Revenue and Receipt Cycle Flashcards

Revenue and Receipts Cycle

Overview

  • The revenue and receipts cycle consists of three components:
    1. Credit Sales
    2. Receipts from Debtors
    3. Sales Adjustments

Credit Sales

  • Five functional areas:
    1. Ordering function
    2. Dispatch function
    3. Invoicing function
    4. Recording function
    5. Credit management function
Ordering Function
  • Objective: Record orders and initiate action to fulfill them.
  • Documentation: Customer order, internal sales order (ISO), price list, credit application form, credit bureau information.
  • Activities and Controls:
    • Generate a numerical ISO with customer details, quantity, prices, and authorization.
    • New Customers: Credit application process, background checks, credit limits, master file capture, authorized detail changes.
    • Existing Customers: Verify account validity and payment status; check credit limits.
Dispatch Function
  • Objective: Fulfill orders accurately and promptly, acting only on authorized orders.
  • Documentation: Picking slip, delivery note, back-order note, list of deliveries.
  • Activities and Controls:
    • Use picking slips to pick goods; create a delivery note.
    • Create back-order notes for out-of-stock items.
    • Delivery notes should be sequentially numbered, describe quantity and goods, signed by the client, and recorded in a register.
    • Gate control: Guards count goods and verify against the delivery note.
    • Segregation of duties is essential.
Invoicing Function
  • Objective: Notify customers promptly of amounts due.
  • Documentation: Sales invoice, price lists.
  • Activities and Controls:
    • Match signed delivery note with ISO to generate invoice.
    • Numerical lists of delivery notes and invoices, with follow-up on missing numbers.
    • Quantities from delivery note; prices from price list.
    • Independent review of calculations.
Recording Function
  • Objective: Record sales made and raise corresponding debtor promptly.
  • Documentation: Invoice, sales journal, debtors ledger, general ledger.
  • Activities and Controls:
    • Accurate invoice recording against the correct debtor.
    • Compare invoice to delivery note (quantity, description, prices).
    • Sequence checks on invoices.
    • Trace posting from sales journal to debtors ledger to general ledger.
    • Monthly statements by an independent person.
Credit Management Function
  • Objective: Limit loss from bad debts and encourage prompt payment.
  • Documentation: All cycle records, age analysis, monthly statements, credit bureau information.
  • Activities and Controls:
    • Credit application process.
    • Identification of debtors for legal action.

Receipts from Debtors

  • Two functional areas:
    1. Cash Sales
    2. Receipts from receivables and recording those receipts
Cash Sales
  • Over-the-counter sales where payment is immediate.
  • Documentation: Receipt
  • Activities and Controls:
    • Cash receipts: Independent cash count and sign-off.
    • Credit/Debit card receipts: Online authorization, invoice signed by customer.
    • Depositing money: Cashier count in the presence of cash controller, daily cash summary sheet, comparison to cash register, bank deposit slip prepared by independent person, comparison of stamped deposit slip to daily summary and bank statement.
Receipts and Recording of Receipts
  • Types of receipts: Cash, EFTs, debit orders, direct deposits.
  • Documentation: Remittance register, remittance advice, receipt, bank deposit slip, cash receipts journal, debtors ledger, general ledger.
  • Activities and Controls:
    • Cash counts (independent count and sign-off).
    • Online authorization/signed invoice for credit/debit card receipts.
    • Cashier counts cash with cash controller, lists total on daily cash summary, compares to cash register, investigates differences, signs cash summary.
    • Independent preparation of bank deposit slip; comparison of stamped slip to daily summary sheet and bank statement.
    • Pre-numbered receipts, strict control of books, register of books used, marked cancelled receipts, recorded mail payments.
    • Prompt depositing, secure money storage, detailed records, cashier without record access, monthly bank reconciliation.
    • Sequentially numbered receipts, cash receipt summary, and deposit slip.
    • Settlement discounts per company policy.

Sales Adjustments

  • Objective: Control goods returned by customers.
  • Documentation: Goods returned vouchers, credit note returns and allowances journals, debtors journal, general ledger.
  • Activities and Controls:
    • Goods returned recorded, debtors account debited, voucher and credit note issued.
    • Accuracy, authorization, discounts, returns, corrections, write-offs, segregation of duties, formal documentation, monitoring, supervision.

Controls

General Controls
  • Supervision and review.
  • Segregation of duties.
  • Rotation of duties.
  • Regular leave for personnel.
  • Management control.
  • Internal audit.
  • Sufficient stationery control.
  • Scrutinize records/documents.
  • Test casting and calculations.
Internal Controls
  • Control Objectives: Occurrence/Validity, Authorization, Completeness, Classification, Accuracy, Recording, Cut-off
  • Internal controls divided into 3 categories:
  1. Objective to be achieved.
  2. How the objective will be achieved (Internal Control).
  3. How to test implementation of the control.
Test of Controls (TOC) Verbs
  • Inspect: Documentation (ISO, Picking slip, DN, invoice). Select a sample and inspect specific details.
  • Observe: A person performing a task. Observe the process and the actions taken.
  • Enquire: About policies, procedures, processes. Enquire with relevant personnel about specific policies.
  • Re-perform/re-calculate: Calculations. Select a sample and re-perform calculations to ensure accuracy.

Controls - Credit Sales

  • Occurrence/Validity: Recorded sales are valid and supported.
    • Internal Control: Entries supported by ISO, delivery note, invoice.
    • TOC: Inspect a sample of sales journal entries for supporting documents.
  • Authorisation: Credit sales approved per company policy.
    • Internal Control: Credit limits set after creditworthiness approval; ISO authorized by manager.
    • TOC: Enquire about credit policy; inspect customer files for application, checks, and limits; inspect ISOs for authorization signature.
  • Completeness: All sales recorded.
    • Internal Control: Numerical ISO, DN, invoice; DN register; follow-up on unmatched DNs.
    • TOC: Enquire about order process; inspect DN sequence; match DNs to invoices in register; inspect unmatched DN follow-up; sequence test DN's & Invoices; Observe gate control.
  • Accuracy: Sales recorded at correct amount, arithmetically correct.
    • Internal Control: Quantities from DN; prices from list; calculations reviewed.
    • TOC: Select invoices and agree quantities to DN, prices to list, re-perform math, inspect review evidence.
  • Recording: Sales correctly recorded.
    • Internal Control: Transactions posted to debtors ledger and general ledger.
    • TOC: Select sales journal entries and inspect postings to ledgers.
  • Classification: Sales correctly classified.
    • Internal Control: External and internal sales distinguished by code.
    • TOC: Select internal purchase orders and follow through to sales journal and postings to general ledger.
  • Cut Off: Sales recorded in correct period.
    • Internal Control: Invoices made out from delivery notes based on delivery date.
    • TOC: Select sales invoices around period end, match with delivery note, follow through to accounting records.

Controls - Receipts from Debtors

  • Occurrence/Validity: Receipts are valid and supported.
    • Internal Control: Payments supported by numbered receipt, cash receipt summary, deposit slip.
    • TOC: Select payments and inspect for supporting documents.
  • Authorisation: Transactions approved per policy.
    • Internal Control: Settlement discounts per policy; management monitors adjustments.
    • TOC: Enquire, inspect discount policy; select payments and recalculate discount; follow adjustments to supporting documents.
  • Completeness: All receipts recorded.
    • Internal Control: Numeric receipts; daily summary; debtor control account reconciliation.
    • TOC: Inspect receipt sequence; follow receipts to summary and duplicate; re-perform control account reconciliation.
  • Accuracy: Receipts recorded at correct amount.
    • Internal Control: Discounts reviewed.
    • TOC: Enquire about review process; inspect for management signature.
  • Recording: Receipts correctly recorded.
    • Internal Control: Payments allocated per payment advice.
    • TOC: Select payments, inspect details against advice.
  • Cut Off: Receipts recorded in correct period.
    • Internal Control: Payments allocated according to payment advice.
    • TOC: Select payment advices and inspect date against recorded date.

General Controls

  • Always applied for other controls to function effectively.
  • Supervision and Review
  • Segregation of Duties
  • Rotation of Duties
  • Personnel Take Leave Regularly
  • Management Control
  • Internal Audit
  • Sufficient Stationery Control
  • Scrutinize all records and documents for extraordinary items
  • Test castings and calculations on all selected items, documents and ledger accounts

Key Terms for TOC's

  • Inspect
  • Observe
  • Enquire
  • Re-perform/ Re-calculate

Control Objectives

  • Occurrence/Validity
  • Authorisation
  • Completeness
  • Classification
  • Accuracy
  • Recording
  • Cut-Off