Marcellana, Ariel P.

BSA-31

ESSAY

1. When Clipper Mail Order Co. receives telephone and fax orders, the billing department prepares an
invoice. The invoice is mailed immediately. A copy of the invoice serves as a shipping notice. The
shipping department removes inventory from the warehouse and prepares the shipment. When the
order is complete, the goods are shipped. The clerk checks the customer’s credit before recording the
sale in the general journal and the account receivable subsidiary ledger.

The receptionist opens the mail and lists all payments. The receptionist also handles all customer
complaints and prepares sales return forms for defective merchandise. The cashier records all cash
receipts in the general journal and makes the appropriate entry in the accounts receivable subsidiary
ledger. The cashier prepares the daily bank deposit.

Describe at least four internal control weaknesses at Clipper Mail Order Co.
- A. no sales order is prepared
B. sales return forms are not authorized by management
C. custody and record keeping duties are not separated
D. the cashier has custody of cash, makes journal entries, and maintains A/R ledger

2. How may an employee embezzle funds by issuing an unauthorized sales credit memo if the
appropriate segregation of functions and authorization controls were not in place?
- An employee who has access to incoming payments, either cash or check, as well as the
authorization to issue credit memos may pocket the cash or check of a payment for goods received.
This employee could then issue a credit memo to this person's account so that the customer does not
show a balance due.

3. For each of the following documents, describe its purpose, the functional area preparing it, and the key
data included: sales order, bill of lading, credit memo.
- A sales order is used to collect information needed to initiate the sales process. It can be a copy of
the customer's purchase order prepared by the customer or a document prepared by a member of
the sales staff in response to mail, phone or personal contact with the customer. It contains
information about the customer, the type and quantity of merchandise being requested, price
information, shipping information, etc.

The bill of lading is prepared by the shipping clerk. It is a formal contract between the seller and the
carrier who will transport the goods to the customer. It contains information about the carrier, the
customer, descriptions of the package(s) being shipped, declared value of the goods, and information
on freight charges, including how much and who will pay.

A credit memo is a document authorizing issuance of credit to a customer for returned goods. It is
prepared in the sales department after receipt of a return slip from receiving. It shows the customer's
name, reason for the return, a list of items and prices, and the total amount of credit. Many credit
memos require additional authorization.
4. Discuss two IT controls or edits that can be programmed into a system to minimize the risk from data
input errors.
- 1. Checks for missing data, numeric-alphabetic data, and valid data values, reduce the risk of
undetected data entry errors in accounts receivable, inventory control, billing, and cash receipts.
2. Check digit edits provide control over accessing the wrong accounts when posting customer sales
and cash receipts transactions. Long customer account numbers are susceptible to transcription and
transposition errors during data entry. Check digit controls reduce the risk of such errors.

5. What role does each of the following departments play in the sales order processing subsystem: sales,
credit, and shipping? Be complete.
- The sales department receives the order information from the customer, either by mail, phone, or
in person. Information is captured on a sales order form which includes customer name, account
number, name, number and description of items ordered, quantities and unit prices plus taxes,
shipping info, discounts, freight terms. This form is usually prepared in multiple copies that are used
for credit approval, packing, stock release, shipping, and billing.
The credit department provides transaction authorization by approving the customer for a credit sale
and returns and allowances.
The shipping department receives information from the sales department in the form of packing slip
and shipping notice. When the goods arrive from the warehouse, the documents are reconciled with
the stock release papers. The goods are packed and labeled. The packing slip is included. The shipping
notice is sent to billing. A bill of lading is prepared to accompany the shipment.

6. With regard to segregation of duties, rule one is that transaction authorization and transaction
processing should be separated. What does this require in the revenue cycle?
- Within the revenue cycle, the credit department is separate from the rest of the process. Hence, the
authorization of the transaction (granting of credit) is independent. If other people, e.g., sales staff,
were able to authorize credit sales, there would be the temptation to approve sales to any customer,
even those known to not be credit worthy.

7. With regard to segregation of duties, rule two is that asset custody and record keeping should be
separated. What does this require in the revenue cycle?
- In the revenue cycle, the warehouse has custody of physical assets while accounting (especially
general ledger and inventory control) maintains the records. Also, in the cash receipts subsystem,
cash receipts has custody of the asset (cash) while general ledger and accounts receivable keep the
records.

8. What role does each of the following departments play in the cash receipts subsystem: mail room, cash
receipts, accounts receivable, and general ledger? Be complete.
- The mail room receives the customer's payment-usually a check accompanied by a document called
a remittance advice (which may be a copy of the invoice sent to the customer). Mail clerks separate
the two, prepare a cash prelist or remittance list which lists all the payments received and sends the
checks to the cashier and remittance advices to accounts receivable. In cash receipts someone (e.g.,
cashier) restrictively endorses the checks and records the payment in the cash receipt journal. A
deposit slip is prepared in which accompanies the checks to the bank.
The accounts receivable department posts from the remittance advises to the customer accounts in
the accounts receivable subsidiary ledger. The general ledger department record cash receipts to the
cash and accounts receivable control accounts based on the list from the mail room and summary
report of posting from accounts receivable.
 9. For each of the following documents, describe its purpose, the functional area preparing it, and the key
data included: remittance advice, remittance list, deposit slip.
- A. remittance advice is a proof of payment document sent by a customer to a business. Generally,
it’s used when a customer wants to let a business know when an invoice has been paid. In a sense,
remittance slips are equivalent to cash register receipts. They’re particularly helpful when it comes to
matching up invoices with payments.
B. A remittance advice is a statement that accompanies a payment to a supplier, detailing what was
paid. The supplier uses the information on a remittance advice to flag outstanding receivables in
its accounting system as having been paid.
C. A deposit slip is a form that is used to itemize the checks and cash being deposited into a bank
account the account number. The amount of each check being deposited. The amount of any bills
and coins being deposited.

10. How is independent verification carried out in a manual revenue system?

The End!