Independent verification in the revenue cycle happens in multiple points in the process.

After the discussions of the major subsytems of Revenue Cycle, there are some instances thatthere will be discrepancies in the system.This will be the next topic which is the Risks and Controls of the Revenue Cycle.Risks1.)Sales Order ProceduresSales documents could be recorded with incomplete data which might stop the orderingprocess and cause delayed deliveries to customers.Erroneous/ fictitious deliveries result in the incorrect processing of invoices- Fictitious orduplicate sales that were recordedInvoices incorrectly state the quantity of goods shipped or incorrect pricing-this problemis really commonInvoices may be generated or recorded in a different period than the goods beingshipped. This could result in understated/overstated revenues and Accounts receivables.2.)Sales Returns ProceduresFictitious or duplicate credit memos may be generated and recorded.3.)Cash receipts ProceduresCash collection, demanding payment of debt to customers and receivable aging might beincorrect.The question is, How can the managements prevent these risks.Summary of Revenue Cycle Controls TableControl ActivitySales ProcessingCash receiptsTransactions AuthorizationCredit CheckReturn PolicyRemittance list (cashprelist)Segregation of DutiesCredit is separate fromprocessinginventory control isseparate fromwarehouseAR subsidiary ledger isseparate from generalledgerCash receipts areseparate from AR andcash accountAR subsidiary ledger isseparate from thegeneral ledgerSupervisionMail RoomAccounting RecordsSales Orders,sales journals,AR subsidiary ledger,inventory control,sales account (GL)Remittance advicesChecksremittance listscash receipts journalAccessPhysical Access toinventory

FILES.The revenue cycle employs several temporary and permanent files that contribute to the audittrail. The following are typical examples:±Open sales order fileshows the status of customer orders.±Shipping logspecifies orders shipped during the period.±Credit records fileprovides customer credit data.±Sales order pending file contains open orders not yet shipped or billed.±Back-order filecontains customer orders for out-of-stock items.±Journal voucher file is a compilation of all journal vouchers posted to the general ledger.Access ControlsAccess controls prevent and detect unauthorized and illegal access to the firm’s assets. The physicalassets at risk in the revenue cycle are inventories and cash. Limiting access to these items includes:±Warehouse security, such as fences, alarms, and guards.±Depositing cash daily in the bank.±Using a safe or night deposit box for cash.±Locking cash drawers and safes in the cash receipts department.Information is also an important asset at risk. Access control over information involves restrictingaccess to documents that control physical assets including source documents, journals, and ledgers. Anindividual with unrestricted access to records can effectively manipulate the physical assets of the firm.The following are examples of access risks in the revenue cycle:1. An individual with access to the AR subsidiary ledger could remove his or her account (or someoneelse’s) from the books. With no record of the account, the firm would not send the customer monthlystatements.C H A P T E R4The Revenue Cycle169

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Intermediate Financial Management

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2. Access to sales order documents may permit an unauthorized individual to trigger the shipmentof a product.3. An individual with access to both cash and the general ledger cash account could remove cashfrom the firm and adjust the cash account to cover the act.Independent VerificationThe objective of independent verification is to verify the accuracy and completeness of tasks that otherfunctions in the process perform. To be effective, independent verifications must occur at key points inthe process where errors can be detected quickly and corrected. Independent verification controls in therevenue cycle exist at the following points:1. The shipping function verifies that the goods sent from the warehouse are correct in type andquantity. Before the goods are sent to the customer, the stock release document and the packing slipare reconciled.2. The billing function reconciles the original sales order with the shipping notice to ensure that custom-ers are billed for only the quantities shipped.3. Prior to posting to control accounts, the general ledger function reconciles journal vouchers andsummary reports prepared independently in different function areas. The billing function summarizesthe sales journal, inventory control summarizes changes in the inventory subsidiary ledger, the cashreceipts function summarizes the cash receipts journal, and accounts receivable summarizes the

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