Revenue and Cash Receipts: Common Frauds and Internal Controls

• Chapter 1 - Revenue Cycle
  • Learning Objectives
  • Introduction
  • Typical Revenue System Overview
    • Introduction
    • Sales Order
    • Picking Ticket/Shipping Documents
    • Billing Cycle
    • Other Sales Transactions
  • Internal Controls in the Typical Revenue System
    • Overview
    • Segregation of Duties
    • Sales Order Controls
    • Picking/Shipping Controls
    • Billing Controls
    • Contra-Revenue Sales Transactions – Control Issues
    • Identifying Risks and Cost/Benefit of Internal Controls
    • Control Matrix – Revenue Cycle
  • Summary
  • Questions
• Chapter 2 - Other Revenue Cycles
  • Learning Objectives
  • Introduction
  • Typical Retail Revenue Cycle
    • Selecting Goods
    • Payment for Goods
    • Internal Control Issues in a Model Retail Revenue System
    • Retail Revenue System with Self-Checkout
    • Control Matrix – Retail Revenue Cycle
  • Typical Manufacturing Revenue Cycle
    • Process
    • Internal Controls in a Typical Manufacturing Revenue Cycle
    • Control Matrix
  • Service Revenue Cycle
    • Service Revenue Cycle
    • Internal Controls in a Service Revenue Cycle
    • Control Matrix
  • Summary
  • Questions
• Chapter 3 - Accounts Receivable and Billing
  • Learning Objectives
  • Overview
  • Manufacturing Entity
    • Sales Discounts
    • Aging Schedules
    • Forms
    • Cash Flow
    • Statements
    • Flowchart
    • Controls
    • Control Matrix – Accounts Receivable
  • Retail Entity
    • Controls
  • Service Entity
    • Controls
  • Summary
  • Questions
• Chapter 4 - Cash Receipts
  • Learning Objectives
  • Overview
  • Typical Cash Receipts System
    • Controls
  • Variations of Mail Receipts
  • Controls over Cash Receipts Received at the Entity
  • Cash Receipts at a Nonprofit Entity – A Faith-Based Organization
    • Controls
    • What Could Go Wrong?
    • How Can the Internal Control Weaknesses Be Mitigated?
  • Summary
  • Questions
• Chapter 5 - Latest Developments

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Chapter 1 - Revenue Cycle

Learning Objectives

After completing this chapter, you will

• Understand a typical revenue system flow.
• Be able to note weaknesses in a revenue system.
• Be able to identify controls to mitigate identified risks and related cost/benefits.
• Understand how revenue systems work in a typical revenue cycle.
• Be able to use a control matrix to understand how one control can mitigate numerous risks.

Introduction

The revenue system that a company uses should have several financial objectives. These objectives include, but are not limited to, recording all revenue in the proper time period and at the proper amounts in accordance with generally accepted accounting principles. It is important to note that there are many different types of revenue systems in place today. Some revenue systems have the option for the entity to grant credit to customers. Others require the customer to prepay before goods are delivered or services are rendered. Some revenue systems in place at brick-and-mortar businesses produce a paper trail of evidence while others in place at electronic storefronts do not.

When to recognize and record revenue on the books in accordance with generally accepted accounting principles depends upon the type of business. Even then, a particular type of business might have various methods of recognizing revenue. For example, a manufacturing entity might not recognize revenue until goods are on the loading dock (FOB shipping point) or when they are received by the customer (FOB destination). A manufacturing company could recognize revenue when a specially made to order item is completed. Other businesses can recognize revenue using other accounting principles. For example, a construction company might use the percentage-of-completion method. Some entities, such as those involved in ecommerce, will recognize revenue when the order is placed if the time to fill the order is relatively short. While typical, this accounting is technically incorrect but is considered reasonable so long as the amount of revenue recognized in an incorrect period (due to cut-off) is clearly insignificant.

A revenue system should have integrity and possess proper internal controls to provide assurance that major system financial objectives are met – recording revenue in the proper time period at the proper amount and in accordance with generally accepted accounting principles. In order to illustrate the types of controls that should exist in revenue systems, a typical revenue system overview is presented as a basis for discussion of more specialized revenue systems.

Typical Revenue System Overview

Introduction

A typical revenue system is addressed below as a foundation for a discussion of other revenue systems that will be presented later in this course. This illustrated system assumes that credit will be granted to the customer and that revenue will be recognized based upon shipping terms.

Sales Order

A customer prepares a purchase order, which is evidence that the customer has authorized the purchase of goods or services. The purchase order is sent from the customer to the seller. The purchase information can be submitted in various ways, including through a website or by postal service, fax, or electronic data interchange (EDI). The customer’s purchase order is sent to the seller’s sales department. The sales department prepares a sequentially numbered sales order. A sales order includes information such as the customer’s shipping and billing address, goods ordered, pricing, shipping terms, and other relevant information.

If the sale is a credit sale, then it is important for the company’s credit department to review the customer’s credit report before filling the order. If the customer’s credit is not reviewed, then there is a risk to the company that the goods will be shipped and the customer’s account receivable will not be paid. Additionally, if the customer is a continuing customer, then the company should consider reviewing past-due amounts from this customer before extending the customer additional credit.

Established customers are often provided a limited credit line. The company should consider performing a calculation to assess if the established customer’s current accounts receivable balance when added to the current sales amount exceeds the customer’s credit limit. If the customer’s credit limit is exceeded, then a special authorization by an appropriate employee should be made before the request by the customer for additional credit (above the credit-limit amount) is approved.

The seller will also determine if the requisite number and type of inventory is in stock. If not, then the customer will be issued a backorder for the items that are not on hand and either need to be acquired (if the seller is a retail entity) or produced (if the seller is a manufacturing entity). The customer will also be issued a sequentially numbered sales order confirmation form which includes, among other items, the date the customer should expect to receive the goods. The sales department will periodically review long-outstanding sales orders and investigate why the order has not been filled in a timely manner.

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