IT-ENABLED SYSTEMS OF REVENUE AND CASH COLLECTION PROCESSES (STUDY OBJECTIVE 5)

The previous section described the processes related to revenue transactions. In addition to the activities that take place within those processes, there must also be accounting systems to record, summarize, and report the results of the related transactions. In the majority of organizations, the accounting information system consists of hardware and software within IT systems. However, there is such great variety in accounting software systems in terms of their size, complexity, and extent of automation that it is impossible to describe all of the various kinds of systems. In general, as complexity and automation increase, there are fewer manual processes and more computerized processes. This is usually true regarding size also: Larger IT systems generally have fewer manual processes and more computerized processes. More computerized processes means there would be a greater need for the type of IT controls described in Chapter 4, and it generally means that there are fewer paper documents within the process. As a simple illustration, consider two kinds of restaurants you might visit. A small, family-owned restaurant might not use computers at all, and the server may simply write your order on a pad. On the other hand, a large restaurant chain might have a system completely based on computers, where servers enter orders on the touch screen of a handheld device that transmits the order to the kitchen. The family-owned restaurant would have no need for computer controls, while the restaurant chain would need many computer-based controls.

The following section provides a description of a typical revenue processing system and some specialized IT systems:

Exhibit 8-17 is a system flowchart of a generic version of revenue system with some paper documents. The system flowchart documents a system for company-to-company sales. When the customer's order is received, an employee enters it into the IT system by keying the order into an input screen. With online data files, the input data can be edited, the customer's credit status can be reviewed, and inventory levels can be checked. If the order does not exceed the customer's credit limit and the inventory items are available, the order can be processed.

Exhibit 8-17 Revenue Processes System Flowchart

Order processing updates the sales records and the customer's account records. The appropriate documents needed to fill and ship the order may be printed. These documents usually include a pick list, a packing slip, an invoice, and a bill of lading. The pick list is used by warehouse personnel to select items from the warehouse shelves. The packing slip is used by shipping personnel to ensure the correct items are packed. The bill of lading is the agreement between the common carrier (such as a trucking or rail transporter) and the company. The invoice is sent to the customer.

Usually at the end of the month, customers are billed and regular monthly reports are generated. Customers are billed according to the customer statement. Regular monthly reports would include sales reports, inventory status reports, and accounts receivable reports.

The general and application controls described in Chapter 4 should be used to ensure the security, availability, processing integrity, and confidentiality of this IT system. General controls would include authentication of users, computer logs, physical access controls, and business continuity planning. General controls to prevent network break-ins would be necessary if the system uses any network connections to other systems. The application controls help ensure the accuracy and completeness of processing. Input controls used in this system would be likely to include data preparation and error handling procedures, programmed input validation checks, and control totals. Well-defined procedures for data preparation and error handling can reduce the chance for mistakes in data entry into the system. The programmed input checks, such as field checks, validity checks, limit checks, and reasonableness checks, will help prevent or detect keying errors. If customer orders are entered in batches, control totals can help ensure the accuracy and completeness of input and processing. Output controls help to protect data through proper distribution, storage, and disposal of reports.

The system depicted in Exhibit 8-17 uses some manual processes, such as keying of data, and some paper forms. More complex IT systems can reduce or eliminate these manual processes and paper forms. For example, orders placed over the Internet would eliminate manual keying by someone within the company. The customer keys in the order while placing an order on the website. The sections that follow describe some types of systems with fewer manual processes and paper forms.

In many companies today, sophisticated, highly integrated IT systems capture, record, and process revenue and cash collection events. These IT systems are more specialized than the generic system described earlier. Such systems include e-commerce systems, electronic data interchange (EDI) systems, and point of sale (POS) systems. E-commerce systems incorporate electronic processing of sales-related activities, and generally, e-commerce sales processes are transacted over the Internet. Electronic data interchange (EDI) systems communicate sales documents electronically with a standard business format. Point of sale (POS) systems process sales at a cash register in retail stores.

When implementing these types of IT systems, many companies find that they must change the methods used to perform sales and collections. As companies redesign these processes to align with their software systems, they conduct what is known as business process reengineering. Business process reengineering (BPR) is the purposeful and organized changing of business processes to make the processes more efficient. BPR not only aligns business processes with the IT systems used to record processes, it also improves efficiency and effectiveness of these processes. Thus, the use of sophisticated IT systems usually leads to two kinds of efficiency improvements. First, the underlying processes are reengineered so as to be conducted more efficiently. Second, the IT systems improve the efficiency of the related information. As an example, Northern Telecom (Nortel Networks Corp.) found that EDI reduced the cost of purchasing from approximately $80 per transaction when paper-based to $35 per transaction with EDI.¹

Explanations of three types of IT systems are included in the sections that follow, including e-commerce, EDI, and POS systems. Each of these systems greatly reduces or eliminates the paper-based documentation used in older manual or automated systems. That is, these systems may eliminate the need for paper-based sales orders or paper-based checks. In these IT systems, information is transmitted electronically and payments are collected electronically, not in paper documents. The elimination of paper completely changes the audit trail and the internal controls. Therefore, the sections that follow will describe the risks and controls for these IT systems.