Accounting Assignment: Evaluating Revenue Cycle of XYZ Ltd

Question

Task: 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 on accounting assignment for the CEO of XYZ Limited to evaluate their revenue cycle. In your report, you need to include the following items: 1. 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.

2. Describe potential internal control weaknesses in the sales order processing procedures and cash receipts procedures of XYZ Limited.

3. Discuss the potential risks associated with the internal control weaknesses identified in Section (2) above.

4. Based on Section (3) above, what types are frauds are possible

Answer

Introduction
The revenue cycle is a crucial thing for an organisation because it is the process through which the organisation manages its finances and procedures related to it. While managing the revenue cycle, several factors need to be maintained by the management, such as the procedure of the cycle, internal control weaknesses, potential risks related to the business. In the present report, these factors will be discussed based on the CRP (cash receipts procedures) and SOPP (sales order processing procedures) cycle of XYZ Ltd. The main aim of the report is to discuss risk related to the revenue cycle of XYZ and evaluate the types of frauds that are related to the CRP and SOPP of the business. The outcomes of the report will help the business to get an idea about existing internal control weaknesses in the CRP and SOPP, risks related to it and the frauds that may occur in those areas. The estimation of potential risks and frauds related to CRP and SOPP will help the business to develop adequate strategies to mitigate those risks.

General risks involved with revenue cycle
Risk related to revenue cycle
Revenue cycle of a business associated with the activities that are related to selling service or products of the business. The five general risks that are related to the revenue cycle of a business are:

1. Lack of guidance and clear authority over the procedures of cash receipts and sales order processing (Ayam, 2015).

2. Ineffective information system is another risk in the revenue cycle that may affect the overall processing of sales order as well as cash receipts(Strand, 2014).

3. Lack of logical and physical security may cause data leakage.

4. Inappropriate procedures and policies to follow the overall activities is another risk factor for the revenue cycle(Strand, 2014).

5. If the job responsibilities are not clearly defined and assigned to the employees, then there are high chances of mismanagement risk (Ayam, 2015). IT and physical control over the defined risks

1. The authorisation problem in the revenue cycle can be mitigated by authorising the transaction before the orders are placed. The updated record of customers may work to do adequate authorisation(Strand, 2014).

2. Risk related to ineffective information system can be addressed by considering the work systematically. Implementation of user-friendly software may help the entity to continue the work more easily (Ayam, 2015).

3. The logical security concern can be addressed by safeguarding the information with passwords.

4. Well written ethics policy may help out an entity to resolve the problem of inappropriate policies and procedures(Strand, 2014).

5. The responsibilities assigned to the employees needs to be clearly identified to them, and each employee needs to be allocated with limited task based on the experience and eligibility to do the tasks(Strand, 2014).

Internal control weakness in SOPP and CRP of XYZ
Internal control or IC is considered as the procedures and policies that are designed by an organisation to manage the revenue cycle activities. The internal controls are of three types' detective, preventative and corrective controls. The internal controls help the employees of an organisation to carry out the activities of revenue cycle based on the procedure designed for the activities(Swlearning.com, 2020). The internal control weakness is the weak procedures or existence of weakness in the procedures that may hamper the activities. In the present context, two revenue cycle of XYZ Ltd. is described, which reflects the internal control weakness in each cycle.

SOPP
The internal control weakness exists in the SOPP of the company are the following:

• The first internal control weakness existing in the SOPP cycle is the unstandardised process of receiving sales order. The order processing starts with receiving the customers' orders through fax or e-mail. After receiving the orders, the verification of customers' creditworthiness is justified based on a computer record, which is three years old. The clerk is following the same record to decide the creditworthiness of the customers. The accounts receivable may change from time to time based on the payment of the customers(Swlearning.com, 2020). Hence, following the old record to justify the creditworthiness of the customers is a weak IC process.
• An ineffective information system is also related to the SOPP of XYZ as the communication between the clerk, and the warehouse manager is maintained through an automated system. The order processing of the customers is verified by the warehouse manager after received the automated sales journal. The automated system may leak the information to other computers.
• Authorisation of the transaction is based on weak control as the order process of many customers are rejected without proper verification, whereas many customers' order is accepted based on old record (Ayam, 2015).

CRP
The internal control weaknesses associated with CRP of XYZ are:

• While receiving the customers’ payments, the receipts directly come to the mailroom, where other mail items are also gathered. Due to the gathering of other mails with the payment receipt mail, any mail may be missed out by the clerk, or it may be a mix-up with other mails(Swlearning.com, 2020). However, the process is followed by the clerk to extract the payment mails, but it is time-consuming.
• The clerk prepares the remittance list manually and makes two hard copies of the list. Maintaining a manual preparation of the remittance list takes more time, and there is a chance of losing the hard copies. Hence, marinating record in the computer is an adequate way (Ariesaand Berasategu, 2009).
• The deposit slip of the payment also prepared manually. The deposit slip is a crucial document, which is a proof of payment. Hence, the preparation of the slip manually may cause a risk of loss.

Potential risks related to the internal control weakness
The weakness in the internal control of revenue cycle also carries some risk factors that may hamper the business operations. The weaknesses of internal control of SOPP and CRP are identified in the above section. The present part of the study describes the risks associated with the identified internal control weaknesses.

SOPP

• The risk related to the first internal control weakness is not receiving the orders of customers on time. The order of customers is received through e-mail that contains other mails too. Hence, there is a high chance of missing out of any order from the notice of the clerk.
• The information system maintained to precede the verification of the sales order needs to be controlled with a safe system, in which the information of the orders cannot be accessed by other person or any outsider (Ariesaand Berasategu, 2009). A secure system can be developed with passcodes, in which only the persons accountable or the activities can access to the information.
• The old records which are followed by the clerk to ensure that the creditworthiness of people may cause problems by rejecting the order of potential customers or accepting the orders of customers who have weak creditworthiness. Following the record of customers, which are three years old needs to be changed periodically based on the current activities of the customers. The more the record will be updated, the more the company will be able to take decision based on recent information.

CRP
The risks associated with the cash receipt procedure of the company are:

• The payment receipts directly came to the mailroom, where other mails are also collected. However, there is an option to extract the payment mails from other mails, but it takes time. If any payment mail is left out from the notice of the clerk, then misunderstanding may be created regarding the payment (Ariesaand Berasategu, 2009). If any mail is deleted wrongfully, then there should be no other proof of that payment mail. Hence, it is important to maintain the payment mails in separate mail-ID, and the record of the payment mail needs to be kept as a hard copy too.
• Remittance list is prepared manually by the clerk, which indicates to the risk of losing the copies. If the two copies of the list lost by chance, then the clerk again has to make it. Using computer records in such case is a better idea to keep the information secured and backed up for future (Kusumaand Julian, 2019). Inappropriate preparation of the remittance list may hamper the payment system infrastructure. The risks associated with the weak structure for remittance preparation are lack of transparency and weak payment system infrastructure. The lack of transparency in the system is not able to provide adequate consumer protection.
• The deposit slip is an important document for the payment proof of a transaction. In the present case, it has shown that the company is following a manual making of deposit slip of each payment. The manual making deposit slip may increase the risk of losing the proof of payment (Dilapanga, 2013). The deposit slip needs to make by recording the data immediately into a cash register by using a computing system. It can be manually made, but there are more chances of losing the proof of payment made by the customer. Hence, it is necessary to keep an additional record for the deposit slip.

Frauds that is possible in SOPP and CRP of XYZ Ltd.
Fraudulent activities in the revenue cycle of an entity hamper the regular operations of the sales ordering process and cash receipts procedure of the business. The frauds may occur in the procedures due to the weak internal control involved in each procedure. The security related to the procedures is not eligible to provide complete protection to the activities from external threats as well as internal threats.

Possible frauds in SOPP
Based on the discussion of risks related to sales order processing procedures, the following frauds may occur in XYZ:

• The general e-mail that is used to collect all the mail information along with the order information may cause cyber threat from the outsiders. The other mails are also gathered in the mailbox along with the order mail of customers. If any corrupt mail is entered in the mailbox, and it is opened by the clerk, then it may able the hacker to get access to the network (Oktaviaand Pamungkas, 2019). However, the order mail does not include critical information that may hamper the customers’ privacy, but it can source the personal information about the customers like name, contact number and address.
• The verification of the sales order process includes the risk of information leakage that may be controlled by an outsider or any person from the internal workforce of the entity. The fraud related to information leakage may occur if the risk of insecure system exists.
• The records that are followed by the clerk for checking customers' credibility include the risk of mislead confirmation of customer orders. The fraud may occur at this step is confirmation of wrong customer order, who has not credible to take goods on credit (Frazer, 2016). The customers who have a good credit history on past years may not possess the same credit worthiness at present.

Possible frauds in CRP

• The payment receipt came directly in the common mailbox, where other mails are also gathered. If the mailbox is accessed by another person apart from the clerk or other person appointed to do the work, then the information related to payment receipt may be accessed by the person. The fraud related to the theft of customer payment information may occur at this stage, and the information related to cash receipt may be deleted before it is entered in accounting records(Putra, 2020).
• The manual handling of the remittance list may bring the fraud of theft of the remittance slip and removing the proof of payment(Putra, 2020).
• The manual preparation of the deposit slip may cause significant fraud in the entity as the deposit slip is a crucial document of proof of payment (Halonen, 2014). Hence, misleading the slip with the different amount or removing the manual proof may bring potential threat to the entity.

Conclusion
The revenue cycle of an entity is a crucial part of business as it maintains the authenticity of revenue sources. If the management of an entity fails to implement the internal control of revenue cycle effectively, then the revenue figure may be hampered. The study reveals that the weakness of internal control in sales order processing procedure and cash receipt procedures may cause potential harm to the revenue cycle of XYZ Ltd., so they need to be addressed with adequate solutions.

References
Ariesa, L. and Berasategu, R.G., 2009. the analysis of internal controls on revenue and expenditure cycle in PT. Levina. Journal of Applied Finance & Accounting, 1(2), pp.268-280. Ayam, JRA, 2015. An Analysis of revenue cycle internal controls in Ghanaian universities. Case Studies in Business and Management, 2(2), pp.1-17.

Dilapanga, W., 2013. THE EVALUATION OF INTERNAL CONTROL ON CASH RECEIPT AND DISBURSEMENT (CASE STUDY: PT. CPNM) (Doctoral dissertation, President University).

Frazer, L., 2016. Internal control: Is it a benefit or fad to small companies? A literature dependency perspective. Journal of Accounting and Finance, 16(4).

Halonen, P., 2014. Risk-based evaluation of internal controls in case company's sales process-case company X.

Kusuma, DW and Julian, L., 2019, October. Implementation of Fraud Risk Assessment on Domestic Revenue Cycle of PT X (Case Study of Tiles Company). In 3rd Asia-Pacific Research in Social Sciences and Humanities Universitas Indonesia Conference (APRISH 2018). Atlantis Press.

Oktavia, F. and Pamungkas, B., 2019, July. Internal Controls in the Sales Cycle to Minimise Risks (Case Study at PT XYZ). In Asia Pacific Business and Economics Conference (APBEC 2018). Atlantis Press.

Putra, L., 2020. Fraud: Embezzlement Of Cash Receipts. [online] Accounting-financial-tax.com. Available at: [Accessed 29 December 2020].

Strand, H., 2014. 10 Common Internal Control Deficiencies Found In Small Businesses - LBA Haynes Strand Is Now Aprio. [online] LBA Haynes Strand is now Aprio. Available at: [Accessed 29 December 2020].

Swlearning.com, 2020. Identifying The Risks And Controls In Business Processes. [online] Swlearning.com. Available at: [Accessed 29 December 2020].