Revenue and Receipt Cycle PDF

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REVENUE AND RECEIPTS CYCLECONTENTSReproduced with full permission: Auditing notes for SA Students 10th edition - 9780 4091 24606, - 10/ CHAPTER ACCOUNTING SYSTEM AND CONTROL ACTIVITIES 10/ Page Introduction 10/ Characteristics of the cycle 10/ Objective of the first section of the chapter 10/ Basic ...

Description

CHAPTER 10

REVENUE AND RECEIPTS CYCLE CONTENTS Page ACCOUNTING SYSTEM AND CONTROL ACTIVITIES

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1.

Introduction

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2.

Characteristics of the cycle

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3.

Objective of the first section of the chapter

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4.

Basic functions for any revenue and receipts cycle

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5.

Narrative description of a manual revenue and receipts cycle by function

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6.

Documents in the cycle

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7.

Flow charts for a manual revenue and receipts cycle

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8.

Computerisation of the revenue and receipts cycle

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9.

Internal control in a cash sales system

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10.

The role of the other components of internal control in the revenue and receipts cycle

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NARRATIVE DESCRIPTION OF THE CYCLE AT PRORIDE (PTY) LTD

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AUDITING THE CYCLE

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1.

Introduction

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2.

Financial statement assertions and the revenue and receipts cycle

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3.

Important accounting aspects

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4.

Fraud in the cycle

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5.

Further audit procedures

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6.

Tests of controls

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7.

Substantive procedures

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8.

Substantive testing of sales

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9.

Substantive procedures for the audit of trade receivables

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10.

The use of audit software (substantive procedures)

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11.

Other audit procedures

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12.

Substantive procedures for the audit of bank and cash

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Reproduced with full permission: Auditing notes for SA Students 10th edition - 9780 4091 24606 RD Jackson, Lexis Nexis

ACCOUNTING SYSTEM AND CONTROL ACTIVITIES 1.

INTRODUCTION

The revenue and receipts cycle is sometimes referred to as the sales and collection cycle and perhaps this name better describes the activities of the cycle. This chapter deals initially with the accounting system (which is part RIWKHFRPSDQ\¶VLQIRUPDWLRQV\VWHPDQGWKHFRQWURODFWLYLWLHVZKLFKDUHSXWLn place to control the sale of the FRPSDQ\¶VJRRGVRUVHUYLFHVDQGWKHFROOHFWLRQRIDPRXQWVRZHGLQUHVSHFWRIWKRVHVDOHV7KHODWWHUSDUWRIWKH chapter deals with the audit of the cycle.

2.

CHARACTERISTICS OF THE CYCLE

2.1

Variation. There are any number of different products and services which are sold by companies, which means that there will be plenty of variations in the systems you encounter in practice. For example, goods can be sold over the counter, over the internet, over the phone or as a result of a hardcopy customer order. Physical objects are sold as well as non-SK\VLFDO REMHFWV HJVHUYLFHV DQGD ³VDOH´PD\WDNHD ORQJ time to complete (e.g. in a construction contract) or may be instantaneous, (e.g. over the counter cash sale).

2.2

Cash sales. Many businesses sell goods for cash and on credit to account holders. Having cash in the business is a security risk which must be addressed. There is a potential for theft and physical harm to employees who deal with cash.

2.3

Credit sales. When a company allows a customer to charge a sale made to an account (rather than settle the amount immediately by say, cash, credit card or cheque), there is a risk that the customer will not pay, and the company will suffer a loss. Important activities in a revenue and receipts cycle will be the checking of creditworthiness of a customer before the sale is made, and the timeous collection of amounts owed.

2.4

Legislation. For companies who sell to consumers, e.g. retailers, the Consumer Protection Act is an important act which must be complied with.

3.

OBJECTIVE OF THE FIRST SECTION OF THE CHAPTER

Our objective in the first section of this chapter is to provide you with the necessary information to understand how revenue and receipts cycles function. As discussed in paragraph 2, revenue and receipts systems can vary considerably; the approach in this chapter is to provide a thorough knowledge of a manual system and then to illustrate how things may change as computerization is introduced into the system. Remember that computerization does not change what is required of the system, e.g. take an order, pick the goods, raise an invoice etc, but it does change how the transactions are carried out and recorded.

4.

BASIC FUNCTIONS FOR ANY REVENUE AND RECEIPTS CYCLE

For the purposes of this text, we have chosen to describe a system for a business which has conventional functions; it receives orders from its customers, supplies the goods from its warehouse and charges the sale to the FXVWRPHU¶VDccount. These functions which are essentially those required for most revenue and receipts cycles can be broken down as follows: 4.1

Order department * receiving customer orders : these may be received in a variety of ways, e.g. by phone, receipt of a FXVWRPHU¶VZULWWHQRUGHURYHUWKH,QWHUQHWRURYHUWKHFRXQWHU * authorising the sale : this will involve granting or confirming credit before the order is processed. This is an important activity because companies do not want to make sales for 10/2

which they will not be paid! (At the authorising stage, an inventory availability test may also be carried out to confirm that the order can be filled). 4.2

Warehouse/despatch * processing the order : this involves the manual process of gathering together (picking) the goods from the stores to fill the order * despatch : this is the manual process of releasing the goods ordered to the customer. The FXVWRPHU PD\ FROOHFWWKHJRRGVWKH JRRGVPD\EHGHOLYHUHGE\WKHFRPSDQ\¶VRZQGHOLYHU\ vehicle or by a transport company, e.g. railways, courier service.

4.3

Invoicing * this is the very important step of notifying the customer of the amounts owed for goods purchased. The invoice may be sent with the goods, or at a later stage. There is no fixed rule, but generally the sooner the invoice is sent, the sooner the customer pays.

4.4

Recording sales and raising the debtor * this involves creating the records of the sales that have been made, as well as who owes the company money, i.e. debtors.

4.5

Receiving and recording payment from debtors * this is also a very important step and involves collecting payment from debtors, ensuring payment is banked DQGUHFRUGLQJWKHUHFHLSWVLQWKHFDVKUHFHLSWVMRXUQDOVDQGGHEWRU¶VOHGJHU.

4.6

Credit management * evaluating creditworthiness: these are the activities carried out to determine whether credit can be extended to a customer, and if so, what the terms (how long the debtor is given to pay, e.g. 60 days) and limits (the amount of credit, e.g. R20 000) will be * approving sales orders particularly those which are from debtors who have exceeded their credit terms and/or limits * collecting amounts owed: these are the activities carried out to ensure amounts owed by debtors, are paid when they are due.

In addition to the above, there are other lesser activities within the cycle which must be controlled. They are * controlling goods sold but which have been returned by the customer * passing credit notes for goods returned or other reasons e.g. overpayment by a debtor * granting discounts on payments from customers * considering and effecting write offs of bad debts. 5.

A NARRATIVE DESCRIPTION OF A MANUAL REVENUE AND RECEIPTS CYCLE BY FUNCTION

5.1

Order department * as the name suggests, the order department is responsible for receiving orders from customers and setting in motion the filling of the order. This will involve instructing the warehouse department to select the items ordered from the stores so that the items can be despatched to, or picked up by, the customer. Before setting this process in motion, the order department should FRQILUP WKDWWKH FXVWRPHU¶VDFFRXQWLV ³XSWR GDWH´ LHWKH DPRXQWRZHG LVZLWKLQWKHWHUPV and limit set for that customer and that processing the current order will not push the customer beyond his credit limit. Example. Stepps (Pty) Ltd, a customer of Ladderland Ltd, has a credit limit of R50 000 on its account and must pay within 60 days. If an order for goods costing R10 000 is received, the order department must check whether any portion of the balance on Stepps 3W\/WG¶VDFFRXQW has been outstanding for longer than 60 days and that the current balance is no more than R40 000. If Stepps (Pty) Ltd is not within its terms and limit, the order department will need to obtain the authorisation of the credit management department to initiate the sale. In most businesses, the order department will also confirm that the goods ordered by the customer are ³LQ VWRFN´ (available) before initiating the sale. If goods are QRW ³LQ VWRFN´ WKH VDOHV RUGHU

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clerk will contact the customer to ask whether the customer wishes the order to be placed on a back order list to await the arrival of more inventory. *

* *

*

*

in a manual system, all orders received by the order department should be entered manually onto a pre-printed, sequenced, multicopy, internal sales order (ISO) regardless of how the order is received, e.g. by phone, through the post, fax or by email the order clerk will take the ISO to the credit management department to have the ISO signed DXWKRULVHGRQFHWKHFXVWRPHU¶VFUHGLWVWDQGLQJKDVEHHQFKHFNHGE\WKDWGHSDUWPHQW if an order is received from a non-account holder, the credit management department will go WKURXJK WKH SURFHVV RI FKHFNLQJ WKH FXVWRPHU¶V FUHGLWZRrthiness and setting credit terms and limits as described in 5.6 D FRS\ RI WKH ,62 ZLOO EH GHOLYHUHG WR WKH ZDUHKRXVH WR DFW DV WKH ³SLFNLQJ VOLS´ LH WKH document which informs the warehouse employees as to which goods to select for despatch to the customer a copy of the ISO will be filed in the order department in numerical sequence and a copy will be sent to the accounting department.

5.2

Warehouse/despatch * the warehouse/despatch function is required to select the goods to be sent to the customer in terms of the ISO/picking slip. (In multipart stationery, the second copy of the ISO can be KHDGHG³SLFNLQJVOLS´ 7KLV IXQFWLRQZLOODOVREH UHVSRQVLEOHIRUFRQWUROOLQJ WKHUHPRYDORI the goods from the warehouse to the despatch area for delivery to, or collection by, the customer (i.e. the goods should be signed out of the custody section of the warehouse and into the despatch section). * in a manual system, the ISO/picking slip sent to the warehouse will be given to a warehouse employee to select (pick) the goods listed on the ISO/picking slip * this employee will tick off the goods picked on the picking slip and mark clearly any items which are not available (note: inventory availability checks carried out in the order department are not foolproof and some companies may choose to make out the ISO without carrying out the inventory availability test. Using this method, ³RXWRIVWRFN´LWHPVZLOOEHLGHQWLILHGDWWKH ³SLFNLQJ´VWDJH * a warehouse clerk will then manually complete a pre-printed, multi-part, sequenced delivery note, detailing the goods picked * once the delivery note has been completed, the goods will be moved to the despatch area with the supporting documentation where they will be checked, boxed or packaged. The despatch clerk will sign the documentation (copy of the delivery note or picking slip) to acknowledge the transfer of the goods into his custody * when the goods are despatched to the customer they will be accompanied by two copies of the delivery note, both copies will be signed by the customer, one of which will be retained by the customer and the other returned to the company * where goods are to be delivered to the customer (not collected), delivery lists will be compiled and the goods loaded onto the delivery vehicle under supervision. The driver will acknowledge taking custody of the goods by signing the delivery list.

5.3

Invoicing * the objective of invoicing is to notify the customer promptly of the amount due * accounting employees will collect together the supporting documentation for the sale which has been made, e.g. the ISO, and the copy of the delivery note signed by the customer. They will check all the details of the sale and create an invoice * a copy of the invoice will be sent to the customer. (Note: in some systems the invoice is made out at the same time as the delivery note. This may lead to more errors in invoicing because the invoice is made out before the customer has checked and accepted the goods, but does have the advantage of getting the invoice to the customer sooner.) * a pre-printed, multi-copy, sequenced invoice will be made out manually, taking the details from the supporting documentation * debtor details, pricing, discounts, casts and extentions and VAT will be checked, and a copy of the invoice sent to the customer.

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5.4

Recording of sales and raising debtors * the purpose of this function is to create a record of sales (the sales journal) and to raise the amount owed by the customer as a debtor (debtors ledger). * in a manual system, a copy of each of the invoices for the period (day, week, month) will be sent to the designated accounting clerk who will write up the invoices in the sales journal in numerical sequence * before the total of sales is posted (transferred) to the general ledger and the individual sales are posted (transferred) to the debtors ledger, another staff member will check the sequence of invoices entered in the sales journal, follow up on any missing numbers, and check the accuracy of the amounts entered in the sales journal against the invoices themselves * amounts will then be posted (transferred) to the respective ledgers.

5.5

Receiving and recording payments from debtors * the objective of this function is to accurately record the receipts of payments from a debtor. 7KHIXQFWLRQZLOOLQFOXGHWKH³PDLOURRP´PDLOUHFHLYLQJIXQFWLRQ) * a business receives a lot of important mail through the postal system. This may include purchase orders from customers, invoices and statements from suppliers, notifications, requests, etc from SARS and other regulatory bodies as well as cheques (or postal orders or even cash!) from debtors * there are basically three ways in which debtors pay, i.e. by cash, cheque or by direct deposit LQWRWKHFRPSDQ\¶VEDQNDFFRXQW7KLVFDQEHGRQHE\WKHGHEWRUJRLQJWRWKHFRPSDQ\¶VEDQN and depositing cash or a cheque directly into this bank account or by effecting an electronic funds transfer (a transfer from the debtor¶VEDQNDFFRXQWWRWKHFRPSDQ\¶VEDQNDFFRXQW * it is very seldom that a company will pay another company by cash, and payment by cheque is becoming far less common. However, payments by cash or cheque are still carried out and the accounting system must accommodate these methods of payment * direct payments LQWR D FRPSDQ\¶V EDQN DFFRXQW DUH TXLFNHU DQG VDIHU EXW GR FKDQJH WKH procedures and control activities for receiving and recording payments from debtors * at the end of the month, the debtors clerk will draw up a statement for each debtor which summarises the transactions with that customer for the month, e.g. sales made, payments received, credit notes issued. The balance on the statement which will be sent to the customer should reconcile with the debtors¶ account in the debtors ledger * all incoming mail of business importance will be recorded in a remittance register and GLVWULEXWHGWRWKHUHOHYDQWGHSDUWPHQW7KLVZLOOEHD³SK\VLFDO´DFWLYLW\ * receipts will be made out manually for all payments received by the employees opening the mail. Cash and cheques, after being receipted and recorded in the remittance register, will be sent to the cashier * the cashier will agree the cash and cheques received, to the remittance register and receipts and make out a bank deposit slip * cheques and cash will need to be (physically) taken to the bank to be deposited * the other part of this function is to record the receipts from debtors in the cash receipts journal. The cash book clerk will write up the cash receipts journal from the receipts and deposit slips and will subsequently post (transfer) the amounts to the debtors ledger and general ledger * ZKHUHDGHEWRUKDVSDLGGLUHFWO\LQWRWKHFRPSDQ\¶VEDQNDFFRXQW, the debtors clerk will need to obtain a bank statement from the bank. This will reflect the payments made directly into the FRPSDQ\¶VEDQNDFFRXQW$VFKHGXOHRIWKHVHUHFHLSWVZLOOEHGUDZQXSDQGXVHGWRZULWHXS the cash receipts journal.

5.6

Credit management * the main objective of this function is to minimise the risk of losses from bad debts. The control activities centre around extending credit only to creditworthy customers, setting reasonable credit terms and limits, preventing customers from exceeding their limits, and following up promptly on debtors who are showing signs of falling behind in their payments. The passing of credit notes may also be managed by this function. * in a manual system, all documentation will be hardcopy and follow up of information supplied by a prospective customer in the credit application form, will be followed up by a phone call or letter. The credit limits and terms will need to be recorded on a schedule or in the debtors ledger. Authorisation of a customer order (ISO) will be a manual exercise.

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6.

DOCUMENTS USED IN THE CYCLE

6.1

Customer order. TKHFXVWRPHU¶VLQVWUXFWLRQDV WRZKDWJRRGVDUH UHTXLUHG (could be sent by post, email, fax or orders could also be placed over the phone)

6.2

Internal sales order. A GRFXPHQWFRPSLOHGE\WKHFRPSDQ\¶VRZQVDOHVRUGHUFOHUNZKLFKUHFRUGVWKHJRRGVRUdered by the customer. It is used for sales authorisation and as a basis for creating the picking slip. A very important document where orders are taken orally e.g. over the phone

6.3

Picking slip. This document lists all the items which the customer has ordered. It is used to assist the stores SHUVRQQHOWR³SLFN´WKHJRRGVQHHGHGWRILOOWKHRUGHUIURPWKHVWRUHVRWKDWWKH\FDQEHGHVSDWFKHGWR the customer

6.4

Invoice. The document which is sent to the customer to notify them of the quantity and price of the goods sold to them, the total amount of the sale, discounts and VAT

6.5

Delivery note. This document details the date, description and quantity of the goods despatched to the customer and is signed by the customer to acknowledge receipt of the goods. When the company delivers to its customers, details of the deliveries e.g. address, delivery note number, will be entered on a delivery list which is used by the delivery staff to schedule and control deliveries

6.6

Statement. A summary of all of the transactions for a period, usually a month, sent by the company to the customer. The statement reflects the opening balance, sales made, payments received, other adjustments such as credit notes, and the closing balance as well as a breakdown of the periods for which the total amount owed has been outstanding e.g. 30 days...