Accounting Assignment Analysing Revenue Cycle Of XYZ Ltd
Question
Task:
ACCOUNTING ASSIGNMENT DETAILS
The Revenue Cycle of XYZ Limited
After finishing your Master of Professional Accounting, you started your accounting consultancy in Brisbane, Queensland, Australia. You got a high distinction in HI5019 Strategic Information System and preferred to analyse the business processes, risks and internal controls. XYZ is one of your clients, and the CEO of XYZ is delighted with your services.1 The head of the accounting department is concerned about their revenue cycle. Therefore, he has recently contacted you to evaluate their revenue cycle. During the initial meeting, you elaborate him that conceptually, the revenue cycle is a recurring set of business activities and related data processing operations associated with providing goods and services to customers and collecting their cash payments. This definition reveals that the revenue cycle can be categorised into (1) sales order processing procedures (SOPP), and (2) cash receipts procedures (CRP). The SOPP and CRP of XYZ are elaborated below. Therefore, you requested the head of the accounting department to describe the SOPP and the CRP of XYZ Limited separately. This description is given below.
SOPP of XYZ Limited
The sales department receives the unstandardised sales order since customer orders are mailed, e-mailed or faxed to the sales department. The sales clerk first converts the unstandardised sales order into the standardised sales order. For this purpose, the sales representative requests the missing information, if any. When the order is received, the sales clerk checks the customer’s creditworthiness of the customer from his computer terminal. Three years ago, the sales clerk requested the accounting department to provide him with a list of customers whose account receivables are written off. The sales clerk is still using this information to check the creditworthiness of the customers. The sales clerk is using the same procedure to check the creditworthiness of the new customers.
The customer’s order is rejected if the customer’s credit is not verified. The sales order processing is started after the credit verification. In particular, the sales clerk records the approved standardised sales order in the sales order system through his computer terminal. A digital copy of the order is distributed to the warehouse and the shipping department terminals for further processing. The computer system automatically records the sale in the sales journal. The clerk reviews this entry and files the hard copy of the customer order in the sales department.
As indicated above, the receipt of the digital sales order prompts on the computer terminal of the warehouse manager. Further, the stock release and the shipping notice are also accessible at the warehouse terminal. For further processing, the warehouse manager prints out the sales order, the stock release, and the shipping notice. Using the stock release copy, a warehouse clerk picks the selected items from the shelves and sends them to the shipping department along with the stock release and the shipping notice. The warehouse manager then updates the inventory subsidiary ledger and the general ledger control account from his computer terminal.
The shipping clerk receives the physical stock, the stock release, and the shipping notice from the warehouse manager. The shipping clerk matches them to the corresponding digital sales order displayed on his terminal. If everything matches, he prints out three hard copies of the bill of lading and a packing slip. The shipping clerk sends two copies of the bill of lading and the packing slip, along with the goods, to the carrier. The stock release copy and the shipping notice are sent to the accounts receivable department. The third bill of lading copy is filed in the shipping department.
Account receivable clerk receives the stock release and shipping notice from the shipping clerk. Then, the accounts receivable clerk manually creates a hard-copy invoice, which is immediately mailed to the customer. After mailing the invoice, the clerk uses information on the stock release to update the accounts receivable subsidiary ledger and general ledger from his computer terminal. After the records are updated, the clerk files the stock release and shipping notice in the accounts receivable department. Sometimes, the account receivable clerk reconciles the quantities from the sales order and adjusts the account receivables.
CRP of XYZ Limited
The payments of customers come directly to the general mailroom along with other mail items. The mail clerk performs the following tasks:
- Sorts the mail,
- Opens the customer payment envelope,
- Removes the customer’s check and remittance advice, and
- Reconciles the two documents.
To control the checks and remittance advices, the clerk manually prepares two hard copies of a remittance list. He sends one copy to the accounts receivable department, along with the corresponding remittance advices. The other copy of the remittance list accompanies the checks to the cash receipts department. Once the checks and remittance list arrive in the cash receipts department, the treasurer performs the following tasks:
- Reconciles the documents,
- Endorses the checks,
- Manually prepares three hard copies of a deposit slip,
- Updates the cash receipts journal and the general ledger from his computer terminal,
- Sends the checks and two copies of the deposit slip to the bank, and
- Files the third copy of the deposit slip and the remittance in the department.
The accounts receivable clerk receives the remittance list and remittance advice from the mailroom and reconciles these two documents. He then updates the accounts receivable subsidiary ledger and the general ledger. Then, account receivable files the two documents in the department.
Required
Based on the above information, prepare a report for the CEO of XYZ Limited to evaluate their revenue cycle. In your report, you need to include the following items:
- The CEO asks you to start the report from five general risks involved in the revenue cycle of any business. Further, indicate the physical and IT control against each risk.
- Describe potential internal control weaknesses in the sales order processing procedures and cash receipts procedures of XYZ Limited.
- Discuss the potential risks associated with the internal control weaknesses identified in Section (2) above.
- Based on Section (3) above, what types are frauds are possible. Hint: we have discussed different types of frauds in the interactive tutorial and lectures. Your discussion should be based on these contents.
Answer
Executive Summary
The analysis of the revenue cycle of XYZ Limited is performed in this accounting assignment. There are internal control weaknesses around the customer credit verification, manual invoicing, double verification, and payments handling procedure identified. These may lead to the numerous risks and frauds around compliance & regulatory risks, information security & privacy violation, and the frauds associated with the payment handling and management.
Introduction
The revenue cycle of an organization is of significant importance and it can be categorized in to two parts viz. Sales Order Processing Procedures (SOPP) and Cash receipts Procedures (CRP). The report is prepared for XYZ Limited and the revenue cycle of the organization is analysed. There are several risks determined in the current revenue cycle with the internal control weaknesses in the SOPP and CRP. The potential risks and the possible frauds are covered thereafter.
It is essential that the revenue cycles and the overall accounting procedures of the business firm are streamlined to ensure effective performance.
Risks in the Revenue Cycle
There are some of the generic risks identified for the revenue cycle of the business organization. One of the significant risks can be the non-accuracy of the sales contracts with the clients. The sales order may be accepted without the due knowledge of the management or without adhering with the applicable regulations. The risks can be mitigated and controlled with an automated sales order verification system. All the sales orders shall be tracked in the process with the automated updates issued in the system(Zhao, 2017).
There is charge capture risk that may arise that is associated with the documentation, posting, and reconciliation of the charges. There can be risk of inaccurate revenues leading to the regulatory exposure. The documented procedure to enter and reconcile all the chargeable processes along with an automated system to keep a track shall be used to mitigate the risk(Braun, 2019).
There are automated tools that the organizations are using to automate their respective revenue cycles. However, the lack of knowledge and understanding of the technology may result in the risk of incorrect or missed charges. The risk can be mitigated by providing effective trainings to the resources so that they can effectively use the IT tools.
There is old or insufficient information used to validate the customer details and authenticity. This results in the increased chances of errors. The risk can be controlled and mitigated with the automated verification process with the inclusion of the defined set of documents for identity verification and management(Capocchi, 2019).
There are risks that may be associated with the billing process in the revenue cycle of the organization. The claims filed by the customers may not meet the requirements resulting in the false claims or unwanted reworks. The risks around increased number of denials or lost reimbursements may emerge. The mitigation and control of the risk is possible through continuous monitoring and analysis of failed edits.
Internal Control Weaknesses
The SOPP and CRP of XYZ Limited are analysed. In the analysis, there are a number of internal control weaknesses and issues identified.
There are weaknesses and issues identified with the process to verify the customer’s creditworthiness. The responsibility of checking and verifying the customers’ creditworthiness is with the sales clerk. The sales clerk requested the customer information three years back and still the same information is being used for the purpose of verification. Also, there have not been any changes in the procedure followed to verify the creditworthiness. The order is straightaway rejected if the credit is not verified. It is possible that the customer may have updated the information and the verification process is based on the old procedure only(Hepp, 2018). In such cases, the verification process will be faulty and the legitimate customer orders will also be rejected on the basis of the customer credit. The credit verification process is, therefore, slow and faulty.
Another major weakness that is identified in the SOPP is the involvement of the manual invoice which is prone to errors and issues. The shipping clerk provides the shipping notice along with the stock release to the Account receivable. The A/R clerk then creates manual invoice. The manual invoice is prone to errors. It is possible that there are incorrect entries made in the invoice. The typing errors or the inaccurate insertion of the information may occur. The invoice is directly mailed to the customer and it is possible that the incorrect invoice is shared with the customer.
One of the most critical aspects in the revenue cycle is the handling and management of the payments. Currently, the CRP followed in the organization includes the payments of the customers coming directly to the general mailroom. These come with the rest of the mail items. It is possible that the payment slips and documents get mixed up or may get misplaced with temporary or permanent loss of some information. It is essential that the payment documentation and process is separately managed so that any of the errors and issues can be avoided.
There is also double verification process identified in the CRP. The manual preparation of the remittance list (hard copy) is carried out by the clerk and one of these copies is shared with the A/R department. However, the treasurer sends the deposit slip to the department and therefore, the sharing of such information by the clerk is not essential. The double verification may lead to unwanted gaps. Also, the clerk prepares the list manually which is prone to numerous errors(Mkonya et al., 2018).
Potential Risks – Internal Control Weaknesses
There are numerous risks identified with the internal control weaknesses that are determined in the section above.
There is risk of deteriorated customer satisfaction and trust with the organization. This risk is identified due to the internal control weaknesses determined with the customer creditworthiness verification process. There is outdated information used to verify the customer credit. The verification process is based on the information that was acquired three years ago. It is possible that there are considerable changes in the customer information during this timeframe. Due to the lack of the latest information available, it is possible that the incorrect rejections are made. The customers with the valid customer credit will lose their trust in the organization. The satisfaction level of the customers will also come down due to such false and incorrect rejections(Mundstock, 2016).
There is also additional risk associated with the use of old and outdated information. The unworthy customers may get through as the information used was gathered three years back. As per the latest information, the customers may not qualify to get through. However, the information used is outdated so the verification process can be faulty.
There is risk of incorrect information and data integrity issues. The invoice shared with the customer is manually prepared. There are risks of incorrect entries in the manual entries. It is also possible that the information stored with the A/R department is different from the one being shared with the customer. Such gaps can cause significant issues with the integrity of the data sets. The data integrity issues can also be worrisome from the aspect of compliance. There are certain legal and regulatory norms defined that must always be adhered with. However, with the issues around data integrity, the violation of the legislative and regulatory norms may be witnessed(Seal et al., 2019).
There is risk of incorrect and missed payments also involved. Also, the risk of inadequate payments monitoring may also emerge. This is because the payments documents are handled with the rest of the mail items. The risks around loss or mixing of the documents are possible. This can result in the concerns around missed payments or the inability to keep a track of the payments made.
The integrity issues and risks can also be witnessed due to some of the double verification processes that are involved. The information stored and shared with one entity may vary from the other. This will lead to the generation of some of the massive gaps. It will not be possible to fill up these gaps and the deterioration of the overall organization reputation will be possible(Wright, 2016). The repeated reworks will also bring the risks to the organization costs and budget.
Possible Frauds
There are numerous frauds that are possible due to the existing internal control weaknesses and the possible risks associated with the revenue cycles implemented in the organization. These frauds are primarily associated with the information security and privacy violations, verification and payment frauds. The SOPP and CRP followed at the organization are marked with significant loopholes that must be improved upon.The duty of checking and verifying the customers' creditworthiness is with the sales clerk. The sales clerk mentioned the customer data three years back and still a similar data is being utilized with the end goal of verification. The order is immediately rejected if the credit isn't checked. It is conceivable that the customer may have refreshed the data and the verification process depends on the old system only(Veysey, 2020). The verification process will be faulty and the real customer orders will likewise be rejected based on the customer credit. It is conceivable that there are significant changes in the customer data during this time span. Because of the absence of the most recent data accessible, it is conceivable that the inaccurate dismissals are made. The customers with the valid customer credit will lose their trust in the association. There are also incorrect verifications that can be made. This may lead to the frauds of the overall billing and revenue system as the fraudulent entities may pass the verification stages based on the outdated information.
The manual invoice is inclined to mistakes. It is conceivable that there are inaccurate entries made in the invoice. The composing blunders or the wrong addition of the data may happen. The invoice is straightforwardly mailed to the customer and it is conceivable that the wrong invoice is imparted to the customer. The data integrity and the data loss are some of the major concerns(Yashina, 2020). The invoice imparted to the customer is manually arranged. There are risks of wrong entries in the manual entries. It is likewise conceivable that the data put away with the A/R division is unique in relation to the one being imparted to the customer. Such gaps can cause critical issues with the integrity of the data sets. It is also possible that the resource responsible for creating the manual invoices also carries out malicious practices. The intentional errors may be made and the incorrect information may be shared with the customers(Brunger, 2016). The customers may be overcharged and the difference may be kept by the insiders.
It is conceivable that the payment slips and reports get stirred up or may get lost with temporary or permanent loss of some data. It is basic that the payment documentation and process is independently overseen so any of the blunders and issues can be maintained a strategic distance from. There is risk of mistaken and missed payments likewise included. Likewise, the risk of lacking payments monitoring may likewise arise. This is on the grounds that the payments records are taken care of with the remainder of the mail items. The risks around loss or mixing of the archives are conceivable. This can bring about the worries around missed payments or the failure to monitor the payments made(Vinod, 2020).
There are frauds around unauthorized data capturing and the misuse of the customer information also possible. The insider threats and attacks may take place. The malevolent entities may also carry out capturing the customer payments, carry out modified claims & billing processes, and it may go undetected due to the system incompetence(Yeoman, 2020).
Conclusion
There are numerous weaknesses, risks, and the possible frauds identified with the existing SOPP and CRP followed at the XYZ Limited. There are improvements that the organization shall make on an immediate basis. These improvements shall include the installation of an automated accounting information system. The system will comprise of the automated codes and algorithms for managing all the functions of the revenue cycles. The system will also include the latest information. The updates and maintenance aspects are necessary. The updates will ensure that the vulnerabilities are effectively managed and resolved. The training mechanisms shall be incorporated as well. This will assist in effective utilization of the technology.
References
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