Continuing Case Study for Robatelli’s Pizzeria. Read the attached narrative and answer the questions within. Responses should be concise and relate to the text(Chp8). One Page Max.
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Chapter 8
Chapter 8
Revenue and
Cash Collection Cycles
Study Objectives
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
An introduction to revenue processes
Sales processes and the related risks and controls
Sales return processes and the related risks and controls
Cash collection processes and the related risks and controls
An overview of IT systems of revenue and cash collection that
enhance the efficiency of revenue processes
E-business systems and the related risks and controls
Electronic data interchange (EDI) systems and the related
risks and controls
Point of sale (POS) systems and the related risks and controls
Ethical issues related to revenue processes
Corporate governance in revenue processes
Real World – Staples®
Staples® – Office supply company, retail and corporate sales
◆ Corporate sales highly dependent on customer
satisfaction
◆ Management seeks to maximize customer satisfaction
◆ Sales process design
✓ Ordering
✓ Delivery
✓ Efficient billing and collection
✓ Easy return
◆ Process must be flexible
✓ Walk-in sales
✓ Telephone sales
✓ Web sales
◆ Measure success in multiple ways
◆ Order entry accuracy
◆ Order rate vs. fill rate
◆ Percent of items correctly picked or miss picked
◆ Percent of orders delivered next day
◆ Products delivered undamaged
Introduction to Revenue Processes
Companies sell products and/or services.
Examples:
Retailers:
✓ Record the sale,
✓ collect cash,
✓ update inventory status
all at the time of the sale.
Manufacturers:
✓ Sell product to other companies.
✓ Deliver goods and bill customer at a later date.
✓ Collect payment.
SO 1 An introduction to revenue processes
Introduction to Revenue Processes
Systems and processes must be in place to capture,
record, summarize, and report sales transactions.
Processes include:
◆ Polices and procedures employees follow in
completing the sale.
◆ Capturing customer data and sales quantities.
◆ Routing sales documents to the right departments.
The Accounting System uses this flow of sales
documents to various departments to record, summarize,
and report the results of the sales transactions.
SO 1 An introduction to revenue processes
Introduction to Revenue Processes
Transactions
Large Volume of Daily Sales,
Return, and Cash Inflow
Transactions
Resulting Report
Processes
Revenue and Return
Processes, Systems &
Controls
Large Volume of Daily
Purchase, Return, and Cash
Outflow Transactions
Large Volume of periodic
Payroll Transactions
Expenditures and Return
Processes, Systems &
Controls
Intermittent Fixed Asset
Purchase Transactions
General Ledger
Processes, Systems
& Controls
(T-Accounts)
Large Volume of Daily Raw
Material, Work-in-Process
Transactions
Conversion Processes,
Systems & Controls
Intermittent Investment,
Borrowing, and Capital
Transactions
Administrative Processes
Systems & Controls
External Reports such as
balance Sheet, Income
Statement, Cash Flow
Statement
Internal Reports such as
Sales, Inventory Status, Cash
Flow, Aged Receivables, etc.
Exhibit 8-1
Revenue Processes within
the Overall System
SO 1 An introduction to revenue processes
Introduction to Revenue Processes
Business processes common in company-to-company sales
transactions are:
1.
2.
3.
4.
5.
6.
Collect order data from customer
Deliver goods
Record receivable and bill customer
Handle product returns
Collect the cash
Update records, such as
◆
◆
◆
◆
◆
accounts receivable,
cash,
inventory,
revenue, and
cost of goods sold.
SO 1 An introduction to revenue processes
Sales Processes
Terminology
◆ Purchase Order
◆ Packing Slip
◆ Sales Order
◆ Bill of Lading.
◆ Price List
◆ Shipping Log
◆ Credit Limit
◆ Sales Invoice (Bill)
◆ Pick List
◆ Sales Journal
SO 2 Sales processes and the related risks and controls
Sales Processes
Exhibit 8-2
Sales Process Map
SO 2 Sales processes and the related risks and controls
Controls and Risks in Sales Processes
Common procedures associated with the
sales process:
◆ Authorization of transactions
◆ Segregation of duties
◆ Adequate records and documents
◆ Security of assets and documents
◆ Independent checks and reconciliation
◆ Cost-benefit considerations
SO 2 Sales processes and the related risks and controls
Controls and Risks in Sales Processes
Authorization
◆ Approval of sales order prior to shipment
◆ Establish sales prices
◆ Establish payment terms
◆ Establish Credit limits
◆ Approval of shipment for proper customer
Minimizes risk of
◆ invalid customers
◆ over-extended customers
◆ unapproved pricing
◆ incorrect amounts
◆ fictitious/wrong customers
SO 2 Sales processes and the related risks and controls
Controls and Risks in Sales Processes
Segregation of Duties:
◆ Separation of responsibility for authorization of new customers from
custody of inventory
◆ Separation of custody of inventory from accounts receivable record
keeping
◆ Separation of of duties related to:
✓ Order entry
✓ Credit approval
✓ Shipping
✓ Billing
✓ Information systems
✓ General Accounting
Minimizes risk of:
◆ Fictitious customers
◆ Invalid sales/omitted transactions
◆ Invalid transactions
◆ Incorrect amounts/accounts
SO 2 Sales processes and the related risks and controls
Controls and Risks in Sales Processes
Adequate Records and Documents:
◆ Preparation of packing lists and shipping records on prenumbered
forms
◆ Preparation of shipping log and packing list only when products have
actually been shipped
◆ Initiation of billing function and updating the sales journal, inventory
records, and customer accounts receivable records only when
products have actually been shipped
◆ Preparation of customer account statements
◆ Matching key information on related documents prior to shipment
✓ Customers
✓ Dates
✓ Inventory quantities/descriptions
✓ Prices
✓ Account codes
SO 2 Sales processes and the related risks and controls
Controls and Risks in Sales Processes
Minimizes risk of:
◆ Omitted transactions
◆ Invalid transactions
◆ Timing issues
◆ Wrong customers
◆ Incorrect amounts
◆ Incorrect accounts
◆ Duplicate transactions
SO 2 Sales processes and the related risks and controls
Controls and Risks in Sales Processes
Security
◆ Physical controls in inventory and shipping areas
◆ IT Controls over computer records
◆ Physical controls in records storage areas
Minimizes risk of:
◆ Invalid sales
◆ Omitted transactions
◆ Incorrect amounts/accounts
◆ Timing issues
◆ Accumulations issues
◆ Duplicate transactions
SO 2 Sales processes and the related risks and controls
Controls and Risks in Sales Processes
Independent Checks and Reconciliations:
◆ Comparison of shipping records with sales journal and invoices
◆ Verification of recorded descriptions, dates, quantities,
authorized prices, and mathematical accuracy
◆ Mathematical verification of sales journal and comparison to
accounts receivable, and general ledger posting
◆ Review of accounts receivable records and comparison with
sales invoices
Minimizes risk of:
◆ Omitted transactions
◆ Incorrect amounts
◆ Wrong/invalid customers
◆ Timing issues
◆ Problems with accumulation transactions
SO 2 Sales processes and the related risks and controls
Controls and Risks in Sales Processes
Cost Benefit Considerations:
◆ Frequent changes to prices or customers
◆ Pricing structure is complex or based on estimates
◆ Large volume of transactions carried out
◆ Company depends on single or very few customers
◆ Shipments made by consignees or otherwise not
controlled by the company
◆ Product mix is difficult to differentiate
◆ Shipping and/or record keeping are performed at
multiple locations
SO 2 Sales processes and the related risks and controls
Controls and Risks in Sales Processes
Characteristics indicating risk with respect to sales
processes:
◆ Frequent changes made to sales prices or
customers
◆ Pricing structure is complex or based on estimates
◆ Large volume of transactions
◆ One or few key customers
◆ Shipments not controlled directly by the company
◆ Product mix is difficult to differentiate
◆ Shipping and/or recordkeeping at multiple locations
SO 2 Sales processes and the related risks and controls
Sales Return Processes
Company must have procedures for receiving
returned goods, crediting customer’s
account, and placing items back in inventory.
Terminology:
◆ Receiving log
◆ Receiving report
◆ Credit memorandum
SO 3 Sales return processes and the related risks and controls
Sales Return Processes
Exhibit 8-8
Sales Returns Process Map
SO 3 Sales return processes and the related risks and controls
Risks and Controls in the Sales
Return Processes
Specific controls over the sales returns
process:
◆ Authorization of transactions
◆ Segregation of duties
◆ Adequate records and documents
◆ Security of assets and documents
◆ Independent checks and reconciliation
◆ Cost-benefit considerations
SO 3 Sales return processes and the related risks and controls
Risks and Controls in the Sales Return Processes
Circumstances which may indicate high level of risk.
◆ Quantities of returns are difficult to determine
◆ High volume of credit memo activity
◆ Product prices change frequently, or pricing
structure is otherwise complex
◆ Returns are received at various locations, or
issuance of credit memos may occur at different
locations
◆ One or few key customers
◆ Returns not controlled directly by the company
SO 3 Sales return processes and the related risks and controls
Cash Collection Processes
Company-to-company sales are
typically made on account, and a time
span is given for the customer to pay.
Terminology:
◆ Remittance advice
◆ Cash receipts journal
SO 4 Cash collection processes and the related risks and controls
Cash Collection Processes
Exhibit 8-12
Cash Receipts Process Map
SO 4 Cash collection processes and the related risks and controls
Risks and Controls in the
Cash Collection Processes
Specific controls over the cash receipts
process:
◆ Authorization of transactions
◆ Segregation of duties
◆ Adequate records and documents
◆ Security of assets and documents
◆ Independent checks and reconciliation
◆ Cost-benefit considerations
SO 4 Cash collection processes and the related risks and controls
Risks and Controls in the Cash Collection
Processes
Circumstances that may indicate risks to
cash collections.
◆ High volume of cash collections
◆ Decentralized cash collections
◆ Lack of consistency in the volume or
source of collections
◆ Presence of cash collections
denominated in foreign currencies
SO 4 Cash collection processes and the related risks and controls
Risks and Controls in the Cash Collection
Processes
Larger IT systems generally have:
◆
Fewer manual processes
◆
More computerized processes
SO 5 An overview of IT systems of revenue and cash collection
that enhance the efficiency of revenue processes
Risks and Controls in the Cash Collection
Processes
Customer
Order
Invoice
Packing List
Bill of Lading
Sales Reports
Accounts
Receivable
Reports
Edit data
Check Credit
Check Inventory
Customer &
Inventory Records
Process sale &
Print Documents
Sales & Customer
Records
Bill Customer &
Print Reports
Accounts
Receivables &
Inventory Records
Inventory
Report
Customer
Statements
Exhibit 8-17 is a
system flowchart of a
generic version of
revenue system with
some paper
documents.
SO 5 An overview of IT systems of revenue and cash collection
that enhance the efficiency of revenue processes
Risks and Controls in the Cash Collection
Processes
Sophisticated, highly integrated IT systems
capture, record, and process revenue and cash
collection events.
Such systems include:
◆ E-commerce systems.
◆ Electronic Data Interchange (EDI) systems.
◆ Point of Sale (POS) systems.
SO 5 An overview of IT systems of revenue and cash collection
that enhance the efficiency of revenue processes
Risks and Controls in the Cash Collection
Processes
Sophisticated IT systems usually lead to:
◆ First, underlying processes are
reengineered (BPR) so as to be
conducted more efficiently.
◆ Second, IT systems improve the
efficiency of the related information.
SO 5 An overview of IT systems of revenue and cash collection
that enhance the efficiency of revenue processes
E-Business Systems and the Related Risks and Controls
Two popular types of Internet sales:
◆ Business to Business (B2B)
◆ Business to Consumer (B2C)
SO 6 E-business systems and the related risks and controls
E-Business Systems and the Related Risks and Controls
Advantages of e-commerce include:
◆ Reduced cost
◆ Shorter sales cycles
◆ Increased accuracy and reliability
of sales data
◆ Increased potential market for
products and services
SO 6 E-business systems and the related risks and controls
Real World
Many large corporations sell to other companies. Staples® is
an example of a company selling to other companies via
websites. Regarding sales of office supplies to other large
corporations, management at Staples realizes that it must
support orders in the manner the customer prefers. Jay
Baitler, the senior vice president of the Staples Contract
Division, said, “Offering Internet-based transactions is now
critical.”2 Internet-based sales accounted for 70 percent of
the revenue in the contract division.
SO 6 E-business systems and the related risks and controls
E-Business Systems and the Related Risks and Controls
Risks related to Internet Sales include:
Security and Confidentiality
◆
Unauthorized access
◆
Hackers or other network break-ins
◆
Repudiation of sales transactions
Processing Integrity
◆
Invalid data entered by customers
◆
Incomplete audit trail
◆
Errors when integrating data into back end systems
SO 6 E-business systems and the related risks and controls
E-Business Systems and the Related Risks and Controls
Risks related to Internet Sales include:
Availability
◆
Hardware and software system failures that
block customers from access to the website
◆
Virus and worm attacks
◆
Denial-of-service attacks by hackers
Controls should be in place to reduce the security,
availability, processing integrity, and
confidentiality risks.
SO 6 E-business systems and the related risks and controls
Electronic Data Interchange (EDI)
Systems and the Risks and Controls
Electronic data interchange is the inter-company,
computer-to-computer transfer of business
documents in a standard business format.
ANSI X.12 standards divide EDI data
transmissions into three parts:
◆ Header and trailer data
◆ Labeling interchanges
◆ Data segments
SO 7 Electronic data interchange (EDI) systems and the
related risks and controls
Electronic Data Interchange (EDI) Systems
Exhibit 8-18
EDI Using a Third-Party
Network
Electronic Data Interchange (EDI)
Systems and the Risks and Controls
Advantages to an EDI system within the
revenue and cash collection processes:
◆ Reduction or elimination of data keying
◆ Elimination of keying errors
◆ Elimination of costs related to keying
errors
◆ Elimination of time needed to key in orders
◆ Elimination of mail delays
SO 7 Electronic data interchange (EDI) systems and the
related risks and controls
Electronic Data Interchange (EDI)
Systems and the Risks and Controls
Advantages to an EDI system within the
revenue and cash collection processes:
◆ Elimination of postage costs
◆ Reduction in inventory levels
◆ Competitive advantage through better
customer service
◆ Preservation of business with existing
customers who have adopted EDI
SO 7 Electronic data interchange (EDI) systems
and the related risks and controls
Real World
Northern Telecom (Nortel) adopted Internet
EDI in 1990s
◆ Global customer base
◆ Online ordering
✓Low cost to customers
✓No need to fax info to Nortel
✓Reduced transmission/data entry
errors
SO 7 Electronic data interchange (EDI) systems
and the related risks and controls
Electronic Data Interchange (EDI)
Systems and the Risks and Controls
Risks in an EDI system include:
Security and Confidentiality
◆
Unauthorized access
◆
Trading partners gaining access to
unauthorized data
◆
Hackers or other network break-ins
◆
Repudiation of sales transactions
SO 7 Electronic data interchange (EDI) systems and the
related risks and controls
Electronic Data Interchange (EDI)
Systems and the Risks and Controls
Risks in an EDI system include:
Processing Integrity
◆ Invalid data entered by trading partners
◆ Incomplete audit trail
◆ Errors when integrating data into back end
systems
Availability
◆ Hardware and software system failures that block
customers from access to the EDI system.
SO 7 Electronic data interchange (EDI) systems and the
related risks and controls
Electronic Data Interchange (EDI)
Systems and the Risks and Controls
IT controls can lessen these risks.
Controls are:
◆ Authentication
◆ Encryption
◆ Transaction logging
◆ Control totals
◆ Acknowledgment
SO 7 Electronic data interchange (EDI) systems and the
related risks and controls
Point of Sale (POS) Systems and
the Related Risks and Controls
Point of Sale systems, features that assist
accountants and managers:
◆ Touch screen menus
◆ Bar code scanning
◆ Real-time access to inventory and price data
◆ Credit card authorizations during the sale
◆ Real-time update of cash, sales, and inventory
records
◆ Immediate summaries and analyses
◆ Integration with the company’s general ledger
system
SO 8 Point of sale (POS) systems and the related risks and controls
Point of Sale (POS) Systems and
the Related Risks and Controls
Point of Sale systems can reduce some
processing integrity risks within revenue and
cash collection:
◆
Pricing errors for products sold
◆
Cash overage shortage errors
◆
Errors in inventory changes—less chance of an
incorrect product number
◆
Erroneous or invalid sales voids or deletions
SO 8 Point of sale (POS) systems and the related risks and controls
Ethical Issues Related to Revenue Processes
Intentional revenue inflation is unethical, and
many types of revenue inflation are illegal.
Two ways to inflate revenue:
◆ Channel stuffing
◆ Leaving sales open
http://www.sec.gov/litigation/lit
releases/lr17001.htm
SO 9 Ethical issues related to revenue processes
Real World
MiniScribe Corporation – manufactured hard drives
Q.T. Wiles – CEO
◆ Convicted of fraud in 1994
◆ Falsifying revenue
Shipped bricks and scrapped parts to distributors
Recorded those shipments as sales.
SO 9 Ethical issues related to revenue processes
Real World
Coca-Cola
◆ Channel Stuffing
✓ Paid $137.5 million in 2008
✓ Admitted no wrongdoing
◆ Falsely increased profits
◆ Artificially inflated stock price
McAffe –Software company
◆ Oversold to distributors
✓ Insufficient end-consumer demand
◆ $50 million settlement in 2006
◆ Admitted no wrongdoing
◆
SO 9 Ethical issues related to revenue processes
Real World
HealthSouth Corp.
◆ CEO and 5 officers accused of inflating profits
✓ $1.4 billion
◆ Accountants accused CEO of orchestrating cover
up
◆ CEO found not guilty
✓ Officers all plead guilty and testified against him
http://www.usdoj.gov/
opa/pr/2003/July/03_cr
m_436.htm
SO 9 Ethical issues related to revenue processes
Corporate Governance of
Revenue Processes
Four primary functions of the corporate
governance process:
◆ Management oversight.
◆ Internal controls and compliance.
◆ Financial stewardship.
◆ Ethical conduct.
Establishing proper processes, internal controls, and ethical guidelines leads
to better corporate governance and, therefore, good financial stewardship.
SO 10 Corporate governance of revenue processes
Chapter 8 (Online): Revenue and Cash Collection
Processes and Controls
Continuing Case: Robatelli’s …
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