Accounting Information Systems, 13e (Romney/Steinbart)

Chapter 12 The Revenue Cycle: Sales to Cash Collections

12.1 Describe the basic business activities and related information processing operations
performed in the revenue cycle.

1) Basic segregation of duties requires the credit manager reports to the ________ and the
treasurer report to the ________.
A) treasurer; controller
B) treasurer; vice president of finance
C) controller; vice president of finance
D) marketing manager; vice president of finance
Answer: B
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

2) The ________ normally triggers the billing process in the revenue cycle.
A) sales order received from the sales department
B) picking ticket received from the sales department
C) packing slip received from the shipping department
D) journal voucher received from the shipping department
Answer: C
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

3) The ________ normally triggers the customer payment recording process.

A) sales invoice
B) deposit slip
C) remittance advice
D) customer monthly statement
Answer: C
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

4) The ________ should always be included with a merchandise shipment to a customer.

A) picking ticket
B) packing slip
C) sales invoice
D) remittance advice
Answer: B
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

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5) According to generally accepted accounting principles, a sale is recognized when
A) cash is received from the customer.
B) inventory is removed from the warehouse.
C) inventory becomes the legal property of the customer.
D) a sales order is approved by sales, inventory control, and credit departments.
Answer: C
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

6) ________ is not a basic activity of the revenue cycle.

A) Sales order entry
B) Shipping
C) Receiving
D) Billing
Answer: C
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

7) When a customer places an order (on account) for a certain product, what should be done
before the order is checked for inventory availability?
A) The customer's available credit should be checked.
B) The sales order should be created and written to a file.
C) Shipping should be notified of an order in process.
D) A picking list should be generated for the warehouse.
Answer: A
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

8) How is credit approval generally handled for established customers with a documented
payment history?
A) A new credit application is requested.
B) General authorization by a sales clerk
C) Specific authorization by the credit manager
D) A formal credit check should be made for each sale.
Answer: B
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

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9) What is a typical procedure for processing sales orders from new customers or customers
making a purchase that causes their credit limit to be exceeded?
A) General authorization to approve the order is given to sales clerks.
B) Specific authorization must be granted by the credit manager.
C) The sale should be rejected.
D) The sales clerk should order a report from a credit bureau before approving the order.
Answer: B
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

10) Checking the quantity of inventory available before accepting a sales order is a good practice
for all of the reasons except to
A) determine which items may need to be back ordered.
B) verify the accuracy of the perpetual inventory records.
C) inform the customer about availability and delivery times.
D) update inventory records to reduce the quantity available by the number of items ordered.
Answer: B
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

11) Special software packages called ________ can help an organization manage customer
service.
A) EDI systems
B) CRM systems
C) POS systems
D) VMI systems
Answer: B
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

12) The ________ is a legal contract that defines responsibility for goods that are in transit.
A) bill of lading
B) packing slip
C) back order
D) picking list
Answer: A
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

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13) Two documents usually accompany goods shipped to a customer. What are the two
documents?
A) a bill of lading and an invoice
B) a packing slip and a bill of lading
C) an invoice and a packing slip
D) an invoice and a sales order
Answer: B
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

14) The basic document created in the billing process is call a ________.
A) bill of lading
B) sales invoice
C) sales order
D) packing list
Answer: B
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

15) A company uses the method for tracking accounts receivable where customers pay according
to individual sales invoices. This describes the ________ method.
A) monthly statement
B) open-invoice
C) balance forward
D) cycle billing
Answer: B
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

16) A method for tracking accounts receivable that matches specific invoices and payments from
the customer is called a(n) ________ method.
A) specific identification
B) balance forward
C) cycle billing
D) open-invoice
Answer: D
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

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17) The document a customer returns with their payment and that identifies the source and the
amount of the payment is called a
A) remittance advice.
B) remittance list.
C) credit memorandum.
D) debit memorandum.
Answer: A
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

18) In the ________ method of tracking accounts receivable, customers pay according to the
amount showing on their monthly statement and payments are applied against the total account
balance.
A) specific identification
B) open-invoice
C) balance forward
D) remittance advice
Answer: C
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

19) When a customer pays off the balance on an invoice, the payment is credited to the
________ file.
A) customer master
B) sales transaction
C) cash receipts master
D) All of the above are correct.
Answer: A
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Reflective Thinking

20) A type of business document in which part of the original document is returned to the source
for further processing is called a ________ document.
A) feedback
B) returnable
C) closed-loop
D) turnaround
Answer: D
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

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21) A document typically encountered in the revenue cycle that is both an output document and a
source document is the
A) sales invoice.
B) customer purchase order.
C) sales order.
D) packing slip.
Answer: A
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

22) A(n) ________ system prepares and mails monthly statements to customers throughout the
entire month, instead of just at the end of the month.
A) continuous
B) open-invoice
C) cycle billing
D) balance forward
Answer: C
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

23) The activities involved in soliciting and processing customer orders within the revenue cycle
are known as the
A) sales order entry process.
B) shipping order process.
C) revenue process.
D) marketing process.
Answer: A
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

24) Laz Chance wears roller blades and headphones when he is at work at the Squishy Things
Toy Company. He is a product packer. The headphones give him computer-generated
instructions so he knows the location of each item and quantity that should be included in the
order. These instructions are the equivalent of a
A) picking ticket.
B) bill of lading.
C) packing slip.
D) sales order.
Answer: A
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

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25) The shipping department at Eka Toys follows policies that determine which carrier will
deliver orders according to the size, weight, and destination of the shipment. It maintains
standing agreements with shippers that specify legal responsibility for the shipment while it is in
transit. The terms of the shipping agreements are documented on
A) picking tickets.
B) packing slips.
C) bills of lading.
D) RFID tags.
Answer: C
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

26) The accounts receivable management method typically used by credit card companies is
A) balance forward.
B) postbilling.
C) monthly statement.
D) open-invoice.
Answer: A
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

27) Describe the basic revenue cycle activities.

Answer: The revenue cycle is a recurring set of business activities and related information
processing operations associated with providing goods and services to customers and collecting
cash in payment for those sales. The basic activities in the revenue cycle are: order entry —
soliciting and processing customer activities — filling customer orders and shipping
merchandise — invoicing customers and maintaining customer accounts collections — the
cashier handles remittances and deposits them in the bank; accounts receivable personnel credits
customer accounts for the payments received.
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

28) Define and describe benefits of a CRM system.

Answer: CRM stands for customer relationship management. Since customer service is so
important today, special CRM software packages have been created that support this vital
process. CRM systems help a company to organize detailed data about customers so that more
personalized service can be given to them. A CRM system may retain customer preferences and
customer transaction history, which can be used to suggest other products the customer may wish
to purchase. The system could also take a pro-active marketing approach in contacting customers
at certain re-order points. A well-implemented CRM system can help the business achieve the
goal of turning satisfied customers into loyal customers.
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

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29) How can Electronic Data Interchange (EDI) facilitate the billing and accounts receivable
process?
Answer: The basic document created in the billing process is the sales invoice. Many companies
still print paper invoices and send them to customers in the mail. Batch processing of invoices
may create cash flow problems because of the time it takes invoices to flow through the regular
mail system. Companies that use EDI can create quicker turnaround for payment, and save costs
by reducing paper handling and processing. Depending on the number of invoices processed per
year, these savings can be significant.
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

30) Describe typical credit approval procedures.

Answer: Most business-to-business sales are made on credit. Key to revenue cycle success is the
approval of credit sales before they are processed and goods shipped. A part of good control in
this area is to establish a credit limit for customers. With new customers, or when orders exceed
a customer's credit limit, or the customer has a past due balance, specific authorization for the
credit manager should specifically authorize and approve further credit. The system can also be
programmed to do a limit check for each order processed to maintain further control in this area.
Also, marketing personnel should not make credit decisions, as a potential conflict of interest is
possible.
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

31) Describe the two methods to manage accounts receivable.

Answer: Open invoice system — customers pay the invoice by returning a remittance advice
turnaround document and a check. Remittances are applied against specific open invoices. The
open-invoice method can be used to offer discounts for prompt payments since invoices are
individually tracked. However, such individual tracking adds complexity in maintaining
information. Balance-forward method — customers pay according to the amount shown on a
monthly statement and remittances are applied against the total outstanding balance; this method
is used by department stores typically where customers make a large number of smaller dollar
amount purchases.
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

32) Describe cycle billing and identify how an organization might benefit by using cycle billing.
Answer: Cycle billing is spreading out the customer base so that a portion of the billing is done
each day to a group of customers. Credit card and utility companies use it extensively because of
their large customer bases. The advantage of this method is that the billing load is dispersed and
the cash flow of the company is evened out dramatically.
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

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33) Discuss ways in which technology can be used to streamline cash collections.
Answer: Answers may include the following points: A lockbox system can reduce delays due to
processing and geographical distance between customer and company. Customers send
remittances to a nearby P.O. bDifficulty :ox; a local bank picks up remittances, deposits cash and
sends remittance advices and copies of all checks to the company. The main disadvantage is cost;
the banks charge a service fee up to 1% of the cash processed through the system. Information
technology can provide additional efficiencies in the use of lockboxes. An electronic lockbox
sends electronic notification of remittances to the company. This method enables the company to
begin applying remittances to customer accounts before the photocopies of the checks arrive. —
An EFT system eliminates paper checks and uses electronic payments between banks.
Integrating EFT and EDI, called the financial electronic data interchange, automates billing and
cash collections. — Procurement cards or credit cards can be used. These cards eliminate the
risks and costs associated with creating and maintaining accounts receivable, but cost between
2% to 4% of the gross sales price.
Objective: Learning Objective 1
Difficulty: Difficult
AACSB: Analytic

34) If a firm does not use an ERP, the best way to mitigate the risk of the destruction of master
data is to
A) implement backup and disaster recovery procedures.
B) use an ERP.
C) proper segregation of duties.
D) use of multiple master data files.
Answer: A
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

35) If a firm uses an ERP, the best way to mitigate the risk of the destruction of master data is to
A) frequently update the ERP system.
B) implement the ERP system in three separate instances.
C) periodically audit the ERP system.
D) integrate the ERP system with all IT functions.
Answer: B
Objective: Learning Objective 1
Difficulty: Difficult
AACSB: Analytic

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36) Identify a useful tool for monitoring accounts receivable.
A) ERP exception report
B) accounts receivable aging report
C) accounts receivable tolerance report
D) customer credit limit report
Answer: B
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

37) An accounts receivable aging report is useful for doing everything except
A) estimating bad debts.
B) estimating future sales.
C) projecting the timing of future cash flows.
D) deciding whether to increase a specific customer's credit limit.
Answer: B
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

38) It costs ________ times as much to acquire a new customer as it does to make a sale to an
existing customer.
A) two
B) five
C) eight
D) ten
Answer: B
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

39) Research suggests which of the following is key to improving total customer satisfaction?
A) price of product
B) speed of shipping
C) quality and nature of customer contact after the sale
D) quality and nature of customer contact before the sale
Answer: C
Objective: Learning Objective 1
Difficulty: Difficult
AACSB: Analytic

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40) A picking ticket is generated by the
A) shipping process.
B) sales order entry process.
C) packing process.
D) billing process.
Answer: B
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

41) A picking ticket is generated by the

A) shipping process.
B) sales order entry process.
C) packing process.
D) billing process.
Answer: B
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

42) The packing slip

A) lists the quantity, price, and description of each item included in the shipment.
B) lists the price and description of each item included in the shipment.
C) lists the quantity and description of each item included in the shipment.
D) lists the quantity and price of each item included in the shipment.
Answer: C
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

12.2 Discuss the key decisions that need to be made in the revenue cycle, and identify the
information needed to make those decisions.

1) Which of the decisions below is not ordinarily found as part of the revenue cycle?
A) What credit terms should be offered?
B) How often should accounts receivable be subjected to audit?
C) How can customer payments be processed to maximize cash flows?
D) What are the optimal prices for each product or service?
Answer: B
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic

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2) Key differences exist when an integrated Enterprise Resource Planning system (ERP) replaces
an existing AIS or legacy system. For example, ________ are more accurate and timely,
enabling sales order entry staff to provide customers more accurate information about delivery
dates.
A) inventory records
B) cash receipts
C) credit approval decisions
D) exception reports
Answer: A
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic

3) Which of the following is not a key decision that needs to be made in the revenue cycle?
A) How should merchandise be delivered to customers?
B) Should credit be extended to customers?
C) How can customer payments be processed to maximize cash flow?
D) Which vendor should inventory be purchased from?
Answer: D
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytic

4) Regularly reviewing an accounts receivable aging report can help management do what?
A) spot firms who are falling behind in their payments
B) identify customers who have not purchased anything lately
C) improve the speed which customers make payments
D) determine whether the firm's pricing policy is effective
Answer: A
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytic

5) Regularly reviewing an accounts receivable aging report can help management do what?
A) identify customers who have not purchased anything lately
B) determine whether changes are needed in the firm's credit policies
C) improve the speed which customers make payments
D) determine whether the firm's pricing policy is effective
Answer: B
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytic

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6) By using an ERP to merge the billing, sales, and marketing functions, the firm may be able to
A) bill the customer right after the sale occurs.
B) market products and services on bills sent to customers.
C) use customer's past purchase history to send information about related products and services
the customer may be interested in.
D) eliminate the need for a firm to have a billing, sales, and marketing department.
Answer: C
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytic

7) Suppose management wanted to increase the speed of processing customer payments. One
way to speed up payment transaction processing is to
A) use a FEDI.
B) use JEDI analysis software.
C) eliminate credit sales.
D) extend the amount of credit offered to customers.
Answer: A
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytic

8) True or False: Shipping efficiency can often be improved by replacing RFID tags with bar
codes.
Answer: FALSE
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic

12.3 Identify major threats in the revenue cycle, and evaluate the adequacy of various control
procedures for dealing with those threats.

1) Before a shipping notice is prepared during the revenue cycle, shipping department personnel
should match the inventory received from the warehouse to the
A) sales order.
B) picking tickets.
C) picking ticket and sales order.
D) sales order and bill of lading.
Answer: C
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

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2) Which is the best control to prevent invoicing customers for more than the actual quantity
shipped?
A) Use the information from the sales order to prepare the sales invoice.
B) Use the information from the packing slip to prepare the sales invoice.
C) Use the information from the bill of lading to prepare the sales invoice.
D) Use the information from the picking ticket to prepare the sales invoice.
Answer: B
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Reflective Thinking

3) The cashier deposits checks for Benedek Incorporated and also prepares payments to vendors.
Of the following, who is best able to reconcile the bank statement to Benedek's records on a
regular basis?
A) cashier
B) internal audit department
C) treasurer
D) external auditor
Answer: B
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

4) A monthly statement sent to customers serves a control purpose by

A) providing an opportunity for customers to verify the balance owed and activity on the
account.
B) triggering the process to record a customer payment.
C) summarizing invoices and amounts due for customers.
D) reminding customers of the balance due and due date.
Answer: A
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Reflective Thinking

5) Which of the following is not one of the controls when customer payments are commingled
with other mail?
A) preparing a remittance list as mail is opened
B) restrictively endorsing checks when received
C) requiring two mail room clerks to open mail together
D) requiring the controller to be personally present when mail is received and opened
Answer: D
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic

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6) Matching customer account numbers and inventory item numbers to the numbers in the
customer and inventory master files is an example of a
A) completeness test.
B) field check.
C) reasonableness test.
D) validity check.
Answer: D
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic

7) During the sales order entry process, a ________ is performed to compare the quantity
ordered with the standard amounts normally ordered.
A) completeness test
B) redundant data check
C) field check
D) reasonableness test
Answer: D
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic

8) During the sales order entry process, a ________ is performed to verify that each transaction
record contains all appropriate data items.
A) completeness test
B) redundant data check
C) field check
D) reasonableness test
Answer: A
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic

9) The best solution for maintaining accurate automated perpetual inventory system is to use
A) closed-loop verification when inventory is received from vendors and recorded.
B) point of sale devices integrated with inventory records.
C) periodic physical counts to reconcile with perpetual inventory records.
D) RFID tags.
Answer: D
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic

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10) Segregation of duties controls dictates that the collection and recording functions be kept
separate from each other. However, the accounts receivable department needs to know when
customers pay their invoices. What is a solution to this potential internal control problem?
A) Establish a lockbox arrangement with a bank.
B) Have customers send a remittance advice with their payment.
C) Have mailroom personnel prepare a remittance list which can be forwarded to accounts
receivable.
D) all of the above
Answer: D
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

11) The benefits of a lockbox arrangement with a bank are maximized when
A) the bank is located nearby to the company, so remittance advices can be delivered to the
company every day.
B) several banks around the country are used, in order to minimize the time payments spend in
the mail.
C) an arrangement is made with only one bank, so all remittance advices can be batched for
processing.
D) the bank deposits the payments and accesses the customer's information system to record the
payments.
Answer: B
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

12) An ________ is an arrangement where a bank receives customer payments and transmits
payment data to the organization.
A) e-commerce.
B) electronic funds transfer (EFT).
C) electronic lockbox.
D) electronic data interchange (EDI).
Answer: C
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

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13) Customers that send their payments electronically directly to the billing company's bank are
using
A) electronic funds transfer (EFT).
B) electronic data interchange (EDI).
C) procurement cards.
D) an electronic lockbox.
Answer: A
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

14) A way to incorporate the advantages of Electronic Data Interchange with the Electronic
Funds Transfer is
A) Financial Electronic Data Interchange.
B) e-commerce.
C) to use procurement cards.
D) an electronic lockbox.
Answer: A
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic

15) To ensure proper segregation of duties, only the ________ has authority to issue credit
memos.
A) accounts receivable supervisor
B) controller
C) credit manager
D) cashier
Answer: C
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

16) It has been discovered that credit sales have been made to customers with a poor credit
rating. If this continues, the company will face increasing uncollectible receivables and losses
due to bad debts. Separation of duties between ________ and ________ should help resolve the
problem.
A) shipping; billing duties
B) credit approval; marketing
C) billing; credit approval
D) marketing; accounts receivable
Answer: B
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

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17) Consider the following revenue cycle scenario: The company has been exposed to customer
dissatisfaction and the suggested control procedure to be implemented is to install and use bar-
code scanners. What is the threat?
A) The company may be shipping the wrong merchandise.
B) The company may be shipping the wrong quantities of merchandise.
C) The company may be shipping orders to the wrong address.
D) All of the above threats may apply to this scenario.
Answer: A
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Reflective Thinking

18) Separating the shipping and billing functions is designed to reduce the threat of
A) failure to bill customers.
B) billing customers for wrong quantities.
C) billing customers before merchandise has been shipped.
D) shipping the wrong merchandise.
Answer: A
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Reflective Thinking

19) All of the following edit checks for online editing of accounts receivable transactions would
probably be included except
A) validity checks on customer ID and invoice numbers.
B) check digit verification on the amount of the sale.
C) closed loop verification on the customer ID.
D) field checks on the values in dollar fields.
Answer: B
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Reflective Thinking

20) When a proper segregation of duties exists in the area of handling cash receipts, the
________, who reports to the ________, actually handles the cash and is not the same person
who posts cash receipts to customer accounts.
A) cashier; treasurer
B) cashier; controller
C) accountant; treasurer
D) accountant; controller
Answer: A
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

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21) In a revenue cycle with proper controls, the ________ who reports to the ________, is not
involved in any cash handling activities.
A) accounts receivable clerk; treasurer
B) accounts receivable clerk; controller
C) cashier; controller
D) cashier; treasurer
Answer: B
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

22) A serious exposure in the revenue cycle is loss of assets. What is the related threat and
applicable control procedure that address this exposure?
A) shipping errors; reconciliation of sales order with picking ticket and packing slip
B) theft of cash; segregation of duties and minimization of cash handling
C) making sales that turn out to be uncollectible; force sales people to make collection calls on
customers with past due balances
D) poor performance; preparation and review of performance reports
Answer: B
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

23) Which of the following duties could be performed by the same individual and not violate
segregation of duty controls?
A) handling cash and posting to customer accounts
B) issuing credit memos and maintaining customer accounts
C) handling cash and authorizing credit memos
D) handling cash receipts and mailing vendor payments
Answer: D
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Reflective Thinking

24) Internal file labels can be used to prevent the loss of data in the revenue cycle since they
A) record off-site storage locations.
B) keep competitors from accessing files.
C) organize the on-site physical storage site.
D) reduce the possibility of erasing important files.
Answer: D
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic

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25) The manager of Callow Youth Clothing was entering an order online from Sad Clown
Pajamas. He ordered 100 one-size fits all pajama bottoms, but when he ordered 1000 one-size
fits all pajama tops, the following error message popped up: "Did you mean to enter a quantity of
1000 for your order?" This message is the result of a
A) reasonableness test.
B) validity check.
C) limit check.
D) closed-loop verification.
Answer: A
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Reflective Thinking

26) The manager of Cezary Foods was purchasing inventory from Bogumil Distributors online.
The manager entered the items and quantities, completed the checkout and payment process, but
received the following error message before the order could be processed: "Please enter your
phone number." This message is likely the result of a
A) validity check.
B) completeness test.
C) closed-loop verification.
D) customer relationship management software application.
Answer: B
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Reflective Thinking

27) Bogumil Distributors is an Internet-based wholesaler. Customers enter their orders online.
The manager of Cezary Foods was entering an order when the following error message popped
up: "Your order exceeds your available credit. You will be contacted within 8 hours." This
message is the result of a
A) sign check.
B) validity check.
C) reasonableness test.
D) limit check.
Answer: D
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Reflective Thinking

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28) Because it is the most fungible of all assets, the management of cash has always been the
most difficult of all control issues. The most important of cash controls is
A) minimization of cash handling.
B) lockbox arrangements.
C) segregation of duties.
D) frequent reconciliation of records.
Answer: C
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

29) A clerk at a grocery store scanned the bar code for a low cost bag of frozen chicken wings
then gave his friend an expensive brand-name bag of frozen chicken wings.Which of the
following controls would best prevent the clerk from getting away with doing this?
A) physical inventory count
B) segregation of duties
C) limited physical access to bar codes
D) use of RFID tags
Answer: D
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

30) The accounts receivable clerk destroys all invoices for sales made to family and friends and
does not record the sales in the accounts receivable subsidiary ledgers. The family and friends
usually give the clerk cash as a "thank you." Which procedure will not prevent or detect this
fraud?
A) Send monthly statements to all customers with balances owed.
B) Reconcile sales invoices in the billing department to the total debits to accounts receivable
subsidiary ledgers.
C) Sequentially prenumber all invoices and prepare a sequence check at the end of each day.
D) Reconcile the accounts receivable control account to the accounts receivable subsidiary
ledger.
Answer: A
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Reflective Thinking

21
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31) Which of the following poses an internal control problem?
A) Physical inspection of inventory quantity and condition is outsourced to a firm that
specializes in this service.
B) Products are released from inventory after a warehouse employee and a shipping clerk both
sign the pick list.
C) Sales representatives have authority to increase customers' credit limits in $1,000 increments.
D) When customer payments are received in the mail, checks are sent to the cashier's office and
remittance advices are sent to the accounts receivable department.
Answer: C
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic

32) The least effective control for preventing an organization from processing fraudulent credit
memo is to
A) match each credit memo with a receiving report.
B) require approval for each credit memo by the credit manager.
C) reconcile total of credit memos to total debits posted to customers' subsidiary ledgers.
D) sequentially prenumber all credit memos and perform a sequence check at the end of each
day.
Answer: C
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Reflective Thinking

33) Explain how validity checks, completeness tests and reasonableness tests can be
implemented to ensure accuracy of customer orders.
Answer: Validity checks can be used to compare the customer and inventory information on the
customer order with the information in the customer and inventory master files. A completeness
test can ensure that all the necessary information is present on the customer order. A
reasonableness test can compare the quantity ordered with the customer's past order history for
that item.
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

22
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34) Failure to collect cash on credit sales is a threat in the revenue cycle. What controls can be
used to help neutralize this threat?
Answer: Both accounts receivable and cash flows should be monitored. Segregation of duty
controls should always be implemented and monitored for compliance. Also, a control used to
deal with accounts receivable (which directly impacts cash flow) is to use an accounts receivable
aging schedule. This schedule lists customer account balances by length of time outstanding and
provides information for estimating bad debts. It can also assist in evaluating credit policies and
specific customer credit limits. Also, a cash budget can be used to provide a more precise
estimate of cash inflows (cash collected from sales) and cash outflow (outstanding payables). An
organization can be alerted to a pending cash flow shortage, thus enabling it to secure short-term
financing at competitive rates to deal with the problem in a timely manner.
Objective: Learning Objective 3
Difficulty: Difficult
AACSB: Analytic

35) Describe four threats in the revenue cycle and identify appropriate controls for each threat.
Answer: Answers can include the following information:
Threat 1: Sales to customers with poor credit — Controls: Having an independent credit approval
function and maintaining good customer accounting can help to prevent problems.
Threat 2: Shipping errors — Controls: Reconciling shipping notices with picking tickets; bar-
code scanners; and data entry application controls will help to catch these errors.
Threat 3: Theft of inventory — Controls: Secure the location of inventory and document
transfers; release only with valid shipping orders; have good accountability for picking and
shipping; and finally, periodically reconcile records with a physical count.
Threat 4: Failure to bill customers — Controls: Separating shipping and billing and pre-
numbering of shipping documents helps along with reconciliation of all sales documents.
Threat 5: Billing errors — Controls: Reconciliation of picking tickets and bills of lading with
sales orders; data entry edit controls; and price lists may prevent billing errors.
Threat 6: Theft of cash — Controls: Segregation of duties is essential to prevent this serious
problem (the following duties should be separate: handling cash and posting to customer
accounts; handling cash and authorizing credit memos and adjustments; issuing credit memos
and maintaining customer accounts); use of lockboxes for receipts and EFT for disbursements;
mailing customer statements monthly; use cash registers in retail operations where cash
payments are received; deposit cash daily in the bank; and have the bank reconciliation function
performed by independent third parties.
Threat 7: Posting errors in updating accounts receivable — Controls: Use of editing and batch
totals is essential here.
Threat 8: Loss of data — Controls: Regular backups are essential with one copy stored off-site;
and logical and physical access controls to prevent leakage to competitors and irregularities.
Threat 9: Poor performance — Controls: Use sales and profitability analyses; accounts
receivable aging; and cash budgets to track operations.
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

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36) Discuss the general control issue of the loss of data, as it relates to the revenue cycle.
Answer: One of the two general objectives that pertain to all revenue cycle activities is the loss
of data. The primary threats related to the data availability objective are the loss of data and
access controls. It is imperative that accurate customer account and inventory records be
maintained for external and internal reporting purposes and for customer inquiries. Such records
must be protected from loss and damage by using backup files. One backup file should be kept
on-site, while a second should be kept off-site. Backup files of the most recent transactions
should also be maintained. Also, all disks and tapes should have both external and internal file
labels to reduce the possibility of accidental erasure of important files. Access controls are also
important as a general control. Unauthorized access to information may cause leaks of the
information to competitors and the risk of damage to sensitive and important data files.
Employees should have certain access restrictions to help prevent this threat from occurring.
Passwords and user IDs will help to limit access to files and the operations allowed to be
performed on files. For example, the sales staff should not be allowed write-access to customers'
credit limit and approval information. Individual terminals should also have access controls in
place. An example of this control would be to prevent someone at a shipping dock terminal from
entering a sales transaction order. Another control that should be put in place is to require
activity logs of any management approved transaction. Such a log should be maintained for audit
trail purposes.
Objective: Learning Objective 3
Difficulty: Difficult
AACSB: Analytic

37) Explain how to effectively segregate duties in the sales order activity.
Answer: Sales orders should be recorded by sales personnel. Credit decisions should be made by
the credit manager, not sales personnel. Also, sales orders authorize release of goods to shipping.
Warehouse and shipping should be separate from sales. Because a computer does recording and
authorization, it is important to ensure integrity of the programs and to perform edit checks on
any online entries.
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

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38) Discuss the revenue cycle threat of stockouts, carrying costs, and markdowns.
Answer: Stockouts, carrying costs, and markdowns are a threat in the sales order entry process.
The problem with stockouts is that when goods are not available to ship to customers, the
business risks losing the sale to a competitor that can provide the goods in a timely manner. The
opposite problem can also occur where excess inventory increases carrying costs, with the result
that markdowns may be necessary in order to sell the inventory. Two controls can be
implemented to cope with this threat. One control that can be put into place is to establish
accurate inventory control. An AIS with real-time online capabilities can be programmed to use
the perpetual inventory method. This will ensure that accurate records are maintained about the
quantity of inventory for sale. This will eliminate mistakes in placing orders for goods when a
sufficient inventory amount is on hand. Periodic physical counts of inventory will also verify the
perpetual amounts recorded by the AIS. Another important control in this situation is that of
accurate sales forecasting. Proper marketing efforts should be made in conjunction with regularly
reviewing sales forecasts for accuracy. Such forecasts should be revised as necessary. Sales force
marketing efforts should be commensurate with inventory levels as well.
Objective: Learning Objective 3
Difficulty: Difficult
AACSB: Analytic

25
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39) You have been hired by a catalog company to computerize its sales order entry process.
Approximately 70% of all orders are received over the telephone by a sales person. The other
30% of orders are received by a sales person through mail or fax. The catalog company wants the
phone orders processed real-time. The mail and fax orders will be processed in batches of 50
orders. The following attributes are collected for every sales order:
Customer number (if the order is from a new customer, a new number needs to be assigned)
Customer name
Address
Payment method (credit card for phone and fax orders and check for mailed orders)
Credit card number and expiration date
Items ordered and quantity of each
Unit price of each item ordered
Identify and describe at least ten specific control policies and procedures you will implement for
the sales order process. Be very specific describing the controls and number each new control
you suggest.
Answer:
1. Validity check on customer number
2. Authorization controls to set up new customer records
3. Check digit on customer number
4. Modules 11 on customer number
5. Closed-loop verification on customer number
6. Credit approval before accepting orders
7. Credit check and credit limit establishment for new customers, before accepting orders
8. Preformatting of customer state, zip code and phone number
9. On-line real-time authorization of credit card charges
10. Field check on credit card number and expiration date
11. Validity check on item number
12. Check digit on item number
13. Modules 11 on item number
14. Closed-loop verification on item number
15. Auto fill of unit price, based on item number
16. Field check on quantity ordered
17. Batch control totals for mail and fax orders
18. Encryption of credit card data
19. Completeness check
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

26
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40) Which of the following is not a threat to the revenue cycle sales order entry process?
A) incomplete orders
B) invalid orders
C) cash flow problems
D) uncollectible accounts
Answer: C
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

41) Which of the following is not a threat to the revenue cycle shipping process?
A) incomplete orders
B) inventory theft
C) picking the wrong items
D) wrong shipping address
Answer: A
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

42) Which of the following is not a threat to the revenue cycle billing process?
A) accounts receivable errors
B) loss of customers
C) failure to bill
D) inaccurate credit memos
Answer: B
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

43) Which of the following is not a general threat to the revenue cycle?
A) inaccurate master data
B) loss of customers
C) poor performance
D) unauthorized disclosure of sensitive information
Answer: B
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

27
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44) Which of the following is not a general threat to the revenue cycle?
A) inaccurate master data
B) loss of customers
C) poor performance
D) unauthorized disclosure of sensitive information
Answer: B
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

45) The legitimacy of customer orders is established by ________ in paper-based customer

orders.
A) the customer's signature
B) the customer's pin number
C) the customer's verbal authorization
D) prior experience with the customer
Answer: A
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

46) The legitimacy of customer orders is established by ________ in Internet-based customer

orders.
A) digital signatures
B) the customer's pin number
C) the customer's credit card number
D) prior experience with the customer
Answer: A
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

47) For strongest segregation of duties, the credit manager should never report to
A) the marketing department.
B) the accounting department.
C) the credit department.
D) the IT department.
Answer: A
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

28
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48) For strongest segregation of duties, a sales representative should never be allowed to
A) discuss the company's products.
B) negotiate the sales price.
C) approve a sale on credit.
D) send a customer a gift.
Answer: C
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

49) True or False: A credit sale should always be denied if it exceeds the customer's credit limit.
Answer: FALSE
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic

50) True or False: A credit sale should always be reviewed by a credit manager if it exceeds the
customer's credit limit.
Answer: TRUE
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic

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