SHORT ANSWER
1.Distinguish between a packing slip, shipping notice, and a bill of lading.
2.State two specific functions or jobs that should be segregated in the sales processing system.
3.State two specific functions or jobs that should be segregated in the cash receipts system.
4.List two points in the sales processing system when authorization is required.
5.For the revenue cycle, state two specific independent verifications that should be performed.
6.What task can the accounts receivable department engage in to verify that all checks sent by
7.What specific internal control procedure would prevent the sale of goods on account to a fictitious customer?
8.The clerk who opens the mail routinely steals remittances and checks. Describe a specific internal control procedure that would prevent or detect this fraud.
9.A customer payment of $247 was correctly posted in the general ledger but was recorded as $274 in the customer’s account receivable. Describe a specific internal control procedure that would detect this error.
10.Goods are shipped to a customer, but the shipping department does not notify billing and the customer never receives an invoice. Describe a specific internal control procedure that would detect this error.
The correct answer and explanation is:
SHORT ANSWER
- Packing Slip, Shipping Notice, Bill of Lading
- Packing Slip: A document included in the shipment listing the items being sent, quantities, and often a brief description but without pricing.
- Shipping Notice: A notification sent to the customer to inform them of the shipped items, tracking information, and expected delivery date.
- Bill of Lading: A legal document between the shipper and carrier, detailing the goods being transported, destination, and terms of shipment.
- Segregated Functions in Sales Processing System
- Order entry and credit approval.
- Shipping and billing.
- Segregated Functions in Cash Receipts System
- Cash handling and record keeping.
- Bank reconciliations and deposit preparation.
- Authorization Points in Sales Processing System
- Credit approval for new orders.
- Authorization for price adjustments or discounts.
- Independent Verifications in the Revenue Cycle
- Matching shipping documents to sales invoices.
- Reconciliation of customer account balances with general ledger.
- Task for Accounts Receivable to Verify All Checks Sent
- Compare remittance advices with cash receipts log and bank deposit records.
- Preventing Sales to Fictitious Customers
- Require customer account setup with verification of business identity and credit checks.
- Internal Control to Prevent Theft of Remittances
- Separate mail-opening duties from cash handling and establish dual control when processing remittances.
- Detecting Posting Errors in Accounts Receivable
- Perform regular reconciliations of subsidiary ledgers with the general ledger.
- Detecting Unnotified Shipments
- Implement reconciliation of shipping logs with billing records.
Explanation:
Effective internal controls in sales and cash processes are critical to mitigating risks like fraud, errors, and inefficiencies. Segregating duties ensures no single individual has excessive control over transactions, reducing fraud risk. For example, separating credit approval from order entry prevents unauthorized credit extensions, while segregating cash handling from recording cash receipts minimizes theft opportunities.
Authorization in the sales process strengthens control by ensuring higher-risk activities, such as granting credit or offering discounts, are reviewed by management. Similarly, independent verifications like matching sales invoices to shipping documents help detect discrepancies and ensure accurate billing.
To address specific errors or fraud, targeted controls are necessary. For instance, to prevent fictitious customer sales, thorough vetting, and credit checks during account setup are essential. Reconciling subsidiary ledgers with the general ledger helps catch posting errors, like mismatches in amounts recorded for customer payments.
Fraud detection procedures are equally crucial. A dual control system for mail processing and cash handling prevents remittance theft by requiring two employees to jointly open and record mail. Similarly, tracking all shipped goods and reconciling with billing records ensures no shipments are missed or invoices omitted, safeguarding revenue integrity.
These controls, when systematically implemented, enhance accuracy, accountability, and security within the revenue cycle.