KEY TERMS two general areas of responsibility are performed packing slip - document that travels with the

independently. goods to the customer to describe the contents of

access control list (ACL) - lists containing the order.
information that defines the access privileges for credit memo - document used to authorize the
all valid users of the resource. An access control customer to receive credit for the merchandise point-of-sale (POS) systems - revenue system in
list assigned to each resource controls access to returned. which no customer accounts receivable are
system resources such as directories, files, maintained and inventory is kept on the store’s
programs, and printers. customer order - document indicating the type shelves, not in a separate warehouse.
and quantity of merchandise being requested.
accounts receivable (AR) subsidiary ledger - Prenumbered documents - Documents (sales
account record that shows activity by detail for deposit slip - written notification accompanying a orders, shipping notices, remittance advices, and
each account type, and containing, at minimum: bank deposit that specifies and categorizes the so on) sequentially numbered by the printer that
customer name; customer address; current funds (such as checks, bills, and coins) being allow every transaction to be identified uniquely.
balance; available credit; transaction dates; deposited.
invoice numbers; and credits for payments, Remittance advice - Source document that
returns, and allowances. electronic data interchange (EDI) - intercompany contains key information required to service the
exchange of computer-processible business customer’s account.
approved credit memo - the credit manager information in standard format.
evaluates the circumstances of the return and Remittance list - Cash prelist, where all cash
makes a judgment to grant (or disapprove) credit. inventory subsidiary ledger - ledger with received is logged.
inventory records updated from the stock release Return slip - Document recording the counting
approved sales order - contains sales order copy by the inventory control system. and inspect of items returned, prepared by the
information for the sales manager to review once receiving department employee.
the sales order is approved. journal voucher - accounting journal entries into
an accounting system for the purposes of making Role - Formal technique for grouping users
back-order - records that stay on file until the corrections or adjustments to the accounting data. according to the system resources they require to
inventories arrive from the supplier. Back-ordered For control purposes, all JVs should be approved perform their assigned tasks.
items are shipped before new sales are by the appropriate designated authority.
processed. journal voucher file - compilation of all journal Role-based access control (RBAC) - is a method
vouchers posted to the general ledger. of restricting network access based on the roles of
bill of lading - formal contract between the seller individual users within an enterprise.
and the shipping company that transports the ledger copy - copy of the sales order received
goods to the customer. along with the customer sales invoice by the billing S.O. pending file - It is where the sales order
department clerk from the sales department. (invoice copy) is placed until receipt of the sipping
cash receipts journal - records that include notice, which describes the products that were
details of all cash receipts transactions, including multilevel security - it employs programmed actually shipped to the customer.
cash sales, miscellaneous cash receipts, and cash techniques that permit simultaneous access to a
received. central system by many users with different Sales invoice - Document that formally depicts
controller’s - the cash receipts department access privileges but prevent them from obtaining the charges to the customer.
typically reports to the treasurer, who has information fo which they lack authorization Sales journal - Document that formally depicts the
responsibility for financial assets. Accounting charges to the customer.
functions report to the controller. Normally these
Sales order - Source document that captures 1. What document initiates the sales department and a journal voucher summary from
such vital information as the name and address of process? Cash receipt department.
the customer making the purchase; the customer’s A customer order usually in the form of a purchase
account number; the name, number, and order initiates the sales process
description of the product; the quantities and unit 5. What are the three authorization controls
price of the items sold; and other financial 2. Distinguish between a packing slip, a The three authorization controls are the following:
information. shipping notice, and a bill of lading. 1. Credit check
The packing slip is the document that travels with 2. Return policy
Sales order (credit copy) - Copy of sales order the goods to the customer to describe the contents 3. Remittance list
sent by the receive-order task to the check-credit of the order. The shipping notice is another
task. It is used to check the credit-worthiness of a document which is forwarded to the billing function 6. What are the three rules that ensure that
customer. as evidence of that the customer’s order was filled no single employee or department
and shipped and it conveys pertinent new facts processes a transaction in its entirety?
Sales order (invoice copy) - Copy of sales order such as the date of shipment, the items and a. Transaction authorization should be
to be reconciled with the shipping notice,. It quantities actually shipped, the name of the separate from transaction
describes the products that were actually shipped carrier, and freight charges. The bill of lading is a processing.
to the customer. formal contract between the seller and the b. Asset custody should be separate
shipping company(carrier) to transport the goods from the task of asset record
Shipping log - Specifies orders shipped during to the customer and it establishes legal ownership keeping.
the period. and responsibility for asset in transit. c. The organization should be
structured so that the perpetration of
Shipping notice - Document that informs the 3. What function does the receiving a fraud requires collusion between
billing department that the customer’s order has department serve in the revenue cycle? two or more individuals.
been filled and shipped. When items are returned, the receiving
department employee counts, inspects, and 7. At which points in the revenue cycle are
Stock records - Formal accounting records for prepares a return slip describing the items. The independent verification controls
controlling inventory assets. goods, along with a copy of the return slip, go to necessary?
the warehouse to be restocked. The employee Independent verification controls in the revenue
Stock release - Document that identifies which then sends the second copy of the return slip to cycle exist at the following points:
items of inventory must be located and picked the sales function to prepare a credit memo. 1. The shipping function verifies that
from the warehouse shelves. The sales return process begins in the receiving the goods sent from the
department, where personnel receive, count, warehouse are correct in type and
Universal product code (UPC) - Label containing inspect for damage, and send returned products to quantity. Before the goods are
price information (and other data) that is attached the warehouse. The receiving clerk prepares a sent to the customer, the stock
to items purchased in a point-of-sale system. return slip, which is forwarded to the sales release document and the packing
department for processing. slip are reconciled.
Verified stock release - After stock is picked, 2. The billing function reconciles the
verification of the order for accuracy and release of 4. The general ledger clerk receives original sales order with the
the goods. summary data from which department? shipping notice to ensure that
What form of summary data? customers are billed for only the
REVIEW QUESTIONS General ledger clerk receives an accounts quantities shipped.
receivable summary from accounts receivable
 3. Prior to posting to control records according to its primary key field and exceed the customer's credit limit may be dealt
accounts, the general ledger possibly a secondary key field. Once the data is with very quickly.
function reconciles journal sorted, the update program posts the transactions
vouchers and summary reports to the appropriate corresponding records in the 13. What is multilevel security?
prepared independently in master file. During a sequential update, each Multilevel security employs programmed
different function areas. The billing record is copied from the original master file to the techniques that permit simultaneous access to a
function summarizes the sales new master file regardless of whether the balance central system by many users with different access
journal, inventory control is affected privileges but prevents them from obtaining
summarizes the changes in the information for which they lack authorization
inventory subsidiary ledger, the 11. What are the key features of a POS
cash receipts function summarizes system? 14. Why does billing receive a copy of the sales
the cash receipts journal, and A point of sale system immediately order when the order is approved but does not
accounts receivable summarizes records both cash and credit transactions and bill until the goods are shipped?
the AR subsidiary ledger. inventory information. The sales journal, accounts The billing department's receipt of the
receivable, and inventory accounts may be sales order occurs in most instances before the
8. What is the purpose of physical controls? updated in real-time, or a transaction file may be goods are actually shipped; thus, the economic
Purpose of this section is to support the system used to later update a master file. event is not complete. Some of the goods may not
concepts presented in the previous section with be available to ship; thus, the customer should not
models depicting people, organizational units, and 12. How is a credit check in the advanced be billed until the goods are shipped and the
physical documents and files. This helps you technology systems fundamentally different economic event is complete.
envision the segregation of duties and from a credit check in the basic technology
independent verifications, which are essential to system? 15. Why was EDI devised?
effective internal control regardless of the In the advanced technology system, the EDI technology was devised to expedite
technology in place. In addition, it highlights system logic, not a human being, makes the routine transactions between manufacturers and
inefficiencies intrinsic to manual systems, which decision to grant or deny credit based on the wholesalers and between wholesalers and
gave rise to modern systems using improved customer's credit history contained in the credit retailers. The customer’s computer is connected
technologies. history file. If credit is denied, the sales clerk directly to the seller’s computer via telephone
should not be able to force the transaction to lines. When the customer’s computer detects the
9. How can we prevent inventory from being continue. need to order inventory, it automatically transmits
reordered automatically each time the In the basic technology system, credit an order to the seller. The seller’s system receives
system detects a low inventory level? checking of prospective customers is a function of the order and processes it automatically. This
The on-order information will prevent items from the credit department, which has responsibility for system requires little or no human involvement.
being accidentally reordered and will assist ensuring the proper application of the firm's credit
customer service clerks in advising customers as policies. The complexity of credit procedures will 16. What assets are at greatest risk in a POS
to the status of inventory and expected due dates vary depending on the organization, its system?
for out-of-stock items. relationship with the customer, and the materiality Inventory and cash. Customers have direct
of the transaction. Credit approval for first-time access to inventory in the POS system.
10. Distinguish between an edit run, a sort customers may take time and involve consultation
run, and an update run. with an outside credit bureau. In contrast, credit 17. In a manual system, after which event is the
An edit run is the first run; it detects most data decisions about existing customers that involve sales process should the customer be billed?
entry errors. Only "clean" data progresses to the ensuring only that the current transaction does not Shipment of goods marks the completion of
sort run. The sort run sequences the transaction the economic event and the point at which the
customer should be billed. Upon receipt of the revenue cycle. The warehouse attendants have sales invoice, which is the customer's bill reflecting
shipping notice and stock release, the billing clerk custody over the finished goods until they receive charges for items shipped, which may be different
compiles the relevant facts about the transaction a stock release form from the sales department. from items ordered, taxes and freight, and any
(product prices, handling charges, freight, taxes, The warehouse clerks pick the inventory items discounts offered. The sales order department
and discount terms) and bills the customer. from the warehouse and send them to shipping should not prepare the bills because the
along with a copy of the stock release form. The salespeople may bill their favorite clients less than
18. What is bill of lading? shipping department is only able to ship goods that they should be billed. The salespeople place the
A bill of lading is a formal contract it receives from the warehouse personnel. Further, order, and thus start the wheels in motion for
between the seller and the shipping company that it must match the goods with a packing slip and inventory to be shipped. Further, the salespeople
transports the goods to the customer. It also shipping notice that originates from the sales should not be allowed to determine how much the
serves as a shipment receipt when the carrier department. Thus, warehouse personnel are not customers pay for their inventory, because they
delivers the goods at a predetermined destination. allowed to ship out any unauthorized inventory may be tempted to charge lower prices and
This document must accompany the shipped items because the shipping personnel would not receive kickbacks. The accounts receivable
products, no matter the form of transportation, and have the corresponding paperwork. The additional department receives the sales orders and posts
must be signed by an authorized representative paperwork required is considered a necessary them to the accounts receivable subsidiary ledger.
from the carrier, shipper, and receiver. cost for the added benefit of control over inventory. As remittance advices are received, they are
The warehouse personnel do not keep the posted to the customer's account in the accounts
19. What documents initiates the billing formal accounting records. The asset custodial receivable subsidiary ledger. The accounts
process? tasks must be kept separate from the formal receivable department should not be allowed to
The shipping notice is proof that the product record-keeping tasks. The inventory control keeps prepare the bills since this department has custody
has been shipped and is the trigger document that the formal accounting records of inventory stock over the accounts receivable assets. Accounts
initiates the billing process. items. receivable personnel record customer payments
and track unpaid bills by customers. If they were
20. Where in the cash receipts process does allowed to prepare the bills, they might not bill
supervision play an important role? 2. Distinguish between the sales order, certain customers and receive a kickback from the
Supervision plays an important role in the billing, and AR departments. Why can’t the customers for the free goods.
mail room where both the check (asset) and sales order or AR departments prepare the
remittance advice (accounting records) are in the bills?
hands of one person. Mail room fraud can result, The sales order department (included in the 3. Explain the purpose of having mail room
which involves stealing the check and destroying sales department in the text) is responsible for procedures.
the remittance advice to cover the theft. taking the customer order and placing it into a The checks received in payment for accounts
standard format. This department records receivable are a crucial asset for the firm. These
DISCUSSION QUESTIONS information such as the customer's name, checks must be protected from individuals who
address, account number, quantities and units of might try to deposit these checks into their own
1. Why do firms have separate departments each item, discounts, freight preferences, etc. The accounts. The process of having a member of the
for warehousing and shipping? What about sales order processing may, in some instances, mailroom personnel open the mail and record all
warehousing and inventory control? play a role in verifying or determining the promised checks received before they are routed to the
Doesn’t this just create more paperwork? shipping date. cashier or the accounts receivable department is
The separation of the warehouse and the The billing department receives a copy of the to ensure that the accounts receivable personnel
shipping department allows for segregation of sales order from the sales department. Upon do not engage in such activities as lapping the
functions over two departments for the custody of receipt of the shipping notice and the stock release accounts receivable accounts.
the assets during two distinct phases of the documents, the billing department prepares the
 7. Why is access control over revenue cycle Credit policy implies that the terms at
4. Explain how segregation of duties is documents just as important as the which credits are forwarded to the organization's
accomplished in an integrated data physical control devices over cash and customer. Inconsistently applied credit policies
processing environment. inventory? may result in an overstatement of accounts
In this environment, segregation of duties is Access control to the billing and accounts receivable. Nonstandard or substandard
accomplished through multilevel security receivable records that are part of the revenue customers having long dues can be provided with
procedures. Multilevel security employs cycle is just as important as the physical control further credits, this would result in an
programmed techniques that permit simultaneous devices over cash and inventory because these overstatement of accounts receivable
access to a central system by many users with records affect the collectability of an asset—
different access privileges but prevents them from accounts receivable—which should eventually be 10. Give three examples of access control in a
obtaining information for which they lack converted into cash. If these records are not POS system.
authorization. adequately controlled, inventory may not be A. Assign each clerk to a separate cash
ultimately converted into the cash amount register for an entire shift. When the clerk
deserved by the firm. leaves the register to take a break, the
5. How could an employee embezzle funds by cash drawer should be locked to prevent
issuing an unauthorized sales credit memo 8. How can reengineering of the sales order unauthorized access.
if the appropriate segregation of duties and processing subsystem be accomplished B. Magnetic tags are attached to
authorization controls were not in place? using the Internet? merchandise, which will sound an alarm
An employee who has access to incoming In the past decade, the Internet has become when removed from the store.
payments, either cash or check, as well as the an integral part of our everyday lives, its ability to C. Locked showcases are used to display
authorization to issue credit memos may pocket quickly gather the data we need in a matter of jewelry and costly electronic equipment.
the cash or check of a payment for goods seconds vastly improve a company's margin of
received. This employee could then issue a credit error. With the Internet's ability to quickly process 11. Discuss the trade-off in choosing to update
memo to this person's account so that the and gather data, it would greatly improve sales the general ledger accounts in real time versus
customer does not show a balance due. order processing subsystem by automating much batch.
of the data processing and ensuring the margin In real-time processing, changes are
6. What task can the AR department engage profit is high through lower rate of error. With the updated in real-time as and when such changes
in to verify that all customer’s checks have ability to quickly determine the inventory level, it occur; whereas, in batch processing changes are
been appropriately deposited and will reduce extra cost a company may incur due to grouped and each group is processed in a single
recorded? backorder items and will prevent a company from batch.
The company should periodically, perhaps over selling items causing customers to lose faith In choosing between real-time or batch
monthly, send an account summary to each in the company. update, the following points could be taken into
customer listing invoices and amounts paid by consideration. If the basis is updating method, in
check number and date. This form allows the 9. What financial statement misrepresentations real-time processing changes are made at the time
customer to verify the accuracy of the records. If may result from an inconsistently applied such changes occur while in batch processing,
any payments are not recorded, they will notify the credit policy? Be specific. updates are accumulated and are processed in
company of the discrepancy. These reports should Financial misinterpretations are made by batches. If the basis is staffing requirements, in
not be handled by the accounts receivable clerk or showing the financial figures in such a way that the real-time processing it increases while batch
the cashier. overall financial position of the company looks processing does not require the recruitment of
healthier than what is in real life. This can be done additional staff.
in many ways like over evaluation of assets and
under evaluation of liabilities.
12. If an automated credit checking function organizations. Generally, only cash, checks, and company actually authorizes or approves a
denies a customer credit, should the sales bank credit card sales are valid. Unlike particular EDI transaction. In its purest form, the
clerk ever be authorized to override the manufacturing firms, the organization maintains no exchange is completely automated.
decision? If so when? customer accounts receivable. Unlike some EDI poses unique control problems for an
The sales clerk is not authorized to manufacturing firms, inventory is kept on the organization. One problem is ensuring that, in the
override the decision because within the revenue store's shelves, not in a separate warehouse. The absence of explicit authorization, only valid
cycle, the credit department is segregated from the customers personally pick the items they wish to transactions are processed. Another risk is that a
rest of the process so formal authorization of a buy and carry them to the checkout location, trading partner, or someone masquerading as a
transaction is an independent event. where the transaction begins. Shipping, packing, trading partner, will access the firm’s accounting
Often, compensation for sales staff is bills of lading, etc. are not relevant to POS records in a way that is unauthorized by the
based on their individual sales performance. In systems. trading partner agreement.
such cases, sales staff have an incentive to
maximize sales volume and thus may not 15. Is a POS system that uses bar coding and a 17. Discuss the two common methods of
adequately consider the creditworthiness of laser light scanner foolproof against inaccurate achieving multilevel security in a system.
prospective customers. By acting in an updates? Discuss. Two methods for achieving multilevel
independent capacity, the credit department may First, the checkout clerk scans the security are the access control list (ACL) and role-
objectively detect risky customers and disallow universal product code (UPC) label on the items based access control (RBAC). Through these
poor and irresponsible sales decisions. being purchased with a laser light scanner. The techniques, purchasing, receiving, AP, cash
scanner, which is the primary input device of the disbursement and general ledger are limited in
13. How can advanced technology transaction POS system, may be handheld or mounted on the their access based on the privileges assigned to
processing systems reduce fraud? checkout table. The POS system is connected them.
Advanced technology transaction online to the inventory file from which it retrieves
processing systems reduce fraud in such a way product price data and displays this on the clerk’s
that there is authorization of transactions. The terminal. The inventory quantity on hand is MULTIPLE CHOICE QUESTION
objective of this is to ensure that only valid reduced in real time to reflect the items sold. As 1. Which function or department records
transactions are being processed and thus items fall to minimum levels, they are automatically a sale in the sales journal?
reducing the occurrence of fraud. reordered. When all the UPCs are scanned, the C. sales department
system automatically calculates taxes, discounts, In accounting system, one of the special
14. What makes POS systems different from and the total for the transaction. journals is sales journal. In this, only sales
revenue cycles of manufacturing firms? made by a company on account are
In point-of-sale systems, the customer 16. How is EDI more than technology? What recorded. Credit sales of inventory and
literally has possession of the items purchased, unique control problems may it pose? merchandise are recorded in this journal.
thus the inventory is in hand. Typically, for EDI is more than just a technology. It
manufacturing firms, the order is placed and the represents a business arrangement between the 2. Which functions should be
good is shipped to the customer at some later time buyer and seller in which they agree, in advance, segregated?
period. Thus, updating inventory at the time of sale to the terms of their relationship. For example, B. Picking goods from the warehouse
is necessary in point-of-sale systems since the they agree to the selling price, the quantities to be shelves and updating the inventory
inventory is changing hands, while it is not sold, guaranteed delivery times, payment terms, subsidiary ledger
necessary in manufacturing firms until the goods and methods of handling disputes. These terms The function segregated is opening the
are actually shipped to the customer. Also, POS are specified in a trading partner agreement and mail and recording the cash receipts in the
systems are used extensively in grocery stores, are legally binding. Once the agreement is in journal. Segregation duties are very
department stores, and other types of retail place, no individual in either the buying or selling important to the internal control structure
 as it founds the faults in the system. Its
main duties are approval, accounting and 5. The bill of lading is prepared by 8. Which of the following sets of tasks
asset custody. The above-mentioned C. Shipping clerk should not be separated?
function is used in reconciling or The shipping clerk packages to goods, E. All of the above tasks should be
accounting purpose. attaches the packing slip, completes the separated
The person who performs the above shipping notice, and prepares a bill of As a part of independent verification
function cannot make the deposit. In his lading. control, duties must be segregated
duties no person can perform the same between the employees to avoid fraud in
task. Different job assignments are 6. Which of the following is NOT an cash transactions.
provided to different person according to independent verification control?
shift wise. D. The billing department reconciles 9. Which of the following is often called a
the shipping notice with the sales compensating control?
invoice to ensure that customers are A.Supervision
3. Which of the following is incompatible billed for only the quantities shipped. Implementing adequate segregation of
task? The cashier collects the cash receipts from duties requires that a firm employ a
C. The AR clerk authorizes the write-off the customers and presents remittance sufficiently large number of employees.
of bad debts advices, to ensure that the amounts are Achieving adequate segregation of duties
Weak internal control structure: entered properly for reconciliation. As a often presents difficulties for small
Account receivable clerk authorizes the part of independent verification control, organizations. Obviously, it is impossible
write-off bad debts indicates the weak duties must be segregated between the to separate five incompatible tasks among
internal control structure. The effective employees to avoid fraud in cash three employees.
internal control structure is that all the transactions. In other words, cash Therefore, in small organizations or in
accounting records get matched when the collections should be made by one functional areas that lack sufficient
audit takes place. If there is no control on employee and the remittances should be personnel, management must compensate
the accounting records that means the made by another employee to avoid cash for the absence of segregation controls
internal control structure is weak. Reduced have any falsification of information with close supervision. For this reason,
records of transfers between warehouse In the present case, both the cash receipts supervision is often called a compensating
often results in the ineffective controls in and cash remittances are handled by a control.
internal structure. single person only. It will lead to fraud by
the employee and falsification of financial 10. Which document triggers the billing
4. Which control helps to ensure that the information. Therefore, it is not an function?
inventory items shipped to the independent verification control. A. Shipping notice
customer are the correct type and the The shipping notice provides proof that the
correct amount? 7. Which department defines terms for product has been shipped and is the
D. Reconcile stock release document shipped goods ownership? trigger document that initiates the billing
and packing slip D. Bill of Lading process.
The effective control that helps ensuring a The bill of lading is a formal contract
check of the inventory systems that between the seller and the shipping
shipped to the customer are correct type company to transport the goods to the
and amount, a proper and effective customer. This ownership establishes
reconciliation of stock release document legal ownership and responsibility for
with the packing slip. assets in transit.
 Study
hard,
Play hard,
Pray
harder.