HALL, ACCOUNTING INFORMATION SYSTEMS

Accounting Information Systems, 6th edition James A. Hall

COPYRIGHT © 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license

Objectives for Chapter 4 y Tasks performed in the revenue cycle, regardless of the technology used y Functional departments in the revenue cycle and the flow of revenue transactions through the organization y Documents, journals, and accounts needed for audit trails, records, decision making, and financial reporting y Risks associated with the revenue cycle and the controls that reduce these risks y The operational and control implications of technology used to automate and reengineer the revenue cycle

The Conceptual System Overview of Revenue Cycle Activities y Three process in revenue cycle for most retail, wholesale & manufacturing organizations: y Sales order procedure y Sales return procedure y Cash receipt procedure

Sales Order 1 Credit / Customer Service 2

REVENUE CYCLE (SUBSYSTEM) Cash Receipts/ Collections 6

Shipping 3

Billing/ Accounts Receivable 4/5

Revenue Cycle Databases y Master files y customer master file y accounts receivable master

file y merchandise inventory master file

y Transaction and Open Document Files y sales order transaction file y

open sales order transaction file

y sales invoice transaction file y cash receipts transaction file

• Other Files – shipping and price data reference file – credit reference file (may not be needed) – salesperson file (may be a master file) – Sales history file – cash receipts history file – accounts receivable reports file

DFD of Sales Order Process

Journal Vouchers/Entries How do we get them? y Billing Department prepares a journal voucher: Accounts Receivable Sales

DR CR

y Inventory Control Dept. prepares a journal voucher: Cost of Goods Sold Inventory

DR CR

y Cash Receipts prepares a journal voucher: Cash

DR Accounts Receivable

CR

Sales Order Process Flowchart

Sales Order Process Flowchart

Manual Sales Order Processing y Begins with a customer placing an order y The sales department captures the essential details on a sales order form. y The transaction is authorized by obtaining credit approval by the credit department. y Sales information is released to: y Billing y Warehouse (stock release or picking ticket) y Shipping (packing slip and shipping notice)

Manual Sales Order Processing y The merchandise is picked from the Warehouse and sent to Shipping. y Stock records are adjusted. y The merchandise, packing slip, and bill of lading are prepared by Shipping and sent to the customer. y Shipping reconciles the merchandise received from the Warehouse with the sales information on the packing slip. y Shipping information is sent to Billing. Billing compiles and reconciles the relevant facts and issues an invoice to the customer and updates the sales journal. Information is transferred to: y Accounts Receivable (A/R) y Inventory Control

Manual Sales Order Processing y A/R records the information in the customer’s account in the accounts receivable subsidiary ledger. y Inventory Control adjusts the inventory subsidiary ledger. y Billing, A/R, and Inventory Control submits summary information to the General Ledger dept., which then reconciles this data and posts to the control accounts in the G/L.

Sales Returns Procedures y The company shipped the customer the wrong merchandise. y The goods were defective. y The product was damage in shipment. y The buyer refused delivery because the seller shipped the goods too late or they were delayed in transit.

DFD of Sales Returns

Sales Returns Flowchart

Sales Return Journal Entry G/L posts the following to control accounts:

Inventory—Control Sales Returns and Allowances Cost of Goods Sold Accounts Receivable—Control

DR DR CR CR

DFD of Cash Receipts Processes

Cash Receipts Flowchart

Manual Cash Receipts Processes y Customer checks and remittance advices are received in the Mail Room. A mail room clerk prepares a cash prelist and sends the prelist and the checks to Cash Receipts. y The cash prelist is also sent to A/R and the Controller. y

y Cash Receipts: verifies the accuracy and completeness of the checks y updates the cash receipts journal y prepares a deposit slip y prepares a journal voucher to send to G/L y

Manual Cash Receipts Processes y A/R posts from the remittance advices to the accounts receivable subsidiary ledger. y Periodically, a summary of the postings is sent to

G/L.

y G/L department: y reconciles the journal voucher from Cash Receipts

with the summaries from A/R y updates the general ledger control accounts

y The Controller reconciles the bank accounts.

Summary of Internal Controls

Authorization Controls y Proper authorization of transactions (documentation) should occur so that only valid transactions get processed. y Within the revenue cycle, authorization should take place when: a sale is made on credit (authorization) y a cash refund is requested (authorization) y posting a cash payment received to a customer’s account (cash pre‐list) y

Segregation of Functions Three Rules 1. 2. 3.

Transaction authorization should be separate from transaction processing. Asset custody should be separate from asset record‐ keeping. The organization should be so structured that the perpetration of a fraud requires collusion between two or more individuals.

Segregation of Functions y Sales Order Processing y credit authorization separate from SO processing y inventory control separate from warehouse y accounts receivable sub‐ledger separate from general ledger control account y Cash Receipts Processing y cash receipts separate from accounting records y accounts receivable sub‐ledger separate from general ledger

Supervision y Often used when unable to enact

appropriate segregation of duties. y Supervision of employees serves as a deterrent to dishonest acts and is particularly important in the mailroom.

Accounting Records y With a properly maintained audit trail, it is possible to track transactions through the systems and to find where and when errors were made: y y y y y

pre‐numbered source documents special journals subsidiary ledgers general ledger files

Access Controls y Access to assets and information (accounting records) should be limited. y Within the revenue cycle, the assets to protect are cash and inventories and access to records such as the accounts receivable subsidiary ledger and cash journal should be restricted.

Independent Verification y Physical procedures as well as record‐keeping should be independently reviewed at various points in the system to check for accuracy and completeness:

shipping verifies the goods sent from the warehouse are correct in type and quantity y warehouse reconciles the stock release document (picking slip) and packing slip y billing reconciles the shipping notice with the sales invoice y general ledger reconciles journal vouchers from billing, inventory control, cash receipts, and accounts receivable y

Automating the Revenue Cycle y Authorizations and data access can be performed through computer screens. y There is a decrease in the amount of paper. y The manual journals and ledgers are changed to disk or tape transaction and master files. y Input is still typically from a hard copy document and goes through one or more computerized processes. y Processes store data in electronic files (the tape or disk) or prepare data in the form of a hardcopy report.

Automating the Revenue Cycle y Revenue cycle programs can include: y formatted screens for collecting data y edit checks on the data entered y instructions for processing and storing the data y security procedures (passwords or user IDs) y steps for generating and displaying output y To understand files, you must consider the record design and layout. y The documents and the files used as input sources must contain the data necessary to generate the output reports.

Computer‐Based Accounting Systems y CBAS technology can be viewed as a continuum with two extremes:

y automation ‐ use technology to improve

efficiency and effectiveness y reengineering – use technology to restructure business processes and firm organization

Example: Automated Batch Sales

Reengineering Sales Order Processing Using Real‐Time Technology y Manual procedures and physical documents are replaced by interactive computer terminals. y Real time input and output occurs, with some master files still being updated using batches. y Real‐time ‐ entry of customer order, printout of stock release, packing slip and bill of lading; update of credit file, inventory file, and open sales orders file y Batch ‐ printout of invoice, update of closed sales order (journal), accounts receivable and general ledger control account

Real‐time Sales Order

Advantages of Real‐Time Processing y Shortens the cash cycle of the firm by reducing the time between the order date and billing date y Better inventory management which can lead to a competitive advantage y Fewer clerical errors, reducing incorrect items being shipped and bill discrepancies y Reduces the amount of expensive paper documents and their storage costs

Reengineered Cash Receipts y The mail room is a frequent target for reengineering. y Companies send their customers preprinted envelopes and remittance advices. y Upon receipt, these envelopes are scanned to provides a control procedure against theft. y Machines are open the envelopes, scan remittance advices and checks, and separate the checks. y Artificial intelligence may be used to read handwriting, such as remittance amounts and signatures.

Automated Cash Receipts

Point‐of‐Sale Systems y Point of sale systems are used extensively in retail establishments. y Customers pick the inventory from the shelves and take them to a

cashier.

Daily Procedure y The clerk scans the universal product code (UPC). The POS system is connected to an inventory file, where the price and description are retrieved. y The inventory levels are updated and reorder needs can

immediately be detected.

Point‐of‐Sale Systems y The system computes the amount due. Payment is either cash, check, ATM or credit card in most cases. y

No accounts receivables

y If checks, ATM or credit cards are used, an on‐ line link to receive approval is necessary.

Point‐of‐Sale Systems End‐of‐day Procedure y At the end of the day or a cashier’s shift, the money and receipts in the drawer are reconciled to the internal cash register tape or a printout from the computer’s database. y Cash over and under must be recorded

y Journal voucher posted to GL account: Cash DR Cash Over/Short DR A/R (credit card) DR COGS DR Sales Inventory

CR CR

Computerized POS

Reengineering Using EDI y EDI helps to expedite transactions. y The customer’s computer: determines that inventory is needed y selects a supplier with whom the business has a formal business agreement y dials the supplier’s computer and places the order y

y The exchange is completely automated. y

No human intervention or management

EDI System Company B

Company A Application Software

Purchases System

Sales Order System

EDI Translation Software

EDI Translation Software

Direct Connection Communications Software

Communications Software Other Mailbox Company A’s mailbox

VAN Other Mailbox

Company B’s mailbox

Application Software

Reengineering Using the Internet y Typically, no formal business agreements exist as they do in EDI. y Most orders are made with credit cards. y Mainly done with e‐mail systems, and thus a turnaround time is necessary y Intelligent agents are needed to eliminate this time lag. y Security and control over data is a concern with Internet transactions.

CBAS Control Considerations y Authorization ‐ in real‐time systems, authorizations are automated y Programmed decision rules must be closely monitored. y Segregation of Functions ‐ consolidation of tasks by the computer is common y Protect the computer programs y Coding, processing, and maintenance should be separated.

CBAS Control Considerations y Supervision ‐ in POS systems, the cash register’s internal tape or database is an added form of supervision y Access Control ‐ magnetic records are vulnerable to both authorized and unauthorized exposure and should be protected y Must have limited file accessibility y Must safeguard and monitor computer programs

CBAS Control Considerations y Accounting Records ‐ rest on reliability and security of stored digitalized data Accountants should be skeptical about the accuracy of hard‐copy printouts. y Backups ‐ the system needs to ensure that backups of all files are continuously kept y

y Independent Verification – consolidating accounting tasks under one computer program can remove traditional independent verification controls. To counter this problem: y y

perform batch control balancing after each run produce management reports and summaries for end users to review

PC‐Based Accounting Systems y Used by small firms and some large decentralized firms y Allow one or few individuals to perform entire accounting function y Most systems are divided into modules controlled by a menu‐driven program: y general ledger y inventory control y payroll y cash disbursements y purchases and accounts payable y cash receipts y sales order

PC Control Issues y Segregation of Duties ‐ tend to be inadequate and should be compensated for with increased supervision, detailed management reports, and frequent independent verification y Access Control ‐ access controls to the data stored on the computer tends to be weak; methods such as encryption and disk locking devices should be used y Accounting Records ‐ computer disk failures cause data losses; external backup methods need to be implemented to allow data recovery

Internal Control Risk Exposures in the Revenue Cycle - I Risk

Exposure

1) Credit sales made to customers who represent poor credit risks

1) Losses from bad debts

2) Unrecorded or unbilled shipments

2) Losses of revenue; overstatement of inventory and understatement of accounts receivable in the balance sheet 3) Alienation of customers and possible loss of future sales; losses of revenue

3) Errors in preparing sales invoices

Figure 12-22

Risk Exposures in the Revenue Cycle ‐ II Risk

Exposure

4) Misplacement of orders from customers or unfilled backorders

4) Losses of revenue and alienation of customers

5) Incorrect posting of sales to accounts receivable records

5) Incorrect balances in accounts receivable and general ledger account records 6) Overstatement of revenue in one year (year of premature booking) and understatement of revenue in the next

6) Posting of revenues to wrong accounting periods, such as premature booking of revenues

Figure 12-22 (continued)

Risk Exposures in the Revenue Cycle ‐ III Risk

Exposure

7) Fictitious credit sales to nonexistent Overstatement of revenues and customers accounts receivable 8) Excessive sales returns and allowances with certain of the credit memos being for fictitious returns 9) Theft or misplacement of finished goods in the warehouse or on the shipping dock


8) Losses in net revenue, with the proceeds from subsequent payments by affected customers being fraudulently pocketed 9) Losses in revenue; overstatement of inventory on the balance sheet

Risk Exposures in the Revenue Cycle ‐ IV Risk

Exposure

10) Fraudulent write-offs of customers’ 10) Understatement of accounts accounts by unauthorized persons receivable; losses of cash receipts when subsequent collections on written-off accounts are misappropriated by perpetrators of the fraud 11) Theft (skimming) of cash receipts, 11) Losses of cash receipts; especially currency, by persons overstatement of accounts receivable involved in the processing; often in the subsidiary ledger and the accompanied by omitted postings to balance sheet affected customers’ accounts 12) Lapping of payments from 12) Losses of cash receipts; incorrect customers when amounts are posted account balances for those customers to accounts receivable records whose records are involved in the lapping Figure 12-22 (continued)

Risk Exposures in the Revenue Cycle ‐ V Risk

Exposure

13) Accessing of accounts receivable, merchandise inventory, and other records by unauthorized persons 14) Involvement of cash, merchandise inventory, and accounts receivable records in natural or human-made disasters 15) Planting of virus by disgruntled employee to destroy data on magnetic media

13) Loss of security over such records, with possibly detrimental use made of the data accessed 14) Losses of or damages to assets


15) Loss of customer accounts receivable data needed to monitor collection of amounts from previous sales

Risk Exposures in the Revenue Cycle ‐ VI Risk

Exposure

16) Interception of data transmittal between customers and the web site

16) Loss of data which may be used to the detriment of customers

17) Unauthorized viewing and alteration of other customer account data via the Web 18) Denial by a customer that an online order was placed after the transaction is processed

17) Loss of security over customer records resulting in misstatement of accounts receivable balances 18) Loss of sales revenues


Risk Exposures in the Revenue Cycle ‐ VII Risk

Exposure

19) Use of stolen credit cards to place 19) Loss of shipped goods for which orders via the Web payments will not be received 20) Breakdown of the web server due to unexpectedly high volume of transactions


20) Loss of sales revenues and alienation of customers

Typical Control Objectives for the Revenue Cycle y Semua customer yang diterima untuk credit sales adalah credit‐ worthy y Semua barang yang dipesan dikirim dan semua jasa dilaksanakan sesuai dengan tanggal yang disetujui oleh semua pihak. y Semua barang yang dikirim diotorisasi dan ditagih All shipped goods are authorized dan ditagih sesuai dengan periode akuntansi yang tepat. y Semua sales returns and allowances diotorisasi dan dicatat dengan teliti dan berdasarkan actual return of goods y Semua cash receipts dicatat dengan lengkap dan akurat. y Semua credit sales dan transaksi cash receipts transactions diposting ke customers’ accounts yang tepat pada accounts receivable ledger y Semua accounting records, merchandise inventory, and cash dilindungi.

General Controls of the Revenue Cycle ‐ I y Organizational Controls y Unit‐unit dengan fungsi kustodian harus dijaga agar terpisah satu sama lain. y Fungsi kustodian harus dipisah dari fungsi record‐ keeping. y Untuk sistem yang dikomputerisasi, pengembangan sistem harus dijaga agar terpisah dari operasi‐operasi sistem.

General Controls of the Revenue Cycle ‐ II y Documentation Controls y Dokumentasi yang lengkap dan up‐to‐date harus tersedia termasuk didalamnya adalah salinan dokumen, flowcharts, record lay‐outs, dan laporan. y Program untuk edit dan proses sales dan cash receipt harus diorganisasikan ke buku atau paket terpisah yang ditujukan ke masing‐masing programer, komputer operator, dan system user. y Kebijakan manajemen yang berhubungan dengan credit approvals, account write‐off, dsb harus dalam bentuk tertulis.

General Controls of the Revenue Cycle ‐ II y Asset Accountability Controls y A/R subsidiary ledger (master file) harus sering direkonsiliasi dengan A/R control account di GL. y Merchandise inventory record harus dijaga pada ledger dan direkonsiliasi secara periodik ke merchandise inventory control account y Bank reconciliation, harus dibandingkan balance pada bank account dengan cash account balance di GL. y Petugas bagian pengiriman yang menyetujui penerimaan order dan pengambilan barang dari gudang dengan menandatangani stock request atau shipping order. y Mail room clerk yang menyiapkan daftar semua receive remittances. y Customer yang mereview monthly statement dari sales dan payments untuk jumlah‐jumlah yang salah.

General Controls of the Revenue Cycle ‐ II y Management Practice Controls Kebijakan manajemen yang berhubungan dengan revenue cycle yang harus ditetapkan dan diikuti adalah sbb:

Pegawai (programer dan akuntan harus dilatih dengan

hati‐hati), pegawai yang menangani kas harus diikat dengan surat perjanjian. Perubahan dan pengembangan sistem harus melalui prosedur yang jelas yang melibatkan prior approvals, testing, dan sign‐offs. Audit terhadap prosedur dan kebijakan sales dan cash receipt harus dilakukan. Manajer harus melakukan review periodic analyses, control summaries, dan laporan‐laporan tentang aktivitas account dan computer‐approved transactions.

General Controls of the Revenue Cycle ‐ II y Data Center Operations Controls y Jadwal pemrosesan komputer untuk sales dan cash receipts batches harus ditetapkan dengan jelas. y Sistem informasi dan pegawai bagian akuntansi harus diawasi secara aktif dan pekerjaannya direview dengan bantuan computer processing control reports dan access logs. y Authorization Controls y Semua transaksi credit sales (atau service order) harus diotorisasi oleh manajer kedit. Pada sistem yang dikomputerisasi otorisasi dilakukan dengan program aplikasi yang dibagun dengan aturan persetujuan kredit. y Manajer tidak terlibat dalam pengolahan sales atau pada A/R. y Salinan permintaan barang dari sales order harus mengotorisasi pengambilan barang dari gudang dan pemindahan barang ke shipping dock.

General Controls of the Revenue Cycle ‐ III y Access Controls y Berikan password pada petugas yang diberi otorisasi untuk

mengakses A/R dan file‐file yang berhubungan dengan customer, untuk melaksanakan tugas‐tugas yang telah ditentukan. y Batasi terminal‐terminal untuk melaksanakan fungsi‐fungsi

yang berhubungan dengan transaksi sales dan cash receipts. y Catat semua transaksi sales and cash receipt ke sistem. y Sering‐seringlah mengeluarkan master file A/R dan

merchandise inventory ke magnetic tape backups y Lindungi gudang dan lemari besi secara fisik. y Gunakan lockbox collection system pada situasi yang feasible.

Application Controls of the Revenue Cycle: Input ‐ I 1. Siapkan pre‐numbered documents dan dokumen yang dirancang dengan baik untuk dokumen sales, shipping, and cash receipts, masing‐masing dokumen diotorisasi oleh orang yang berwenang. 2. Validasi data sales orders dan remittance advices seperti data yang disiapkan dan dimasukkan untuk pengolahan. Pada computer‐based systems, validasi harus dilaksanakan dengan sarana program edit check. Saat data dimasukkan ke computer‐readable medium, key verification dicocokkan.

Application Controls of the Revenue Cycle: Input ‐ II 3. Betulkan kesalahan yang terdeteksi selama data entry dan sebelum data diposting ke record‐record customer dan inventory. 4. Precompute batch control totals yang berhubungan dengan data penting pada sales invoices (atau shipping notices) dan remittance advices. Precomputed batch control totals haus dibandingkan dengan totals yang dihitung selama posting ke accounts receivable ledger dan setiap kali processing run. Pada cash receipts, total pada remittance advices harus dibandingkan dengan total pada deposit slips.

Application Controls of the Revenue Cycle: Processing ‐ I Pindahkan barang yang dipesan dari gudang barang jadi (finished goods warehouse) dan kirim barang‐barang hanya berdasarkan otorisasi tertulis seperti stock request copies 2. Invoice customers hanya diberiahukan oleh bagian pengiriman atas jumlah yang telah dikirimkan. 3. Pengeluaran credit memos untuk sales returns hanya jika disertai bukti (seperti receiving report) telah diterima bhwa barang memang benar‐benar dikembalikan. 4. Periksa semua perhitungan pada sales invoices sebelum dikirim dan diposting ke customers’ accounts yang tepat. Bandingkan sales invoices dengan shipping notices and open orders, untuk meyakinkan nahwa jumlah yang dipesan direkonsiliasi dengan order yang dikirim dan back‐ordered. 1.

Application Controls of the Revenue Cycle: Processing ‐ II Periksa bahwa jumlah total yang diposting ke accounts receivable accounts dari batch transaksi sama dengan precomputed batch totals, dan posting jumlah total ke general ledger accounts yang tepat. 6. Depositokan semua kash yang diterima lengkap dengan minimum of delay, sehingga menghilangkan kemungkinan cash receipts yang sedang digunakan untuk membayar pegawai atau untuk membayar petty cash funds. 7. Betulkan kesalahan yang dibuat selama tahapan pengolahan biasanya dengan membalik kesalahan posting ke perkiraan dan masukan data yang benar. Audit trail yang berhubungan dengan perkiraan yang dikoreksi akan menunjukkan kesalahan aslinya, the reversals, and the corrections 5.

Application Controls of the Revenue Cycle: Output Siapkan monthly statements, yang harus diposkan ke semua credit customers, terutama jika pendekatan balance forward digunakan. 2. Salinan file dari semua dokumen yang berkaitan dengan transaksi sales dan cash receipts dicek secara periodik dengan urutan nomor pada tiap file untuk melihat celah yang ada. Jika transaksi tidak didukung dengan preprinted documents, seperti yang sering terjadi pada online computer‐based systems, tandai nomor transaksi ke transactions. 3. Siapkan daftar transaksi yang dicetak dan account summaries pada periodic basis untuk menyediakan audit trail dan dasar untuk review. 1.

Web Security Procedures y Authentication, user identification number dan password dibutuhkan untuk akses ke private network. y Authorization y Use of an Access Control List y Accountability, untuk menetapkan tanggung jawab atas segala modifikasi pada Web sites Web sercer log harus dipelihara. y Data Transmission, untuk menjaga kerahasiaan dan integritas data yang dikirim via Web harus menggunakan enkripsi. y Disaster Contingency & Recovery Plan, y Diperlukan prosedur backup yang cukup termasuk fault tolerance untuk meminimalkan gangguan yang tidak diharapkan. y Recovery plan direncanakan untuk meyakinkan rekonstruksi dari data yang hilang.