Audit of the Revenue Cycle

CAS 265 – Communicating deficiencies in internal control to those charged with governance and management
CAS 300 – Planning an audit of financial statements
CAS 315 – Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment
CAS 320 - Materiality in Planning and Performing an Audit
CAS 330 - The Auditor’s Response to Assessed Risk
CAS 500 – Audit Evidence
CAS 530 – Audit Sampling

Revenue Cycle 1
 Risk Assessment
Must understand the entities method of generating revenues
in order to assess the business risk and risk of misstatement.

Thus:

Also:

Revenue Cycle 2
 Typical Transactions in the Sales and
Collection Cycle
Five major classes of Transactions:
• Sales

• Cash receipts – collecting and depositing

• Sales returns and allowances

– Technically two distinct transactions

• The write-off of uncollectible accounts

• Bad-debt expense

Revenue Cycle 3
 Typical Activities
See the following slides
Receiving and processing customer orders.
Delivering goods and services to customers.
Billing customers and accounting for receivables.
Collecting and depositing cash.
Reconciling bank accounts.

Revenue Cycle 4
LO1
 Revenue and Collection Process

Start Here

Collections Customer
Orders

Revenue Cycle
Bill
Customers
Credit
Granting
Warehousing,
Shipping, and
Delivery
Revenue Cycle 5
LO1
 An Overview of Functions, Documents,
and Accounting Systems
Order Entry Department = Good control point
The starting point
Signed by the customer,
except for telephone or
Customer By phone, internet orders.
Purchase, or internet or
Contracts mail

Sales Order 1 Customer

2
Prepare Sales Order 3

Credit Department

Credit Granting
Credit Manager signs the
A sales order for credit
approval
Revenue Cycle 6
 Okra Development Corp. Copy

8924 Bailey Road Purchase Order 6-3378

Salem, OR 92117 Date: August 5, 201X
Ship By: September 12,
201X
Terms: 2/10, n/30
FOB Shipping Point
To: Ship to:
Faragut Sales, Inc. Okra Development Corp.
3812 Briar Drive 8924 Bailey Road,
Salem, OR 92115 Salem, OR 92117
Quantity Number Description Price Amount

10 Model 317 Roller Bearing for 48.00 480.00

Model 3118 Ripper

Purchase order number must appear

on all shipments and invoices Ordered By
Margaret Spangler

Revenue Cycle 7
 Sales Order 64412
Prenumbered Sales Order. Controlled
numerically
To:
Copy
Okra Development Corp.
8924 Bailey Road Faragut Sales, Inc.
Salem, OR 92117 Ship to Okra Development
8924 Bailey Road, OR

Ship by September 12, 20XX C.H.

Credit Approval___________
Terms: 2/10, n/30 Goods Counted ___________
M.K.
FOB Shipping Point Customer Order Number 6-3378

10 Model 317 Roller Bearing 480.00

Date shipped: 8/20/20XX Freight Bill #229-237441

Revenue Cycle 8
 Shipping involves the Warehouse , Shipping, & Delivery

Approved by Credit Manager.

Order
Entry

Approved
Sales Order Sales Order
Bill of Lading
Bill of Lading Billing and
A/R
Bill of Lading
Prepare Multi-Part
Bill of Lading
Bill of Lading
N

Customer
A legal document that the Always useful to have a
Common
carrier is required to have. numerical file. Kept in
Carrier Shipping. Dept.

Revenue Cycle 9
 BILL OF LADING Copy
Faragut Sales, Inc.
3812 Briar Drive
229-237441
Prenumbered Bill of Lading. Controlled
Salem, OR 92115 numerically
August 20, 201X

Shipp to: Okra Development Corp.

Destination: 8924 Bailey Road,Salem, OR 92117
Carrier: Yellow Express Car Initial: Car No.

Number of Description of Articles, Class or

Packages Special Marks, and Exceptions Weight Rate
5 Roller Bearings, 2 each 28 lbs. 3

Faragut Sales Shipper, Per Joe Chen Agent Yellow Express Per
Sue Jones
Revenue Cycle 10
 Sales Order & Bill of Lading goes to
Billing/Accounts Receivable Department

Pricing checked. A numerical file that shows

Account coding approval of the sale, proof of
checked. shipment, and billing. Good
for testing internal controls.
Shipping
Department
Sales Order
Sales Order
Bill of Lading
Authorized Bill of Lading
Price List
Invoice
Invoice
Invoice
Prepare Sales Invoice N
& Sales Summary Invoice
Summary
by invoice
number. Cost Department
for Perpetual
Inventory
Sales Summary
General
Customer
Accounting
Revenue Cycle 11
Faragut Sales, Inc. D8-9912
Copy
3812 Briar Drive, Salem, OR 92115
Prenumbered Sales Invoice. Controlled
Sales Invoice numerically

Sold Shipped to Freight Bill No.

Okra Development Corp. 8924 Bailey Road 229-237441
8924 Bailey Road Salem, OR 92117
Salem, OR 92117

FOB Shipping Point

Invoice Date Date Shipped Terms Your Order No.
August 25, 20XX August 25, 20XX 2/10, n/30 6-3378

Quantity We are pleased to serve you Price Amount

10 Model 317 48.00 480.00

Key controls. Initials are

evidence of control being
performed. In total or Pricing and Math J.D.
sample. Account Coding
S.A.L.
Revenue Cycle 12
Page 327 SALES JOURNAL

Date Sold to: Invoice No: Amount

August 25 Okra Development Corp. D8-9912 480.00.

Revenue Cycle 13
 • Cash Collection
• Receptionist/Mail Room Clerk

Deposits prepared by a
person separate from the
Customer Remittance Advice one who opens the mail.

Invoice Copy
Remittance Advice
Cheque
Invoice
Cheque

List

List
Prepare List of Cashier
Cash Received
(2 copies)
Two separate
listing going to
two different
Control Copy to places for later
General cross checking
Accounting

Revenue Cycle 14
 Notice the complete
details on the
Remittance Advice

Okra Development Corp. REMITTANCE ADVICE

Salem, OR

Invoice No. Date Voucher Gross Amount Discount Net Amount

D8-9912 8-25-XX 9-00018 480.00 9.60 470.40
Cheque No. Date Vendor No. Vendor Name Total Amount
867 9-04-XX 00327003 Faragut Sales, Inc. 470.40

If the remittance advice is not returned, the person opening

the mail should prepare one so that each cheque received is
represented by a remittance advice complete with all
pertinent details.
Revenue Cycle 15
 15642
Also called a pre-listing
September 5, 201X of cash receipts
Cash Receipts Listing
Fountain City Warehouse x,400.00
Adding Machine Tape
Charlotte Sawyers, Inc. x,295.00
x,120.00
Brown, Inc. 1,200.00
x,x98.32
Okra Development Corp. x,470.40
x,x23.66
Toil Incorporated x,490.00
x,842.33
Harreleson Hardware 1,872.80
x,988.11
Barnaby Sales, Inc. x,982.00
3,130.40
Hartfords x,x92.00
5,802.20
J.T.Lockett September 5, 201X
Preparer
Cash Summary
Cash Receipts Listing 5,802.20
All cash receipts should be Over-the-counter cash receipts 3,130.40
listed on the pre-listing from 8,932.60
the remittance advices.
Revenue Cycle 16
 • Cash must be deposited in the Bank
• Cashier
Once again, a separate
dept.
Remittance Advice
Mail Clerk List of Receipts
Remittance Advice
Invoice Copies
List of Receipts
Cheques
CR Summary
CR Summary

Cheques
A/R to update
Deposit Slip
Prepare Deposit A/R Sub-Ledger
Slip & Cash
Receipts Summary
General
Accounting

Distribution going to
separate depts. For
Bank reconciliation

All cash receipts should be

deposited daily Revenue Cycle 17
 First National Bank
Prepared by cashier,
Faragut Sales, Inc. separate from the
Deposit Slip receipt of cash by
Receptionist
September 5, 201X
Currency 3,130.40
Cheques 400.00
295.00
1,200.00
470.00
490.00
1,872.80
982.00
92.00

$8,932.60
Teller
5 P.L. Initialed by cashier

Revenue Cycle 18
Page 112 CASH RECEIPTS JOURNAL

Date Customer Name Cash Sales Account Receivable

Discount Credit

August 25 Okra Development Corp. 470.40 9.60 480.00

Revenue Cycle 19
 The Accounts Receivable Sub-Ledger must be updated
A/R Department

Bank

Duplicate Deposit
Cashier Slip
Notice that the posting to the
Remittance Advice accounts is separate from collection
List of Receipts of cash, and deposit in the bank.

Cash Receipts
Summary

Subsidiary
customer accounts Trial Balance
posted from
remittance advices. Trial Balance
Post to the Customer
Accounts & Prepare Trial
Balance D

Daily remittance list compared to

duplicate deposit slip received from bank
by person independent of either function. General Accounting for
comparison to the G/L
Revenue Cycle 20
 • The Role of General Accounting

Post to the general

A/R Dept. ledger using data Subsidiary customer
obtained from other accounts posted from
depts. remittance advices.

Sales
Summary

List of Receipts

CR Summary
Post to the General
Ledger
Mail Clerk

There should be a monthly reconciliation of Cashier

control account to customers' individual
accounts and bank statement reconciled
promptly.
Revenue Cycle 21
 Typical Documents and Records
• Sale is initiated with a

• What documents accompany the sale?

• Routine reports
– include a sales journal

– aged accounts receivable trial balance

– Anything else?

Revenue Cycle 22
The Accounts of the Sales and Collection Cycle
Gross
sales Cash in bank
Cash
Sales
Accounts receivable
Sales on
Account Beginning Cash receipts
balance Cash discounts
Sales returns taken
Sales on and allowances
account
Charge-off of
Ending uncollectible
balance accounts
Sales returns
Allowance for
and allowances
uncollectible accounts
Charge off of Beginning
uncollectible balance
accounts
Bad debts
Bad debts
Ending
balance

Revenue Cycle 23
 Methods of Recording Transactions

• Manual recording

• Recorded one transaction at a time

Revenue Cycle 24
Control Differences Between Manual and Online
Systems

Manual systems: Online systems:

• Transactions readily • Transactions recorded one
traced at a time

• Document sequencing is
important

Revenue Cycle 25
Control Differences For Error Detection and Correction

Manual systems: Online systems:

• An erroneous transaction • Focus is on preventing
errors

• Input edit check for valid

• Error follow-up should be customer data and
done in a timely manner reasonableness

Revenue Cycle 26
Manual and Online Systems: Segregation of Duties

Manual systems: Online systems:

• Separate • In decentralized systems

• Use passwords to separate

• Reconciliation and error
follow-up

Revenue Cycle 27
 Risk Assessment and the Sales Cycle
Why do risk assessment?

Risk Type Impact upon Sales and Collection Cycle

Client business risk Increased client business risk could lead to greater risks of misstatement of
sales.
Audit risk As audit risk decreases, the level of assurance required increases, and the
extent of testing required increases.
Inherent risk - overall As inherent risk increases, the extent of testing required increases; inherent
risks associated with the handling of cash directly affect certain audit
assertions in sales (e.g. completeness).
Risk of material Management biases due to bonus incentives or stated earnings forecasts
misstatement - overall could increase the extent of testing.
Risk of fraud - overall Poor fraud risk management could result in increased risk of fraud, with a
need to increase the extent of testing.
Identify significant risks Revenue recognition is considered a significant risk unless the auditor has
evidence to the contrary; this means that controls over revenue recognition
need to be assessed and increased testing is required of assertions that
affect revenue recognition.

Remember that as risk increases

Revenue Cycle 28
 Effect of General Controls
• General controls

– Are pervasive and affect multiple transaction cycles

– Typical examples of general controls

Revenue Cycle 29
• If general controls are good,
– the auditor may be able to rely upon them

• If general controls are poor

Revenue Cycle 30
Methodology for Designing Tests of Controls for
Sales
Understand general controls -
sales

Understand internal control

and evaluate design
effectiveness - sales

By assertion:

Assess planned control risk;

identify and assess risks of
material misstatement - sales

Evaluate
cost-benefit
of testing
controls

Design tests of Audit procedures

controls for sales to Sample size
meet transaction-
related audit Items to select
objectives Timing

Revenue Cycle 31
 Documentation of Internal Controls
• Internal controls need to be documented

• The auditor focuses on

• What type of controls can these be?

Revenue Cycle 32
 Key Controls for Sales
• Segregation of Duties
– requires that different individuals be assigned responsibility for different elements of related activities,
particularly those involving authorization, custody, or recordkeeping.

• Authorization
– Proper authorization of transactions and activities helps ensure that all company activities adhere to
established guide lines unless responsible managers authorize another course of action.

• Documents and Records

– Adequate documents and records provide evidence that financial statements are accurate.

Revenue Cycle 33
• Internal verification

• Prenumbered documents

• Monthly statements

• Periodic reconciliation

Revenue Cycle 34
• Application Controls
– These are computer internal controls
– Edit checks for key fields can be verified by classifying the transactions on the values for the field.

Revenue Cycle 35
 Tests of Internal Controls

• Once the key controls have been identified, the auditor can
decide

• Tests of internal controls will be devised for

Revenue Cycle 36
 Examples of Internal Control using the
Occurrence Assertion

• Manual Control

• Key control: credit is approved before shipment takes

place.
– The manual control?

• Possible test of control

Revenue Cycle 37
Automated Online
• Occurrence assertion

• Key control: Orders causing balances to exceed credit

limits are held in a separate transaction file

• Possible test of control:

Revenue Cycle 38
Interdependent
• Occurrence Assertion

• Key control: Orders causing balances to exceed the credit

limit are printed on an exception report and must be
approved by a credit manager

• Possible test of control:

Revenue Cycle 39
Manual, Automated and Interdependent Controls

From the previous examples, it can be seen that:

– Manual controls are controls performed entirely by people

– Automated controls (batch or online) are performed only by

computerized systems

– Interdependent controls rely upon computer processes

(automation) but a person must also be involved to fully perform
the control

Revenue Cycle 40
Direction of Testing

Tracing

Vouching

Revenue Cycle 41
• Tracing
– Goes from the start of the transaction to the posting

– Is this a test for overstatement or understatement of sales?

• Vouching
– Goes from the general ledger or sales journal back to the original
document

Revenue Cycle 42
 Typical Concerns for Tests of Sales

1. Recorded sales occurred

– Occurrence –

– Auditor is concerned with following possible misstatements

• Recorded sale for which there was no shipment

• Sale recorded more than once

• Shipment made to non-existent customer

Revenue Cycle 43
2. Existing sales transactions are recorded
– Completeness assertion

– Want to test for unbilled shipments

– Are shipping documents complete?

3. Recorded Sales are accurately recorded

– Measurement assertion

Revenue Cycle 44
4. Recorded sales are properly classified
• Ensure correct entry into the general ledger

5. Sales transactions are properly updated in the master file

and correctly summarized
• Accuracy of the master file is essential

6. Sales are recorded on the correct dates

• Sales must be billed as soon as shipment takes place

• Remember all the tests can be dome with the same sample
of sales invoices and shipping documents

Revenue Cycle 45
 Typical Controls and Tests for Cash Receipts
Transaction-Related Audit Objective Key Internal Control General Tests of Controls Quantitative/Dual-Purpose Test of Controls

Recorded cash receipts are for funds Separation of duties between handling Observe separation of duties. Review the cash receipt journal, general ledger,
actually received by the company cash and record keeping or data entry and accounts receivable master file or trial
(occurrence) balance for large and unusual amounts.
Independent reconciliation or review of Observe independent reconciliation of Trace from cash receipts listing to duplicate
bank accounts. bank account. deposit slip and bank statements
Cash received is recorded in the cash Separation of duties between handling Discussion with personnel and Trace from remittances or prelisting to
receipts journal (completeness). cash and record keeping. observation. duplicate bank deposit slip and cash receipts
Use of remittance advices or a prelisting As above. journal.
of cash. Review reconciliation reports of credit card or
Immediate endorsement of incoming Observe immediate endorsement of electronic funds transfer receipts.
cheques. incoming cheques.
Internal verification of the recording of Examine indication of internal
cash receipts. verification.
Regular monthly statements to Observe whether monthly statements
customers. are sent to customers.

Cash receipts are deposited and Approval of cash discounts. Examine remittance advices for proper Examine remittance advices and sales invoices
recorded at the amount received approval. to determine whether discounts allowed are
(accuracy). Regular reconciliation of bank accounts. Review monthly bank reconciliations. consistent with company policy.
Comparison of batch totals with Examine file of batch totals for initials of
duplicate deposit slips and computer data control clerk; compare totals with
summary reports. summary reports.

Cash receipts are properly classified Use of adequate chart of accounts or Review chart of accounts and computer- Examine documents supporting cash receipts
(classification). automatic posting to specified accounts. assigned posting accounts. for proper classification.

Cash receipts are properly included in Regular monthly statements to Observe whether statements are mailed. Foot journals, and trace postings to general
the customer master file and are customers. ledger and accounts receivable master file.
correctly summarized (posting and Use of properly approved master file Examine master file change forms for
summarization). change forms. proper authorization.
Comparison of customer master file or Examine documentation verifying that
aged accounts receivable trial balance comparison was complete,
totals with general ledger balance.

Cash receipts are recorded on correct Procedure requiring recording of cash Observe unrecorded cash at any point in Compare dates of deposits with dates in the
dates (timing). receipts on a daily basis. time. cash receipts journal.
Revenue Cycle 46
 Frequency of Testing of Internal Controls

• Is an auditor allowed to use the results of prior testing in a

current audit?

• In this case, which type of controls must be tested

annually?

• Which type of controls could potentially be tested every

three years?

Revenue Cycle 47
 Testing of Interdependent Controls

• The interdependent control has two parts:

– A function performed
– A function performed
• It is only possible to rely upon the automated function if:

• Both parts of the control must be tested to enable

Revenue Cycle 48
What if Control Testing Yielded Many Errors?

• The first step is to determine whether the errors or

exceptions
– were due to a particular circumstance

– or restricted to a particular time period

Revenue Cycle 49
• If the errors are systemic

• If this alternative control achieves the same purpose and is

functioning correctly

• If no compensating control?

Revenue Cycle 50
 Material Error

• If there is no compensating control

• Want to quantify the extent of the error.

Revenue Cycle 51
 Results of Quantifying the Error

• If it turns out that the results of the weakness could result

in immaterial error

• If a material error could result

Revenue Cycle 52
Communicating Deficiencies in Internal Control
(CAS 265)

Communicate to those charged with governance and

management
Those deficiencies in internal control identified by the auditor

The auditor shall include a written communication of th

significant deficiencies

Revenue Cycle 53
 Performing the Audit Program

• The initial audit program is organized by audit assertion

• In performing for maximum efficiency

• The use of automated working paper software facilitates

this process.

Revenue Cycle 54
 Computer-Assisted Audit Tests

• Where there are a large number of transactions

• E.g. In internal controls testing, the auditor could use

automated sampling routines

Revenue Cycle 55
 Suitability of Test Data

• Online systems
– Test data is useful

Revenue Cycle 56
 Suitability of Generalized Audit
Software
• Best suited for analytical review, tests of detail, or dual-
purpose tests, for example:

Revenue Cycle 57
Problem DC 10-2, Page 547
The following are auditor judgments and audit sampling results for six populations. Assume large population sizes.

1 2 3 4 5 6
TER (in percentage) 6 3 8 5 20 15
ARACR (in percentage) 5 5 10 5 10 10
Actual sample size 100 100 60 100 20 60
Actual number of exceptions in the 2 0 1 4 1 8
sample

REQUIRED
a.For each population, did the auditor select a smaller sample size than is indicated by using attribute sampling tables for determining
sample size? (Assume K=0 in sample size planning). Evaluate, selecting either a larger or smaller size than those determined in the tables.
b.Calculate Sample Deviation Rate (SDR) and Upper Error Limit (UEL) for each population.
c.For which of the six populations should the sample results be considered unacceptable? What options are available to the auditor?
d.Why is analysis of the exceptions necessary even when the populations are considered acceptable?
e.For the following terms, identify which is an audit decision, which is a non-statistical estimate made by the auditor, which is a sample
result, and which is a statistical conclusion about the population.
a. Estimated population deviation rate.
b. Tolerable deviation rate.
c. Acceptable risk of overreliance on internal control.
d. Actual sample size.
e. Actual number of deviations in the sample.
f. Sample deviation rate.
g. Achieved P or UEL

Revenue Cycle 58
 Confidence Factors for MUS Sample Size Design (ARIA in brackets)
Number of
Errors (K)
99% 97.5% 95% 90% 85% 80% 75%
(1%) (2.5%) (5%) (10%) (15%) (20%) (25%)

0 4.51 3.69 3.00 2.31 1.90 1.61 1.39

1 6.64 5.58 4.75 3.89 3.38 3.00 2.70

2 8.41 7.23 6.30 5.33 4.73 4.28 3.93

3 10.05 8.77 7.76 6.69 6.02 5.52 5.11

4 11.61 10.25 9.16 8.00 7.27 6.73 6.28

5 13.11 11.67 10.52 9.28 8.50 7.91 7.43

6 14.58 13.06 11.85 10.54 9.71 9.08 8.56

7 16.00 14.43 13.15 11.78 10.90 10.24 9.69

8 17.41 15.77 14.44 13.00 12.08 11.38 10.81

9 18.79 17.09 15.71 14.21 13.25 12.52 11.92

10 20.15 18.40 16.97 15.41 14.42 13.66 13.03

Revenue Cycle 59
 ACTUAL NUMBER OF DEVIATIONS FOUND
Sample size
0 1 2 3 4 5 6 7 8 9 10
5 PERCENT RISK OF OVER RELIANCE (RIA or Beta Risk)

20 14.0 21.7 28.3 34.4 40.2 45.6 50.8 55.9 60.7 65.4 69.9
25 11.3 17.7 23.2 28.2 33.0 37.6 42.0 46.3 50.4 54.4 58.4
30 9.6 14.9 19.6 23.9 28.0 31.9 35.8 39.4 43.0 46.6 50.0
35 8.3 12.9 17.0 20.7 24.3 27.8 31.1 34.4 37.5 40.6 43.7
40 7.3 11.4 15.0 18.3 21.5 24.6 27.5 30.4 33.3 36.0 38.8
45 6.5 10.2 13.4 16.4 19.2 22.0 24.7 27.3 29.8 32.4 34.8
50 5.9 9.2 12.1 14.8 17.4 19.9 22.4 24.7 27.1 29.4 31.6
55 5.4 8.4 11.1 13.5 15.9 18.2 20.5 22.6 24.8 26.9 28.9
60 4.9 7.7 10.2 12.5 14.7 16.8 18.8 20.8 22.8 24.8 26.7
65 4.6 7.1 9.4 11.5 13.6 15.5 17.5 19.3 21.2 23.0 24.7
70 4.2 6.6 8.8 10.8 12.7 14.5 16.3 18.0 19.7 21.4 23.1
75 4.0 6.2 8.2 10.1 11.8 13.6 15.2 16.9 18.5 20.1 21.6
80 3.7 5.8 7.7 9.5 11.1 12.7 14.3 15.9 17.4 18.9 20.3
90 3.3 5.2 6.9 8.4 9.9 11.4 12.8 14.2 15.5 16.9 18.2
100 3.0 4.7 6.2 7.6 9.0 10.3 11.5 12.8 14.0 15.2 16.4
125 2.4 3.8 5.0 6.1 7.2 8.3 9.3 10.3 11.3 12.3 13.2
150 2.0 3.2 4.2 5.1 6.0 6.9 7.8 8.6 9.5 10.3 11.1
200 1.5 2.4 3.2 3.9 4.6 5.2 5.9 6.5 7.2 7.8 8.4
300 1.0 1.6 2.1 2.6 3.1 3.5 4.0 4.4 4.8 5.2 5.6
400 0.8 1.2 1.6 2.0 2.3 2.7 3.0 3.3 3.6 3.9 4.3
500 0.6 1.0 1.3 1.6 1.9 2.1 2.4 2.7 2.9 3.2 3.4

Revenue Cycle 60
 ACTUAL NUMBER OF DEVIATIONS FOUND
Sample size
0 1 2 3 4 5 6 7 8 9 10
10 % Risk of Incorrect Acceptance (RIA or Beta Risk)
20 10.9 18.1 24.5 30.5 36.1 41.5 46.8 51.9 56.8 61.6 66.2
25 8.8 14.7 20.0 24.9 29.5 34.0 38.4 42.6 46.8 50.8 54.8
30 7.4 12.4 16.8 21.0 24.9 28.8 32.5 36.2 39.7 43.2 46.7
35 6.4 10.7 14.5 18.2 21.6 24.9 28.2 31.4 34.5 37.6 40.6
40 5.6 9.4 12.8 16.0 19.0 22.0 24.9 27.7 30.5 33.2 35.9
45 5.0 8.4 11.4 14.3 17.0 19.7 22.3 24.8 27.3 29.8 32.2
50 4.6 7.6 10.3 12.9 15.4 17.8 20.2 22.5 24.7 27.0 29.2
55 4.2 6.9 9.4 11.8 14.1 16.3 18.4 20.5 22.6 24.6 26.7
60 3.8 6.4 8.7 10.8 12.9 15.0 16.9 18.9 20.8 22.7 24.6
65 3.5 5.9 8.0 10.0 12.0 13.9 15.7 17.5 19.3 21.0 22.8
70 3.3 5.5 7.5 9.3 11.1 12.9 14.6 16.3 18.0 19.6 21.2
75 3.1 5.1 7.0 8.7 10.4 12.1 13.7 15.2 16.8 18.3 19.8
80 2.9 4.8 6.6 8.2 9.8 11.3 12.8 14.3 15.8 17.2 18.7
90 2.6 4.3 5.9 7.3 8.7 10.1 11.5 12.8 14.1 15.4 16.7
100 2.3 3.9 5.3 6.6 7.9 9.1 10.3 11.5 12.7 13.9 15.0
125 1.9 3.1 4.3 5.3 6.3 7.3 8.3 9.3 10.2 11.2 12.1
150 1.6 2.6 3.6 4.4 5.3 6.1 7.0 7.8 8.6 9.4 10.1
200 1.2 2.0 2.7 3.4 4.0 4.6 5.3 5.9 6.5 7.1 7.6
300 0.8 1.3 1.8 2.3 2.7 3.1 3.5 3.9 4.3 4.7 5.1
400 0.6 1.0 1.4 1.7 2.0 2.4 2.7 3.0 3.3 3.6 3.9
500 0.5 0.8 1.1 1.4 1.6 1.9 2.1 2.4 2.6 2.9 3.1

Revenue Cycle 61
 Problem DC 11-4, Page 612
Control Weakness: Shipping and Billing:
Ajax Inc. recently implemented a new accounting system to process the shipping, billing, and accounts receivable records
more efficiently. During the interim work of Ajax’s auditors an assistant completed the review of the accounting system and
the internal controls. The assistant determined the following information concerning the computer systems and the
processing and control of shipping notices and customer invoices.
The computer system documentation consists of the following items: program listings, error listings, logs, and database
dictionaries. The system and documentation are maintained by the IT administrator. To increase efficiency, batch totals, and
processing controls are not used in the system.
Ajax ships its product directly from two warehouses, which forward shipping invoices to general accounting. There, the
billing clerk enters the price of the item and accounts for the numerical sequence of the shipping notices. The billing clerk
also manually prepares daily adding machines tapes of the units shipped and the sales amounts. The computer processing
output consists of the following:
a)A three-copy invoice that is forwarded to the billing clerk
b)A daily sales register showing the aggregate total of units shipped and sales amounts that the billing clerk compares with
the adding machine tapes
The billing clerk mails two copies of each invoice to the customer and retains the third copy in an open invoice file that
serves as detailed accounts receivable record.
Required:
a.Prepare a list of weaknesses in internal control (manual and computer), and for ,each weakness make one or more
recommendations.
b.Suggest how Ajax’s computer processing over shipping and billing could be improved through the use of remote
terminals to enter shipping notices. Describe appropriate controls for such an online data entry system.

Revenue Cycle 62