ACCOUNTING INFORMATION SYSTEMS SYSTEMS CONTROLS AND PROCESSES TURNER / WEICKGENANNT CHAPTER 8: Revenue and Cash Collection Processes TEST BANK - CHAPTER 8 - TRUE / FALSE 1. Because different companies conduct business in different different manners, there there tends to be few similarities in the way the related business processes are carried out. 2. Sales processes need supporting practices practices such as credit credit checks and stock authorization. authorization. 3. Even though most most companies collect order data from customers, customers, the manner manner of receiving order data seldom varies. 4. What a customer customer refers to as a purchase purchase order is referred referred to as a sales sales order by the vendor. vendor. 5. When a sales order order has been entered entered into the system, system, the customer’s customer’s credit status status must be checked. For existing customers, customers, the sale on account account should be approved approved only if the customer customer has exceeded their credit limit. 6. If a sales order comes comes from a new customer, customer, it is necessary necessary to evaluate the the creditworthiness of that customer before the sale is approved. 7. Whenever a sales sales order is received, it is necessary to check check the inventory to make sure that that the items ordered are in stock. If the items are in stock, a packing slip will be prepared. 8. Billing to the customer customer should take place prior prior to shipment so so that the customer customer receives the the bill before the merchandise arrives. 9. If a vendor waits too long to to send the bill to the customer due due to the fact that that it could cause a delay of the collection of the cash. 10. When the customer customer is billed, the accounts accounts receivable records records should be updated updated to reflect the decreased balance. 11. The existence existence of good internal internal controls do not ensure high sales and and profits. 12. Effective and efficient internal internal control often takes takes up valuable management management time that that could otherwise be spent on attention to revenue growth and cost controls. 13. Proper sales authorization control requires obtaining approval before processing an order and and again before the order is shipped. 14. The internal control control activity, related to the authorization of transactions, requires requires that only specific individuals within the company should have the authoritative responsibility for establishing sales prices and credit terms.
15. The individuals individuals who are given the authority authority to establish establish sales prices, credit credit limits, and guidelines for accepting customers should be sure to keep most of the information confidential. 16. In order to meet the objectives of internal internal controls, individuals individuals with authoritative authoritative responsibilities need to have access to the record keeping functions. 17. Record files related to sales sales can be organized organized by customer name or by the numerical numerical sequence of the documents. 18. A benefit of a company accounting accounting for their their documents in a numerical numerical sequence sequence is that it is much easier to see if a document or documents are missing. 19. Independent checks checks and reconciliations should be performed on a regular basis as as part of the segregation of duties area of internal controls. 20. A reconciliation should be prepared prepared by the same same person who is responsible for the recording recording function. 21. A company is more likely to implement implement internal controls if they view the cost of the controls to be less than the benefits provided. 22. When a credit memorandum memorandum has a reference to the the original sales invoice and approved price list it will assure that the correct customer customer receives credit for the return. 23. Internal controls over over sales returns are similar to those for the revenue process process where it is important to match receiving reports for returns with the related credit memos to ensure that the company issues credit for all returns for the correct amounts. 24. Specific internal control procedures to be performed, performed, specifically independent independent checks and reconciliations, should be performed by someone who as the responsibility for the recording of the transactions and the custody of the assets received. 25. It is necessary for a company to consider consider the risks of its system system to determine determine whether the the costs of implementing a control procedure are worthwhile in terms of the benefits realized from the control. 26. As a rule, the higher higher the risk, the more controls are generally generally required and the less costly its accounting system may become. 27. Company to company sales sales normally occur on account and involve involve a time span given for the customer to pay the vendor. The actual number of days will depend on the the credit terms and the diligence of the customer concerning on-time payments. 28. The remittance advice send by the customer with the the related payment payment is used by the vendor vendor to properly apply the payment to the customer’s account. 29. The segregation of duties duties states that that the authorization authorization of duties is to be separated from the recording function but not from the custody function.
30. At a minimum, those who who handle cash should should be the ones ones to reconcile the the bank statement. 31. Those who handle cash should not have access to the related accounting accounting records. 32. At a minimum, minimum, cash receipts receipts should be deposited on a weekly basis. basis. 33. Detailed customer accounts should should be maintained and and reconciled with customer customer statements statements regularly. 34. Access to cash collections collections needs to limited limited to those who are expressly authorized authorized to record the cash transactions. 35. Controls over cash collections collections are likely the most important control control procedure because because cash is the asset most susceptible to theft and misappropriation. 36. Integrated IT systems systems that are used to conduct internet internet sales in a business to customer customer manner are referred to as e-commerce. 37. Business to business business sales on the the internet are are referred to as e-commerce. e-commerce. 38. The use of control control totals and related related acknowledgments can can reduce the risk of denial of service attacks by hackers. 39. Because the point-of-sale systems are not normally connected connected to outside trading trading partners, they pose fewer risks related to security and confidentiality than e-commerce or EDI systems. 40. Because the point-of-sale systems are not normally connected connected to outside trading trading partners, they pose fewer risks related to availability. 41. Few deceptions and fraudulent fraudulent acts in the business and accounting environment environment relate to revenue measurement and recognition. 42. Regardless of how effective effective and good the accounting accounting system is, is, if top management management is intent on falsifying financial statements by inflating revenue, they can usually find ways to misstate revenue. 43. In many cases where revenue has been overstated overstated by management, management, accountants accountants have participated in the deception. deception. Thankfully, once the overstatement has occurred, it will be offset by lower revenues in the subsequent year and normally will not recur. 44. When top management management behaves ethically ethically and encourages encourages ethical behavior, behavior, there are usually usually fewer cases of frauds, errors, or other ethical problems. 45. Establishing proper processes, processes, internal internal controls, and ethical guidelines guidelines does not lead lead to better corporate governance, even though it does improve the financial stewardship.
ANSWERS TO TEST BANK – CHAPTER 8 – TRUE / FALSE: 1. 2. 3. 4. 5. 6. 7. 8. 9.
F T F T F T F F T
10. 11. 12. 13. 14. 15. 16. 17. 18.
F T F T T F F T T
19. 20. 21. 22. 23. 24. 25. 26. 27.
F F T F T F T F T
28. 29. 30. 31. 32. 33. 34. 35. 36.
T F F T F T F T T
37. 38. 39. 40. 41. 42. 43. 44. 45.
F F T F F T F T F
TEST BANK - CHAPTER 8 - MULTIPLE CHOICE 46. In a large company, company, there are hundreds, hundreds, possibly thousands, thousands, of sales transactions transactions each day. The company needs to have in place, systems and processes to: A. Capture the results results of the sales sales transactions B. Record the proper and and complete sales transactions transactions C. Summarize and report the results of the transactions D. All of the above 47. The policies and and procedures that employees follow when completing completing the sale, sale, capturing customer data and sales quantities, and routing the resulting sales documents do cuments to the right departments within the company are referred to as: A. Transactions B. Processes C. Posting D. Systems 48. When a sale occurs, occurs, the information resulting from that sale must flow into into the sales recording recording systems, the accounts receivable and cash collection systems, and the inventory i nventory tracking systems. In IT accounting systems, these these recording and processing systems systems are referred to as: A. Transaction Processing Processing Systems B. Revenue and Cash Cash Processing Systems C. Point of Sale System D. E-business System 49. The business processes that are are common in company-to-company company-to-company sales business business types include include all of the following, except: A. Collect order data B. Record receivable receivable and bill bill the customer C. Update affected records, such as accounts payable and cash D. Handle any product returns from the the customer customer
50. The into A. B. C. D.
business processes that are common in company-to-company company-to-company sales business business are divided three groups. Which of the following is not one of those groups? groups? Sales processes, including ordering, delivery, and billing Purchase of inventory, including ordering, ordering, delivery, and billing Sales Returns processes Cash Collection processes
51. The risks that may affect the revenue revenue and cash collection processes include all of the following, except: A. Transactions recorded recorded by the wrong company. company. B. Valid transactions transactions may have been omitted from the records. records. C. Transactions may may not have been recorded in a timely timely manner. D. Recorded transactions transactions may not be valid or complete. complete. 52. The risks that may affect the revenue revenue and cash collection processes include all of the following, except: A. Transactions may may have been recorded recorded in the wrong customer customer account. account. B. Transactions may be recorded in the wrong amount. C. Invalid transactions transactions may have been omitted from the records. D. Transactions may may not have been accumulated or transferred transferred to the accounting accounting records correctly. 53. Common means means of presenting the the revenue and cash collections processes processes pictorially include: A. Data Flow Diagram B. Document Flowchart C. Business Process Map D. All of the above 54. The A. B. C. D.
sales and cash collections process process begins when: Merchandise is shipped to a customer customer A customer places an order with the company company Merchandise is purchased A vendor places an an order with the the company company
55. The form, or source document, that that conveys the details details about a customer’s customer’s order, prepared prepared by the customer, is referred to as: A. Sales Order B. Sales Invoice C. Purchase Order D. Purchase Invoice 56. Sales orders are calculated calculated based on current selling prices of the items sold. The source source of these prices, which would include the entire set of preestablished and approved prices for each product, is referred to as a(n): A. Price list B. Purchase order C. Packing slip D. Pick list
57. The maximum dollar amount that a customer is allowed allowed to carry as an accounts receivable balance: A. Maximum Limit B. Credit Balance C. Maximum Balance D. Credit Limit 58. This item documents the quantities quantities and descriptions of items ordered. ordered. Items from this document should be pulled from the warehouse shelves and packaged for the customer. A. Packing Slip B. Price List C. Pick List D. Purchase Order 59. The terms of agreement agreement between between the company and and the common carrier are documented documented in a(n): A. Pick List B. Bill of Lading C. Invoice D. Packing Slip 60. A chronological listing of shipments shipments that allows management to to track the status status of sales and to answer customer inquiries regarding order status is called a(n): A. Invoice B. Bill of Lading C. Pick List D. Shipping Log 61. This document document is prepared and and sent to the customer once the shipment has occurred. occurred. The document provides the details of the sale and requests payment. A. Sales Invoice B. Accounts Receivable Statement C. Bill of Lading D. Sales Order 62. A special journal that is used to record sales sales transactions and is periodically posted to the general ledger. A. General Journal B. Subsidiary Journal C. Sales Journal D. Accounts Receivable Journal 63. This document is prepared on a regular regular basis to accumulated accumulated and summarize summarize all the transactions transactions that have taken place between the customer and the company within the period. A. Accounts Receivable Journal B. Sales Invoice C. Subsidiary Journal D. Customer Account Statements
64. Which of the following relationships does not violate violate the rules of segregation of duties? A. Credit authorization authorization and preparation of the sales order. order. B. Preparation of the sales order and sales invoice. C. Preparing goods for shipment and accounting accounting for inventory. inventory. D. Entering sales sales in the sales journal journal and handling handling the inventory. inventory. 65. The internal control control activity related to the the adequate records and documents, documents, related to sales, sales, includes which of the following? A. Those responsible for recording sales should should ensure that the supporting documentation documentation is retained and organized. B. Information systems duties included in the revenue process process includes the preparation of sales orders and shipping logs. C. All records are to be prepared by someone other other than the person who has custody of the assets. D. The authorization authorization process is to remain remain separate from the recording recording process. 66. Which of the following is not one of the stated physical controls for inventory inventory in a warehouse? warehouse? A. Surveillance Cameras Cameras B. Alarm Systems C. Backup Copies D. Security Guards 67. In order to protect data data files, production programs, programs, and accounting accounting records from unauthorized unauthorized access, each of the following may be used, except: A. Passwords B. Physical controls (locked cabinets) C. Backup copies D. Surveillance cameras 68. Common types of independent independent checks within the revenue revenue process include all of the following, except: A. Verification of information in the sales journal journal and on sales invoices. invoices. B. Verification of the bank statement and and the cash account account in the general general journal. C. Reconciliation of accounts accounts receivable detail with invoices invoices and with the general general ledger. D. Reconciliation of inventory inventory records with actual (counted) quantities quantities on hand. hand. 69. Examples of characteristics characteristics that indicate indicate a company may may be more risky with respect respect to the revenue process include all of the following, except: A. Changes in sales sales prices or customers customers are infrequent. infrequent. B. The pricing structure structure is complex or is based on estimates. estimates. C. There is a large volume of transactions is carried out. D. The company depends on a single or on very few customers.
70. The comparison of the the shipping records with with the sales journal journal and invoices is completed to minimize the related risk of: A. Invalid transactions B. Fictitious customers C. Omitted transactions D. Duplicate transactions 71. The preparation of packing packing lists and shipping shipping records on prenumbered prenumbered forms will help help to minimize the related risk of: A. Incorrect amounts amounts B. Invalid sales C. Wrong customers D. Omitted transactions 72. The separation of the the responsibility for the authorization of new customers from the custody of inventory will help to minimize the related risk of: A. Invalid sales B. Fictitious customers C. Incorrect amounts D. Timing issues 73. A document prepared prepared that lists the the chronological sequence sequence of all returned items items is referred to as a(n): A. Receiving log B. Receiving report C. Invoice D. Packing list 74. A source document document prepared by the personnel personnel in the receiving receiving dock that documents documents the quantity quantity and condition of the items received is called a(n): A. Invoice B. Receiving log C. Receiving report D. Credit memorandum 75. A document prepared prepared to prepare a record record of the sales return return and to adjust adjust the amount of the customer’s credit status is called a(n): A. Receiving log B. Credit memorandum C. Sales invoice D. Sales journal
76. The authorization authorization of sales returns requires that certain certain individuals within the company company be assigned the authority for all of the following, except: A. Authorize Sales Returns B. Approve Credit Memos C. Develop Sales Return Policies D. Record the Credit Memos 77. The segregation of duties related to sales returns would would ideally separate the the function of performing the credit memo activity and all of the following, except: A. Credit approval B. Approve the credit memos C. Billing D. Data entry 78. Circumstances within a company, company, related to sales returns, returns, that indicate indicate a high level of risk risk include all of the following, except: A. Returns are received received a one location with with credit memos issued at the same same location. B. Quantities of products returned are are often difficult to determine. determine. C. There is a high volume of credit memo memo activity. D. Returns are received received by consignees or under other arrangements arrangements not directly directly controlled by the company. 79. Differences between between a sales sales return and and a sales allowance include: include: A. The issuance of a credit memorandum memorandum B. The existence of defective defective merchandise merchandise C. The documentation in a receiving report D. All of the above 80. The separation of the the custody of inventory inventory from the accounts accounts receivable record keeping keeping will help to minimize the related risk of: A. Incorrect amounts amounts B. Invalid returns C. Fictitious customers D. Timing issues 81. The documentation documentation accompanying payment payment that identifies identifies the customer customer account number number and invoice to which the payment applies is referred to as a(n): A. Cash Receipts Journal Journal B. Promissory Note C. Deposit List D. Remittance Advice 82. A special journal journal used to record all cash collections is called a(n): A. Cash Receipts Journal Journal B. Remittance Advice C. Check Register Journal D. Customer Subsidiary Journal
83. In order to ensure that all records are updated updated only for authorized transactions, transactions, appropriate individuals should be assigned all of the following duties, except: A. Opening and closing all all bank accounts. B. Preparing the bank reconciliation. C. Approving bank deposits. D. Approving electronic transfers of funds. funds. 84. The A. B. C. D.
recording responsibilities responsibilities for cash cash receipts includes all of the following, except: Maintaining a cash receipts journal journal Updating accounts accounts receivable receivable records records for individual customers customers Posting subsidiary subsidiary ledger totals to the general general ledger Preparing bank deposits
85. The A. B. C. D.
custody responsibilities for cash receipts include all of the following, except: except: Updating accounts receivable receivable records Opening mail Preparing a list of collections Handling receipts of currency currency and and checks checks
86. The internal control control of cash receipts related related to adequate records and documents documents would include which of the following? A. Cash receipts listings listings prepared on a daily daily basis and reconciled reconciled to supporting documentation documentation from the bank deposit. B. Bank deposit receipts should should be retained and filed chronologically. C. Detailed customer customer accounts should also be maintained maintained and reconciled reconciled with customer customer statements regularly. D. All of the above. 87. Independent checks checks and reconciliations, related to cash receipts, receipts, include all of the the following, except: A. Cash counts should should occur on a surprise surprise basis and be conducted by someone not responsible for cash receipts functions. B. Cash collections should should be deposited in the the bank in a timely timely manner to prevent prevent the risk of theft. C. Physical count of cash needs to be conducted conducted from time to time in order to compare compare actual cash on hand with the amounts in the accounting records. D. Daily bank deposits should should be compared with the detail on the related remittance remittance advice and in the cash receipts journal. 88. Bank reconciliation tasks include: A. Procedures to ensure ensure that deposits deposits are examined for proper proper dates B. Procedures to ensure that that all reconciling items are reviewed and explained C. Both of the above D. None of the above
89. The A. B. C. D.
following circumstances may may indicate risks related to cash collections, collections, except: High volume of cash collections collections Centralized cash collections Lack of consistency consistency in the volume or source of collections Presence of cash collections collections denominated denominated in foreign currencies currencies
90. Whenever a company company grants credit to to customers, there there is a danger that that customers will not pay. In fact, most companies have occasional problems with customers who fail to pay which leads to writing off the accounts accounts receivable. Proper controls related related to these uncollectible uncollectible accounts include all of the following, except: A. Segregation of responsibilities responsibilities so that no one has the opportunity opportunity to write off an account to cover up stolen cash. B. Thorough guidelines are to be established established for determining the amount of an allowance allowance for uncollectible accounts. C. An accounts receivable receivable aging report should should be generated to to analyze all customer customer balances and the lengths of time that have elapsed since the payments were due. D. Mathematical verification verification of the cash receipts journal and and the accounts receivable ledger. 91. The separation of the responsibility for custody custody of cash from the the responsibility for reconciling the bank accounts will help to minimize the related risk of: A. Wrong customers B. Incorrect amounts C. Invalid bank account D. Invalid transactions 92. The separation of the custody of cash cash from the accounts accounts receivable record keeping keeping will help to minimize the related risk of: A. Invalid cash receipts B. Incorrect amounts C. Invalid transactions D. Duplicate transactions 93. The A. B. C. D.
preparation of deposit deposit slips on prenumbered prenumbered forms will help to minimize minimize the related related risk of: Invalid transactions Incorrect amounts Duplicate transactions Omitted transactions
94. The security of having having cash receipts deposited deposited in the bank bank on a daily basis will help help to minimize the related risk of: A. Invalid receipts B. Invalid bank account C. Lost or stolen cash D. Duplicate transactions
95. General controls of the IT system would include all all of the following, except: A. Security B. Accuracy C. Availability D. Confidentiality 96. Application controls controls of the IT system would include: A. Availability B. Accuracy and Completeness C. Security D. Processing Integrity 97. This type of highly integrated integrated IT system incorporates electronic electronic processing of sales-related activities and, generally, the sales processes are transacted over the internet. A. E-commerce B. Virtual commerce C. Electronic data interchange D. Point of sale 98. This type of highly integrated integrated IT system, system, inter-company, computer-to-computer, computer-to-computer, communicates communicates sales documents electronically with a standard business format. A. E-commerce B. Virtual commerce C. Electronic data interchange D. Point of sale 99. This A. B. C. D.
type of highly integrated integrated IT system processes processes sales at a cash register register in retail stores. stores. E-commerce Virtual commerce Electronic data interchange Point of sale
100. The advantages of e-commerce, or e-business, include all of the following, except: A. Reduced cost through through lower marketing, marketing, employee, and paperwork paperwork costs. B. Shorter sales cycles C. Repudiation of sales transactions D. Increased accuracy and reliability of sales data 101. The risks of e-commerce, or e-business, include all of the following, except: A. Confidentiality B. Accuracy C. Security D. Processing Integrity 102. Availability risks of e-commerce, or e-business, include all of the following, except: A. Hardware and software software system failures B. Virus and worm attacks C. Denial-of-service attacks by hackers D. Incomplete audit trail
103. Important characteristics of electronic data interchange (EDI) include all of the following, except: A. Sales register is used used to record all transactions. transactions. B. Inter-company refers refers to two or more companies companies conducting business electronically. electronically. C. Computer-to-computer Computer-to-computer aspect indicates indicates that each company’s computers computers are connected connected via a network. D. A standard business business format is necessary necessary so that companies companies can interact interact and trade with a variety of buyers and sellers. 104. The standard format used with EDI allows all vendors and buyers to speak the same language. Which group has developed the standard format for the common documents used in the sales process? A. Electronic Data Systems Systems B. American Common Forms Institute C. Association of Naturalized Documents D. American National Standards Institute 105. The standard format for common forms used in the United States for EDI data transmission is divided into three parts. parts. Which of the following is one of those “parts”? “parts”? A. Availability Segment B. Labeling Interchanges C. Security Trailer D. Processing Data 106. This section of the common forms used as the standard format in EDI data transmission contains data about the file or transmission and identify the end of a particular transaction. A. Header and Trailer Data B. Labeling Interchanges C. Data Segments D. Footer Data 107. Because it can be expensive to develop and maintain a system that links two companies directly, the companies often often use a third-party third-party network. This third-party network network provides other valuable services such as translation and encryption of the EDI data and authentication of a valid and authorized training training partner. These third-party third-party networks are called: A. EDI Mailboxes B. American National Standards Provider C. Value Added Networks D. Secured EDI Networks 108. EDI systems have have many advantages within the the revenue and cash collection processes. processes. Which of the following is not one of those benefits? A. Reduction or elimination elimination of data keying. B. Trading partners gaining access to data. data. C. Elimination of postage costs. D. Competitive advantage through better customer service.
109. The process of user identification to ensure that only authorized users are accessing the IT system, which occurs through the use of user ID, password, and other unique identifiers, i dentifiers, is called: A. Processing Integrity Integrity B. Virtualization C. Availability D. Authentication 110. A control that limits the risk of network break-ins is the coding of data that makes data unreadable to those without without the appropriate key. This process does not stop the breaches, breaches, but will make the data useless. A. Encryption B. Encoding C. Repudiation D. Hacking 111. This occurs when the IT system automatically makes a list of users and the actions they take within the IT system. A. Control Totals B. Transaction Logging C. Encryption Keys D. Acknowledgment 112. The Point-of-sales (POS) systems capture all relevant sales data at the point of sale - the cash register. The data that that is captured includes includes all of the following, except: A. Prices are determined determined by accessing inventory inventory and price list data data B. Sales revenue is recorded C. Ordering for low-inventory items D. Inventory values are updated 113. Advantages to management and accountants, as the result of the point-of-sale systems, include all of the following except: A. Bar code scanning scanning eliminates the need to manually manually enter product codes, quantities, or prices. B. Real-time update of cash, sales, sales, and inventory inventory records allows allows for immediate immediate analysis of sales trends, inventory needs, and cash on hand. C. List prices can be changed changed by the check-out check-out clerks to take advantage of any price price changes. D. Credit card authorization authorization during the sale save time and help prevent credit card card fraud. 114. This term refers to moving the current accounting period forward to include sales that correctly occur in a future period. This activity occurs so that the the selling company can inflate their sales in the current period. A. Channel stuffing stuffing B. Leaving sales open C. Shipping reversal D. Sales deferral
ANSWERS TO TEST BANK – CHAPTER 8 – MULTIPLE CHOICE: 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59.
D B A C B A C D B C A D C B
60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73.
D A C D B A C D B A C D B A
74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87.
C B D B A C B D A B D A D B
88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101.
C B D B A D C B B A C D C B
102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114.
D A D B A C B D A B C C B
TEST BANK – CHAPTER 8 – END OF CHAPTER QUESTIONS: 115. Within the revenue processes, processes, a signed approval of a sales order indicates all of the following except: A. The date of delivery. B. The sale sale is to an accepted customer. C. The customer’s customer’s credit has has been approved. D. The sales price is correct. 116. An example of an independent verification in the sale process is: A. Preparation of packing lists on prenumbered prenumbered forms. B. Initialing the sales order. C. Proof of recorded recorded dates, quantities, and prices on an invoice. D. Physical controls in record record storage storage areas. areas. 117. The purpose of tracing shipping documents to prenumbered sales invoices would be to provide evidence that: A. Shipments to customers customers were properly properly invoiced. B. No duplicate duplicate shipments shipments or billings occurred. C. Goods billed to customers customers were shipped. D. All prenumbered prenumbered sales invoices were were accounted accounted for. 118. The purpose of tracing sales invoices to shipping documents would be to provide evidence that: A. Shipments to customers customers were properly properly invoiced. B. No duplicate duplicate shipments shipments or billings occurred. C. Goods billed to customers customers were shipped. D. All prenumbered prenumbered sales invoices were were accounted accounted for.
119. To ensure that all credit sales transactions of an entity are recorded, which of the following controls would be most effective? A. On a monthly basis, basis, the accounting accounting department supervisor supervisor reconciles the the accounts receivable subsidiary ledger to the accounts receivable control account. B. The supervisor of the the accounting department department investigates investigates any account account balance differences reported by customers. C. The supervisor of the the billing department sends copies of approved approved sales orders to the the credit department for comparison of authorized credit limits and current customer balances. D. The supervisor of the billing department matches prenumbered prenumbered shipping shipping documents with entries recorded in the sale journal. 120. Under a system of sound internal controls, if a company sold defective goods, the return of those goods from the customer should be accepted by the: A. Receiving Clerk B. Sales Clerk C. Purchasing Clerk D. Inventory Control Clerk 121. The source document that initiates the recording of the return and the adjustment to the customer’s credit status is the: A. Pick list B. Sales journal C. Credit memorandum D. Sales invoice 122. Which of the following is not a document that is part of the cash collection process? A. Remittance advice B. Cash receipts journal C. Bank deposit slip D. Packing slip 123. Which of the following would represent proper segregation of duties? A. The employee who has custody of cash cash also does accounts accounts receivable record keeping. keeping. B. The employee who has custody custody of cash completes the the bank reconciliation. reconciliation. C. The employee who opens mail containing checks prepares prepares a list of checks received. D. The employee who opens mail containing checks records transactions in the general general ledger. 124. Immediately upon receiving checks from customers in the mail, a responsible employee working in an environment of adequate internal control should prepare a listing of receipts and forward it to the company’s cashier. A copy of this cash receipts receipts listing should also also be sent to the company’s: A. Treasurer for comparison comparison with the monthly monthly bank statement. statement. B. Internal auditor auditor for investigation investigation of any unusual unusual transactions. transactions. C. Accounts receivable receivable clerk for updating updating of the accounts receivable receivable subsidiary ledger. D. Bank for comparison comparison with deposit slips. slips.
125. If a company does not prepare an aging of accounts receivable, which of the following accounts is most likely to be misstated? A. Sales revenues B. Accounts receivable C. Sales returns and allowances D. Allowance for uncollectible accounts 126. When a company sells items items over the Internet, it is usually usually called e-commerce. There are many IT risks related to Internet Internet sales. The risk of invalid data data entered by a customer customer would be a(n): A. Availability risk. B. Processing integrity risk. C. Security risk. D. Confidentiality risk. 127. When a company sells items items over the Internet, there there are many IT risks. The risk of hardware and software failures that prevent website sales would be a(n): A. Availability risk. B. Processing integrity risk. C. Security risk. D. Confidentiality risk. 128. The use of electronic data interchange (EDI) to conduct sales electronically has both risks and benefits. Which of the following is a benefit of EDI, rather rather than a risk? A. Incomplete audit trail trail B. Repudiation of sales transactions C. Unauthorized access D. Shorter inventory cycle time 129. An IT system that uses touch screens, bar coded products, and credit card authorization during the sale is called a(n): A. Electronic data interchange interchange system. system. B. E-commerce system. C. Point of sales system. D. E-payables system. 130. Which of the following is not a method of unethically inflating sales revenue? revenue? A. Channel stuffing stuffing B. Holding sales open C. Premature recognition of contingent contingent sales D. Promotional price discounts ANSWERS TO TEST BANK BANK – CHAPTER 8 – END END OF CHAPTER QUESTIONS QUESTIONS 115. 116. 117. 118.
A C A C
119. 120. 121. 122.
D A C D
123. 124. 125. 126.
C A D B
127. 128. 129. 130.
A D C D
TEST BANK – CHAPTER 8 – SHORT ANSWER QUESTIONS 131. Why is it important to establish and monitor credit limits for customers? Answer: Allow customers to order an excess over what they are are able to pay poses a large risk for companies. It is important to review a customer’s customer’s credit worthiness and based on that that credit worthiness, establish a credit credit limit. Once the limit is established, the company company should have processes or methods methods to insure the credit limit is not exceeded. exceeded. Without a limit, or monitoring monitoring that limit, the company has the risk of not being paid for goods or services purchased by customers. 132. Distinguish between a pick list and a packing slip. Answer: Although the the information on these these two documents documents is essentially the the same, they are are used for two different purposes. Both documents contain contain the items and quantities quantities for a particular customer order. However, the pick list is used in the warehouse warehouse to pull items from the warehouse shelves, while the packing slip is included in the the box or boxes shipped shipped to the customer. customer. The packing slip tells the customer which items should be in the shipment. 133. How can an effective system of internal controls lead to increased sales revenue? Answer: When an effective effective systems of internal internal controls is in place, managers may be able to spend less time overseeing operations and can therefore, spend more time on revenue growth strategies and activities. activities. For example, with a proper proper set of general general authorization procedures procedures for sales, a manager would not need need to approve each sale individually. This gives the manager manager more time to focus on activities that could lead to increased revenue. 134. Why should the person responsible for shipping goods to customers not also have responsibility for maintaining records of customer accounts? Answer: Custody of assets assets and responsibility responsibility for record keeping should should always be segregated. segregated. In this case, the person shipping the the goods has custody and could therefore, therefore, steal assets. Access to customer records would allow that person person to also alter records to hide the theft. The alteration to the records could include deleting the sale or writing off the sale as a bad debt. 135. What is the purpose of a credit memorandum? Answer: The credit memorandum memorandum documents documents the fact hat a customer customer has returned returned goods. The credit memorandum is also used to reduce the customer’s receivable account balance based upon the return of goods. 136. How are sales invoices used (in a manual system) in the preparation of credit memos? Answer: The sales invoice is matched to the the receiving report that that results from returned returned goods. This match is necessary to verify the fact that the merchandise was in fact sold to the customer, and to verify the selling price that should be refunded. 137. How can a security guard in a warehouse be considered an important component of a company’s accounting system? Answer: Internal controls controls over asses should should include physical controls controls to prevent theft theft or misuse. For example, cash should should be locked in a safe safe to prevent the theft of cash. Likewise, a security guard can help prevent theft theft or misuse of assets. This internal control would not prevent all theft, theft, but would help reduce any theft.
138. How could fraud be perpetrated through the sales returns process? Answer: In the absence absence of good internal controls, controls, there are several several types of fraud that that could occur in sales returns. These include: 1) customers customers returning goods not originally purchased purchased from the company, 2) customers requesting a refund higher than the original sales amount, 3) requesting refunds for goods that were never returned, but submitting false documentation of a return, and 4) theft of returned goods by an employee. 139. Identify and distinguish between the three types of IT systems used in the sales process. Answer: The three types of IT systems systems described are EDI, Internet Internet EDI, and point of sale systems. EDI and Internet Internet EDI are are used in company to company sales of goods and services. services. In EDI systems, the buyer and seller computer systems are connected and order data is exchanged electronically. EDI typically uses a value added network (VAN), while Internet EDI uses the internet to exchange data. data. Internet EDI is usually much more more cost effective than EDI because the the exchange via the Internet Internet can be cost free. A POS system is used in end consumer consumer sales such as retail stores and restaurants. restaurants. A POS system usually is a touch screen, screen, or bar code system at the cash register that records the sale and updates the appropriate cash, sales, and inventory accounts. All three systems are IT enablement enablement of the sales process and they each each improve the efficiency and effectiveness of sales processes. 140. Distinguish between B2B sales and B2C sales. Answer: Other than than those presented presented in this chapter, chapter, name a company company from your personal personal experience that that uses B2C B2C sales. B2B sales sales are IT enabled enabled sales between two businesses. B2C sales are IT enabled sales between between a business and an end consumer. consumer. A student could mention any online retailer, online bank, online broker, airline, or travel agent as examples of B2C. 141. List the advantages of e-commerce systems. Answer: The advantages advantages are reduced costs, shorter sales sales cycles, increased increased accuracy and reliability of sales data, and an increase in the potential market. 142. Identify two of the biggest risks to companies who use e-commerce, along with controls to prevent these risks. Answer: Two of the business business risks of e-commerce e-commerce would be availability availability and security. If a company relies on online sales extensively, any failure in the hardware or software may make the online sales system unavailable and and this causes lost sales. sales. These lost sales can at times times be very large losses. Unauthorized access or hackers represent represent a big risk to e-commerce. Placing sales online opens the company to unauthorized access and hacking, and therefore potential loss or destruction of data. 143. What controls should a company implement to ensure consistency of sales information between the front end and back end of its systems? Answer: Reconciliations and and verifications are important important in the integration integration of front end and and back end systems. As data moves from a front end system, system, such as an online sales system, system, to a back end system, such as warehouse systems, a reconciliation or verification can insure the data was transmitted between systems accurately. 144. Why is a redundant server system needed in an e-commerce environment? Answer: Availability is extremely extremely important in e-commerce e-commerce systems. systems. Any failure of the system system represents lost sales because the system is not available for customer use. A large e-commerce company could lose thousands of dollars in sales from a two or three hour downtime.
145. Question not available. 146. What are the three components of an EDI system? Answer: The three three component parts are: 1) intercompany intercompany transfer, indicating indicating the sale/purchase sale/purchase is between two companies; 2) computer to computer, indicating the computer system of the two companies are connected; and 3) a standard format for business documents to facilitate the intercompany transference of electronic documents. 147. What are the three standard parts of an EDI data transmission? Answer: Header and trailer trailer data, labeling interchanges, interchanges, and and data segments. segments. Header data is data data about the file or transmission being sent. sent. The header identifies identifies the beginning and end of a particular transaction data data set. Trailer data is also data about the file or transmission transmission and identifies the end of a particular transaction transaction data set. Labeling interchanges identify identify the type of transactions in the set, such such as a set of sales invoices. Data segments include the the actual data within the invoices, such as quantities and prices. 148. How could it be possible for two companies to conduct EDI if they are not directly connected with each other? Answer: Two companies companies could use a value value added network (VAN) as a third party to serve as the provider of electronic inboxes for EDI exchanges. 149. List the advantages of an EDI system. Answer: The advantages advantages are elimination elimination of keying, keying errors, and the time needed needed for keying, the elimination of mailing time and postage costs, reduction of inventory levels, and competitive advantage and/or preservation of existing business. 150. What is the purpose of maintaining maintaining transaction logs? Why are they especially important important in IT systems? Answer: Transaction Transaction logs serve as the audit trail of transactions transactions processed by the the computer. Review of these logs can insure that transactions transactions are lost or unaccounted unaccounted for. The logs also help insure a company can avoid repudiation of sales. 151. List some advantages of a POS system. Answer: Advantages are: are: ease of use by employees, employees, the elimination elimination of manually entered entered data, real-time access to prices and inventory levels, real-time credit card authorization, real-time update of affected accounting records, immediate summaries and reports of sales and cash, and integration with the general ledger accounts. 152. Why are backup systems one of the most important controls for POS systems? Answer: A system failure failure in a POS system would interrupt or halt sales. Such lost sales can be a large dollar amount and there could be future lost sales if customers become irritated by the system failures. To avoid these failures and the resulting resulting lost sales, a company should maintain maintain some type of backup system. 153. Describe a popular fraud scheme where company employees misuse the sales revenues cutoff. Answer: This is called leaving leaving sales open. It counts sales from the first few days days of the next month in the current month, and thereby inflates sales.
TEST BANK – CHAPTER 8 – SHORT ESSAY 154. Describe what is likely to occur if company personnel erroneously recorded a sales transaction for the wrong wrong customer? What if a cash receipt was applied to the wrong wrong customer? Identify internal controls that would detect or prevent this from occurring. Answer: If the sale is attached to the the wrong customer, customer, the wrong customer customer would be billed and it may cause both the wrong customer and the correct customer to have a negative opinion about the company. In addition, if the company does not maintain maintain adequate documentation, documentation, it may be difficult to determine which which customer should should be billed. Therefore, the company may not be able to collect the cash they should have collected. collected. If a cash receipt is applied to the wrong customer, customer, then two customer balances will be erroneous. The company would continue to bill the customer who paid, while not billing the correct amount to the wrong customer. Without adequate documentation, it would be difficult to correct this situation. situation. The internal internal controls that that would help prevent these errors are maintaining adequate documentation, including source documents such as sales orders and remittance lists; the matching of key documents before recording; reconciliations and verifications of invoices to receivables; and supervision. 155. Debate the logic used in the following statement: “The person responsible for handling handling cash receipts should also prepare the bank reconciliation because he is most familiar with the deposits that have been made to the bank account.” Answer: It is true that that if a person could be absolutely trusted trusted to do both duties, duties, it may be more efficient. However, having both duties duties provides opportunity opportunity and temptation for that person to steal cash and cover up the theft. In addition, a single person doing both duties might make an error affecting both the the receipts and reconciliation. reconciliation. Segregating these these duties may slightly decrease the efficiency of bank reconciliations, but the positive benefits of fraud prevention or detection and error detection outweigh any efficiencies. 156. Revenue systems are crucial in the healthcare industry, where hundreds of billions of dollars are spent annually reconciling revenues and billing data from f rom the perspectives of providers (doctors and clinics, etc.) and and payers (insurance (insurance companies). Briefly describe how EDI would would be beneficial in this industry. Describe the purpose of the header header data and trailer data. In an EDI system, the computer systems of the biller and payer are connected and they would greatly speed up the billing and paying process, as well as decrease the errors in the process. Answer: Without EDI, the the would be keying errors, errors, delays related to keying data and mailing mailing bills and payments. The header and trailer data identify identify the transaction data set set so that the two computer systems can insure insure the correct transaction data data is matched. The header and trailer also identify the beginning and end of a transaction data set.
157. Use the process maps in this chapter to answer the following questions: a. What would a credit manager do if a sales order received caused a customer to exceed its credit limit? b. What happens after the shipping department verifies that the quantities and descriptions of goods prepared for shipment are consistent with the sales order c. What would an accounts receivable clerk do if a $100 credit memo is issued to a customer whose accounts receivable balance is $1,000 d. When is it necessary for an accounts receivable clerk to notify a customer Answer: a. What would a credit manager do if a sales order received caused a customer to exceed its credit limit? The sale should be disapproved (rejected). b. What happens after the shipping department verifies that the quantities and descriptions of goods prepared prepared for shipment are consistent with the sales order? The goods are shipped, an invoice is prepared and mailed; the following records are updated: sales, general ledger; and a month end statement is prepared and mailed to the customer. c. What would an accounts receivable clerk do if a $100 credit memo is issued to a customer whose accounts receivable receivable balance is $1,000? $1,000? The clerk should first first check to make sure of the balance. Then, that customer’s customer’s balance would be decreased decreased to $900. b) When is it necessary necessary for an accounts accounts receivable clerk to notify notify a customer? An accounts receivable clerk would not need to notify customers. 158. Describe how the matching of key information on supporting documents can help a company determine that its revenue transactions have not been duplicated. Answer: For any sale, return or cash transaction, transaction, only one set of matching documents should should exist. Once the documents are are matched and recorded for a particular transaction, transaction, they should be filed as a completed transaction. Thus, that same same transaction would not be recorded again since the source documents are filed. 159. Describe how the use of pre-numbered forms for receiving reports and credit memos can help a company determine that sales return transactions have not been omitted from the accounting records. Answer: When pre-numbered pre-numbered forms are used, it is much easier to insure that that the entire series of transactions have been accounted accounted for. Conversely, a missing number number in the sequence of prenumbered documents documents is a clear indication that a transaction transaction has been omitted. This may be easier to understand if you think about what it would mean if your own personal check book record was missing a check numbered 154. 160. Describe how a POS system system could be useful to a company’s marketing marketing managers. How could it be useful to production managers? Answer: A POS system system can provide immediate immediate feedback about product product sales and inventory inventory levels. Therefore, a marketing manager can get immediate feedback about which products sell well, which do not, and how price changes may affect sales of individual individual products. A production manager could use the inventory level feedback to more appropriately plan when to produce certain products.
161. Briefly describe an example from your personal experience where you purchased something from a company that uses uses a POS system. How might your experience have have been different if the POS system did not exist in the experience you described? Answer: There are many possible experiences experiences students could describe. Each student student would probably describe. Most often students students see or use POS systems at fast food restaurants restaurants and retail stores. Many students will will have been employees who have used POS systems systems and may have very good examples. In regards to the differences differences if the POS system did not exist, the check out experience would be slower, thereby leading to longer lines, and more errors in the process. Errors include incorrect prices and incorrect orders. TEST BANK – CHAPTER 8 – PROBLEMS 162. In 1956, Gussepi DeLucca opened a pizza restaurant that he named DeLucca’s in St. Louis, Missouri. Over the years, he opened both company company and franchise locations locations and grew the business to include over 40 restaurants restaurants that that serve the three states around around the St. Louis area. In 1993, DeLucca introduced a centralized phone ordering system with one phone number for customers to use. This meant that the the customer did not need to look up the phone number number of a local restaurant and call that restaurant to order. Rather, customers call call one number and the employees taking the order can determine the closest DeLucca’s location and process the order. This system also also centralized the pricing, ordering, and inventory inventory systems for DeLucca’s. In 2004, DeLucca’s began began offering online pizza orders through through its Web site. DeLucca’s advertises this Web ordering as more convenient convenient for the customer. For example, its ads suggest that that a customer can examine the entire menu on the Web site prior to ordering; something that is not possible with phone orders. While there are many customer advantages of Web ordering, there are also many advantages to the company. From an accounting and internal internal control perspective, describe the the advantages of DeLucca’s system, and any risks that it reduces. Answer: Advantages: The The Web ordering system provides the advantages advantages of: cost savings savings through lower marketing, employee, and paperwork costs; shorter sales cycles due to reduced time to place an order, increased accuracy and reliability of the order data; and increased potential market for the company’s products. Accordingly, DeLucca’s Web ordering system reduces the risks of misplacing an order, filling an order incorrectly, losing a sale due to a long wait time, and recording erroneous data due to errors in manual paperwork processing. Although some of these advantages and risk reductions are also realized through the company’s centralized phone ordering system, that phone system still involves manual processes to input customer orders, so there remain some costs and risks associated with employees, accuracy, and wait times.
163. You are the recent heir of $20,000 cash, with which you are considering opening a sushi bar in the university community. community. You would accept cash and credit card card payments, which would be handled primarily by your servers. servers. You also plan to offer introductory specials to attract customers during the initial initial months of business. business. Identify some advantages advantages and disadvantages of investing in a POS system as part of this new business business venture. What internal controls should be implemented to reduce the risk of theft or error related to the handling of cash, credit card payments, and coupons? Answer: The advantages advantages of investing in a POS system as as part of a new business business venture include the following: Ease of use and ease of training servers. servers. This is expected to lead to fewer errors and more accurate sales and inventory data. Time savings related to the elimination of manual input processes. This includes increased efficiency and reduced fraud related to processing of credit card payments from customers. Increased accuracy accuracy due to the real-time real-time access to inventory inventory and price data. data. For instance, if the sushi bar’s daily special is sold out, that information can be immediately changed online so that servers can quickly inform customers of the change. Enhanced accounting features such as real-time update of cash, sales, and inventory records, immediate summaries and analyses, and the potential for integration with a general ledger system will save manual steps and provide timely information for management purposes. Despite these many advantages, a new business venture would need to be especially careful of the extensive hardware hardware and software costs that are necessary necessary to support a POS system. system. In addition, availability risks may be significant, as any hardware and software failures could make the system unavailable and interrupt interrupt efficient business business processes. Therefore, it is important that a new business venture consider these risks, analyze the costs and benefits of the system, and implement backup systems should be in place to reduce the availability risk. In order to reduce the risk of theft or error related to the handling of cash, credit card payments, and coupons, the sushi bar should be sure that its POS system includes all relevant payment information, including options options to enter the use of coupons and and method of payment. payment. In addition, summaries can be provided immediately, so servers should be required to reconcile their transactions at the end of their shifts. •
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164. Aaron Preswick is the owner of AP’s Instant Replay, a consignment shop for used sporting goods. Aaron accepts accepts consigned goods and offers them for sale to the general public. public. Aaron rents business space, including a retail store where the consigned goods are displayed and sold, with adjoining office space where an Internet site is maintained and other administrative functions are performed. The Internet site includes includes photos and descriptions of items available available for sale worldwide. If the goods sell, Aaron’s Aaron’s consignment consignment fee is 40% of the sale price, and 60% is remitted to the consignor. Shipping costs on electronic orders are paid paid by the customers. Identify internal internal control considerations considerations for the the following: a. the e-commerce portion of the business b. the retail portion of the business, assuming that the accounting systems are mostly manual and handled by Aaron and his wife. Answer: a. the e-commerce portion of the business. Internal control considerations associated with e-commerce should address the risks of security and confidentiality, processing integrity, and availability. Regarding security security and confidentiality, Aaron should ensure that customers accessing the website and conducting sales transactions are valid customers with valid payment authorization and that transactions are logged so that an audit trail is established to avoid repudiation. Regarding processing integrity, Aaron
should be concerned with data input checks that verify the completeness, accuracy, and validity of the data entered entered on the website. website. In addition, he should implement implement back-end controls, such as reconciliations and verifications, v erifications, to ensure the accuracy of information taken from this system to the company’s accounting systems. Finally, Aaron should implement controls to minimize service disruptions that could reduce sales. Accordingly, he should implement implement controls for redundant redundant systems, systems, disaster recovery, recovery, testing of software changes, and capacity planning and testing. b. the retail portion of the business, business, assuming that the accounting accounting systems are are mostly manual and handled handled by Aaron and his his wife. The five internal control control activities should be considered with respect to the retail business and manual accounting systems involving sales and cash cash collections. Even though segregation segregation of duties will will be difficult considering that only Aaron and his wife are operating the business, they can perform business processes in a manner to promote good control. For instance, they can check each other’s work in instances where they are performing incompatible duties involving combinations of custody custody and record keeping. keeping. They can ensure ensure that prices prices are properly authorized by consignors and credit card payments are authorized at the time of the sale. Thorough documentation documentation (such as detailed sales receipts) receipts) should be maintained maintained and accounted for purposes of performing reconciliations and supporting the general ledger. Also, physical controls should be in place at the retail store in order to protect the company’s assets and records. 165. Identify an internal control procedure that would reduce each of the risks that follow in a manual system. system. Also describe how (or if) an an IT system could could reduce these risks. Answer: Student Student responses may may vary, as more that that one control may may apply to risk reduction in these circumstances. circumstances. However, following are are some likely answers: answers: a. Revenues may be recorded before the related shipment occurs. Shipping documentation should be matched with sales order data and presented to the billing department as the the basis for recording the the sale and preparing preparing the bill. The IT system can perform an automatic match whereby shipping data are required as a basis for f or recording the revenue. b. Employees responsible for shipping and accounts receivable may collude to steal goods and cover up the theft by recording fictitious fi ctitious sales. To prevent this type of problem, sales orders should be reviewed for proper customer and authorized by an independent member of management prior to shipment. The IT system can include validity checks or other controls that require a valid customer in order for the transaction to be recorded. In addition, reconciliation procedures can compare manual documentation with system records to determine that valid transactions transactions are recorded. If the collusion involves recording the fictitious sale in the account of a valid, existing customer, the process of sending sales invoices and customer statements, and the subsequent reconciliation procedures, would be important for uncovering this type of fraud. c. Credit memos may be issued at full price, when the goods were originally sold at a discount. Original sales documentation, including key information such as original sales price, must be required required as a basis for preparing preparing credit memos. memos. An IT system could automatically match credit memo authorizations with the original sales data so that the credit would be issued at amounts that are consistent with the original sale pricing. d. Sales invoices may contain mathematical errors. Independent checks of sales invoices should occur before the customer is billed. This includes verification of mathematical accuracy. If an automated system is in place, the the IT system can perform mathematical mathematical computations at a great time savings.
e. Amounts collected on accounts accounts receivable may may be applied to the wrong customer. customer. Customer account statements should be sent on a regular basis so that customer records can be reconciled reconciled to the company’s company’s records. This is likely to detect a misapplication of a customer customer collection. An IT system could could enhance the the process by requiring cash receipts to be entered along with a customer account number as well as an invoice number to ensure that the receipt is applied properly. f. Duplicate credit memos may be issued for a single sales return. A comparison of the receiving log with the credit memo listing would indicate if duplicate credit memos have been issued for a single single sales return. return. An IT system could also also prevent this risk by requiring that credit memos be generated only upon entering key information from the original sale and blocking the issuance of another credit memo for an item for which credit had already been issued. i ssued. g. Sales invoices may not be prepared for all shipments. Shipping records should should be compared with the sales invoices records. records. This may be done through the verification verification of the sequence of shipping documents to ensure that an invoice was prepared for each item shipped. An IT system may may enhance this this process by matching shipping shipping document numbers with invoices, and preparing a warning report for any instances of unmatched shipping documents. h. Shipments may contain the wrong goods. Companies should require the matching of key information on related related documents prior to shipment. This includes inventory inventory quantities and descriptions on approved sales orders and packing lists. An IT system may make this process more efficient by performing the match automatically; it can verify whether product numbers and quantities on the sales orders match those on the shipping documentation. i. All sales transactions may not be included in the general ledger. ledger. A regular reconciliation should be performed to compare the sales journal with the amounts recorded in the general ledger. An IT system may perform a periodic automatic post of the sales journal to the general ledger, thereby eliminating the potential for missing sales transactions. 166. The following list presents various internal control strengths (S) or risks (R) that may be found in a company’s revenues and cash collection processes. ____ Credit is authorized authorized by the credit manager. ____ Checks paid in excess of $5,000 $5,000 require the the signatures of two two authorized members members of management. (Although this is viewed as an internal control strength, it is not applicable to the revenues processes.) ____ A cash receipts receipts journal is prepared prepared by the Treasurer’s Treasurer’s department. department. (This type of accounting record should be prepared by those with recordkeeping responsibilities rather than those in a position to perform reconciliations of the cash records.) _____ Collections received by check are received by the company company receptionist, who who has no additional recordkeeping responsibilities. _____ Collections received by check are immediately forwarded unopened to the accounting accounting department. (This would place the accounting department in an incompatible role combining recordkeeping and custody of cash.) ______ A bank bank reconciliation is prepared prepared on a monthly basis basis by the Treasurer’s Treasurer’s department. department.
_____ Security Security cameras are placed placed in the shipping shipping dock. _____ Receiving reports are prepared prepared on pre-printed, numbered numbered forms. _____ The billing department verifies the amount of customer customer sales invoices invoices by referring to the authorized price list. (This price authorization role should be performed before billing. An approved sales order, order, including verified prices, should be in place at the time the documents reach the billing department.) _____ Entries Entries in the shipping log are are reconciled with the the sales journal on a monthly basis. _____ Payments Payments to vendors are made promptly upon receipt of goods or services. (Vendor (Vendor payments relate to the expenditures processes rather than the revenues processes.) _____ Cash Cash collections are deposited deposited in the bank account account on a weekly basis. basis. (If cash receipts receipts occur daily, they should be deposited promptly – preferably on a daily basis.) _____ Customer Customer returns must must be approved by a designated designated manager manager before a credit memo memo is prepared. _____ Account Account statements are sent to customers customers on a monthly monthly basis. _____ Purchase Purchase returns are are presented to the the sales department department for preparation of a receiving report. (Receiving reports should be prepared promptly upon receipt of returned items. This should be done in the receiving area, where the personnel have a custody function, rather than in the sales department, where the personnel initiate sales transactions.) Answer: __S__ Credit is authorized by the the credit manager. _N/A_ Checks paid in excess of $5,000 $5,000 require the signatures signatures of two authorized authorized members of management. (Although this is viewed as an internal control strength, it is not applicable to the revenues processes.) __R__ A cash receipts receipts journal is prepared prepared by the Treasurer’s Treasurer’s department. department. (This type of accounting record should be prepared by those with recordkeeping responsibilities rather than those in a position to perform reconciliations of the cash records.) __S__ Collections Collections received by check are received by the company company receptionist, who who has no additional recordkeeping responsibilities. __R__ Collections received by check are immediately immediately forwarded unopened unopened to the accounting accounting department. (This would place the accounting department in an incompatible role combining recordkeeping and custody of cash.) __S___ A bank bank reconciliation is prepared prepared on a monthly basis basis by the Treasurer’s Treasurer’s department. department. __S__ Security Security cameras are placed placed in the shipping shipping dock.
__S__ Receiving reports are prepared prepared on pre-printed, numbered numbered forms. __R__ The billing department department verifies the amount of customer customer sales invoices by referring to the authorized price list. (This price authorization role should be performed before billing. An approved sales order, order, including verified prices, should be in place at the time the documents reach the billing department.) __S__ Entries Entries in the shipping log are are reconciled with the the sales journal journal on a monthly basis. basis. _N/A_ Payments to to vendors are made promptly upon receipt of goods goods or services. (Vendor payments relate to the expenditures processes rather than the revenues processes.) __R__ Cash collections collections are deposited deposited in the bank account account on a weekly basis. (If cash receipts occur daily, they should be deposited promptly – preferably on a daily basis.) __S__ Customer Customer returns must must be approved by a designated manager manager before a credit memo memo is prepared. __S__ Account statements are sent to customers customers on a monthly monthly basis. __R__ Purchase Purchase returns are presented to the the sales department department for preparation of a receiving report. (Receiving reports should be prepared promptly upon receipt of returned items. This should be done in the receiving area, where the personnel have a custody function, rather than in the sales department, where the personnel initiate sales transactions.)
167. Question not available. 168. Question not available.
169. Following are ten internal control failures related to the revenues and cash collection processes. _____ A customer customer ordered 12 boxes boxes of your product (total of 144 144 items) for express express shipment. Your data entry entry clerk inadvertently entered entered 12 individual items. items. _____ You enter enter sales and accounts accounts receivable data data in batches at the end of each each week. Several problems have resulted recently as a result of recording invoices to the wrong customer account. _____ In an effort effort to boost sales, you obtain some of the the stock of unissued unissued shipping reports and create a dozen fictitious shipments. shipments. You submit these documents documents to the billing department for invoicing. _____ Checks Checks are received by the the mailroom and then then forwarded to the accounts receivable receivable department for recording. recording. The accounts receivable clerk holds the the checks until the the proper customer account has been identified and reconciled. _____ Several shipping shipping reports have been misplaced en route to the billing department department from the shipping department. _____ Several sales sales transactions were not invoiced within within the same month month as the related related shipment. _____ A sales clerk clerk entered a non-existent non-existent date in the computer system. system. The system rejected rejected the data and the sales were not recorded. _____ Upon entering entering sales orders in your new computer system, a sales sales clerk mistakenly omitted omitted customer numbers from the entries. ______ A computer computer programmer altered altered the electronic electronic credit authorization authorization function for a customer company owned by the programmer’s cousin. _____ Customer Customer orders were lost in the mail en route route from the sales sales office to the accounting accounting department (located at the company’s headquarters). headquarters). Required: Select one internal control from the following list that would be most effective in the prevention of the failure. Indicate the letter of the control next to each failure failure above. Letters should should not be used more than once and some letters may not be used at all. a. b. c. d. e. f. g. h. i.
Pre-formatted data entry screens Pre-numbered documents Programmed edit checks 100% check for matching of customer orders and sales orders 100% check for matching of sales orders, pick list, and packing slips 100% check for matching of sales orders and invoices 100% check for matching of deposit slip and customer check. Prompt data entry immediately upon receipt of customer order Customer verification
j. Independent authorization for shipments k. Independent authorization authorization for billing l. Reasonableness check m. Hash totals n. Data back-up procedures o. Program change controls p. Sequence verification q. Periodic confirmation of customer account balances Answer: __d__ A customer customer ordered 12 boxes of your product (total of 144 144 items) for express express shipment. Your data entry entry clerk inadvertently entered entered 12 individual items. items. __q__ You enter enter sales and accounts accounts receivable data in batches at the end of each week. Several problems have resulted recently as a result of recording invoices to the wrong customer account. __f__ In an effort to boost sales, you obtain obtain some of the stock of unissued shipping shipping reports and create a dozen fictitious shipments. shipments. You submit these documents documents to the billing department for invoicing. __g__ Checks are received by the mailroom and then forwarded to the accounts accounts receivable department for recording. recording. The accounts receivable clerk holds the the checks until the the proper customer account has been identified and reconciled. __p__ Several shipping shipping reports have been misplaced en route to the billing department department from the shipping department. __h__ Several Several sales transactions transactions were not invoiced invoiced within the same same month as the the related shipment. __c__ A sales clerk clerk entered a non-existent non-existent date in the the computer system. system. The system rejected rejected the data and the sales were not recorded. __a__ Upon entering entering sales orders in your new computer computer system, a sales sales clerk mistakenly mistakenly omitted customer numbers from the entries. __o___ A computer computer programmer altered altered the electronic credit credit authorization function function for a customer company owned by the programmer’s cousin. __n__ Customer Customer orders were lost in the mail en route route from the sales office to the accounting accounting department (located at the company’s headquarters). 170. Brathert Company Company is a small company with four people working in the revenue revenue processes. One of the four employees supervises supervises the other three. Some tasks that must must be accomplished within the revenue processes are the following: a. Accounts receivable record record keeping b. Approving credit of customers
c. d. e. f. g. h. i. j. k.
Authorizing customer customer returns Authorizing new customers customers Billing customers Cash receipts journal posting Entering orders received Inventory record keeping Maintaining custody of cash Maintaining custody of inventory Reconciling records to the bank statement
Required: For each of the four employees (supervisor, employee 1, employee 2, and employee 3), consider the duties you would assign to each employee. employee. In assigning duties, no employee employee should have more than three tasks and there should be a proper separation of duties to achieve appropriate internal control. List the four people, the the duties you assigned assigned to each employee, employee, and a description of why those assignments achieve proper separation of duties. Answer: Supervisor: b., c., and d. (all Authorization functions) Employee 1: a., f., and h. (receivables, collections, and inventory Recordkeeping) Employee 2: e., g., and k. (sales and billing Recordkeeping and cash reconciliation) Employee 3: i. and j. (all Custody functions) 171. Refer to the ethics case regarding a mail order scenario presented as number 54 in Chapter 3. What term introduced in this chapter applies to the type of mail order deceit described in that case? What could the mail order company company do to avoid a loss resulting from an event, assuming assuming that it uses an e-commerce system? Answer: This type of mail order deceit is known known as repudiation. repudiation. The mail order company company should have controls in place to make sure that each sale is to a valid customer with valid payment authorization and that an an audit trail is maintained to avoid repudiation. repudiation. Customer authentication authentication through user ID and password should should be used, as well as transaction logs and and data trails. In this case, it may be most effective if the company uses digital signatures or digital certificates to authenticate and and validate a customer. The signature verification would also be important important upon delivery.
