Chapter 4

CHAPTER 4

THE REVENUE CYCLE

REVIEW QUESTIONS
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1. The packing slip travels with the goods to the customer, and it describes the

contents on the order. Upon filling the order, the shipping department sends the

shipping notice to the billing department to notify them that the order has been

filled and shipped. The shipping notice contains additional information that the

packing slip may not contain, such as shipment date and carrier and freight

charges. The bill of lading is a formal contract between the seller and the

transportation carrier; it shows legal ownership and responsibility for assets in

transit.

2. The receiving department counts and inspects items that are returned by

customers. The receiving department prepares a return slip, copies of which go

to the warehouse for restocking, and to the sales order department so that a

credit memo can be issued to the customer.

3. The general ledger clerk receives a total of all sales from the billing department in

the form of a summary journal voucher. The accounts receivable department

sends an account summary of the individual accounts receivable so that the

accounts receivable control account can be verified against the accounts

receivable ledger. The inventory control department sends summary information

in the form of a journal voucher that reflects the total reductions of inventory in

financial terms and the associated charges to cost of goods sold.

4. a. credit checks

b. returns policy for granting cash refunds and credits, and

c. cash prelists providing verification that customer checks and remittance

advices match in amount.

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5. The three rules that ensure segregation of functions are:

a. Transaction authorization should be separate from transaction processing.

b. Asset custody should be separate from asset record keeping.

c. The organization structure should be such that the perpetration of a fraud

requires collusion between two or more individuals.

6. a. Shipping departmentverifies that the correct amount and types of goods

are sent from the warehouse by reconciling the stock release document and the

packing slip.

b. Billing departmentreconciles the shipping notice with the invoice to ensure that

customers are appropriately billed.

c. GL clerksreconcile journal vouchers from various departments such as the billing

department, the accounts receivable department, and inventory control

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7. The objective of re-engineering is to greatly reduce costs by identifying and

eliminating non value-added tasks and also by streamlining necessary existing

processes.

8. A point of sale system immediately records both cash and credit transactions and

inventory information. The sales journal, accounts receivable, and inventory

accounts may be updated in real-time, or a transaction file may be used to later

update a master file.

9. The primary key provides the link between magnetic records stored on a

computer disk and the physical source documents and business events that they

represent.

10. The billing departments receipt of the sales order occurs in most instances

before the goods are actually shipped; thus, the economic event is not complete.

Some of the goods may not be available to ship; thus, the customer should not

be billed until the goods are shipped and the economic event is complete.

11. Microcomputers tend to have inadequate segregation of functions, inadequate

control over access to data files, and inadequate protection against data loss.

12. Billing occurs after the product is shipped to the customer.

13. A billing of lading is a formal contract between the seller and the shipping

company (carrier) to transport the goods to the customer.

14. The billing process is initiated by the shipping notice, which signals the shipment

of the goods to the buyer.

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15. Supervision plays an important role in the mail room where both the check

(asset) and remittance advice (accounting record) are in the hands of one

person. Mail room fraud can result, which involves stealing the check and

destroying the remittance advice to cover the theft.

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DISCUSSION QUESTIONS

1. The checks received in payment for accounts receivable are a crucial asset for

the firm. These checks must be protected from individuals who might try to

deposit these checks into their own accounts. The process of having a member

of the mail room personnel open the mail and record all checks received before

they are routed to the cashier or the accounts receivable department is to ensure

that the accounts receivable personnel do not engage in such activities as

lapping the accounts receivable accounts.

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2. The sales order department (included in the sales department in the text) is

responsible for taking the customer order and placing it into a standard format.

This department records information such as the customers name, address,

account number, quantities and units of each item, discounts, freight preferences,

etc. The sales order processing may, in some instances, play a role in verifying or

determining the promised shipping date. The billing department receives a copy of

the sales order from the sales department. Upon receipt of the shipping notice and

the stock release documents, the billing department prepares the sales invoice,

which is the customers bill reflecting charges for items shipped, which may be

different from items ordered, taxes and freight, and any discounts offered. The

sales order department should not prepare the bills because the salespeople may

bill their favorite clients less than they should be billed. The salespeople place the

order, and thus start the wheels in motion for inventory to be shipped. Further, the

salespeople should not be allowed to determine how much the customers pay for

their inventory, because they may be tempted to charge lower prices and receive

kickbacks.

The accounts receivable department receives the sales orders and posts them to the

accounts receivable subsidiary ledger. As remittance advices are received, they are

posted to the customers account in the accounts receivable subsidiary ledger. The

accounts receivable department should not be allowed to prepare the bills since this

department has custody over the accounts receivable assets. Accounts receivable

personnel record customer payments and track unpaid bills by customers. If they
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were allowed to prepare the bills, they might not bill certain customers and receive a

kickback from the customers for the free goods.

3. The separation of the warehouse and the shipping department allows for

segregation of functions over two departments for the custody of the assets

during two distinct phases of the revenue cycle. The warehouse attendants have

custody over the finished goods until they receive a stock release form from the

sales department. The warehouse clerks pick the inventory items from the

warehouse and send them to shipping along with a copy of the stock release

form. The shipping department is only able to ship goods that it receives from the

warehouse personnel. Further, it must match the goods with a packing slip and

shipping notice that originates from the sales department. Thus, warehouse

personnel are not allowed to ship out any unauthorized inventory items because

the shipping personnel would not have the corresponding paperwork. The

additional paperwork required is considered a necessary cost for the added

benefit of control over inventory.

The warehouse personnel do not keep the formal accounting records. The asset

custodial tasks must be kept separate from the formal record-keeping tasks. The

inventory control keeps the formal accounting records of inventory stock items.
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4. An employee who has access to incoming payments, either cash or check, as well

as the authorization to issue credit memos may pocket the cash or check of a

payment for goods received. This employee could then issue a credit memo to this

persons account so that the customer does not show a balance due.

5. The company should periodically, perhaps monthly, send an account summary to

each customer listing invoices and amounts paid by check number and date.

This form allows the customer to verify the accuracy of the records. If any

payments are not recorded, they will notify the company of the discrepancy.

These reports should not be handled by the accounts receivable clerk or the

cashier.

6. Access control to the billing and accounts receivable records that are part of the

revenue cycle is just as important as the physical control devices over cash and

inventory because these records affect the collectibility of an asset accounts

receivablewhich should eventually be converted into cash. If these records are

not adequately controlled, inventory may not be ultimately converted into the

cash amount deserved by the firm.

7. The Internet is rapidly becoming a popular source for information gathering,

price comparison, and the purchase of products. The Internet may be used to

allow buyers to submit orders through the Internet. Until intelligent agents are

commonly used, this type of transaction will occur with a lag.

8. Accounts receivable may be overstated because allowance for doubtful

accounts is understated due to poor credit policy.

o Bad debt expense may be understated.

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9. The advantage of real-time updating is that the general ledger would be current

after every transaction. The tradeoff is a potential decline in operating efficiency,

depending on the volume of transactions processed by the system.

10. a. Switching from a manual system to a large-scale computer based

accounting system may pose the following problems:

1. authorizationwhen authorizations are automated as in

real-time processing systems, the programmed decision rules need to be

periodically reviewed to determine if they are still appropriate, and these

programmed decision rules need to be protected from unauthorized changes.

2. segregation of functions of systems personnelmany tasks

are now performed by the computer. The programs and access to them must be

closely supervised. Unauthorized changes to programs should be prohibited.

3. access controllimitation of file access by unauthorized

employees becomes important, especially in the case of a disgruntled employee.

In a manual system, the employee would literally have to torch the records, shred

them, or destroy them in some similar fashion. With magnetically stored records,

the data is much more vulnerable to acts of malice. Further, access controls over

data and programs against internal employees and external agents is crucial.

4. accounting recordsthe accounting records need to be

carefully backed up in case of destruction.

b. Switching from a manual system to a microcomputer based accounting

system may pose the following problems:

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1. inadequate segregation of functionsone or a handful of

people may be trained to work on the microcomputer. Thus, the entering of sales

order data, cash receipts, invoices, and disbursements may be performed by one

or two persons. Close supervision becomes crucial in these situations.

2. access controlmany applications do not provide adequate

access control of various data files, and when they do the office procedures may

not strictly reinforce them.

3. inadequate backup recordsmany times backup copies are

not appropriately made, or are sloppily labeled and filed. Microcomputers are

prone to hard disk failures. If disk failure occurs, and the data cannot be found or

reliably ascertained as being the appropriate data file due to poor labeling, the

company may suffer a tremendous loss in terms of accounting records.

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11. Automated mail room procedures that can open cash receipts mail and separate

remittance advice and checks, as well as verify the dollar amounts, are best used in

environments where payments are for single invoices, such as monthly electrical

bills or telephone bills. For those situations where the amount paid is not pre-printed

on the remittance advice or is for partial payments or payment of multiple invoices, a

high number of rejects is likely to result.

12. In point-of-sale systems, the customer literally has possession of the items

purchased, thus the inventory is in hand. Typically, for manufacturing firms, the

order is placed and the good is shipped to the customer at some later time

period. Thus, updating inventory at the time of sale is necessary in point-of-sale

systems since the inventory is changing hands, while it is not necessary in

manufacturing firms until the goods are actually shipped to the customer.

13. No, the bar-codes are not read with 100% accuracy. Another potential error can

occur if the wrong bar-coded stickers are attached to the merchandise, which can

occur in some discount retail stores that do not update the database; they just

print out bar-coded stickers and attach them to the merchandise. Devious

customers may switch stickers on price tags.

14. The tasks of design, maintenance, and operation of computer programs need to

be segregated. The programmers who write the original computer programs

should not also be responsible for making program changes. Both of these

functions must also be separate from the daily task of operating the system.
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15. EDI represents a unique business arrangement between the buyer and seller in

which they agree, in advance, to the terms of their relationship on such items as

selling price, quantities, delivery times, payment terms and methods of handling

disputes. The terms of agreement are binding. One problem is ensuring that only

valid transactions are processed. Another risk is that a non-trading partner will

masquerade as a trading partner and access the firms processing systems.

MULTIPLE CHOICE

1. B

2. C

3. C

4. B

5. C

6. A

7. C

8. A

PROBLEMS

1. a. This system uses real-time data collection and real-time updating of critical

records (subsidiary accounts that are unique to the transaction). General ledger

accounts that are common to all transactions are processed in batch mode.

b. As each transaction is received, all records associated with it will need

to be updated immediately. This would eliminate the batch-processing step and

the sales order transaction file from the current system.

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A new real-time update program will be required.

Sales summaries, currently prepared periodically, can now be

extracted on demand by the marketing manager directly from his/her terminal.

c. Updating all general ledger accounts in real-time may cause operational delays.

Each customer will need to wait until the previous customers transaction is

completely processed, including general ledger accounts that are common to all

customers. The extent of the delays will depend in part on transaction volume

and the number of simultaneous transactions executed.

d. Please refer to the diagram on the following page.

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2. a. This is a batch processing system that uses direct access storage devices

rather than sequential tapes, but the records are stored in sequential files. The

transactions are keyed in, and the batch totals are calculated. The batch totals

accompany the sales order file through all the data processing runs that follow.

The edit run is used to test each record for the existence of clerical or logical

errors. Any records with errors are removed and written to an error file to be

corrected later by an authorized person. The batch totals are recalculated for the

clean transactions. The edited file is then sorted based on the primary customer
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account number. The batch totals are used to verify the integrity of the sorted

database file. The sorted file is used to update the accounts receivable file. The

original accounts receivable file remains in tact and is used for backup. The

newly created accounts receivable becomes the new master file. The customers

invoices are processed during the update and billing run. The sales order file is

sorted on the inventory number so that the inventory master file can be updated.

The original inventory file remains in tact and is used for backup. The newly

created inventory file becomes the new master file. The batch totals are still used

to verify the completeness and accuracy of the transaction file. At the end of the

day, the batch totals are sorted and used to update the general ledger. The

original general ledger remains in tact and is used for backup. The newly created

general ledger becomes the new master file.

b. If the sequentially stored data files are not used and real-time processing of data

using indexed direct access files are used instead, the editing and sort runs no

longer become necessary. The transactions will be immediately checked for input

errors, and the accounts receivable file and inventory files will automatically be

updated as each transaction is processed. Thus, batch totals will no longer be

used. Accumulators may be used to accumulate values that are periodically

posted to the general ledger. The accounts affected by each transaction in the

master file will be overwritten with each transaction that is processed.

c. Since the computers will be performing tasks that individuals used to perform,

such as inventory controls, the control procedures over program code need to be

secured from unauthorized access. The master files are overwritten each time a
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record is processed. Controls should be put into place for periodically making a

backup copy of the master file so that the records may be covered in case the

current working copy of a master file is destroyed or incorrectly overwritten.

d. See diagram:

3. Sales clerk should not record sales in the Sales Journal before the

economic event (shipping the goods) has occurred. Billing should perform this

role.

o No credit check is performed.

o Billing department bills customer before the goods are shipped and without
confirmation of shipment and quantity shipped. A shipping notice should
trigger the billing process.
o Accounts Receivable should not process cash receipts and maintain the AR
subsidiary records.
o Warehouse clerk, who controls the physical inventory, should not also
maintain the inventory subsidiary records.
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o The general ledger department should receive journal vouchers and account
summaries from AR, cash receipts, billing, and inventory control. Instead they
inappropriately use source documents to update GL accounts.
o
o

4. Strengths Problems Avoided

All 25 stores use the same system Avoids difficulty in auditing the

for controlling sales transactions. stores and incorporating chainwide

improvements.
The assistant manager and manager Avoids subjectivity in sales and

are paid on a salary basis. commission allocations.

Reduces subjectivity for credit and

check approvals.
The separation of cashiers and The separation of duties minimizes

salespeople for completing sales the possibility of fraud.

invoices and returns.

Helps mitigate sales invoice errors.

Prevents the salespeople from

taking the returns for their own use.

Automatic sequential numbering is Eliminates subjective, consecutive

done by the cash register. numbering, minimizing employee theft.

Avoids the undetected loss of an

invoice.

Provides an audit trail for invoices.

The multi-part invoices are Prevents the omission of an

sequentially ordered. invoice.

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Avoids possible fraudulent

payment shortage.

Provides a distribution of copies of

the invoice throughout the system.

The reconciliation of cash receipts, The separation of duties reduces

checks, bank cards, returns, and cash the possibility of theft or fraud.

register tapes is performed.

This review provides another

opportunity to catch errors.

o
o
o
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5. Iris needs to consider whether she wishes to purchase one microcomputer

system or three. Assuming that she only wishes to purchase one microcomputer

for the central shop, she should definitely consider an accounting software

package that has an accounts payable and general ledger module. The purchase

of a payroll module will depend upon the number of employees paid each period.

Iris will need to determine if the time saved is worth the cost. The payroll module

may also help with year end forms such as W-2s and 1099s. Iris may also wish

to consider centralizing the purchasing function in order to obtain quantity

discounts by placing larger orders. If she wishes to do this, an inventory control

module may be appropriate. As the system is currently designed, Iris has no

good way to determine whether the managers are purchasing the right mix of

inventory items, nor whether they are being used efficiently. Floral shops,

because of the perishability of inventory and need to respond to unexpected

orders suddenly, may not lend themselves to centralized purchasing and/or

centralized inventory control.

If Iris wishes to purchase a computer for each store then, in addition to the

modules discussed above, she should consider purchasing software that can

process point of sale transactions and balance the cash receipts at the end of the

day. Inventory control software, which helps to track the profitability and spoilage

of certain items as well as to aid the managers in their purchasing decisions,

might be considered. The system could then provide summary reports for Iris so

that she may examine the inventory purchasing and usage decisions of the

managers. The cash receipts should provide better management over cash
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receipts due to errors than a manual system, and if the correct controls are

included, then control may increase. For example, a notice might be placed over

the cash register that states If you do not get a receipt from the computer, your

order is free. The information system then will cut down on the possibility that a

customer may pay cash and the employee or manager keeps the money and

never rings up the sale.

Iris may be able to find software specifically designed for florists. She should

examine them to see if they will suit her partially decentralized management.

With the correct system, Iris should see increased control over cash receipts and

maybe even over inventory purchases and usage. A disadvantage is that the

managers may feel that they are being watched more closely and this may cause

some resentment.

6.

a. Cash prelist or remittance list

b. Cash Receipts department

c. Post to Cash Receipts Journal and deposit checks

d. Bank

e. Cash Receipts Journal

f. Accounts Receivable Department

g. Computer terminal
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h. Computer disk

i. Accounts Receivable file

o
o
7. The document flowchart is illustrated on the following page. One key control

issue is that all sales are recorded. Merchandise should not be given to a

customer if the sale is not entered into the system so that an employee can

pocket the money received for the sale. Another issue is the reconciling of

physical coupons with the number of coupons entered into the system. Again, an

employee should not be able to ring up a sale at the lower price for a customer

without a coupon, charge the customer full-price and keep the difference.

Another concern is that employees will steal inventory by giving away free food to

their friends and relatives. The system should track all food items recorded as

sold and the related waste and compare with the materials used. The flowchart

presented provides checks and balances for ensuring that employee theft of cash

received from customers is prevented.

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o
o
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8. All are proper segregation of functions except b. The sales department should

not be allowed to approve credit memos since it could potentially overstate sales

in one period to meet quotas and boost bonuses and reverse them in a

subsequent period. The receiving report indicating that goods have been

received by the receiving department should be the source document for credit

memos and it should be authorized by someone independent of the sales

department.

o
9. a. Elaine performs many incompatible tasks. She opens the mail, deposits all

cash and check receipts, and keeps the accounts receivable records. She could

easily keep checks and alter the accounts receivable to cover her theft.

Furthermore, she records the bills, so she could potentially bill a customer, not

record it in the books and keep the money when the check is received. Even

more troublesome is the fact that she handles the point of sale receipts and

prepares the daily deposits, which are a substantial amount of sales (30%).

Elaine never takes enough vacation time where anyone else can perform her

duties long enough to check the books. The employee who handles the inventory

and accounts payable function also has incompatible tasks. This employee could

be making payments to a family or friend for inventory not received. The

employee who handles all receipts, stocking, and shipping of inventory is also

performing incompatible tasks and could be pilfering some inventory as it comes

in and shipping it to him or herself.

b. Close supervision is needed for the employee working in the receiving, stocking,

and shipping department. This employee needs to be kept from stealing

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inventory. Close supervision should help this aspect. Prenumbered shipping

forms which must be accounted for may deter this employee from shipping any

goods to him or herself or friends. The accounting function should be

redistributed among the remaining two employees and close supervision should

be exercised at one time. One possible reallocation of tasks would be:

Employee 1 Employee 2
record point of sale receipts prepare the daily cash deposits and

reconcile to daily cash sales

update the accounts receivable open the mail and make a list of all

account records incoming checks; prepare deposit

prepare the bills for accounts accounts payable

receivable
inventory general ledger
purchasing
payroll
This system is not perfect and close supervision is important.
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10. In a batch system, the general ledger master file is not updated every time a

batch is processed; rather, the general ledger is typically updated at the close of

each day. Each of the systems, such as accounts payable, accounts receivable,

cash receipts, cash disbursement, inventory control, etc, accumulate batch totals

for all of the batches that were processed since the last general ledger update.

These batch totals are sorted by the general ledger account number and the

general ledger is updated in a single run.

11. When insufficient inventory is available to fill a customers approved order, the

warehouse clerk places these items on back-order. The back-order status is

reported to the sales department where either a new sales order for the

outstanding item(s) is prepared or the existing sales order is copied and adjusted

to reflect the missing product(s). The stock release documents are noted to

reflect the amounts that are being shipped to the customer. The customer is

typically not billed until the goods are shipped.

12. a. Customer open order file Sales

b. Sales journal Billing

c. Journal voucher file General Ledger

d. Cash receipts journal Cash Receipts

e. Inventory subsidiary ledger Inventory Control

f. Acct Rec subsidiary ledger Accounts Receivable

g. Sales history file Sales

h. Shipping report file Shipping

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i. Credit memo file Sales

j. Sales order file Sales

k. Closed sales order file Sales

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INTERNAL CONTROL CASES

1. Solution to Spice is Right

a), b), See diagrams on the following pages.

c) Internal Control Weaknesses

1) No credit check

2) Inventory control function is performed by warehouse clerk.

3) Accounting department bills customer, updates the AR account, and

records sales in the Sales Journal thus reducing the opportunity to detect
discrepancies between total sales and AR postings.

4) Customer is billed before order is actually shipped

5) Remittance List should be prepared in the mailroom

6) No journal voucher prepared by cash receipts clerk.

7) Cash receipts clerk does not prepare a deposit slip.

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d) Flowchart of revised system

Student responses will vary for this part of the assignment. The following issues,

however, need to be addressed.

Upgrade stand-alone computers to a networked environment

The internal control problems already covered that need to be corrected in

the new system.

A system configuration similar to figure 4-18 would be appropriate.

2. Solution to ABE Plumbing

a), b) See diagrams on the following pages.

c) Internal Control Weaknesses

1) No Credit check is performed.

2) The sales clerk closes the open sales order causing the sale to be
recorded before the goods are actually shipped.
3) The warehouse clerk has asset custody and should not also update the
inventory records.
4) The shipping clerk does not reconcile the stock release with the original
order. This allows for the wrong items and or quantities to be shipped.
5) Customer is billed before the goods are shipped. Billing should be
triggered by shipping notice. Instead, the customer invoice is printed from
the closed sales order, which was prepared before the goods were
shipped.
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d) Flowchart of revised system

Student responses will vary for this part of the assignment. The following issues,

however, need to be addressed.

The internal control problems already covered that need to be corrected in

the new system.

A system configuration similar to figure 4-18 would be appropriate.

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3. Solution Smiths Market

a), b) See diagrams on the following pages.

c) Internal Control Weaknesses

1) Access to the cash drawers by sales clerks requires more

accountability. Each drawer is accessed by various clerks throughout
the day and cash may be withdrawn by any of them.

2) The internal cash register tape should be used as a control to

determine how much cash (including checks, and credit card vouchers)
should be in the register drawer.

3) The shift supervisor does not sign for the specific amount of cash
received or returned at the end of the day. He simply logs the drawers
in and out.

4) The treasury clerk is unsupervised in the counting of cash.

5) The treasury clerk has asset custody and responsibility for recording
sales and cash in the journal and General Ledger.
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4. Solution to Walker Books

a), b), See diagrams on the following pages.

c) Internal Control Weaknesses

Sales Processing:

1) The credit check is performed by the sales representative

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2) The sales department should not be maintain the sales journal

3) The warehouse should not be updating inventory subsidiary ledger

Cash Receipts

4) Mail room workers have access to both check and remittance advices.
This situation require a reduced span of control and separate mail room
procedures for customer payments vs routine mail.

5) The accounts receivable clerk has access to both the checks and the
customer accounts
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d) Revised System Walker Books System

Student responses will vary for this part of the assignment. Notwithstanding the
internal control issues already covered that need to be addressed, Walker Books
automated system design could reflect features similar to those in figures 4-19
and 4-19.
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5. Solution to AV Safety, Inc. a), b), d) See diagrams on the following pages.

c) Internal Control Weaknesses

1) No credit check is performed
2) Sales journal is updated before the goods are shipped
3) Warehouse clerk has access to inventory and also update the inventory
ledger
4) Mailroom clerk has access to both the remittance advice and the checks,
no remittance list id prepared.
5) AR clerk has access to both the checks and the remittance advices
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6. Solution to Premier Sports Memorabilia

a), b), d) See diagrams on the following pages.

c) Internal Control Weaknesses

1) Transaction is recorded in Sales Journal before goods are shipped

2) Warehouse and Shipping functions are combined. This removes control

over picking and shipping the wrong products.

3) Mail room clerk should prepare a remittance list to control remittance

advices and checks

4) Although not stated in the case as aproblem, the auditor should evaluate

network access controls (passwords, access privileges) to ensure a

proper segregation of duties

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D) Student solutions to this part of the case will vary. The solution should

address the control issues identified in part C.

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7. Solution to Bait n Reel

Internal Control Weaknesses

1) The sales clerk performs the credit check this is a segregation of duties
and transaction authorization problem.
2) Warehouse should not update the inventory and General ledger control
accounts.
3) AR Clerk should not update the general ledger.
4) Billing and AR are combined. This structure will mask discrepancies
between what was billed and what was recorded as a sale.
5) Supervision is needed in the mailroom because employees who open the
mail have access to both cash and the remittance advice.
5) The cash receipts clerk has access to the assets (cash) and is responsible
for updating the general ledger.
6) See 3 above.
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8. Solution to USA Cycle Company

a), b), d) see diagrams on the following pages.

c) Internal Control Weaknesses

Sales Order Processing

1) No credit department to authorize sales to creditworthy customer
and no proper credit policy is in place.

2) The material release form provides a formal authorization for a

warehouse worker to release stock to either the shipping department or
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the factory. Therefore, the factory worker should not prepare this form but
rather the sales department should generate the form

3) The warehouse worker has assets custody and is responsible for

recording the inventory in both the sales process and sales returns.

4) Products are shipped directly from the warehouse thereby reducing

opportunity to independently identify discrepancies between what was
ordered and what is shipped.

5) USA Cycles data are distributed each department has its own
computer system. USA Cycle needs control over integration of data such
as inventory records and the Sales Order data. It also needs control over
access to customer account data, the sales journal, and the general
ledger to prevent misuse or theft of customer information.

6) No formal general ledger function exists to reconcile the journal

vouchers sent from the different departments.

Sales Returns

7) In the sales returns processing, USA Cycle needs not only a separate
credit department for authorizing the process of sales returns but also an
official return policy rather than management personal judgment.

Cash Receipts
8) No segregation between mail room employees and cash receipt
department employees. There should be segregation of duties between
employees that prepare the remittance list and those that update the cash
receipt journal.
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9. Solution to Green Mountain

a), b), d) See diagrams on the following pages.

c) Internal Control Weaknesses

Sales Order System
1) The sales department performs the credit check

2) Billing receives no shipping notice prior to billing the customer

3) The warehouse clerk has asset custody and updated the inventory records.

4The shipping department fails to notify billing that the good have been shipped.

Cash Receipts
5) The mail room clerk has access to both the cash (asset) and the remittance
advice (record).

6) Cash receipts department is also doing the job of the accounts receivable
department. The cash receipts department has custody of the physical asset
(cash) and keeps the accounting records.
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Revised Green Mountain System

Student responses will vary for this part of the assignment.

Notwithstanding the internal control issues already covered that need

to be addressed, Green Mountains batch oriented system is

inappropriate for their type of business. Student solutions should

reflect this with system designs similar to those in figure 4-18 and 4-19.