ACCY225 Tri 2 2019 Tutorial 3 Revenue and Expenditure controls- Solution PDF

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1School of Accounting and Commercial Law ACCY 225 ACCOUNTING INFORMATION SYSTEMS Trimester Two 2019 Tutorial 3: Revenue and Expenditure controls Week 7 starting 2 September 2019SOLUTIONObjective of Tutorial: At the end of this tutorial, students will - Demonstrate understanding of the Code of Ethics...

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School of Accounting and Commercial Law ACCY 225 ACCOUNTING INFORMATION SYSTEMS Trimester Two 2019 Tutorial 3: Revenue and Expenditure controls Week 7 starting 2 September 2019

SOLUTION Objective of Tutorial: At the end of this tutorial, students will • Demonstrate understanding of the Code of Ethics and the ethical decision-making model We expect that with respect to the tutorial: • Students will have prepared answers to the questions before the tutorial and will be able to discuss them • Tutors will provide guidance, but no model answers will be handed out. QUESTION ONE: REVENUE CONTROL AND DOCUMENTATION O’Brien Corporation is a midsize, privately owned, industrial instrument manufacturer supplying precision equipment to manufacturers in the Midwest. The corporation is 10 years old and uses an integrated ERP system. The administrative offices are located in a downtown building and the production, shipping, and receiving departments are housed in a renovated warehouse a few blocks away. Customers place orders on the company’s website, by fax, or by telephone. All sales are on credit, FOB destination. During the past year sales have increased dramatically, but 15% of credit sales have had to written off as uncollectible, including several large online orders to first-time customers who denied ordering or receiving the merchandise. Customer orders are picked and sent to the warehouse, where they are placed near the loading dock in alphabetical sequence by customer name. The loading dock is used both for outgoing shipments to customers and to receive incoming deliveries. There are ten to twenty incoming deliveries every day, from a variety of sources. The increased volume of sales has resulted in a number of errors in which customers were sent the wrong items. There have also been some delays in shipping because items that supposedly were in stock could not be found in the warehouse. Although a perpetual inventory is maintained, there has not been a physical count of inventory for two years. When an item is missing, the warehouse staff writes the information down in log book. Once a week, the warehouse staff uses the log book to update the inventory records. 1

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The system is configured to prepare the sales invoice only after shipping employees enter the actual quantities sent to a customer, thereby ensuring that customers are billed only for items actually sent and not for anything on back order. Required: a. Identify at least three weaknesses in O’Brien Corporation’s revenue cycle procedures, explain the associated problem, and propose a solution. Present your answer in a three-column table with these headings: Weakness, Problem, Solution. b.Draw a BPMN diagram to depict O’Brien Corporation’s revenue cycle revised to incorporate your solutions to step a. (CMA Examination, adapted)

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SOLUTION QUESTION ONE: REVENUE CONTROL AND DOCUMENTATION a. Identify at least three weaknesses in O’Brien Corporation’s revenue cycle procedures, explain the associated problem, and propose a solution. Present your answer in a three-column table with these headings: Weakness, Problem, Solution.

Recommendation(s) to Correct Weaknesses

Weaknesses and Potential Problem(s) 1. Orders from new customers do not require any form of validation, resulting in several large shipments being sent and never paid for.

Require digital signatures on all online orders from new customers.

2. Customer credit histories are not checked before approving orders, resulting in excessive uncollectible accounts.

Customers’ credit should be checked and no sales should be made to those that do not meet credit standards.

3. Outgoing shipments are placed near the loading dock door without any physical security. The loading dock is also used to receive incoming deliveries. This increases the risk of theft, which may account for the unexplained shortages in inventory.

Separate the shipping and receiving docks.

4. Physical counts of inventory are not made at least annually. This probably accounts for the inaccuracies in the perpetual inventory records and may also prevent timely detection of theft.

Physical counts of inventory should be made at least once a year.

5. Shipments are not reconciled to sales orders, resulting in sending customers the wrong items.

The system should be configured to match shipping information to sales orders and alert the shipping employees of any discrepancies.

6. The perpetual inventory records are only updated weekly. This contributes to the unanticipated shortages that result in delays in filling customer orders.

The warehouse staff should enter information about shortages as soon as they are discovered.

Require a written customer purchase order as confirmation of telephone and fax orders.

Physically restrict access to the loading dock area where customer orders are placed.

Inventory records discrepancies should be corrected and investigated.

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b. Solutions to part b will vary depending upon which weaknesses the students identified and corrected. The following corrects all six weaknesses listed above.

Employee Sales Clerk

Activity Performed (sequential, left-to-right across all rows) Receive Customer Order

No

Sale > Credit Limit?

Warehouse Clerk

Prepare Sales Order

Pack Order

Shipping Clerk hip to stomer

Credit Manager Approve Credit Sale?

Accountant e& Mail Invoice to Customer

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Update Accounts Receivable

QUESTION TWO: EXPENDITURE CYCLE INFORMATION SYSTEM a. Explain what is meant by the expenditure cycle as a "mirror image" of the revenue

cycle.

SOLUTION The expenditure cycle has been called a "mirror image" of the revenue cycle because the activities of the expenditure cycle are the opposite, or "reflection" of several activities found in the revenue cycle. For example, the order goods activity generates a purchase order, which serves as customer input to the sales order entry process. The receive goods activity handles the goods sent via the supplier's shipping function. The pay for goods activity generates the payments that are processed by the supplier's cash collection activity. This mirror image also means that major technological improvements in the expenditure cycle may bring about complementary improvements in suppliers' revenue cycle as well.

b. Identify ten threats and applicable control procedures in the expenditure cycle.

SOLUTION This can include the following information: 1: Stock-outs — Controls: Inventory control system; accurate perpetual inventory; and vendor performance analysis is needed to prevent this problem 2: Requesting goods not needed — Controls: Review and approval by supervisors; use of prenumbered requisition forms; and restricted access to blank purchase orders 3: Purchasing goods at inflated prices — Controls: Competitive bidding and proper supervision; approved purchase orders; and price list consultations are needed to prevent this problem 4: Purchasing goods of inferior quality — Controls: Use experienced buyers who know good vendors; review purchase orders; and incorporate approved vendor list into formal procedures 5: Purchasing from unauthorized vendors — Control: Pre-numbered purchase orders should be approved; restrict access to approved vendor list and have procedures in place for any change to the list 6: Kickbacks paid to buyers to influence their decisions — Controls: Clear conflict of interest policy prohibiting the acceptance of any gift from vendors; disclosure of financial interest policy for purchasing agents; and vendor audits 7: Receiving unordered goods — Controls: Receiving department must reject any goods for which there is no approved purchase order 8: Errors in counting goods received — Controls: Use "blind" P.O. copies to force receiving personnel to actually count goods; provide incentives for counting goods 9: Theft of inventory — Controls: Secure inventory storage locations; make transfers of inventory with proper approval and documentation; do periodic physical count and

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reconciliation with recorded amounts 10: Errors in vendor invoices — Controls: Invoice accuracy should be verified and compared to P.O.s and receiving report data 11: Paying for goods not received — Controls: Voucher package and original invoice should be necessary for payments 12: Failure to take available purchase discounts — Controls: File approved invoices by due date; track invoices by due date; use a cash budget to plan for cash needs 13: Paying same invoice twice — Controls: Invoices should be approved only with a full voucher package and paid ones should be canceled so they cannot be used again; do not pay invoices marked "Duplicate" or "Copy" 14: Recording and posting errors for purchases and payments — Controls: Data entry controls, and periodic reconciliation of subsidiary ledger with general ledger control account 15: Misappropriation of cash by paying fictitious vendors and alteration of checks — Controls: Restrict access to cash, blank checks, and check signing machine; use check protection, pre-numbered checks, and imprinted amounts on checks to cut down on forgery and fraud; use petty cash fund for small expenditures only; have proper segregation of duties and independent bank reconciliation function 16: Theft associated with EFT use — Controls: Access controls to the system; encryption of transmissions; time-stamp and number transmissions; control group should monitor all EFT activity 17: Loss of data — Controls: Use file labels, back up of all data files regularly; and, use access controls 18: Poor performance — Controls: Preparation and review of performance reports

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