Independent verification in the revenue cycle happens in multiple points in the process.

QUESTION 11.NOsales order is prepared2.CREDITshould be checked before shipping the item3.INVOICESare mailed before the goods are shipped4.SHIPPINGhas access to the warehouse5.Record keeping duties areNOT SEGREGATED(general ledger from subsidiary ledger)6.ONLY ONE PERSONreceive and record all payments7.Sales return forms areNOT AUTHORIZEDby management8.CUSTODY AND RECORDkeeping duties are not separatedThe cashier has custody of cash, makes journal entries, andmaintains A/R ledger; handles customer complaints (e.g., aboutunrecorded payments).QUESTION 2Answer for Question 2(a) Weakness(b) Risk1.Segregation of dutiesThe sales clerk who process sales order alsoapproves credit to customers.The warehouse assistant who packs thematerials ordered also updates the inventorymaterials records.Fictitious sales to non-existence customer.The materials might be overstated if materialspacked are not recorded or wrongly recorded.2.Segregation of dutiesThe employee who makes bank depositsalso reconciles bank statements.The account clerk who handles cash receiptsalso prepare deposit slip and deposit cash tobank.The cash balance per books may be overstatedif not all cash is deposited.Theft of money by the clerk. Understating cashreceipts because some receipts are notrecorded in the deposit slip.3.Transaction authorization:Credit sales are granted based on customeractive purchase rather than properauthorization based on customer credit’srecords.Approves credit sales to customer with badcredit history or exceeding credit limit.4.Independent verification:Package containing materials are notindependently checked against the order.Wrong materials or wrong quantity might havebeen packed.

FILES.The revenue cycle employs several temporary and permanent files that contribute to the audittrail. The following are typical examples:±Open sales order fileshows the status of customer orders.±Shipping logspecifies orders shipped during the period.±Credit records fileprovides customer credit data.±Sales order pending file contains open orders not yet shipped or billed.±Back-order filecontains customer orders for out-of-stock items.±Journal voucher file is a compilation of all journal vouchers posted to the general ledger.Access ControlsAccess controls prevent and detect unauthorized and illegal access to the firm’s assets. The physicalassets at risk in the revenue cycle are inventories and cash. Limiting access to these items includes:±Warehouse security, such as fences, alarms, and guards.±Depositing cash daily in the bank.±Using a safe or night deposit box for cash.±Locking cash drawers and safes in the cash receipts department.Information is also an important asset at risk. Access control over information involves restrictingaccess to documents that control physical assets including source documents, journals, and ledgers. Anindividual with unrestricted access to records can effectively manipulate the physical assets of the firm.The following are examples of access risks in the revenue cycle:1. An individual with access to the AR subsidiary ledger could remove his or her account (or someoneelse’s) from the books. With no record of the account, the firm would not send the customer monthlystatements.C H A P T E R4The Revenue Cycle169

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Intermediate Financial Management

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2. Access to sales order documents may permit an unauthorized individual to trigger the shipmentof a product.3. An individual with access to both cash and the general ledger cash account could remove cashfrom the firm and adjust the cash account to cover the act.Independent VerificationThe objective of independent verification is to verify the accuracy and completeness of tasks that otherfunctions in the process perform. To be effective, independent verifications must occur at key points inthe process where errors can be detected quickly and corrected. Independent verification controls in therevenue cycle exist at the following points:1. The shipping function verifies that the goods sent from the warehouse are correct in type andquantity. Before the goods are sent to the customer, the stock release document and the packing slipare reconciled.2. The billing function reconciles the original sales order with the shipping notice to ensure that custom-ers are billed for only the quantities shipped.3. Prior to posting to control accounts, the general ledger function reconciles journal vouchers andsummary reports prepared independently in different function areas. The billing function summarizesthe sales journal, inventory control summarizes changes in the inventory subsidiary ledger, the cashreceipts function summarizes the cash receipts journal, and accounts receivable summarizes the

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What is the revenue cycle process?

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What are the three activities that comprise the revenue cycle?