The Revenue Cycle

Sales Order Subprocess

1st Subprocess: Receive Orders – Sales department

Customer orders > sales department captures details

Key Activities:

1. Receive purchase order (PO) lagay sa own SO

2. File copy in SO file
3. Send credit copy to the credit department

Controls:

Prenumbering of forms

Edit check for certain online forms (customer numbers etc.)

2nd subprocess: Credit Check – Finance department, credit section

Key Activities and forms (receive credit copy from sales):

1. Credit section performs a credit check on copy of SO sales order (new v old customers,
credit limit)
2. Approved SO sales order triggers continuation of process such as release of docs stock
release, packing slip, shipping notice, sales invoice – special purpose sales order
a. SO invoice  bill customer (pending)
b. Stock release  pick goods
c. PS, SN  ship goods

Controls

Prenumbering of forms

Edit check for certain online forms

3rd subprocess: Pick Goods – Warehouse

Key activities and forms:

1. Stock release (special from of SO) given to warehouse

2. Warehouse verifies SR stock release
3. Back order backorder record for insufficient inventory items, purchase to suppliers
before order can be fulfilled
 4. Adjust stock records (not accounting records), own verification

Controls

SOID (segregation of incompatible duties) (Cost keeping vs Record keeping in control dapat)

Input edits

4th subprocess: Ship Goods – Shipping

Key activities and forms

1. Upon receipt of goods from warehouse, shipping clerk reconciles stock release,
packing slip and shipping notice
2. Goods, packing slip, and bill of lading are prepared  carrier

Controls

Crucial – reconciliation of SR stock release with PS packing slip and Shipping notice

5th subprocess: Bill Customer – Billing accounting

Key activities and forms

1. A SO sales order (invoice copy) was given to billing after CR credit record check. This
was filed in the open file
2. Receipt of SN shipping notice is given by the shipping, billing this trigger recording to the
sales journal (bill customer function)
3. SO sales order (ledger copy) and stock release are forwarded (SO – AR, SR –
inventory)
4. Prepare at month end a Sales Journal Voucher to general ledger

Controls

SOID

6th subprocess: Update Inventory Sub Ledger – Accounting – Inventory Control

Key activities

1. Approve SR stock release is received from billing dept

2. Inventory control updates the subsidiary sub ledger
3. At end of month, Journal vouchers are forwarded to GL

Controls
SOID inv clerk has copy of sub ledger but not GL

6th subprocess: Update AR - Accounting - AR

Key Activities

1. Ledger SO sales order copy is forwarded to AR accounts receivable

2. AR uses this to update the Sub ledger
3. Already an entry in sales journal, Month end, AR forwards account summaries to GL for
recon

Controls

SOID

7th subprocess Update GL – Accounting – GL

1. SJV sales journal voucher from billing are forwarded to GL

2. Account summaries from AR are forwarded to GL
3. Journal vouchers from Inv control are forwarded to GL
4. GL post entries to GL accounts
5. Reconciles

Controls

Independent verification

Those maintaining sub ledger are not maintaining gen ledger

Those with sub ledger do not perform reconciliation

Sales Return Subprocess

-avenue for theft and asset misappropriation

Process Department Procedures

1. Prepare return slip Receiving Check goods and prepare return slip
-in charge of anything
inbound
2. Prepare credit Sales Upon receipt of RS return slip, salesclerk
memo Informed of return slip prepares CM credit memo
3. Approve CM – Credit Credit manager approves CM credit memo
triggers
authorization of
recording
4. Update sales journal Billing Upon receipt of approved cm (form of
authorization, Billing prepares the SR
(sales return) entry, CM credit memo to
Inventory Control.

Period end – JV to GL
5. Inventory update Inventory control Clerk prepares entry to inventory
subsidiary ledger

Period end JV to GL for recording and

reconciliation
6. Update AR AR Clerk prepares entry to AR SL

Period end – JV to GL
7. Update gl General Ledger Clerk updates GL by referring to the JVs
and account summaries

Controls

SOID

Sub ledger should not maintain GL and perform reconciliation

Credit memo must be approved by credit department

Cash Receipts

1st subprocess: Open Mail and prepare Remittance List – Mail Room

Key Activities

1. Mailroom clerk opens mail and endorses checks and RAs (remittance advice) to another
clerk
2. Admin clerk reconciles the RAs and checks (to connect amount, details, inconsistencies)
3. Admin clerk prepares three remittance list (contains a list of checks received within the
day). Original goes with the Check; 2nd goes with RA to AR (to update SL). 3rd goes to
recon.

Controls

2 persons (mailroom clerk and admin clerk) open mail or supervision

Preparation of the remittance list (to account for all checks, completeness controls)

Accounting records (prenumbered accounting records, for completeness of transactions)

2nd subprocess: Record checks (Accounting), deposit checks (Finance)

Key Activities

1. Cash Receipts employee compares the prelist with checks for completeness, prelist
forwarded to accounting and then
2. Records the check in the Cash receipts journal (SOID)
3. CR employee prepares deposit slip and deposit checks in the bank
4. At the end of day, accounting summarizes deposits and prepares JV

Controls

Completeness check – prepare the prelist to check

SOID – recording is accounting, deposit is finance

3rd subprocess: Update AR – Accounting (AR)

Key Activities

1. AR uses the RA remittance advice (2nd copy) to update SLs sub ledger to remove
accounts because it is payment already
 2. AR sends summaries to the GL for comparison

Controls

SOID

4th subprocess: update GL – Accounting GL

Key activities

1. GL clerk updates the GL accounts upon receipt of the JVs (someone in accounting) and
the account summaries (one in charge of AR SLs) (periodic).

Controls

SOID

5th subprocess: Reconcile cash receipts and deposits

Controllers office – GL

- Able to find out if deposits are in transit

Key Activities

1. Periodically, a clerk reconciles the prelist, deposit slips and JVs to make sure amounts
are consistent

Controls

SOID

Independent verification – performed by someone not involved in transaction processing or

record keeping
The Expenditure Cycle

Objective – convert cash to physical resources (materials or human resources)

Credit basis – payable, there is a time lag. Cycle is subdivided into two:

Physical and Financial phase

 Physical – acquisition of resources

 Financial – cash disbursement

Conceptual and Physical Systems

 Conceptual – tasks and processes involved (DFDs)

 Physical – who performs, depts involved, technology used (manual or automation)

Risks and Internal controls

Risks: physical and manual, automated or computerized processes

Controls: physical and manual, IT controls, majority are application controls

Overviews of Purchase and Cash disbursement activities

- Conceptual system is technology – neutral: meaning can be applied to manual system

(human involvement) or can be automated
- Focus on what activities are done and not the how (tech involved, manually or
automatically, what dept)
- Docs may be physical and digital

Purchase System -DFD can be applied to manufacturing and merchandising

1st suprocess: Monitoring of inventory records

Activities:

1. Start: when inventories are depleted

2. PR (purchase requisition): generated by inventory control dept because they monitor
inventory levels, document that authorizes purchase. >> PR sent to the prepare PO
function (purchasing dept) >> PR is internal docu
3. Valid vendor file contains vendor mailing info, file to see the approved and valid vendors.
Reference file, transaction authorization file prevents fraud related to purchases such as
 conflict of interest, buying from relative, excessive prices, bribe, kickback, illegal gratuity,
billing scheme pass through fraud.
4. PRs purchase requisition can be combined to a single PO

2nd subprocess: prepare purchase order (PO) (purchasing dept) pr from inv control dept

1. PO document specifies items ordered from a vendor or supplier. Diff of pr and po: pr –
prepared by inv control dept, internal docu; PO: formal purchase docu, prepared by
purchasing dept sent to vendor, external docu
2. Multiple copies of PO purchase order: 4 copies, 1 st: vendor 2nd: AP function to let them
know that there are purchases made 3 rd receiving dept (blind copy) 4th copy retained by
purchase dept 
3. Open/closed PO file: last copy filed (open) PO file closed when goods are received.

3rd subprocess – receive goods (there is related entry to inventory)

Receiving clerk will count goods and match with blind copy

1. Blind copy of PO: contains no price or quantity; purpose is to force count the goods
received; because if quantity is already provided, clerk may not count goods
a. Control to prevent receiving goods that are missing damage or of incorrect count
2. Prepared by receiving clerk RR Receiving report: lists quantity and condition of the
inventories. Multiple copies: raw materials storeroom, purchasing to close open PO file,
AP function to know that goods are received, inv control dept update inv sl, retained by
rec dept form part of rr file
3. AP pending file: contains documents to set-up AP
4. RR file: file of all RRs prepared

4th subprocess – updating of inventory records

1. Standard cost system: uses predetermined standard value for inventory (need only info
for quantity to update sl)
2. Actual cos inv ledger: uses actual costs rather than standard costs for inventory (need
quantity and info about prices based on supplier invoice)
3. Inv acc summary: contains details of inventories prepared by inventory clerk; semt tp the
gl function

5th subprocess set-up AP

1. SI suppliers invoice: bill showing costs, taxes, freight, and other charger
 2. Scenario: lag time in recording liab, because goods are first receive dthen vendors will
bill us
3. Three-way match: control that reconciles PO (purch dept) , RR rec dept, SI suppliers
invoice; compare actual amount orders and approved to be prderd (PO), should match
actual quatity received (RR), with actual amount to be paid SI; if all match, AP is
approved for payment
4. AP packet: consists of AP supporting docus (PO RR SI), filed in open AP file
5. AP sub ledger: controls cash disb system
6. Journal voucher: sent to GL, contains journal entry

Vouchers payable system (alternative to AP system)

Main diff is number 1

1. Vouchers payable system – uses cash disb vouchers and voucher register (showing
evidence of payment, PO, RR, SI attached with CD vouchers)
2. CD cash disb vouchers: provide improved control over cash disb (can write prepared by
approved by, can be prenumbered so can be monitored); we can consolidate several
payments to one voucher prepare only 1 check, reducing num of checks written)
3. Voucher register: refkects the firms AP
4. Vouchers payable file: equivalent to the open AP file

6th subprocess post to GL

1. GL clerk receives JV )from AP dept and inventory account summary from inventory
control dept
2. Posts to the GL
3. Reconciles the inventory control account with the inventory account summary
4. Files the JV

Cash Disbursement System conceptual

Intro: system processes the payment of obligations and liabs recorded in the purchase system

Objective, timely and correct payments to valid vendors

Effects of early and late payment

 Early – opportunity costs

 Late – loss cash discount
1st subprocess – identify liabilities due (ap dept)

1. Ap clerk reviews ap file

2. Ap file by payment due
3. Ap clerk sends payment approval (ap packet) accounts payable packet to the cash disb
dept

2nd subprocess (main) – prepare cash disb (CD)

1. CD clerk receives and reviews the ap packet

2. Based on ap packet, clerk will prepare checks: Check register: record of CD aka CD
journal cash disbursement journal; register provides audit trail to provide authenticity
3. Additional approval by the dept manage or treasurer (Authorization)
4. 3 copies: 1 vendor, 2 ap packet, 3 filed in CD dept
5. Marks the docus paid ansd returns to the AP clerk
6. Prepares JV and sends to the GL function

3rd subprocess – update ap record

1. AP clerk updates the AP SL (remove liabs related to the payment processed by CD

clerk)
2. Closed AP file: record of all Aps paid
3. Prepares AP acc summary and sent to the GL function

4th subprocess – post to general ledger (gl)

1. General ledger clerk receives and reconciles the jv journal voucher and ap account
summary (independent verification)
2. Posts the journal entry to the gl
3. Files the JV in the approved JV file

Basic and Advanced Technologies in the Revenue Cycle

Characteristics of basic technology

 Nonnetworked personal comp – comps and terminals are independent

 Hardcopy docs – info folws are communicated via these
 Audit trail – physical files are critical fro evidence trail. Basic tech is just anchored on the
conceptual system
Hallmarks of an integrated sales order system

 Integration of comp operations/data processing

 Use of a sales order system
 Real time update of certain records from sales order system

Key processes in and integrated sales order system

 Use of int sales system

 Real time triggers in other dept
