12.9) Figure depicts the activities performed in the revenue cycle by the Newton

ID: 2477188 • Letter: 1

Question

12.9) Figure depicts the activities performed in the revenue cycle by the Newton HArdware company.

Required:

a) Identify at least three weaknesses in Newton Hardware's revenue cycle. Explain the resulting threat, and suggest methods to correct the weakness.

b) Identify ways to us IT to streamline Netwon's revenue cycle activites. Describe the control procedures required in the new system.

Figure

Newton Hardware Company Revenue Cycle Prooedures Employee Activity Performed (sequential, lefrto-right across all rows Sales Clek ecive Prepare Customer Sale Order Oder Cred CH12 10F Pak& Pack Order Shipping Clerk Credt Manoger Propare Mail Invcice CastonerReceivable Colecfion Receive& Rleconcile bank

Explanation / Answer

Weakness

Threat/Problem

Recommendation

Credit approval by bookkeeper A has no effect on shipping.

Uncollectible sales.

Credit approval must occur prior to shipping merchandise to customers.

Warehouse clerk (who has physical access to the inventory) initiates posting to inventory records by preparing shipping advice.

Failure to prepare shipping advice would result in inaccurate inventory records; could release goods to friends with no invoice.

Inventory posting should be done by the sales clerk once sales are approved.

Warehouse clerk does not retain copy of the shipping advice.

Cannot easily identify loss if the carrier has accident.

Use a 4-copy shipping advice and retain one copy in the warehouse.

Bookkeeper A authorizes customer credit and prepares source documents for posting to customer accounts.

Sales to friends that exceed credit limit.

Credit manager should approve all credit.

Bookkeeper A prepares invoices without notification about what was shipped and when.

Billing mistakes.

Prepare invoice only after receipt of a copy of the shipping advice indicating the quantities shipped and the date.

Bookkeeper A authorizes write-offs of customer accounts and approves credit.

Can approve sales to friends and later write them off.

Someone else should authorize the write-off of customer accounts.

Bookkeeper B does not periodically verify that all sales orders and shipping advices have been invoiced.

Failure to bill customers.

Prenumber all sales orders and shipping documents and periodically account for them

Verify that all sales orders and shipping advices have been invoiced.

Bookkeeper C does not reconcile the subsidiary A/R with the general ledger.

Potential imbalances due to posting errors.

Reconcile the subsidiary A/R ledger with the general ledger.

Bookkeeper C maintains journals and posts to ledgers.

No independent check on accuracy of recording process.

Bookkeeper B should record in journals and Bookkeeper C post to ledgers.

Collections Clerk does not deliver postdated checks and checks with errors to an employee independent of the bank deposit for review and disposition.

Possible theft of checks.

Deliver all checks not deposited to another employee who has no bank deposit/reconciliation duties.

Collection Clerk initiates posting of receipts to subsidiary accounts receivable ledger and has initial access to cash receipts.

Theft by lapping.

Checks should be opened by someone who does not have bookkeeping or accounting duties. That person should then send a list of cash receipts to the collections clerk to be used to record cash receipts.

Cash collection clerk does not deposit checks promptly.

Possible loss of checks; loss of interest.

Deposit all receipts promptly.

Cash collection clerk reconciles bank statement and has initial access to cash receipts.

Can cover up theft by “fudging” the bank reconciliation.

Have bank reconciliation performed by an employee with no other involvement in cash receipts processing.

Identify ways to use IT to streamline Newton’s revenue cycle activities. Describe the control procedures required in the new system.

Some ways that Newton could use IT to improve efficiency include:

Controls that should be implemented in the new system include: