Cycle — Sales Order Entry

• Receiving and logging the order

• Verifying inventory availability

• Preparing the sales order document

(Module 4) True or False: An effective AIS may automate validations at the sales order entry stage of the revenue cycle

True

(Module 4) Revenue Cycle — Credit Approval

• Evaluating the customer’s creditworthiness before fulfilling the order to minimize bad debt risk

• Implementing background/credit checks for new customers

• Evaluating existing customers against credit limits and past payment history

• Automatically approving for low-risk or repeat customers, while higher-value transactions may be routed to a credit manager

(Module 4) Inadequate controls at the credit approval stage of the revenue cycle can cause what?

A loss of revenue or damaged customer relationships

(Module 4) Revenue Cycle — Inventory and Shipping

• Upon credit approval, the sales order is forwarded to the warehouse for picking, packing, and shipment

• Pick and pack lists are generated based on inventory availability

• Shipping documents, such as packing slips and bills of lading, are prepared

• Carrier handoff is logged, and the shipping date is captured for revenue recognition and customer service tracking

(Module 4) Examples of AIS functionality at the inventory and shipping phase of the revenue cycle

• Inventory Updates

• Barcode Scanning for Accuracy

• Automated Triggers for Invoicing Once Shipment is Confirmed

(Module 4) Revenue Cycle — Billing

• After the goods are shipped/services are rendered, the billing department generates and sends invoices to the customer

• Sales invoices detail the transaction, including quantity shipped, prices, taxes, and payment terms

• System generated invoices help prevent discrepancies by pulling data directly from the sales order and shipping records (three-way match)

(Module 4) Errors in the billing step of the revenue cycle can lead to what?

Delayed collections and impaired cash flows

(Module 4) Revenue Cycle — Accounts Receivable and Collections

• Once the invoice is issued, it is recorded in the Accounts Receivable subsidiary ledger and the company monitors the outstanding balance until payment is received

• Customer payments may arrive via check, ACH, credit card, or digital platforms

• Cash application matches payments to open invoices and updates the A/R balance

• Follow up procedures, such as reminders, dunning letters, or collection agency referrals are used for delinquent accounts

(Module 4) How do AIS systems support the accounts receivable and collections step of the revenue cycle?

• Automating Aging Reports

• Tracking Payment Histories

• Flagging Overdue Accounts for Further Action

(Module 4) Revenue Cycle — Cash Receipts and Deposits

Once payment is received:

• Cash is deposited into the company’s bank account

• Deposit information is recorded in the general ledger and reconciliations are performed to ensure that bank activity aligns with accounting records

(Module 4) ___________ is a key control in the cash receipts and deposits step of the revenue cycle to prevent fraud or misappropriation

Segregation of Duties

(Module 4) In the Revenue Cycle, when do the journal entries take place?

• When the invoice is issued

• When cash is received

(Module 4) True or False: In the revenue cycle, there are no journal entries at the sales order and picking ticket/shipping stage

True

(Module 4) Revenue Cycle — What is the journal entry to be made when the invoice is issued?

DR Accounts Receivable XXX

— CR Revenue XXX

DR Cost of Goods Sold XXX

— CR Inventory XXX

(Module 4) Revenue Cycle — What is the journal entry to be made when cash is received?

DR Cash XXX

— CR Accounts Receivable XXX

(Module 4) What are the major source documents that appear in the Revenue Cycle?

• Customer Purchase Order (PO)

• Sales Order

• Picking Ticket

• Packing Slip

• Bill of Lading (BOL)

• Sales Invoice

• Remittance Advice

(Module 4) Customer Purchase Order (PO)

Customer’s request to buy goods/services — starts the revenue cycle and is used to create the company’s sales order.

(Module 4) Sales Order Document

Internal document created from the customer PO that authorizes the sale and triggers credit approval, shipping, and billing

(Module 4) Picking Ticket

Instruction sent to the warehouse identifying which inventory items and quantities to retrieve

(Module 4) Packing Slip

Document sent with the shipment listing the items actually shipped — evidence shipment occurred

(Module 4) Bill of Lading (BOL)

Legal shipping contract confirming goods were transferred to the carrier

(Module 4) Sales Invoice

Formal bill sent to the customer requesting payment and recording revenue/accounts receivable

(Module 4) Accounts Receivable Subsidiary Ledger

Record tracking each customer’s outstanding invoices and payment history

(Module 4) Remittance Advice

Customer document returned with payment indicating which invoice is being paid

(Module 4) Cash Receipts Journal

Record of all cash received from customers (date, customer, amount, payment method)

(Module 4) Where/when are risks most concentrated in the revenue cycle?

• Order Entry

• Shipping

• Billing

• Cash Collections

(Module 4) What are the key risks/weaknesses when it comes to issuing sales orders and granting credit?

• Incomplete or Inaccurate Sales Orders

• Invalid or Unauthorized Orders

• Uncollectable Accounts

• Stockouts or Excess Inventory

• Loss of Customers Due to Poor Order Management

(Module 4) Issuing Sales Orders and Granting Credit — Mitigating Controls to Address the Risk Tied to Incomplete or Inaccurate Sales Orders

• Data Entry Validation Controls

• Reconciliations Between Sales Orders and Customer Records

• Pre-Set Inventory Availability Checks

(Module 4) Issuing Sales Orders and Granting Credit — Mitigating Controls to Address the Risk Tied to Invalid or Unauthorized Orders

• Specific Authorization for High-Value Transactions

• Digital Signature

• Credit Checks and Pre-Approval for New Customers

(Module 4) Issuing Sales Orders and Granting Credit — Mitigating Controls to Address the Risk Tied to Uncollectable Accounts

• Credit Limits

• Aging Reports and Review of Accounts Receivable

• Customer Credit Approval Process

(Module 4) Issuing Sales Orders and Granting Credit — Mitigating Controls to Address the Risk Tied to Stockouts or Excess Inventory

• Inventory Management Systems with Real-Time Tracking

• Sales Forecasting Tools

• Cycle Counts and Reconciliations

(Module 4) Issuing Sales Orders and Granting Credit — Mitigating Controls to Address the Risk Tied to the Loss of Customers Due to Poor Order Management

• Customer Relationship Management (CRM) Systems

• Return Policy Reviews and Monitoring

• Post-Sale Surveys and Customer Feedback

(Module 4) What are the key risks/weaknesses when it comes to picking items from inventory and shipping the goods?

• Picking the Wrong Items or Quantity

• Inventory Theft

• Shipping Errors (e.g. Duplicate Shipments)

• Shipping Delays or Failures

• Damage During Shipment

(Module 4) Picking Items from Inventory and Shipping the Goods — Mitigating Controls to Address the Risk Tied to Picking the Wrong Items or Quantity

• Bar Codes or RFID Tagging

• Reconciliation Between Picking Lists and Sales Orders

• Pick-to-Light Systems (visual indicators to guide workers to the correct storage locations)

(Module 4) Picking Items from Inventory and Shipping the Goods — Mitigating Controls to Address the Risk Tied to Inventory Theft

• Restriction of Physical Access to Inventory

• Segregation of Duties

• Security Cameras and Monitoring

(Module 4) Picking Items from Inventory and Shipping the Goods — Mitigating Controls to Address the Risk Tied to Shipping Errors (e.g. Duplicate Shipments)

• Automated Order Management Systems

• Reconciliation of Shipment Documents

• Shipping Confirmation Protocols

(Module 4) Picking Items from Inventory and Shipping the Goods — Mitigating Controls to Address the Risk Tied to Shipping Delays or Failures

• Integrated Shipping and Order Management Systems

• Real-Time Shipment Tracking

• Periodic Shipping Performance Audits

(Module 4) Picking Items from Inventory and Shipping the Goods — Mitigating Controls to Address the Risk Tied to Damage During Shipment

• Standardized Packaging Procedures

• Carrier Selection and Performance Monitoring

• Shipment Insurance

(Module 4) True or False: Periodic Inventory Counts and Reconciliations and Documentation of Inventory Transfers are not useful in mitigating the risks tied to the picking and shipping processes

False

(Module 4) What are the key risks/weaknesses when it comes to issuing the invoice?

• Failure to Bill

• Billing Errors (Incorrect Amounts or Quantities)

• Posting Errors in Accounts Receivable

• Inaccurate or Invalid Credit Memos

(Module 4) Issuing the Invoice — Mitigating Controls to Address the Risk Tied to the Failure to Bill

• Automated Billing Systems

• Periodic Audits and Reconciliations

• System Alerts for Unbilled Orders

(Module 4) Issuing the Invoice — Mitigating Controls to Address the Risk Tied to Billing Errors (Incorrect Amounts or Quantities)

• Automated Price and Quantity Verification

• Data Validation Checks

• Reconciliations Between Sales Orders, Delivery Receipts, and Invoices

(Module 4) Issuing the Invoice — Mitigating Controls to Address the Risk Tied to Posting Errors in Accounts Receivable

• System-Integrated Posting

• Review of Daily Posting Summaries

• Segregation of Duties

(Module 4) Issuing the Invoice — Mitigating Controls to Address the Risk Tied to Inaccurate or Invalid Credit Memos

• Separate Authorization for Credit Memos

• Credit Memo Reconciliation

• Return and Credit Memo Verification

(Module 4) True or False: Separation of Billing and Shipping Functions, Monthly Statements to Customers, and Routine Reconciliations with Inventory Control Accounts are all helpful mitigating controls for the invoicing process

True

(Module 4) What are the key risks/weaknesses when it comes to cash collections?

• Theft of Cash

• Cash Flow Problems

• Misapplication of Payments

• Delayed Deposits

• Unapplied or Lost Payments

(Module 4) Cash Collections — Mitigating Controls to Address the Risk Tied to the Theft of Cash

• Segregation of Duties

• Restrictive Endorsements on Checks

• Daily Deposit of All Cash Receipts

• Multiple Cashiers Opening Mail

(Module 4) Cash Collections — Mitigating Controls to Address the Risk Tied to Cash Flow Problems

• Aging of Accounts Receivables

• Early Payment Discounts

• Credit Monitoring and Limits

• Cash Flow Forecasting

(Module 4) Cash Collections — Mitigating Controls to Address the Risk Tied to the Misapplication of Payments

• Automated Payment Matching Systems

• Customer Payment Instructions or Improved Turnaround Documents

• Reconciliations of Accounts Receivable

(Module 4) Cash Collections — Mitigating Controls to Address the Risk Tied to Unapplied or Lost Payments

• Use of Secure Payment Channels

• Customer Payment Reconciliation

• Electronic Invoicing and Systems

True or False: Segregation of Duties, Monitoring and Reporting of Collection Metrics, and Customer Payment Reminders are all great additional mitigating controls for cash collections

True

(Module 4) What kinds of fraud is likely to occur in the Revenue Cycle if unmitigated?

• Lapping of Accounts Receivable

• Skimming

• Check Substitution and Theft

• Manipulation of Receivables

(Module 4) Lapping of Accounts Receivable

• When an employee steals a cash payment from one customer and covers it by applying a subsequent payment from another customer to the first customer’s account

• Example: An employee applies Customer B’s payment to Customer A’s outstanding balance to conceal theft of Customer A’s original payment

(Module 4) Consequences of the Lapping of Receivables

• Distortion of Receivables Aging

• Overstated Assets

• Delayed Detection of Misappropriated Funds

(Module 4) Red Flags related to the Lapping of Accounts Receivable

• Frequent Adjustments to Customer Accounts

• Unusually Long Delays in Applying Payments

• Overreliance on a Single Employee for Both Collection and Recordkeeping

(Module 4) Skimming

Diverting income cash before it is recorded in the accounting system

(Module 4) Consequences of Skimming

• Revenue is understated

• Assets are understated

• Undetected fraud with weak controls

(Module 4) Red Flags related to Skimming

• Discrepancies between sales records and cash deposits

• Missing or unnumbered receipts

• Complaints from customers claiming to have paid

(Module 4) Check and Substitution Theft

An employee intercepts customer checks and substitutes them with personal checks or withholds them entirely, particularly in small businesses without robust mailroom controls

(Module 4) Consequences of Check Substitution and Theft

• Loss of funds

• Misstated cash balances

• Serious legal consequences

(Module 4) Red Flags related to Check Substitution and Theft

• Unexplained delays in deposits

• Checks made out to the business found missing or undeposited

• Lack of separation between mail opening and accounting duties

(Module 4) Manipulation of Receivables and Related Journal Entries — Examples

• Fictitious credits and write-offs

• Unauthorized reversals and refunds

• Concealment tactics and weak control environments (i.e. fake customer accounts, altering system records to delay reconciliation or mask aging, and collusion among employees in different departments)

(Module 4) How can the risks tied to the manipulation of receivables and related journal entries be mitigated?

• Daily reconciliations of cash receipts and deposits

• Mandatory vacations and job rotations

• Independent approval of write-offs and credits

• System-based segregation of duties and access restrictions

(Module 4) Segregation of Duties Across the Revenue Cycle — How is Authorization Implemented in the Sales Order and Credit Approval stage?

Credit limits and sales terms should be approved by a credit manager or controller—not the salesperson

(Module 4) Segregation of Duties Across the Revenue Cycle — How is Recording Implemented in the Sales Order and Credit Approval stage?

Sales order data should be entered by sales staff but without the ability to approve terms or adjust customer master data

(Module 4) Segregation of Duties Across the Revenue Cycle — How is Custody Implemented in the Shipping and Billing stage?

Warehouse staff handle physical goods and shipping

(Module 4) Segregation of Duties Across the Revenue Cycle — How is Recording Implemented in the Shipping and Billing stage?

Billing staff generate invoices based on shipping confirmations

(Module 4) Segregation of Duties Across the Revenue Cycle — How is Authorization Implemented in the Shipping and Billing stage?

Shipping should only occur for approved orders

(Module 4) Segregation of Duties Across the Revenue Cycle — How is Custody Implemented in the Cash Collections and A/R Posting stage?

Employees who handle cash or checks should not update accounting records

(Module 4) Segregation of Duties Across the Revenue Cycle — How is Recording Implemented in the Cash Collections and A/R Posting stage?

The accounts receivable clerk should apply payments but have no access to physical receipts

(Module 4) Segregation of Duties Across the Revenue Cycle — How is Authorization Implemented in the Cash Collections and A/R Posting stage?

Adjustments to A/R balances (e.g. write-offs, credits) should require supervisor approval

(Module 4) Authentication

Determines who can login or connect to a new system

(Module 4) Authorization

Limits what actions a user can perform within the system

(Module 4) What are the factors for authentication?

• What someone knows (username, password, PIN, SSN, etc.)

• What someone has (key fob, phone, email, etc.)

• What someone is (biometric identifiers like face/fingerprint/eye scans)

(Module 4) Multi-Modal Authentication

The use of a single factor, but multiple modes within that factor

(Module 4) Multi-Factor Authentication

Authentication using two or more different types of factors

(Module 4) Examples of Multi-Factor Authentication

• Password + text message code

• Password + Microsoft Authenticator app

• ATM card + PIN

• Login + fingerprint

(Module 4) Examples of Multi-Modal Authentication

• Fingerprint + facial recognition

• Face scan + voice recognition

• Retina scan + fingerprint

(Module 4) Example of Authentication

Logging in with password

(Module 4) Example of Authorization

Only managers can approve payments

(Module 4) Flowchart Symbol — What does the following symbol represent?

Start/End: The beginning or end of any flow

(Module 4) Flowchart Symbol — What does the following symbol represent?

Electronic Process: Any electronic action or moment in the flow

(Module 4) Flowchart Symbol — What does the following symbol represent?

Decision: Branching point, followed by two or more paths

(Module 4) Flowchart Symbol — What does the following symbol represent?

Document: Any brief, form, or other document

(Module 4) Flowchart Symbol — What does the following symbol represent?

Multiple Documents: Multiple briefs, forms, or other documents

(Module 4) Flowchart Symbol — What does the following symbol represent?

Filing

(Module 4) Flowchart Symbol — What does the following symbol represent?

Connector: A jump between separated sections of the flow on one page

(Module 4) Flowchart Symbol — What does the following symbol represent?

Off-Page Connector: Flow continues on the next page/from the previous page

(Module 4) Flowchart Symbol — What does the following symbol represent?

Arrows: Bold alternatives to standard connectors

(Module 4) Flowchart Symbol — What does the following symbol represent?

Display: Information displayed to a user

(Module 4) Flowchart Symbol — What does the following symbol represent?

Journal Entry/Subsidiary Ledger Update

(Module 4) Flowchart Symbol — What does the following symbol represent?

Manual Input: Data that must be entered at a prompt (e.g. filling out a form)

(Module 4) Flowchart Symbol — What does the following symbol represent?

Manual Operation: Any adjustment to the flow that must be made manually

(Module 4) Flowchart Symbol — What does the following symbol represent?

Database: Data that can be accessed in any order

(Module 4) Flowchart Symbol — What does the following symbol represent?

Computer Terminal: Entering something into the system while viewing it on the display