Accounts Receivable, Accounts Payable & Cash Chapter 4 Accounts Receivable, Accounts Payable & Cash

The Revenue Cycle The revenue cycle relates to the exchange of goods and/or services with customers and the collection of revenue generated by this activity. To design internal controls we need to understand the flow of information in this cycle and the characteristics of the financial information needed by management.

The Revenue Cycle

A Computerised Revenue Cycle Technology can lead to automation of human tasks, increasing efficiency and reducing paperwork Input typically comes from a hard copy document and goes through one or more processes. Processes store data in files or prepare data in the form of a report.

A Computerised Revenue Cycle Internet Sales require no prior planning or agreements. However there are new risks for both the seller and the buyer; hackers, viruses and transaction fraud. Some internal controls that can be implemented to minimise this include passwords, message encryption and firewalls

Revenue Cycle Outputs The main objective in processing sales revenue is to record the earning of income and to achieve timely collection of it in order to pay bills of the organisation. Must produce outputs to help achieve this objective. Monthly Reports 1. Customer billing statement. 2. Aging report. 3. Bad debts report. 4. Cash receipts forecast. 5. Customer listing. 6. Sales commission reports.

Revenue Cycle Outputs Performance Reports 1. Time analysis reports: Customer order to delivery. Invoicing to cash receipts. 2. Comparison analysis reports: Salesperson expenses to sales amounts. Bad debts to credit sales. Sales to advertising and promotion spending.

The Internal Control Objectives for the Revenue Cycle The internal control objectives for the revenue cycle are to ensure that information for the period: is complete. is valid. is accurate. is safeguarded. can be used for reporting.

Segregation of Duties Segregation of duties and responsibilities is an integral part of an internal control system. The fundamental requirement is the separation of: Custodial responsibilities (responsible for assets). Record-keeping responsibility. Authorisation responsibility.

Segregation of Duties The following duties should be segregated: Segregation of custody and recordkeeping Segregation of authorisation and recordkeeping Segregation of custodial duties and authorisation

Internal Controls the for Revenue Cycle Controls over records and documents Credit investigation and approval procedures Sequentially pre-numbered documents Authorisation procedures for bad debts Shipping documents, sales orders, customer orders and sales invoices should be reconciled Accounts Receivable should have control and subsidiary ledger Limited employee access to documents and records

Internal Controls the for Revenue Cycle Segregation of Duties Credit authorisation function separate from handling cash receipts, sales and billing functions Specific authorisation for non-standard transactions Formal procedures for assigning customer credit limits

Accounts Receivable Controls Basic Controls Completeness – Record all transactions using prenumbered and sequential documents and match them against each other. Safeguarding – Secure storage of debtor records. A/R staff should not handle cash Accuracy – Invoices checked and sent quickly Validity – Approval of sales orders and credit given. Standard price list, approval for returns, bad debt approval. Accountability – Staff accountable for reconciling control and subsidiary ledgers and follow up of slow payers. Valuation – Monthly review of aged debtors reports and check on adequacy of Allowance for Doubtful Debts

Cash Receipts Subsystem Basic Controls Completeness – All receipts should be journalised. Mail should be entered on a prelist, cash counted and banked daily. Accuracy – Receipts classified accurately, cash register tapes checked daily, reconcile cash counted to receipt summaries daily, mail opened by 2 staff, check EFTs. Validity – All discounts need to be authorised. Safeguarding – Daily banking, cash held in safe. Accountability – Set procedures for staff to follow, bank reconciliations done monthly. Valuation – Debtors balances need to reflect A/R receipts

Summary of the Internal Control System Revenue Cycle

Mailed Cash Receipts High inherent risk of mistakes or fraudulent activities Internal Control Objectives for Mail To ensure that items received in the mail are: safeguarded. accounted for accurately. treated promptly. recorded correctly.

Mailed Cash Receipts Internal Control Procedures for Mail Segregation of Duties Persons opening the mail should not have duties of: Banking. Preparation of cash receipts. Accounts receivable entry. Mail opened in presence of two persons. One a responsible officer. Mail duties rotated.

Mailed Cash Receipts Safeguarding assets Cheques received should be endorsed and immediately stamped ‘not negotiable’ and ‘account payee only’ Proper documents and records Cheques should be listed to establish a control total. The name of payer and amount remitted. Cheque list should be signed when handed to cashier and a copy sent to accounts receivable with remittance advice. Another copy should be sent to general accounting.

Mailed Cash Receipts Independent reconciliations and verifications Control list used to reconcile: Daily banking deposits. Credits to customer accounts. Bank totals should be independently verified.

Summary of Controls for Cash Receipts

Internal Control Systems and the Expenditure Cycle The expenditure cycle relates to the purchase and payment of goods and services and other assets. The Accounts Payable and cash payments subsystem are major parts of the expenditure cycle.

The Expenditure Cycle

Computer-based systems in the expenditure cycle Many purchasing systems are now computerised. Benefits of the automated system include: Greater control over inventory. Better record keeping of inventory levels. Enhanced purchasing department efficiency and effectiveness. Cash management is enhanced as the computer keeps tabs on when invoices come due. Real-time data input improves controls by shortening lag time, eliminating manual procedures and dimishing paperwork.

Expenditure Cycle Outputs Monthly Reports Financial statement information. Vendor checks. Cheque register. Discrepancy reports. Cash requirements forecast. Purchase analysis reports.

Expenditure Cycle Outputs Performance Reports Purchase discounts lost. Time analysis reports: Inventory request to order placed. Order placed to goods received. Goods received to invoice recorded.

Internal Control Objectives for the Expenditure Cycle The internal control objectives for the expenditure cycle are to ensure information for the period : is complete – all transactions recorded is valid – transactions properly authorised, fair price paid is accurate – goods ordered are what is received and reflected in invoice is safeguarded – creditor records restricted to authorised staff can be used for reporting – accountability purposes

Segregation of Duties and Responsibilities The following duties should be segregated: Segregation of custodial and record-keeping duties Segregation of authorisation and record keeping duties Segregation of custodial and authorisation duties.

Internal Control for the Expenditure Cycle Adequate controls over records and documents Authorisation of purchase requisitions Sequentially pre-numbered documents Authorisation procedures for the payment of invoices Purchase orders, delivery dockets and invoices should be reconciled Accounts Payable should have a control and subsidiary ledger Limited employee access to goods received

Internal Control for the Expenditure Cycle Segregation of Duties The duties that must be segregated are: Authorisation of purchase requisitions Recording of goods received Custody of stock

Accounts Payable Basic Controls Completeness – All purchase orders and receiving reports should be sequentially prenumbered. Invoices and receiving reports should be checked against these order Accuracy – Invoices checked against order and receiving report Validity – Purchase orders, received items and invoices need to be approved, vouchers stamped PAID immediately, all payments authorised.

Accounts Payable Basic Controls Safeguarding – Secure storage of A/P records. No A/P staff to handle cash. Accountability – Staff need to be accountable for the reconciliation of control and subsidiary accounts, ensure creditors are paid within 30 days. Valuation – Monthly review of aged creditors report

Cash Payments Subsystem Basic Controls Completeness – all payments should be journalised. Accuracy – Check cash payments daily, Classify payments accurately, check payments against summaries Validity – all discounts authorised Safeguarding – daily banking, cash held in safe Accountability – set procedures to follow to make cash payments, reconciliation done monthly Valuation – Creditor balance needs to reflect A/P payments