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Revenue and Receipts cycle - Coggle Diagram
Revenue and Receipts cycle
Function
Receiving customer order(Order Deparment)
The order department:
-Receives / records orders from customers and initiate action to fill them. These may be received in a variety of ways (e.g. by phone, receipt of a customer’s written order, over the internet or over the counter).
-Check inventory levels (i.e. make sure that goods ordered are in stock).
-Create backorders (i.e. pending sales orders for goods out of stock and awaiting a delivery of these goods from the entity’s suppliers).
Document Records
-Customer order
-Internal sales order (ISO)
-Price list
Risks
– Orders may not be acted upon timeously or at all, resulting in a loss of sales and customer goodwill (operational control).
Order is accepted without there being sufficient inventory in stock to despatch to customer leading to delays in delivery and possible negative customer relations (operational control).
Product prices included on internal sales orders (ISOs) are not those agreed with customer and approved by management, leading to customers being under / over charged resulting in incorrect accounting records until such time as the customer complain and the error is corrected (accuracy).
2.Authorisation of sales orders
Responsibilities / Activities
The order department needs to ensure that sales are made only to approved customers and only to those who will be able to settle their debts when due.
The intention is to determine whether the customer is creditworthy and has not exceeded his / her credit limit. Manual and / or computerised authorisation of sales.
This is an important activity because companies do not want to make sales for which they will not be paid!
Documents;
-Credit application
-Debtors ledger
Risks
-Order may be accepted from a non-account holder / risky client leading to possible uncollectable debt in future and financial losses for the entity (validity).
-A sale will be made to a customer who will exceed his credit limit should the sale be accepted, which may give rise to irrecoverable debts (validity).
-Unauthorised picking slips are created, leading to goods being removed from the warehouse for despatch to a customer who takes custody of the goods but who will not be able to settle his / her debt (validity).
3.Picking goods from warehouse
Responsibilities / Activities
-To fill accepted orders promptly and accurately and to ensure that only authorised orders are acted upon.
-This involves the manual process of gathering together (picking) the goods from the store using a copy of the ISO (picking slip) and creating a delivery note.
Documents
-Picking Slip
-Delivery note
-Back order note
Risk
Valid ISO / picking slips may not be timeously acted upon / not acted upon at all resulting in negative customer relations (operational control).
Incorrect items and quantities (i.e. are not in terms of an approved ISO) may be picked leading to short / over deliveries and resultant negative customer relations (operational control).
customer not notified of "out of stock" items resulting in loss of the sale and customer goodwill
4.Dispatch and delivery of goods to customers
Responsibilities / Activities
This is the manual process of releasing the goods ordered to the correct customer.
Despatch personnel is responsible for:
-Packaging goods for dispatch.
– Safely storing goods until despatch. – Loading packaged goods onto delivery vehicles. – Performing security checks on goods leaving entity’s premises.
– Transporting goods.
– Delivery of goods to customers.
Risks
Theft may be facilitated by uncontrolled dispatch.
Quantities on authorised picking slips are not those transferred to the despatch bay which could result in possible misappropriation of inventory before it is despatched to the customer (operational control).
-Goods leaving premises are not recorded on a supporting document, leading to delivery without charge to the customer or to theft of the goods before reaching the customer (completeness).
– Customers may deny having received goods leading to a sale inappropriately recorded for a transaction that may not have occurred (validity).
Documents
-Delivery note
-List of deliveries
Invoicing
Responsibilities / Activities
-Involves notifying the customer of the amounts owed for goods purchased.
-On return of the signed delivery note from the customer it should be matched with the sales order and an invoice should be generated and issued to the customer.
Risk
Good dispatched may not be invoiced (completeness).
Deliveries are not invoiced timeously resulting in sales possibly being recorded in an incorrect accounting period (validity).
Invoices are created when no goods were in fact delivered to the customer leading to fictitious sales revenue if recorded in the sales journal (validity).
Invoices may be inaccurately prepared / misstated (prices, quantities, description, discounts, VAT) (accuracy).
Documents
_Sales invoice
-Price list
Recording of sales / debtors
Responsibilities / Activities
This involves creating the records of the sales that have been made, as well as who owes the company money (i.e. debtors). Invoices must be recorded accurately in the sales journal and entered accurately against the correct debtor in the debtor’s ledger. Total sales for the period must also be posted to the sales and debtors control accounts in the general ledger. Debtors reconciliations must be performed and monthly statements must be sent to debtors.
Risks
Invoices are omitted from sales journal (completeness).
Invoices are duplicated in the sales journal (validity).
Invoices are inaccurately entered in the sales journal (accuracy).
Invoice entered against incorrect debtor when posting to the debtors ledger account (accuracy).
Documents
-Invoice
-Sales journal
-Debtors ledger
-Genral ledger
Receiving and recording of payment from debtors
Responsibilities / Activities
Involves collecting payment from debtors, issuing a receipt for the payment received, banking it (i.e. cash receipts) and recording the receipts in the cash receipts journals and debtor’s ledger
Risks
Payments received may not be banked due to theft or carelessness (completeness).
Deposits may never be recorded / not recorded timeously (completeness).
Recorded payments may be:
-Inaccurate (accuracy).
-Overstated (fictitious receipts) (validity).
-Credited to the wrong debtor (accuracy).
Documents
Recording
-Bank deposit slip
-Cash receipts Journal(CRJ)
-Debtors ledger
-General ledger
Receipts mail room/cashier
-Remittance register
-Customer remittance advice
-Receipts
-Bank deposit slip
Credit management
Responsibilities / Activities
Evaluating creditworthiness
– These are the activities carried out to determine whether credit can be extended to a customer, and if so, what the terms and limits will be.
– Approving sales orders particularly those which are from debtors who have extended their credit terms / limits.
– Ongoing evaluation of customer’s creditworthiness. Collecting amounts owed
– These are the activities carried out to ensure amounts owed by debtors are paid when they are due in order to limit the loss from bad debts.
– Handing over uncollectable debts to attorneys.
– Recommending to management debtor balances that should be written off as uncollectable.
Documents
-Goods returned vouchers
-Credit note returns and allowances journal
-Debtors ledger
-General ledger
Risks
New customers are not creditworthy (i.e. who cannot pay their incurred debt in the future) are accepted and provided with credit (validity).
Existing customers fail to pay their debt, leading to uncollectable debt and financial losses for the company (validity).
Unauthorised changes to credit limits are made to debtor’s records / the debtors master file (validity).
Company fails to collect outstanding debt from defaulting debtors as collection procedures are not followed promptly (operational control).
Allowance for credit losses is misstated (accuracy).
Unauthorised bad debts that are in fact collectable, are written off from customer accounts (validity).
Debts that have become uncollectable are not written off (completeness).
The control objectives;
REVENUE CYCLE FOR CREDIT SALES:
Occurrence/Validity: All recorded credit sales are valid and supported by proper documentation.
Internal Control
1) All entries in the sales journal are supported by: a. an internal sales order, b. delivery note and c. invoice
Authorisation: All credit sales are authorised according to company policy.
Internal Control
1) Credit limits are determined for all credit clients after approving their creditworthiness.
2) No credit granted for non-creditworthy clients. 3) An internal sales order is made out on receipt of the client's order which is authorised by the credit manager.
4) The sales manager authorises credit sales on a daily basis – he signs the orders as proof of authorisation.
Completeness: All valid credit sales are recorded and nothing is left out.
Internal Control
1) An internal sales order is made out on receipt of the client's order which: a. is numerical; b. specifies the quantity ordered; c. contain the prices of goods per official price list;
2) After the sale has been authorised, a delivery note is prepared, which is: a. sequentially numbered; b. describes the quantity and the goods; c. signed by the client as acknowledgement of receipt of the goods a. recorded in a register for purposes of matching with the invoice at later stage 3) On receipt of a signed delivery note a numerical invoice is made out, and marked off in the register (mentioned).
4) All unmatched delivery notes (in the register) are frequently followed up
. 5) A numerical list of delivery notes and invoices is frequently produced and missing numbers are frequently followed up by a senior person
6) Gate control: guard counts goods and agrees it with the delivery note.
Accuracy: All credit sales are recorded on sales invoices at the correct quantity, price and are arithmetically correct
Internal Control
1) The quantities on the invoices are obtained from the delivery notes.
2) The price on the invoice is obtained from the official price list (master file).
3) Calculations are reviewed by an independent person
Recording: All credit sales invoices are recorded correctly
Internal Control
1) The sales journal is recorded from the sales invoices
2) Sales journal are posted to: a. the individual debtor's account in the debtors ledger; b. the total sales to the debtors control account and the sales account in the general ledger
3) The debtors control account is reconciled monthly with the debtor’s ledger.
Classification: All sales are correctly classified according to the nature thereof.
Internal Control
1) External and internal sales (intercompany) are classified as such, clearly distinguished by a code number, recorded on separate documentation and are separately recorded.
Cut off: All sales transactions are recorded in the correct reporting period
Internal Control
1) Invoices are made out from the delivery notes in respect of the date of delivery
THE RECEIPTS CYCLE:
Occurrence/Validity: All payments and discount on debtors' accounts are valid and are supported by appropriate documentation
Internal Control
1) Payments on debtors' accounts are supported by:
a. a sequentially numbered receipt;
b. cash receipt summary
c. deposit slip
Authorisation: All credit adjustments, e.g. credit notes, discounts, etc., are authorised according to company policy
Internal Control
1) Settlement discounts are granted according to fixed company policy
2) Management monitors discounts granted and goods returned
Completeness: All valid payments received from debtors are recorded.
Internal Control
1) Numeric receipts are issued in respect of all money received.
2) A daily cash receipt summary is prepared, balanced with cash and independently reviewed
3) A debtors' control account is kept and is regularly reconciled with the debtors' ledger.
Accuracy: All payments and discounts accounted for at the correct amount and discounts are accurately calculated.
Internal Control
1) Discounts granted are independently reviewed 2) Calculations are independently reviewed
Recording & Classification: All payments and discounts are correctly classified and recorded
Internal Control
1) Payments allocated to debtor's account and accounting period according to the payment advice. 2) Debtors' statements are sent out regularly and differences and errors on statements are immediately independently followed up
Cut off: Payments and discounts are recorded in the correct period to which it relates.
Internal Control
1) Payments and discounts are recorded on the date of receipt.
Weaknesses
There is no gate control.
No delivery notes are created
No Internal sales order (ISO) created