END OF CHAPTER MATERIAL

CONCEPT CHECK

  1. 1. Within the revenue processes, a signed approval of a sales order indicates all of the following except images
    1. date of delivery
    2. sale to an accepted customer
    3. approval of the customer's credit
    4. correct sales price
  2. 2. An example of an independent verification in the sales process is
    1. preparation of packing lists on prenumbered forms
    2. initialing the sales order
    3. proof of recorded dates, quantities, and prices on an invoice
    4. physical controls in record storage areas
  3. 3. The purpose of tracing shipping documents to prenumbered sales invoices would be to provide evidence that
    1. shipments to customers were properly invoiced
    2. no duplicate shipments or billings occurred
    3. goods billed to customers were shipped
    4. all prenumbered sales invoices were accounted for
  4. 4. The purpose of tracing sales invoices to shipping documents would be to provide evidence that
    1. shipments to customers were properly invoiced
    2. no duplicate shipments or billings occurred
    3. goods billed to customers were shipped
    4. all prenumbered sales invoices were accounted for
  5. 5. To ensure that all credit sales transactions of an entity are recorded, which of the following controls would be most effective?
    1. On a monthly basis, the accounting department supervisor reconciles the accounts receivable subsidiary ledger to the accounts receivable control account.
    2. The supervisor of the accounting department investigates any account balance differences reported by customers.
    3. The supervisor of the billing department sends copies of approved sales orders to the credit department for comparison of authorized credit limits and current customer balances.
    4. The supervisor of the billing department matches prenumbered shipping documents with entries recorded in the sales journal.
  6. 6. Under a system of sound internal controls, if a company sold defective goods, the return of those goods from the customer should be accepted by the
    1. receiving clerk
    2. sales clerk
    3. purchasing clerk
    4. inventory control clerk
  7. 7. The source document that initiates the recording of the return and the adjustment to the customer's credit status is the
    1. pick list
    2. sales journal
    3. credit memorandum
    4. sales invoice
  8. 8. Which of the following is not a document that is part of the cash collection process?
    1. Remittance advice
    2. Cash receipts journal
    3. Bank deposit slip
    4. Packing slip
  9. 9. Which of the following would represent proper segregation of duties?
    1. The employee who has custody of cash also does accounts receivable record keeping.
    2. The employee who has custody of cash completes the bank reconciliation.
    3. The employee who opens mail containing checks prepares a list of checks received.
    4. The employee who opens mail containing checks records transactions in the general ledger.
  10. 10. Immediately upon receiving checks from customers in the mail, a responsible employee working in an environment of adequate internal control should prepare a listing of receipts and forward it to the company's cashier. A copy of this cash receipts listing should also be sent to the company's
    1. treasurer for comparison with the monthly bank statement
    2. internal auditor for investigation of any unusual transactions
    3. accounts receivable clerk for updating of the accounts receivable subsidiary ledger
    4. bank for comparison with deposit slips
  11. 11. If a company does not prepare an aging of accounts receivable, which of the following accounts is most likely to be misstated?
    1. Sales revenues
    2. Accounts receivable
    3. Sales returns and allowances
    4. Allowance for uncollectible accounts
  12. 12. When a company sells items over the Internet, it is usually called e-commerce. There are many IT risks related to Internet sales. The risk of invalid data entered by a customer would be a(n)
    1. availability risk
    2. processing integrity risk
    3. security risk
    4. confidentiality risk
  13. 13. When a company sells items over the Internet, there are many IT risks. The risk of hardware and software failures that prevent website sales would be a(n)
    1. availability risk
    2. processing integrity risk
    3. security risk
    4. confidentiality risk
  14. 14. The use of electronic data interchange (EDI) to conduct sales electronically has both risks and benefits. Which of the following is a benefit of EDI, rather than a risk?
    1. Incomplete audit trail
    2. Repudiation of sales transactions
    3. Unauthorized access
    4. Shorter inventory cycle time
  15. 15. An IT system that uses touch screens, bar-coded products, and credit card authorization during the sale is called a(n)
    1. electronic data interchange system
    2. e-commerce system
    3. point of sale system
    4. e-payables system
  16. 16. Which of the following is not a method of unethically inflating sales revenue?
    1. Channel stuffing
    2. Holding sales open
    3. Premature recognition of contingent sales
    4. Promotional price discounts

DISCUSSION QUESTIONS

  1. 17. (SO 2) Why is it important to establish and monitor credit limits for customers?
  2. 18. (SO 2) Distinguish between a pick list and a packing slip.
  3. 19. (SO 2) How can an effective system of internal controls lead to increased sales revenue?
  4. 20. (SO 2) Why should the person responsible for shipping goods to customers not also have responsibility for maintaining records of customer accounts?
  5. 21. (SO 3) What is the purpose of a credit memorandum?
  6. 22. (SO 3) How are sales invoices used (in a manual system) in the preparation of credit memos?
  7. 23. (SO 2) How can a security guard in a warehouse be considered an important component of a company's accounting system?
  8. 24. (SO 3) How could fraud be perpetrated through the sales returns process?
  9. 25. (SO 6,7,8) Identify and distinguish between the three types of IT systems used in the sales process.
  10. 26. (SO 6) Distinguish between B2B sales and B2C sales. Other than those presented in this chapter, name a company from your personal experience that uses B2C sales.
  11. 27. (SO 6) List the advantages of e-commerce systems.
  12. 28. (SO 6) Identify two of the biggest risks to companies who use e-commerce, along with controls to prevent these risks.
  13. 29. (SO 6,7) What controls should a company implement to ensure consistency of sales information between the front end and back end of its systems?
  14. 30. (SO 6) Why is a redundant server system needed in an e-commerce environment?
  15. 31. (SO 6) Why should a company continuously monitor the capacity of its e-commerce system?
  16. 32. (SO 7) What are the three important characteristics of the EDI definition?
  17. 33. (SO 7) What are the three standard parts of an EDI data transmission?
  18. 34. (SO 7) How could it be possible for two companies to conduct EDI if they are not directly connected with each other?
  19. 35. (SO 7) List the advantages of an EDI system.
  20. 36. (SO 6,7,8) What is the purpose of maintaining transaction logs? Why are they especially important in IT systems?
  21. 37. (SO 8) List some advantages of a POS system.
  22. 38. (SO 8) Why are backup systems one of the most important controls for POS systems?
  23. 39. (SO 9) Describe a popular fraud scheme where company employees misuse the sales revenues cutoff.

BRIEF EXERCISES

  1. 40. (SO 2,4) Describe what is likely to occur if company personnel erroneously recorded a sales transaction for the wrong customer. What if a cash receipt were applied to the wrong customer? Identify internal controls that would detect or prevent this from occurring.
  2. 41. (SO 4) Debate the logic used in the following statement: The person responsible for handling cash receipts should also prepare the bank reconciliation because he is most familiar with the deposits that have been made to the bank account.
  3. 42. (SO 7) Revenue systems are crucial in the health care industry, where hundreds of billions of dollars are spent annually reconciling revenues and billing data from the perspectives of providers (doctors and clinics, etc.) and payers (insurance companies). Briefly describe how EDI would be beneficial in this industry. Describe the purpose of the header data and trailer data.
  4. 43. (SO 2,3,4) Use the process maps in this chapter to answer the following questions:
    1. What would a credit manager do if a sales order received caused a customer to exceed its credit limit?
    2. What happens after the shipping department verifies that the quantities and descriptions of goods prepared for shipment are consistent with the sales order?
    3. What would an accounts receivable clerk do if a $100 credit memo is issued to a customer whose accounts receivable balance is $1000?
    4. When is it necessary for an accounts receivable clerk to notify a customer?
  5. 44. (SO 2) Describe how the matching of key information on supporting documents can help a company determine that its revenue transactions have not been duplicated.
  6. 45. (SO 2,3) Describe how the use of prenumbered forms for receiving reports and credit memos can help a company determine that sales return transactions have not been omitted from the accounting records.
  7. 46. (SO 8) Describe how a POS system could be useful to a company's marketing managers. How could it be useful to purchasing agents?
  8. 47. (SO 8) Briefly describe an example from your personal experience where you purchased something from a company that uses a POS system. How might your experience have been different if the POS system did not exist in the experience you described?

PROBLEMS

  1. 48. (SO 6) In 1956, Nicolai Rizzoli opened a pizza restaurant that he named Rizzoli's in St. Louis, Missouri. Over the years, he opened both company and franchise locations and grew the business to include over 40 restaurants that serve the three states around the St. Louis area. In 1997, Rizzoli introduced a centralized phone ordering system with one phone number for customers to use. This meant that the customer did not need to look up the phone number of a local restaurant and call that restaurant to order. Rather, customers call one number, and the employees taking the order can determine the closest Rizzoli's location and process the order. This system also centralized the pricing, ordering, and inventory systems for Rizzoli's. In 2009, Rizzoli's began offering online pizza orders through its website. Rizzoli's advertises this Web ordering as more convenient for the customer. For example, its ads suggest that a customer can examine the entire menu on the website prior to ordering, something that is not possible with phone orders.

    While there are many customer advantages of Web ordering, there are also many advantages to the company. From an accounting and internal control perspective, describe the advantages of Rizzoli's system and any risks that it reduces.

  2. 49. (SO 8) You are the recent heir of $40,000 cash, with which you are considering opening a sushi bar in the university community. You would accept cash and credit card payments, which would be handled primarily by your servers. You also plan to offer introductory specials to attract customers during the initial months of business. Identify some advantages and disadvantages of investing in a POS system as part of this new business venture. What internal controls should be implemented to reduce the risk of theft or error related to the handling of cash, credit card payments, and coupons?
  3. 50. (SO 2,4,6) Chris Horgrave is the owner of CH's Instant Replay, a consignment shop for used sporting goods. Chris accepts consigned goods and offers them for sale to the general public. Chris rents business space, including a retail store where the consigned goods are displayed and sold, with adjoining office space where an Internet site is maintained and other administrative functions are performed. The Internet site includes photos and descriptions of items available for sale worldwide. If the goods sell, Chris's consignment fee is 40 percent of the sale price, and 60 percent is remitted to the consignor. Shipping costs on electronic orders are paid by the customers.

    Required:

    Identify internal control considerations for the following:

    1. The e-commerce portion of the business
    2. The retail portion of the business, assuming that the accounting systems are mostly manual and handled by Chris and his wife
  4. 51. (SO 2,3,4) Identify an internal control procedure that would reduce each of the risks that follow in a manual system. Also, describe how (or if) an IT system could reduce these risks:
    1. Revenues may be recorded before the related shipment occurs.
    2. Employees responsible for shipping and accounts receivable may collude to steal goods and cover up the theft by recording fictitious sales.
    3. Credit memos may be issued at full price, when the goods were originally sold at a discount.
    4. Sales invoices may contain mathematical errors.
    5. Amounts collected on accounts receivable may be applied to the wrong customer.
    6. Duplicate credit memos may be issued for a single sales return.
    7. Sales invoices may not be prepared for all shipments.
    8. Shipments may contain the wrong goods.
    9. All sales transactions may not be included in the general ledger.
  5. 52. (SO 3,4,5) The following list presents various internal control strengths or risks that may be found in a company's revenues and cash collection processes:

    _____ Credit is authorized by the credit manager.

    _____ Checks paid in excess of $5000 require the signatures of two authorized members of management.

    _____ A cash receipts journal is prepared by the treasurer's department.

    _____ Collections received by check are received by the company receptionist, who has no additional record-keeping responsibilities.

    _____ Collections received by check are immediately forwarded unopened to the accounting department.

    _____ A bank reconciliation is prepared on a monthly basis by the treasurer's department.

    _____ Security cameras are placed in the shipping dock.

    _____ Receiving reports are prepared on preprinted, numbered forms.

    _____ The billing department verifies the amount of customer sales invoices by referring to the authorized price list.

    _____ Entries in the shipping log are reconciled with the sales journal on a monthly basis.

    _____ Payments to vendors are made promptly upon receipt of goods or services.

    _____ Cash collections are deposited in the bank account on a weekly basis.

    _____ Customer returns must be approved by a designated manager before a credit memo is prepared.

    _____ Account statements are sent to customers on a monthly basis.

    _____ Purchase returns are presented to the sales department for preparation of a receiving report.

    Required: In the space provided, indicate whether each of these items represents a strength (S) or risk (R) related to internal controls in the revenues and cash collection processes. Alternatively, indicate whether the item is not applicable (N/A), meaning that it either has no impact on the strength of internal controls or does not pertain to the revenues and cash collection processes.

  6. 53.images (SO 2) Following is the April 30 Accounts Receivable Subsidiary Ledger of Gerrett, Inc., a retailer of tents and camping equipment.

    images

    images

    Required:

    Use Microsoft Excel to prepare an electronic spreadsheet of an accounts receivable aging report for Gerrett for April 30. Organize the spreadsheet with the following column headings:

    images

    Be sure to include each individual invoice for each customer, and show column totals for each customer. Also show report totals for each column and be certain that the report totals cross-foot and agree with the ending Total Account Balance for all customers.

  7. 54. (SO 2) Following is a sales order form for Weston's World of Wines, Inc. This form is prepared manually by a sales clerk and based on a telephone order from a customer. This form represents the source document that triggers the revenues process at Weston's World of Wines. images

    images

    Required:

    Use Microsoft Excel to perform the following:

    1. Design an appropriate format for a data entry screen that could be used in the accounting department to enter information from the sales order in the company's revenues software program.
    2. Prepare a sales journal with appropriate column headings. Enter the relevant information from the preceding sales order into your spreadsheet.
  8. 55. (SO 2,4) Following are ten internal control failures related to the revenues and cash collection processes:

    _____ A customer ordered 12 boxes of your product (total of 144 items) for express shipment. Your data entry clerk inadvertently entered 12 individual items.

    _____ You enter sales and accounts receivable data in batches at the end of each week. Several problems have resulted recently as a result of invoices being recorded to the wrong customer account.

    _____ In an effort to boost sales, you obtain some of the stock of unissued shipping reports and create a dozen fictitious shipments. You submit these documents to the billing department for invoicing.

    _____ Checks are received by the mail room and then forwarded to the accounts receivable department for recording. The accounts receivable clerk holds the checks until the proper customer account has been identified and reconciled.

    _____ Several shipping reports have been misplaced en route to the billing department from the shipping department.

    _____ Several sales transactions were not invoiced within the same month as the related shipment.

    _____ A sales clerk entered a nonexistent date in the computer system. The system rejected the data and the sales were not recorded.

    _____ Upon entering sales orders in your new computer system, a sales clerk mistakenly omitted customer numbers from the entries.

    _____ A computer programmer altered the electronic credit authorization function for a customer company owned by the programmer's cousin.

    _____ Customer orders were lost in the mail en route from the sales office to the accounting department (located at the company's headquarters).

    Required:

    From the list that follows, select one internal control would be most effective in the prevention of each listed failure. Indicate the letter of the control next to each failure. Letters should not be used more than once, and some letters may not be used at all.

    1. Preformatted data entry screens
    2. Prenumbered documents
    3. Programmed edit checks
    4. 100 percent check for matching of customer orders and sales orders
    5. 100 percent check for matching of sales orders, pick list, and packing slips
    6. 100 percent check for matching of sales orders and invoices
    7. 100 percent check for matching of deposit slip and customer check
    8. Prompt data entry immediately upon receipt of customer order
    9. Customer verification
    10. Independent authorization for shipments
    11. Independent authorization for billing
    12. Reasonableness check
    13. Hash totals
    14. Data backup procedures
    15. Program change controls
    16. Sequence verification
    17. Periodic confirmation of customer account balances
  9. 56. (SO 2,3,4) Brathert Company is a small company with four people working in the revenue processes. One of the four employees supervises the other three. Some tasks that must be accomplished within the revenue processes are the following:
    1. Accounts receivable record keeping
    2. Approving credit of customers
    3. Authorizing customer returns
    4. Authorizing new customers
    5. Billing customers
    6. Cash receipts journal posting
    7. Entering orders received
    8. Inventory record keeping
    9. Maintaining custody of cash
    10. Maintaining custody of inventory
    11. Reconciling records to the bank statement

    Required:

    From the preceding list, assign all the duties to each of four employees: supervisor, employee 1, employee 2, and employee 3. No employee should have more than three tasks, no two employees should have any of the same tasks, and there should be a proper separation of duties to achieve appropriate internal control. List the four people, the duties you assign to each employee, and a description of why those assignments achieve proper separation of duties.

  10. images 57. (SO 6) Refer to the Ethical Dilemma: Mail Order Case presented in Chapter 3. What term introduced in this chapter applies to the type of mail order deceit? What could the mail order company do to avoid a loss resulting from an event, assuming that it uses an e-commerce system?
  11. 58. (SO 9) Visit the financial education website created by Equade Internet Ltd. at www.investopedia.com. Note the definition for channel stuffing. According to this site, what is the primary motivation for channel stuffing?
  12. 59. (SO 6) Using a search engine, locate an article written by Vangie Beal titled “Top 2012 eCommerce Trends.” Briefly describe the main point of this article.
  13. 60. (SO 9) This chapter mentioned alleged fraudulent revenue reporting at CocaCola and McAfee. Using a search engine, search the phrase “SEC Channel Stuffing.” Give one more example of a company that was investigated, or is being investigated, by the SEC. What are the facts and status of the case?

CASES

  1. 61. Sound Redux Company is a regional retail chain that sells used CDs. The company has eight stores throughout the Philadelphia region. At each store, customers can bring in used CDs to sell to Sound Redux or to trade for used CDs already in stock. Also, customers can buy used CDs from the large selection on racks in the stores. Sound Redux also carries older LP records for collectors.

    When a used CD or LP record arrives at a Sound Redux store, it is checked for damage, labeled with a bar code, and entered into the extensive inventory. A customer buying a used CD or record takes it to the cash register, where it is scanned through a bar code reader and the customer's cash, check, or credit card payment is processed.

    Sound Redux has decided to establish a website and to begin selling used CDs and records on its website. The company believes there is a niche market for collectors of CDs or records that it can reach via the Web.

    Required:

    1. Describe any differences in the sales processes of the online sales in comparison with in-store sales processes.
    2. Describe any data collected about customers in the in-store sales.
    3. Describe any data collected about customers in the online sales process.
    4. Describe any data you believe Sound Redux should collect from online sales to help improve customer service or profitability.
    5. Describe any data you believe Sound Redux should collect from online sales to help improve customer service or profitability.
  2. 62. At Kornsen Industries, the revenue processes are conducted by five employees. The five employees are the sales clerk, warehouse clerk, accountant 1, accountant 2, and the collection clerk. A description of their duties is as follows:
    1. The sales clerk receives customer orders by phone. She prepares a fourcopy sales order form. She files one copy, one copy goes to the warehouse clerk, one copy goes to accountant 1, and one copy is mailed to the customer.
    2. After receiving a sales order, the warehouse clerk prepares a packing slip, takes the proper items from the warehouse, and ships them with the packing slip enclosed. The sales order is stamped with the ship date, and the shipping log is updated. The sales order is filed by customer number.
    3. After receiving the sales order from the sales clerk, accountant 1 reviews the customer records and either approves or disapproves customer credit. If he approves the customer's credit, he stamps the sales order “approved” and forwards it to accountant 2. Accountant 1 prepares a three-copy invoice. One copy is mailed to the customer, one copy is forwarded to accountant 2, and one copy goes to the collection clerk.
    4. Accountant 2 matches the approved sales order to the invoice and files these by customer number.
    5. After receiving a copy of the invoice, the collection clerk posts the sale to the sales journal and the accounts receivable subsidiary ledger. Daily totals from the sales journal are sent to accountant 1, and she posts these sales summaries to the general ledger.
    6. A mail clerk forwards customer checks to the collection clerk. The collection clerk stamps the check “For Deposit Only” and records it in the accounts receivable subsidiary ledger. The check is also recorded in the cash receipts journal by the collection clerk. The collection clerk deposits checks in the bank account weekly. A weekly summary of cash receipts is forwarded to accountant 2, and she records these summaries in the general ledger.

    Required:

    1. Draw two process maps to reflect the sales processes and collection processes at Kornsen. The student website has a document flowchart in an Excel file for your reference.
    2. Describe any weaknesses in these processes or internal controls. As you identify weaknesses, also describe your suggested improvement.
    3. Draw two new process maps that include your suggested improvements. One process map should depict the sales processes, and the second process map should depict the cash collection processes.
  3. 63. Brigston, Inc., has five departments that handle all sales, billing, and collection processes. The five departments are sales, billing, accounts receivable, warehouse, and general ledger. These processes occur as follows:
    1. A customer mails a purchase order to Brigston, and it is forwarded to the sales department.
    2. A sales clerk in the sales department prepares a four-copy sales order. Two copies are forwarded to billing, one copy to the warehouse, and one copy to general ledger. The sales clerk posts the sale to the sales journal.
    3. Upon receiving the sales order, the warehouse picks goods from the warehouse, updates the inventory subsidiary ledger, and ships the goods to customers. The copy of the sales order is given to the common carrier to accompany the shipment.
    4. Upon receiving the sales order, the billing department looks up prices in the price list and adds these prices to the sales order. One copy is sent to the customer as the invoice. The second copy is forwarded to accounts receivable.
    5. Upon receiving the sales order from billing, the accounts receivable temporarily stores the sales order until the customer mails a check and remittance advice to accounts receivable. The accounts receivable department matches the check to an open sales order, posts to the accounts receivable subsidiary ledger and the cash receipts journal, and deposits checks in the bank daily.
    6. Upon receiving the sales order from the sales department, the general journal and general ledger are updated.

    Required:

    1. Draw two process maps to reflect the business processes at Brigston. One process map should depict the sales processes, and the second process map should depict the cash collection processes.
    2. Describe any weaknesses in these processes or internal controls. As you identify weaknesses, also describe your suggested improvement.
    3. Draw two new process maps that include your suggested improvements. One process map should depict the sales processes, and the second process map should depict the cash collection processes.
  4. 64. Art's Artist World is a retailer of arts and craft supplies in the suburban Chicago area. It operates a single retail store and also has extensive catalog sales on account to area schools, churches, and other community organizations. Retail customers pay for supplies with cash, check, or credit card at the time of the sale. Occasionally, a credit customer may come into the store and purchase supplies on account. In such cases, the sales clerk is required to have the sale approved by the manager. The manager will authorize the sale if he or she recognizes the customer. The sales clerk must complete a charge slip for each sale on account.

    At the end of each shift, the sales clerk prepares a summary of cash collections. This report is forwarded to the accounting department. The charge slips are forwarded to the accounts receivable department at this time.

    The supervisor in the accounts receivable department verifies the information on the charge slip. Prices are matched with an approved price list. If errors are found, they are manually noted on the charge slip. A sales invoice is then prepared by the accounts receivable supervisor. The accounts receivable clerk mails the invoice to the customer.

    The accounts receivable supervisor enters invoices in the computer system each afternoon. At this point, the accounts receivable subsidiary ledger is created and details of the sale are forwarded to the accounting department. At month's end, the accounts receivable supervisor prints a monthly report of the accounts receivable subsidiary ledger and list of past-due accounts. These reports are filed and referred to in cases of customer complaints or payment problems.

    A cashier supervises the sales clerks and performs the basic cash collection functions. The cashier opens the mail each day and stamps the check “For Deposit Only,” with the company's endorsement and bank account number. Checks are compared with any supporting remittance advice received with the check, and a daily listing of mail collections is prepared. Two daily deposits are prepared: one for the mail collections and another for cash register collections. A duplicate copy of all deposit slips is maintained by the cashier for use in the preparation of the monthly bank reconciliation.

    In the accounting department, a staff accountant receives documentation of cash collections from sales clerks and the cashier. The staff accountant uses the information to prepare the journal entry for posting to the general ledger. When all of the collections have been entered, the remittance information is transmitted electronically to the accounts receivable supervisor for purposes of updating the accounts receivable subsidiary ledger for the day's collections.

    Monthly account statements are prepared by the staff accountant and mailed to all customers. If a customer's account remains unpaid for six months, the staff accountant will notify the accounts receivable supervisor to write off the account as uncollectible. At this time, the credit manager is also notified of the account status so that additional credit will not be granted to this customer.

    Required:

    From the facts of this scenario, describe the internal control risks associated with Art's internal controls over the revenues and cash collection processes. Prepare a business memo, addressed to Art Dusing, the company's owner/operator, describing your recommendations for correcting each of these problems.

  5. 65. Gorko LLC is in the process of updating its revenues and receivables systems with the implementation of new accounting software. Jarrett Howstill, Inc., is an independent information technology consultant who is assisting Gorko with the project. Jarrett has developed the following checklist containing internal control points that the company should consider in this new implementation:
    • Is the sales department separate from the credit office and the IT department?
    • Are all collections from customers received in the form of checks?
    • Is it appropriate to program the system for general authorization of certain sales, within given limits?
    • Are product quantities monitored regularly?
    • Will all data entry clerks and accounting personnel have their own PCs with log-in IDs and password protection?
    • Will different system access levels for different users be incorporated?
    • Will customer orders be received via the Internet?
    • Has the company identified an off-site alternative computer processing location?
    • Does the project budget include line items for an upgraded, uninterrupted power source and firewall?
    • Will the system be thoroughly tested prior to implementation?
    • Will appropriate file backup procedures be established?
    • Will business continuity plans be prepared?
    • Will an off-site data storage exist?
    • Will intrusion detection systems be incorporated?

    Required:

    Describe the control purpose of each of the points presented.

  6. 66. Springtown Pediatric Association is a partnership of six pediatrician owners, two nurse practitioners, ten nurses, three accounting clerks, two receptionists, and an office manager. The office manager and all of the accounting clerks have their own PCs, and the receptionists share a PC.

    These PCs are connected through a local area network. They are password protected, and the managing partner keeps a record of all passwords. The practice uses a standard medical-services software package that cannot be modified. Following is a description of the revenues and cash collections processes used in this medical practice:

    Most patients receive medical attention after insurance coverage has been verified by the office manager. Upon entering the medical office, the patient presents proof of insurance to a receptionist. The insurance documentation is photocopied and immediately forwarded to the office manager for verification (while the patient is in the waiting room). In some situations, the office manager may extend credit on the basis of special circumstances. Approximately 20 percent of the patients pay for services with cash or check at the time of the appointment.

    The attending physician must prepare a prenumbered service report at the time services are rendered to patients. Completed service reports are immediately forwarded to the first accounting clerk, who updates the report with pricing information. One copy of this report is given to the patient, and the other copy is retained by the second accounting clerk. Depending upon the patient's form of payment, the second accounting clerk will perform one of the following for each service report:

    • File an insurance claim and record the related insurance company receivable for any reports that are signed by the office manager as a verification of the patient's insurance coverage.
    • Record a patient receivable for any reports that are designated by the office manager as approved credit.
    • Receive the cash or check from the patient and record the related cash collection in a cash receipts listing.

    The second accounting clerk prepares a daily summary of patient revenues.

    The first accounting clerk opens the mail each day and handles insurance company correspondences. When collections are received in the mail from insurance companies and patients, they are forwarded to the second accounting clerk for deposit. The second clerk stamps each check “For Deposit Only” and prepares a daily cash receipts listing (which also includes collections from patients who received services that day). One copy of this list is retained, and a copy is sent to the third accounting clerk. The third clerk prepares the daily bank deposit slip and retains a copy in a chronological file. This clerk also handles patient correspondences and scheduling and maintains a list of patients whose insurance coverage has been approved by the office manager.

    When patient accounts are not collected within 60 days, the second clerk notifies the office manager, who analyzes the reasons for all instance of nonpayment. When the insurance company rejects the claim, the office manager reclassifies the receivable from an insurance account to a patient account. The second clerk adjusts the insurance company and patient account files for reclassifications and write-offs. This clerk maintains a listing of patients with uncollectible balances and provides an updated copy each week to the third clerk, who will not allow patients with this status to schedule new appointments.

    Springtown Pediatrics Association uses a local CPA firm to perform various accounting functions. On a monthly basis, the firm posts the daily revenues summaries to the general ledger and prepares a trial balance and monthly financial statements. In addition, this firm accounts for the numerical sequence of service reports, files tax returns and payroll forms, and performs the monthly bank reconciliations. The CPA firm reports directly to the managing partner of the practice.

    Required:

    Evaluate the information in each of the following situations as being either an internal control (1) strength, (2) weakness, or (3) not a strength or weakness.

    1. Springtown Pediatrics Association's office manager approves the extension of credit to patients and also authorizes write-offs of uncollectible accounts.
    2. Springtown Pediatrics Association's office manager may extend credit based on special circumstances rather than using a formal credit search and established credit limits.
    3. Springtown Pediatrics Association extends credit rather than requiring cash or insurance in all cases.
    4. The computer software package cannot be modified by the employees of the practice.
    5. None of the employees who generate revenues or record revenues are able to write checks.
    6. Computer passwords are known only by the individual employees and the managing partner, who has no record-keeping responsibilities.
    7. Individual pediatricians document the services they perform on pre-numbered reports that are used for both recording revenues and patient receipts.
    8. Insurance coverage is verified by the office manager before medical services are rendered.
    9. The bank reconciliation is prepared by an independent CPA firm.
    10. The sequence of prenumbered service reports is accounted for on a monthly basis by an independent CPA firm.
    11. The second accounting clerk receives cash and checks and prepares the daily deposit.
    12. The second accounting clerk maintains the accounts receivable records and can add or delete receivables information on the PC.
    13. The second clerk receives the cash and checks and also records cash receipts.
    14. Springtown Pediatrics Association is involved only in medical services and does not have diversified business operations.

      (Excerpt from Adapted CPA Simulation Problem)

  7. 67. Gramiko, Inc., processes its sales and cash receipts documents in the following manner:

CASH RECEIPTS

Each morning a mail clerk in the sales department opens the mail containing checks and remittance advices, which are then forwarded to the sales department supervisor, who reviews each check and forwards the checks and remittance advices to the accounting department supervisor. The accounting department supervisor, who also functions as the credit manager, reviews all checks for payments of past-due accounts and then forwards the checks and remittance advices to the accounts receivable clerk, who arranges the advices in alphabetical order. The remittance advices are posted directly to the accounts receivable ledger. The checks are totaled, and the total is posted to the cash receipts journal. The remittance advices are filed chronologically.

After receiving the cash from the preceding day's cash sales, the accounts receivable clerk prepares a three-copy daily deposit slip. The third copy of the deposit slip is filed by date, and the second copy and the original accompany the bank deposit.

SALES

Sales clerks prepare a three-copy sales invoice for each sale. The original and the second copy are presented to the cashier, while the third copy is retained by the sales clerk in the sales book. When the sale is paid for with cash, the customer pays the sales clerk, who presents the money to the cashier with the invoice copies.

A credit sale is authorized by the cashier using an approved credit list after the sales clerk prepares the three-copy invoice. After receiving the cash or approving the invoice, the cashier validates the original copy of the sales invoice and gives it to the customer. At the end of each day the cashier recaps the sales and cash received and forwards the cash and the second copy of all sales invoices to the accounts receivable clerk. The accounts receivable clerk balances the cash received with cash sales invoices and prepares a daily sales summary. The credit sales invoices are posted to the accounts receivable ledger, and then all invoices are sent to the inventory control clerk in the sales department for posting to the inventory control catalog. After posting, the inventory control clerk files all invoices numerically. The accounts receivable clerk posts the daily sales summary to the cash receipts journal and sales journal and files the sales summaries by date.

BANK DEPOSITS

The bank validates the deposit slip and returns the second copy to the accounting department, where the accounts receivable clerk files it by date. Monthly bank statements are reconciled promptly by the accounting department supervisor and filed by date.

Required:

  1. Prepare a process map of these processes.
  2. Identify internal control weaknesses in these processes.

    (Adapted CPA problem)

CONTINUING CASE: ROBATELLI'S PIZZERIA

Reread the Robatelli's Pizzeria case in Chapter 1. Consider the following issues related to the revenues processes at Robatelli's:

As Elaine Black reflects on her meeting with Jim Saxton and Peter Greyton, she considers where the company has been and where it is heading, and ponders the current issues regarding Robatelli's accounting information systems and its ability to take and record sales. She is concerned about the limitations of the current accounting information system. Are internal controls strong enough? Would a new, integrated IT system yield improvements? As she contemplates the integration of the POS systems at the restaurant locations with the GL software at the home office, she wonders about the requirements for developing and implementing such a system, and how to best utilize the system to support Robatelli's plans for growth. Elaine realizes that her ability to address these issues will be critical not only to the success of the company, but also to her career.

Required:

  1. Briefly describe the differences in Robatelli's three order-entry systems (instore, telephone, and Internet). For each method, specifically identify the employees needed and describe the tasks performed by these employees.
  2. Draw three process maps of the ordering and sales processes at Robatelli's. One process map should depict in-store sales, one map should depict phone orders, and one should depict online orders.
  3. From the descriptions of Robatelli's various revenue and collection processes, answer the following questions regarding internal controls:
    1. Separately identify at least one internal control strength and/or weakness for each of the three ordering systems (in-store, telephone, and Internet).
    2. What is the control purpose of the drop-down boxes in the Internet ordering system?

    SOLUTIONS TO CONCEPT CHECK

    1. (SO 2) Within the sales processes, a signed approval of a sales order indicates all except a. the date of delivery. When a designated employee approves a sales order, it is an indication that the sale is authorized in accordance with company policies. This means that the customer is approved, that the customer's credit status has been verified to indicate that the credit limit is not exceeded, and that the sales price is in accordance with established pricing. The date of delivery is typically beyond the control of the authorizing person, as it is dependent upon the amount of inventory in stock.
    2. (SO 2) An example of independent verification in the sales process is c. proof of recorded dates, quantities, and prices on an invoice. This is the only choice that reflects an independent verification procedure. In option a., preparation of packing lists on prenumbered forms is an example of a control over documents and records; in option b., initialing the sales order is an indication of authorization; and in option d., physical controls in record storage areas is a security measure.
    3. (CPA Adapted) (SO 2) The purpose of tracing shipping documents to prenumbered sales invoices would be to provide evidence that a. shipments to customers were properly invoiced. The forward direction of this testing verifies that the billing process was completed for this shipping transaction. Response b. is incorrect because an entire sequence of such documents would need to be verified in order to determine that there were no omissions. Response c. is incorrect because its direction of the testing is opposite; in other words, the proper starting point would be the invoice for this determination (as in question 4). Response d. is not relevant because it is concerned with the completeness of the accounting records.
    4. (CIA Adapted) (SO 2) The purpose of tracing sales invoices to shipping documents would be to provide evidence that c. goods billed to customers were shipped. The backward direction of this testing serves the purpose of verifying the existence of the transaction. Response a. is incorrect because its direction of the testing is opposite; in other words, the proper starting point would be the shipping document for this determination (as in question 3). Response b. is incorrect because a review of all matched invoices and shipping documents would be needed to determine whether any duplicates had occurred. Response d. is not relevant, because it is concerned with the completeness of the accounting records.
    5. (CPA Adapted) (SO 2) To ensure that all credit sales transactions of an entity are recorded, the most effective control would be that d. the supervisor of the billing department matches prenumbered shipping documents with entries recorded in the sales journal. This test addresses the completeness of accounting records. Response a. is incorrect, because agreement of the records does not necessarily ensure that there are no omissions. Responses b. and c. are incorrect, because they address the accuracy and authorization of the account balances, respectively, rather than completeness.
    6. (CPA Adapted) (SO 3) Under a system of sound internal controls, if a company sold defective goods, the return of those goods from the customer should be accepted by the a. receiving clerk. Since the receiving clerk is independent of all related record-keeping functions, this is the correct response. Each of the other responses involves record-keeping functions that would violate internal controls regarding adequate segregation of duties.
    7. (SO 3) The source document that initiates the recording of the return and the adjustment to the customer's credit status is the c. credit memorandum. Option a., a pick list, provides detail of the items to be pulled from inventory to fulfill a customer's order; option b., a sales journal, is the record of sales transactions; and in option d., a sales invoice, provides details of a sale and requests payment from the customer.
    8. (SO 4) The choice which is not a document that is part of the cash collection process is a d. Packing slip. This is part of the sales process. Each of the other options relates to a document that is part of the cash collection process.
    9. (SO 4) c. The employee who opens mail containing checks prepares a list of checks received is the statement that would represent proper segregation of duties. This involves preparation of the daily cash receipts listing, which is typically performed by the person who opens the mail. Each of the other options describes a scenario lacking in proper controls regarding segregation of duties.
    10. (CPA Adapted) (SO 4) Immediately upon receiving checks from customers in the mail, a responsible employee working in an environment of adequate internal control should prepare a listing of receipts and forward it to the company's cashier. A copy of this cash receipts listing should also be sent to the company's a. treasurer for comparison with the monthly bank statement. Response b. is incorrect because internal auditors are not part of a company's routine processing. Response c. is incorrect because the accounts receivable subsidiary ledger should not be updated before a cash receipts journal is prepared and the receipt has been matched with an outstanding invoice. Response d. is incorrect because the bank would not be involved in reconciliation of the company's cash transactions.
    11. (CIA Adapted) (SO 4) If a company does not prepare an aging of accounts receivable, the account most likely to be misstated is the d. allowance for uncollectible accounts. An accounts receivable aging report is used to analyze customer balances according to the respective lengths of time that have elapsed since payment was due. This helps determine the collectibility of customer accounts, which is the foundation of the allowance for uncollectible accounts.
    12. (SO 6) When a company sells items over the Internet, it is usually called ecommerce. There are many IT risks related to Internet sales. The risk of invalid data entered by a customer would be b. processing integrity risk. Option a., availability risk, relates to service denial due to system failures or attacks; options c. and d., security risk and confidentiality risk, relate to unauthorized access, network break-ins, and repudiation of sales.
    13. (SO 6) The risk of hardware and software failures that prevent website sales would be an a. availability risk. Option b., processing integrity risk, relates to invalid, incomplete, or erroneous data; options c. and d., security risk and confidentiality risk, relate to unauthorized access, network break-ins, and repudiation of sales.
    14. (SO 7) The use of EDI to conduct sales electronically has risks and benefits. d. Shorter inventory cycle time is a benefit of EDI, rather than a risk. This makes it possible for the company to reduce its inventory levels and replenish those inventory levels more quickly, as a result of the time savings realized from avoiding keying, keying errors, and mail delays. Option a., incomplete audit trail, is an example of a processing integrity risk associated with EDI; options b. and c., repudiation and unauthorized access, relate to security and confidentiality risks associated with EDI.
    15. (SO 8) An IT system that uses touch screens, bar-coded products, and credit card authorization during the sale is called a c. point of sale system. Option a., EDI, involves inter-company exchanges of standard business documents; option b., e-commerce, uses electronic processing for Internet-based sales transactions; and d., e-payables, uses electronic processing of payments.
    16. (SO 9) d. Promotional price discounts are not a method of unethically inflating sales revenue unless the discounts are not part of the company's customary promotions or are used with excessive coercion. Each of the other options is unethical, because it involves the artificial inflation of revenue.

1F. Borthick and H.P. Roth, “EDI for Reengineering Business Processes,” Management Accounting, October 1993, pp. 32–37.

2Jay Baitler, “The Power of Effective Procurement and Strategic Suppliers,” Strategic Finance, April 2003, p. 40.

3Ellen Messmer, “Nortel embraces Net EDI,” Network World, March 17, 1997, p. 69.

4Andy Zipser, “Cooking the Books: How Pressure to Raise Sales Led MiniScribe to Falsify Numbers.” The Wall Street Journal, 9/11/1989.

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