REVENUE AND RECEIVABLES CYCLE: PREPARED BY A ZUNGU

Background:
▪ One of the five basic business cycles (Auditing Notes, 13th edition, ch 10 = Revenue & receipts
cycle, ch 11 = Acquisitions and payments cycle, ch 12 = Inventory and production cycle, ch 13 =
Payroll and personnel cycle & ch 14 = Finance and investment cycle)
▪ Affect the both the statement of financial position (Receivables & Cash and cash equivalents)
and profit or loss (revenue)
▪ Credit and cash sales (cash sales specific on 10/41)
▪ Focuses on accounting system and control activities. Please read through (10/3 to 10/41) =
characteristics of the cycle, basic functions of any revenue and receipts cycle, documents used,
computerization of the revenue and receipts cycle, internal control in a cash sales system & the
role of the other components of internal controls (control environment, risk assessment &
monitoring) in the revenue and receipts cycle)
▪ Narrative descriptions of the cycle and through practical examples. Please read through
(10/44 to 10/52). ([1] Narrative description of the revenue and receipts cycle at ProRide (Pty)
Ltd, clearly showing background to the company, overall control awareness & computerization of
the cycle. [2] How the system work ProRide in terms of sales, clearly showing receiving orders,
opening an account, the production of the picking slips, picking the goods & dispatch [3] and
showing how the system at ProRide works in terms of recording and entering receipts from
debtors, credit notes and adjustments to debtor’s accounts and monitoring)

Learning Outcomes:
▪ Describe credit sales transactions by referring to the activities, functions and documents
associated with these transactions.
▪ Identify and explain the risks associated with credit sales transactions and explain and apply the
internal controls that could be implemented to mitigate the risks.
▪ Describe and apply internal control in a computerised environment for credit sales transactions.
▪ Describe cash sales transactions by referring to the activities, functions and documents associated
with these transactions.
▪ Identify and explain the risks associated with cash sales transactions.
▪ Describe and apply the internal controls that could be implemented to mitigate the risks

Activities and functions: (Auditing notes, 13th edition – 10/4 to 10/5)

▪ Order department (receiving customer order & Authorizing the sale)
▪ Warehouse/dispatch (processing the order & dispatch)
▪ Invoicing
▪ Recording sales and raising the debtor
▪ Receiving and recording payment from debtors
▪ Credit management (evaluating creditworthiness & collecting amounts owed)

Other activities: (Auditing notes, 13th edition – 10/5)

▪ Controlling goods sold but have been returned by the customer
▪ Passing credit notes for goods returned or other reasons, for example, overpayment by a debtor
▪ Granting discounts on payments from customers, and
▪ Considering and effecting write-offs of bad debts

Documents used in the cycle: (Auditing notes, 13th edition – 10/4 to 10/5)
▪ Customer order
▪ Internal sales order
▪ Picking slip
▪ Invoice
▪ Delivery note
▪ Statement
▪ Credit application form
▪ Receipt
▪ Remittance advice
▪ Remittance register
▪ Credit note
▪ Deposit slip
▪ Price lists
▪ Back-order note
▪ Goods returned voucher
▪ Masterfile amendment form
▪ Logs, variance reports etc

The risks and internal controls in this cycle: (Auditing notes, 13th edition – 10/7 to 10/26)
Recording of receipts

The order clerk will take the ISO to the credit management department to have it signed (authorized) once the customer’s
credit rating has been checked by that department.

If an order is received from a non-account holder, the credit management department will go through the process of
checking the customer’s creditworthiness and setting credit terms and limits

A copy of the ISO will be delivered to the warehouse to act as the “pricing slip” that is, the document that informs the
warehouse employee which goods to select for dispatch to the customer
 A copy of the ISO will be filed in the order department in numerical sequence and a copy will be sent to the accounting
department
Function Documents/records Risks Manual control Control Assertion
(what can go objectives
wrong if
controls are not
implemented)
▪ To approve ▪ Customer order Order may be Where the order All orders ▪ Accuracy,
customer ▪ Debtors ledger accepted from a is from a received are valuation &
▪ New non-account prospective from approved allocation
customer holder resulting customer, credit customers of debtors
in possible bad application (Validity) ▪ Existence of
debtors who procedures must debtors
cannot pay the be conducted
amount owing to before the order
the company is filled:
▪ The credit
application
form
▪ Trade
references
and credit
bureaus
▪ Terms and
limits

Internal controls over credit sales transactions in a computerized environment: (Auditing notes,
13th edition – 10/27 to 10/40)

Credit management
Computerization does not change the objectives of credit management, but it can make it far more
efficient and effective than in a manual system.

For example, application done online, resolving queries, statements emailed, debtors’ recons, age
analysis and ratios.
Activity/procedure Control, comment and explanation
1. Granting of credit terms and limits (new (a) Regardless of how it is done (online,
customers) personal visit), a credit application must be
submitted. The application must contain
customer banking details, trade references,
financial information:

▪All details should be followed up

with bureaus such as Transunion
or Credit Secure, which will
supply as assessment of the
applicant’s credit rating.
▪ Online access to a bureau site will
be password and should be known
only to the credit controller and
his/her assistant, and must be kept
confidential
▪ A credit rating should be obtained
directly from the applicant’s bank
(b) The company should have guideline for:
 ▪The credit terms given, for
example only 30 or 60 days
▪ Initial credit limit, and
▪ Handing over of long outstanding
debtors
(c) The final credit terms and limits must be
agreed between the credit controller and
financial manager in terms of company
policy
▪ The terms and limit will be
recorded on the credit application
form that will be signed by the
credit controller and the financial
manager

Automated (programme) controls:

▪ Segregation of duties
▪ Isolation of responsibilities
▪ Approval and authorization
▪ Custody
▪ Access controls
▪ Comparison and reconciliation
▪ Performance review
▪ Control techniques and application controls
▪ Logs and reports

Computer technologies used in the cycle: (Auditing notes, 13th edition – 10/39)
▪ Access
▪ Menus
▪ Integration
▪ Screen aids and programme (automated) checks
▪ Logs and reports
▪ Matching and minimum entry
▪ On system control
▪ Audit trail

Cash sales: (Auditing notes, 13th edition – 10/41 to 10/44)

▪ Internal controls:
▪ Physical safeguards
▪ An independent record
▪ The independent record should not be alterable
▪ The independent record should be sequenced
▪ Cash should not accumulate
▪ Where cash is transferred form one person to the another, its should be counted, reconciled,
documented and signed for by both parties in a safe location
▪ Cash should be banked regularly (at least daily) and intact, should not be removed to pay wages
or other expenses.

The role of the other components of internal control in the revenue and receipts cycle:
▪ The control environment
▪ Risk assessment procedures
▪ Monitoring

Practice question:

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