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REVENUE CYCLENOTE FROM TIM: This document I found on the web seems to have some relevant CPAExam Questions that are worth studying.I. REVENUE CYCLE. As you will recall, the revenue cycle involves accounting transactionsresulting from economic events that produce revenue for the accounting entity. The majorevents occurring in the revenue cycle are: receiving and ordering from a customer,delivering goods or services to the customer, requesting payment from the customer, andreceiving the payment. Understanding a cycle involves familiarity with the documentationof the cycle. Flowcharts, internal control questionnaires and narratives are commonmethods of documentation. Fill in the flowcharts for revenue (credit sales and cashsales and receipts).II. Identify appropriate internal control procedures for the revenue cycle using DAASI.(Reconciliation to ARCCS: D (Recorded) A (Custody) A (Authorized) S (Seg of Duties) I(Comparison).)D Prenumbered (and accounted for), multiple-copy SO, SD, SI usedOne copy of the SO, SD, SI filed in the department generatedRemittance advices used to post fromA/R subsidiary ledger, sales journals, cash receipts journalPrenumbered cash receipt tickets, credit memos & bad debt write-off formsAging prepared monthlyPrepare a prelisting of cash receiptsA Individuals with access to cash or goods should be bondedUse of a lockboxCash deposited intact dailyChecks restrictively endorsedControl over write-offs and collection of write-offsCash registers --internal tapes, locked drawers, correct change, bell, window tocustomer, assigned drawers, preprogrammed prices, drawers reconciledA Credit approved prior to shipment of goodsMonthly statements reviewed by supervisor before sent outAppropriate credit policyApproved sales price list with deviations authorizedAuthorization of A/R write-offsS Segregate the sales order function from the A) credit function from the B) shippingfunction from the C) billing function from the D) cash receipts functionSegregate cash receipts from accounts receivable record keepingSegregate cash receipts from the credit functionSegregate accounts receivable subsidiary ledger from the general ledgerI A/R general ledger reconciled to subsidiary ledgerRotate duties between G/L and A/R subsidiary ledger (S/L) clerksSendout monthly statements to customersCompare SO, SD, & SI to ensure ordered goods were shipped/shipped goods billed1
Compare duplicate deposit slip with a) cash receipts journal, and b) A/R sub ledgerDaily reconciliation of cash collectionsMatch credit memoranda and receiving report2
III. Internal controls frequently missing in the revenue cycle.A.B.C.D.E.F.G.H.I.J.K.L.Credit granted by the credit departmentSales orders and invoices prenumbered and controlledSales return credit memoranda prenumbered and matched with receiving reportsSubsidiary ledger reconciled to control ledger regularlyIndividual who does not post accounts receivables reviews monthly statements beforesending to customerMonthly statements sent to all customersWrite-offs approved by mgm’t official independent of recordkeeping responsibilityCash receipts received in mail listed by individual(s) with no recordkeepingresponsibility; cash goes directly to cashierOver-the-counter cash receipts controlled (cash register tapes)Cash deposited intact dailyEmployees handling cash are bondedBank reconciliation prepared by individuals independent of cash receipts recordkeepingIV. Internal control questionnaire designed using DAASI.TITLED A I Yes or NoAre prenumbered SO, SD, and SI used and accounted for?Is posting of the A/R S/L done from remittance advices?Is a trial balance and aging of the A/R prepared monthly?Is credit approved prior to shipment of goods?Are monthly statements reviewed by the supervisor prior to mailing?Is the A/R G/L reconciled with the S/L on a regular basis?Are sales invoices compared to sales orders and shipping documents?to determine that ordered goods were shipped and shipped goods wereordered?NOTE: A “NO” answer on an I/C questionnaire indicates a weakness.The following questions are from the CPA Exam. You are given 15 - 25 minutes toanswer each question. Each essay question is worth 10 points.CPA EXAMPLE ESSAY #1(Internal Controls for Cash Receipts) You have been asked by the board of trustees of a localchurch to review its internal controls. As a part of this review, you have prepared the followingcomments relating to the collection made at weekly services and recordkeeping for members’pledges and contributions:The church’s board of trustees has delegated responsibility for financial management andaudit of the financial records to the finance committee. This group prepares the annual budgetand approves major disbursements, but is not involved in collections or recordkeeping. No3
audit has been considered necessary in recent years because the same trusted employee haskept church records and has served as financial secretary for fifteen years.The collection at the weekly service is taken by a team of ushers. The head usher countsthe collection in the church office following each service. He then places the collection and anotation of the amount counted in the church safe. Next morning, the financial secretaryopens the safe and recounts the collection. She withholds about 100 to meet cashexpenditures during the coming week and deposits the remainder of the collection intact. Inorder to facilitate the deposit, members who contribute by check are asked to draw theirchecks to “cash”.At their request, a few members are furnished prenumbered, predated envelopes in whichto insert their weekly contributions. The head usher removes the cash from the envelopes tobe counted with the loose cash included in the collection and discards the envelopes. Norecord is maintained of issuance or return of the envelopes and the envelope system is notencouraged.Each member is asked to prepare a contribution pledge card annually. The pledge is regardedas a moral commitment by the member to contribute a stated weekly amount. Based upon theamounts shown on the pledge cards, the financial secretary furnishes a letter to the membersthat supports the tax deductibility of their contributions.REQUIRED: Identify the internal control weaknesses apparent in this scenario andrecommendations for improvements.4
CPA ESSAY ANSWER #1WeaknessesFinancial secretary exercises toomuch control over collections.Recommended ImprovementsTo the extent possible, financial secretary’s responsibilities should beconfined to record-keeping.Finance committee is not exercisingits assigned responsibility forcollections.Finance committee should assume a more active supervisory role.The auditing function has beenassigned to the finance committee,which also has responsibility for theadministration of the cash function.Moreover, the finance committeehas not performed the auditingfunction.An audit committee should be appointed to perform periodic auditingprocedures or engage outside auditors.The head usher has sole access tocash during the period of the count.One person should not be left alonewith the cash until the amount hasbeen recorded or control has beenestablished in some other way.The number of counters should be increased to at least two, and cashshould remain under joint surveillance until counted and recorded sothat any discrepancy will be brought to attention.The collection is vulnerable torobbery while it is being countedand transported from the churchsafe to its deposit bank.The collection should be deposited in the bank’s night depositoryimmediately after the count. Physical safeguards, such as locking andbolting the door during the period of the count, should be instituted.Vulnerability to robbery will also be reduced by increasing the number ofcounters.The financial secretary should receive a copy of the collection report forposting to the financial records. The head usher should maintain a copyof the report for use by the audit committee.The head usher’s count lacksusefulness from a controlstandpoint because he surrenderscustody of both the cash and therecord of the count.Contributions are not depositedintact. There is no assurance thatamounts withheld by the financialsecretary for expenditures will beproperly accounted for.Contributions should be deposited intact. If it is considered necessaryfor the financial secretary to make cash expenditures, he or she shouldbe provided with a cash-working fund. The fund should be replenishedby check based upon satisfactory support and a properly approvedreimbursement request.Members are asked to draw checksto “cash” thus making the checkscompletely negotiable andvulnerable to misappropriation.Members should be asked to make checks payable to the church. Atthe time of the count, ushers should stamp the church’s restrictiveendorsement (For Deposit Only) on the back of the check.The envelope system has not beenencouraged. Control features whichit could provide have been ignored.The envelope system should be encouraged. Ushers should indicate onthe outside of each envelope the amount contributed. Envelopecontributions should be reported separately and supported by the emptycollection envelopes. Prenumbered envelopes will permit readyidentification of the donor by authorized persons without general loss ofconfidentiality.5
CPA EXAMPLE ESSAY #2Trapan Retailing Inc., has decided to diversify operations by selling through vendingmachines. Trapan’s plans call for the purchase of 312 vending machines which will be situatedat 78 different locations within one city, and the rental of a warehouse to store merchandise.Trapan intends to sell only canned beverages at a standard price.Management has hired an inventory control clerk to oversee the warehousing functions,and two truck drivers who will periodically fill the machines with merchandise, and deposit cashcollected at a designated bank. Drivers will be required to report to the warehouse daily.Required:What internal controls should the auditor expect to find in order to assure the integrity ofthe cash receipts and warehousing functions?The internal controls should provide for—S or IIADIII AI or AASD or III Drivers to count and then sign for all merchandise received.Daily verification of each driver’s ending inventory.Cash to be deposited daily by each driver.Daily return of duplicate deposit slips by each driver.Reconciliation of cash deposits with the daily net change in inventory.Provision for explanation of overages and shortages.Periodic independent surprise check of machines to verify that—a. Machines contain only authorized Trapan-purchased merchandise.b. Machines are mechanically programmed to charge the authorized prices.c. Cash and merchandise in machines equal a predetermined total.Bonding of employeesAlternate driver routes and required vacations.Restricting access to the warehouse.The warehouseman to count and sign for all items.Maintenance of perpetual inventory records.Periodic physical inventory count of merchandise in the warehouse.Analytical review of collections.6
CPA EXAMPLE ESSAY #3Taylor, CPA, has been engaged to audit the financial statements of JohnsonCoat Outlet, Inc., a medium-sized mail-order retail store that sells a widevariety of coats to the public.Required:Prepare the “Shipments” segment of Taylor’s internal control questionnaire.Each question should elicit either a yes or no response.Do not prepare questions relating to the cash receipts, sales returns andallowances, billing, inventory control, or other segments.Use the following format:QuestionYesNoJOHNSON COAT OUTLET, INC.ShipmentsInternal Control QuestionnaireQuestionD or ADDDDISAIIYesNo1. Are shipping documents prepared from sales ordersapproved in accordance with management’sauthorization?2. Are shipping documents prenumbered?3. Are shipping documents periodically accounted for?4. Are shipping documents recorded in a register, log, or file?5. Are copies of shipping documents forwarded to theBilling department?Inventory control department?6. Do shipping documents include cross reference to salesorders; customer identity and address; description andquantities of goods shipped; date; and other details?7. Is the shipping function independent ofSales orders?Credit approval?Billing and accounts receivable?Cash receipts?Warehouse?Receiving?Inventory Control?8. Is access to merchandise restricted and controlled withinthe shipping department?9. Are type and quantities of goods withdrawn and packed forshipping verified by independent counts?10. Are receipts from carriers obtained and filed?7
CPA EXAMPLE ESSAY #4A CPA’s audit working papers include the narrative description below of the cash receipts and billingportions of the internal controls of Parktown Medical Center, Inc. Parktown is a small health careprovider that is owned by a publicly held corporation. It employs seven salaried physicians, ten nurses,three support staff in a common laboratory, and three clerical workers. The clerical workers perform suchtasks as reception, correspondence, cash receipts, billing, and appointment scheduling and areadequately bonded. They are referred to in the narrative as “office manger, “ “clerk #1,” and “clerk #2.Most patients pay for services by cash or check at the time services are rendered. Credit is notapproved by the clerical staff. The physician who is to perform the respective services approves creditbased on an interview. When credit is approved, the physician files a memo with the billing clerk (clerk#2) to set up the receivable from data generated by the physician.The servicing physician prepares a charge slip that is given to clerk #1 for pricing and preparation ofthe patient’s bill. Clerk #1 transmits a copy of the bill to clerk #2 for preparation of the revenue summaryand for posting in the accounts receivable subsidiary ledger.The cash receipts functions are performed by clerk #1, who receives cash and checks directly frompatients and gives ea
Prepare a prelisting of cash receipts A Individuals with access to cash or goods should be bonded Use of a lockbox Cash deposited intact daily Checks restrictively endorsed Control over write-offs and collection of write-offs Cash registers --internal tapes, locked drawers, correct change, bell, window to customer, assigned drawers, preprogrammed prices, drawers reconciled
