Revenue Cycle and Control Activities Essay

The receipts cycle for many companies is considered the primary source to earn revenue from the sale of goods or service. advantageously suss outs mustiness be established to maintain the effectiveness of receivables and reference book gross revenue, not doing so can harm the company and might be pricy to the business. Six classes of internal controls guides us in evaluating and designing transaction treat. They ar authorization, supervision, segregation of duties, access control, independent verification, and accounting spirits. We will discuss each surgical incision that is involved in the revenue cycle, its activities, and control activities.The first section discusses the discussion sections that make the revenue cycle , starting with Sales surgical incision and ending with accusation Department, knowingly that collections must be received and adjustments must be made. The second section discusses the six activities mentioned earlier.DepartmentsThe revenue cycle is comp osed of five independent (in activities and personnel) departments that are required to make give way and make a sale. Each department carry out its confess, and all department depends on the the preceding department in order to function properly. An additional two activities must be considered in the revenue cycle are collection of receivables and adjustments to gross gross revenue and receivables.Sales DepartmentEvery gross sales process starts with receiving a node purchase order- by mail, in person, or telephone. Thus controlling the guests orders is carefully done, and in operation(p) procedures must be maintained in an adequate manners. The department then identifies and reviews items and quantities to determine whether the order can be placed, then they prepare The Sales Order. The sales order is not the standard format that the sellers order processing system needs.The sales order has vital information, such as the customers name account number, description of the i tems sold quantities, and prices. A copy of sales order is placed in the open order file, the customer acquire the ordered goods might take days or even weeks. The customer might check more or less the status of his or her order, order file is updated all time the status of the order changes .It also sets instructions to guide various divisions and department, including credit, finished goods, shipping, billing, and accounts receivable units.Credit Approval DepartmentTo provide independence to the credit authorization process, the credit department is organizationally and physically disclose from the Sales Department. The credit approval department receives a copy of the sales order from the sales department. The written document received serves as an authorization to preform a client credit check. The check includes investigating red-hot customers ability to pay and creditworthiness, and a line of reasoning of credit is established. Typically new checking new customers take time more that existing customers. A good control use is a limit canvas, which measures the customer have unused credit. This process set an upper limit that the customer must not pass, if passing it the purchase order by the customer will be denied.Warehouse ProceduresAfter a credit check has been performed and approved, and a sales order is received. The warehouse is prudent of issuing merchandise and items that were mentioned in the sales order to the shipping department. In a typical company that have finished goods in its inventory, this inventory is supervised and controlled by a storekeeper. He is responsible for issuing the goods. Another control activity must be done is updating the inventory records by the accountant, not by the storekeeper. This separation of traffic prevents theft of inventory.The transferral departmentWhen receiving the finished goods from the warehouse, the shipping clerk must reconcile the products received from the warehouse with the products mentioned in the sales order. This is an important control activity, which ensures tear the right products and quantities to the customer who ordered them. Then this department prepares shipping documents , such as the bill of lading as they are loaded into the carrier- cars, trucks etc. These documents numerically controlled and are entered in a shipping register before being forwarded to the billing department. A gate control is done when shipments are made by truck, this ensure that goods have been recorded as shipments. The clerk enters these transaction and sends a shipping notice and declivity release to the billing department.The Billing DepartmentUpon receiving the Shipping notice and stock release from the shipping department, a sales invoice with any relevant information about the transactions and bills the customer. Billing departments are responsible of serially numbered shipping documents, comparing documents received from other departments, entering data from sales o rderers and purchase order on the sales invoice, applying prices and discount to the invoice, make extensions and footing, accumulating follow amounts. Controls should be done to ensure the accuracy of sales invoice before sending them to the customer, such as a second person review. The billing clerk enters the transaction into the sales journal and send the documents to the account receivables and inventory control department.Collection of ReceivablesMost receivables are either consisted of checks, and remittance advice and collected through the mail. The rive is responsible for checks and depositing them, and the remittance advice will be forwarded to the account receivable or the data processing department, which will be recorded in the appropriate accounts. Reductions in the AR are posted periodically to the general ledger control account.Adjustments to Sales and ReceivablesAll adjustments to sales for go forthances, returns, and write-offs of account receivables should be s upported by a credit memo which is serially numbered. This memo must be signed by an employee having no change handling duties or maintenance over the customers ledger. Good Internal controls require that goods must be checked and examined before a credit is given, and the memo should have the serial number of the receiving report on the returned shipment. The treasurer give grant the credit manager the authorization to initiate the process of uncollectible receivable write off.Updating Inventory RecordsThe inventory control function updates the inventory subsidiary from the information included in the stock release document which was prepared by the the warehouse. In a typical perpetual system, every item has its experience record in the ledger containing data, such as units sold, units received m reorder point, EOQ, and standard cost. The stock release document decrease the amount of the inventory. Over a period of time the total reduction in inventory is summarized in a journal voucher and move to the general ledger function.Revenue Cycle controlsAs mention earlier every department of the revenue cycle must have its own controls over is activities, doing so might prevent theft, error, fraud, and enhancing the its operations. Six controls are to be covered in this section regarding various department and activities in the revenue cycleTransaction authorization this ensure that valid transactions are processed only, and it include credit check and return policy for sales processing and remittance list for cash receipts. Credit Check as mentioned is function carry out by the credit department. This department might uses various test and techniques to determine if the customer is trust worthy or not. Different procedures and done to do credit check, depending on the organization, its relationship with the customer, and the materiality of the transactions. Approving for a new customer might take longer time that existing customer, and a decision that falls wi thin the employee authority may be done quickly.yet credit check must be done with consistency of the companys policy. Return Policy is also a credit department travail, the returns must be authorized by this department before receiving them. the nature of the sales and the circumstances determine the authorization granted. Again policies set by the organization, such as cash refunds, must be taken into consideration for granting returns. Remittance List verifies that customers checks and remittance advice match. This reconciliation might detect errors, such as an extra remittance advice or and absence of a customers check, it also might detect a difference between checks and remittances. This list authorizes the posting of a remittance advice to a customers account.Segregation of Duties it ensure that separate individual and department processes the transactions. The size and type of an organization affect this type of control, for instance a personally own small business might no t need this kind of control, because the owner is the management. The revenue cycle has three rules about the system designers. First, transaction authorization should be separate from transaction processing, such as the warehouse department. The warehouse department cannot issue goods without the confirmation of the credit and the sales department. Second, asset chains should be separate from the task of asset record keeping.For instance, the warehouse department has physical custody over its inventory, but the inventory control is in charge of maintaining the record of inventory levels. Last, the organization must be structured so that fraud require collision between two or more individuals. This means that task should be separated, such as different record keeping individuals. An employee with a total record keeping responsibility, in a collusion with an other employee with custody might commit fraud. Separating task needs more people to commit fraud.Supervision is considered a compensating control for companies who have little number of employees to make a segregation of duties. Supervising those employees detects error made, and inadequate functions. This tool is used also in system with a good segregation function. For instance the mail elbow room is a good place to commit theft for check received, cashing it, and destroying and evidence relating to the theft. Although this might be detected when complaints made by a customer about billing him again, but the best solution is preventing it from the beginning. Therefor a good supervision over employees is considered a good prevention control.Accounting Records this control activity describes how a firms documents, journals, and ledgers form the system in various stages of processing. Its also an important feature of well-designed accounting systems. Prenumbered Documents, are sequentially numbered documents that allow every transaction to be uniquely identified. Tracking event related to documents throug h t system is easy. Special Journals, The revenue cycle uses a particular proposition journals, such as sales journal and the cash receipts journal.Special journal groups similar transactions into a specific journal. Subsidiary Ledgers, theres two subsidiary ledgers in the revenue cycle, the inventory and accounts receivables subsidiary ledgers. They provide links to the documents used to capture the events related to each subsidiary. General Ledgers, these are the innovation for every accounting system, and for the preparation of every financial statement. Sales, Inventory, Cost of goods sold, AR, and cash are affected by the revenue cycles transactions. Files, temporary and perpetual files are opened as a result from the revenue cycle. Some examples are, sales order files, shipping log, credit records file, back order file, journal vouchers, . get to Controls its used to grant authorization and permission to employee and access to the firms assets, such as the physical assets, c ash and inventories. Ways in defend these assets are warehouse security, Daily cash deposits, safe/night deposit box, using safes. Access control over information involves restricting access to documents that control physical assets, such as journals and ledgers. Examples of the access risk Removing ones account from Account receivables ledger, do so he company cant send the customer monthly statements. Access to sales order might trigger unauthorized shipment of a product. Access to general ledger and cash might steal and cover it up by adjusting the ledgers.Independent Verification the main reason independent verification is to verify and assure how accurate and round out the tasks are. Independent verification make pass at various point is the process, so that errors are detected and dealt with quickly. Independent Verification in the revenue cycle occur at the following points. First, The shipping department reconciled the goods sent from warehouse with the quantity and type ordered by the customer. this is done by reconciling the stock release document with the packing slip. Second, The billing department reconciles sales ordered with the shipping notice to ensure sending the right invoice with the quantities and prices ordered by the customer. Last, Before posting to any control accounts, the general ledger function reconciles various journal vouchers and summary reports which were prepared independently.Other Controls include verifying approved buyer, this is not frequently used, but sometimes a purchase order might be completed and signed by and unauthorized person from the client company. Stamp approval on sales order. It is possible for sales orders to be fraudulently routed around the credit department and sent to the warehouse,s o an approval stamp to be used on each sales order. Prenumber sales order forms. Only prenumbered sales order documents should be used. By doing so, the company can report which sales order numbers did not reach the bi lling department, which may indicate that a delivery was not invoiced. Lock up unused sales order forms. It is possible for someone to enter an order to a shell company on an unused sales order form, fraudulently stamp it as approved by the credit department, and route it to the warehouse as authorization for a delivery.References.1. Whittington, O.Ray, and Pany,Kurt.(2001).Principles of Auditing and other assurance services.13th edition.New York Irwin. 2. Hermanson, Roger, and Strawser, Jerry, and Strawser, Robert.(1989).Auditing Theory and Practice.5th edition. Boston Irwin. 3. Bragg, Steven. 2009. Accounting Control outmatch Practices. New Jersey Wiley & Sons Inc. 4. Hall, James. Accounting Information Systems. 7th edition. Ohio. Cengage Learning. 5. Wilkinson, Joseph and Cerullo, Micheal and Wong-on-Wing, Bernard and Raval,Vasant .2000 .Accounting Information Systems Essential Concepts and Applications.Wiley 6. Mooney, Kate. 2008. The essential accounting dictionary. 1st editio n. Illinois Sphinx Publishing, An imprint of sourcebooks, inc.