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NOTE FROM TIM: This document I found on the web seems to have some relevant CPA
Exam Questions that are worth studying.
I. REVENUE CYCLE. As you will recall, the revenue cycle involves accounting transactions
resulting from economic events that produce revenue for the accounting entity. The major
events occurring in the revenue cycle are: receiving and ordering from a customer,
delivering goods or services to the customer, requesting payment from the customer, and
receiving the payment. Understanding a cycle involves familiarity with the documentation
of the cycle. Flowcharts, internal control questionnaires and narratives are common
methods of documentation. Fill in the flowcharts for revenue (credit sales and cash
sales and receipts).
II. Identify appropriate internal control procedures for the revenue cycle using DAASI.
(Reconciliation to ARCCS: D (Recorded) A (Custody) A (Authorized) S (Seg of Duties) I
(Comparison).)
D=
A=
A=
S=
Segregate the sales order function from the A) credit function from the B) shipping
function from the C) billing function from the D) cash receipts function
Segregate cash receipts from accounts receivable record keeping
Segregate cash receipts from the credit function
Segregate accounts receivable subsidiary ledger from the general ledger
I=
Compare duplicate deposit slip with a) cash receipts journal, and b) A/R sub ledger
Daily reconciliation of cash collections
Match credit memoranda and receiving report
Yes or No
The following questions are from the CPA Exam. You are given 15 - 25 minutes to
answer each question. Each essay question is worth 10 points.
CPA EXAMPLE ESSAY #1
(Internal Controls for Cash Receipts) You have been asked by the board of trustees of a local
church to review its internal controls. As a part of this review, you have prepared the following
comments relating to the collection made at weekly services and recordkeeping for members
pledges and contributions:
The churchs board of trustees has delegated responsibility for financial management and
audit of the financial records to the finance committee. This group prepares the annual budget
and approves major disbursements, but is not involved in collections or recordkeeping. No
audit has been considered necessary in recent years because the same trusted employee has
kept church records and has served as financial secretary for fifteen years.
The collection at the weekly service is taken by a team of ushers. The head usher counts
the collection in the church office following each service. He then places the collection and a
notation of the amount counted in the church safe. Next morning, the financial secretary
opens the safe and recounts the collection. She withholds about $100 to meet cash
expenditures during the coming week and deposits the remainder of the collection intact. In
order to facilitate the deposit, members who contribute by check are asked to draw their
checks to cash.
At their request, a few members are furnished prenumbered, predated envelopes in which
to insert their weekly contributions. The head usher removes the cash from the envelopes to
be counted with the loose cash included in the collection and discards the envelopes. No
record is maintained of issuance or return of the envelopes and the envelope system is not
encouraged.
Each member is asked to prepare a contribution pledge card annually. The pledge is regarded
as a moral commitment by the member to contribute a stated weekly amount. Based upon the
amounts shown on the pledge cards, the financial secretary furnishes a letter to the members
that supports the tax deductibility of their contributions.
REQUIRED: Identify the internal control weaknesses apparent in this scenario and
recommendations for improvements.
Recommended Improvements
To the extent possible, financial secretarys responsibilities should be
confined to record-keeping.
S or I
I
A
D
I
I
I
A
I or A
A
S
D or I
I
I
D or A
D
D
D
D
I
S
A
I
I
Yes
No
Potential misstatement
Accounts receivable could
be overstated and
uncollectible accounts
understated because of the
lack of controls.
SALES CLERK
RECEIVES
CUSTOMER
ORDER BY
PHONE
BOOKKEEPER #1
SALES ORDER
BOOKKEEPER #2
APPROVED SALES
ORDER
SALES ORDER
2
COLLECTION CLERK
CUSTOMER
CHECK
INVOICE
3
INVOICE
2
PREPARES
4-COPY
SALES
ORDER
SALES ORDER
SALES ORDER
SALES ORDER
SALES ORDER
CONFIRMATION
AUTHORIZED
CUSTOMER'S
CREDIT
PREPARES
SHIPPING
ADVICE
SHIPPING ADVICE
1
2
MATCHES INV.
& APPROVED
SALES ORDER
INFORMATION
APPROVED
SALES ORDER
SALES ORDER
2
SALES
JOURNAL
BY
NUMBER
DAILY
COPY OF
SALES
JOURNAL
POST TO
RECORDS
4
PREPARES
3-COPY
INVOICE
STAMPS
SALES
ORDER #2
WITH DATE
SHIPPED
BY
NUMBER
SALES ORDER
(DATED)
SUBSIDIARY
ACCOUNTS
RECEIVABLE
INVOICE
INVOICE
2
1
INVOICE
TO
CUSTOMER
BY
CUSTOMER
STAMPS
"FOR
DEPOSIT
ONLY"
POSTS TO
RECORDS
FOOTS &
POSTS TO
GENERAL
LEDGER
WEEKLY
COPY OF
CASH REC.
JOURNAL
2
3
RELEASES
LUMBER
TO
CARRIER
TO
CUSTOMER
Required: Identify weaknesses in the internal control structure relating to the acitivties of
a) warehouse clerk, b) bookkeeper #1, c) bookkeeper #2, and d) collection clerk
GENERAL
LEDGER
DEPOSITS
CHECKS
WEEKLY
FROM
MAIL
CLERK
Bookkeeper #2
Bookkeeper #1
Collection Clerk
SHIPPING DEPARTMENT
From
Order
Dept
Customer Order
Sales Order
Sales Order
Sales Order
Sales Order
2
Sales Order
Shipping Doc.
Customer Order
Customer Order
Sales Order
Sales Order
Sales Order
Sales Order
4
Sales Order
3
Sales Order
Sales Order
3
6
5
To
Customer
Sales Order
2
Considered
the
supporting
documentation for the
sales
To
Billing
To
Credit
Sales Order
Sales Order
Shipping
ShippingDocument
Document
File sales
order and
customer
order
pending
notice of
shipment
3
2
Shipping
Document
Sales Order
Customer Order
Sales Order
Sales Order
Shipping Doc.
Sales Invoice
Sales Invoice
Sales Invoice
To
A/R
Sales Invoice
To
Billing
To Customer
(Packing Slip)
3
1
N
To
Customer
To
Inventory
Acctg.
CASHIER
Cash
Remittance Advice
Checks From
Customers
Document
Cash Sales
Invoice
2
1
Register Reading
Count Sheet
Supervisor
reading of
register daily
and
reconciliation
with cash
Cash
Prelist
Prelist
Register Reading
3
Count Sheet
Deposit Slip
Checks
Prelist
2
Prelist of
Mail Receipts 1
Document
Document
Cash
3
Cash and Checks
2
1
Document
Prelist
Register Reading
3
Cash Count Sheet
2
Deposit Slip
Daily Cash Summary
Document
2
1
Daily Cash
Summary
To
Accounting
To Bank
To General
Accounting
2
2
1
Register Reading
Prelist
Prelist
2
3
Register Reading
2
Count Sheet
1
Deposit Slip
Daily Cash
Summary
2
2
2
2
Remittance Advice
Prelist
To
Treasurer
Daily Cash
Summary
Supervisor
preparation of
Cash Count
Sheet
Register
Reading
Checks
TREASURER
ACCOUNTS RECEIVABLE
GENERAL ACCOUNTING
Start Write
Offs
Reviews
Aged Trial
Balance
From Credit
Manager
Prepare
Aged Trial
Balance
Prepares
Credit
Memo
Approves
Write Off
Aged Trial
Balance
Credit Memo
Credit Memo
1
Document
Post to
Customer
Account
Document
Credit Memo
Post To
Customer
Account
2
1
Individual
Customer
Account
To
Treasurer
Credit
Memo
C/N
C/N
Account
Receivable
Control
Allowance
For Doubtful
Accounts
Credit
Memo
C/N
RECEIVING
Start
Returns
Inspect
returned
goods
TREASURER
BILLING
GENERAL LEDGER
ACCOUNTS RECEIVABLE
From
Receiving
Receiving
Report
Route
return to
receiving
Prepare
Receiving
Report
File pending
arrival of CM
C/N
General
Ledger
Prepare
Credit
Memo
Document
Receiving
Report
3
2
1
Approves
Returns
Credit Memo
C/N
Post
General
Ledger
Posts To
Customer
Accounts
Receiving Report
Receiving Report
R. R.
Credit Memo
Credit Memo
Returns
And
Allowances
C/N
Individual
A/R
A/R General
Ledger
Account
SHIPPING DEPARTMENT
From
Order
Dept
Customer Order
Sales Order
Sales Order
Sales Order
Sales Order
2
Sales Order
Shipping Doc.
Customer Order
Customer Order
Sales Order
Sales Order
Sales Order
Sales Order
4
Sales Order
3
Sales Order
Sales Order
3
6
5
To
Customer
Sales Order
2
Considered
the
supporting
documentation for the
sales
To
Billing
To
Credit
Sales Order
Sales Order
Shipping
ShippingDocument
Document
File sales
order and
customer
order
pending
notice of
shipment
3
2
Shipping
Document
Sales Order
Customer Order
Sales Order
Sales Order
Shipping Doc.
Sales Invoice
Sales Invoice
Sales Invoice
To
A/R
Sales Invoice
To
Billing
To Customer
(Packing Slip)
3
1
N
To
Customer
To
Inventory
Acctg.
CASHIER
Cash
Remittance Advice
Checks From
Customers
Document
Cash Sales
Invoice
2
1
Register Reading
Count Sheet
Supervisor
reading of
register daily
and
reconciliation
with cash
Cash
Prelist
Prelist
Register Reading
3
Count Sheet
Deposit Slip
Checks
Prelist
2
Prelist of
Mail Receipts 1
Document
Document
Cash
3
Cash and Checks
2
1
Document
Prelist
Register Reading
3
Cash Count Sheet
2
Deposit Slip
Daily Cash Summary
Document
2
1
Daily Cash
Summary
To
Accounting
To Bank
To General
Accounting
2
2
1
Register Reading
Prelist
Prelist
2
3
Register Reading
2
Count Sheet
1
Deposit Slip
Daily Cash
Summary
2
2
2
2
Remittance Advice
Prelist
To
Treasurer
Daily Cash
Summary
Supervisor
preparation of
Cash Count
Sheet
Register
Reading
Checks
CHARTING
Charting, Inc. processes its sales and cash receipts documents as follows:
Payment on account: The mail is opened each morning by a mail clerk in the sales
department. The mail clerk prepares a remittance advice showing customer and amount paid if
one is not received. The checks and remittance advices are then forwarded to the sales
department supervisor who reviews each check and forwards the checks and remittance
advices to the accounting department supervisor.
The accounting department supervisor, who also functions as credit manager approving
new credit and all credit limits, reviews all checks for payments on past due accounts and then
forwards the checks and remittance advices to the A/R clerk, who arranges the advices in
alphabetical order. The remittance advices are posted directly on the A/R ledger cards. The
checks are endorsed by stamp and totaled. The total is posted to the cash receipts journal.
The remittance advices are filed chronologically.
After receiving the cash from the previous days cash sales, the A/R clerk prepares the
daily deposit slip in triplicate. The third copy of the deposit slip is filed by date, and the second
copy and the original accompany the bank deposit.
Sales: Sales clerks prepare sales invoices in triplicate. The original & second copy go to
the cashier. The third copy is retained by the sales clerk in the sales book. For cash sales, the
customer pays the sales clerk, who presents the money to the cashier with the invoice copies.
A credit sale is approved by the cashier from an approved credit list after the sales clerk
prepares the three-part invoice. After receiving the cash or approving the invoice, the cashier
validates the original copy of the sales invoice and gives it to the customer. At the end of each
day, the cashier recaps the sales and cash received and forwards the cash and the second
copy of all sales invoices to the accounts receivable clerk.
The A/R clerk balances the cash received with cash sales invoices and prepares a daily
sales summary. The sales invoices are sent to the inventory control clerk in the sales
department for posting to the inventory control cards. After posting, the inventory control clerk
files all invoices numerically. The A/R clerk posts the daily sales summary to the cash receipts
journal and sales journal and files the sales summaries by date. The clerk also post the credit
sales to the accounts receivable subsidiary ledger account.
The cash sales and cash received on account make up the daily bank deposit.
Bank deposits: The bank validates the deposit slip and returns the second copy to the
accounting department where it is filed by date by the accounts receivable clerk. Monthly bank
statements are reconciled promptly by the accounting department supervisor and filed by date.
REQUIRED:
1. Complete the flowchart on the following page by labeling the appropriate symbols and
indicating information flows.
The chart is complete as to symbols and document flows.
2. Identify weaknesses in Chartings internal controls.
CASHIER
SALES SUPER.
A/R SUPER
Mail Clerk
Checks
Checks
Remittance
Advice
Checks
Open
Mail
Remittance
Advice
Remittance
Advice
Prepare Remittance
Advice if Needed
Sales Clerks
Write
Invoice For
Cust. Order
Remittance
Advice
3
Sales
Invoice
Accounts
Receivable
Ledger
Checks
Post
Retained
In Sales
Book
Post
Check
Total
Sales
Invoice
Filed Third
Copy of
Deposit
Slip
Endorse
Checks Total
Cash and
Prepare
Deposit Slip
T
S
Sales
Journal
R
Q
From Customer
Daily Sales
Summary
Post
File
D
Cash
D
C
Customer
To Bank
Sales
Invoice
Sales Invoice
2
G
File
N
Post
Cash
N
H
Validated
Deposit Slip
Monthly Bank
Statement
From
Bank
Necessary
Control
Potential Test
of Control
Reperform procedure.
Observe warehouse
personnel filing orders.
Independent check by
shipping clerks of agreement
of goods received from
warehouse with approved
sales order.
Examine evidence of
performance of independent
check.
Observe segregation of
duties.
Preparation of shipping
document for each shipment.
Independent check of
agreement of sales journal
entries and amounts posted
to customer accounts with
control totals of invoices.
Review evidence of
independent checks; reperform checks.
Necessary
Control
Use of cash registers or pointof-sale devices.
Periodic surveillance of cash
sales procedures.
Potential Test
of Control
Observe cash sales
procedures.
Inquire of supervisors about
results of surveillance.
Restrictive endorsement of
checks immediately on
receipt.
Immediate preparation of
prelist of mail receipts.
Independent check of
agreement of cash and
checks with cash count
sheets and prelist.
Examine evidence of
independent check.
Independent check of
agreement of validated
deposit slip with daily cash
summary.
Reperform independent
check.
Independent check of
agreement or remittance
advices with prelist.
Examine evidence of
independent check.
Independent check of
agreement of amounts
journalized and posted with
daily cash summary.
Reperform independent
check.
Preparation of periodic
independent bank
reconciliations.
Observe preparation of
prelists.
A.
B.
C.
D.
E.
F.
G.
1.
H.
2.
I.
3.
J.
4.
K.
L.
5.
6.
7.
N.
8.
O.
9.
P.
Q.
R.
S.
T.
1.
2.
3.
4.
5.
6.
7.
8.
1. For effective internal control, the billing function should be performed by the
a. Accounting department.
c. Shipping department.
b. Sales department.
d. Credit & collection department.
2. For good internal control, which of the following functions should not be the
responsibility of the treasurers department?
a. Data processing.
c. Custody of securities.
b. Handling of cash.
d. Establishing credit policies.
4. Which one of the following is not a universal rule for achieving strong internal
control over cash?
a. Separate cash handling and the record keeping functions.
b. Decentralize the receiving of cash as much as possible.
c. Deposit each days cash receipts by the end of the day.
d. Have bank reconciliations performed by employees independent with
respect
to handling cash.
a. Only persons who handle cash receipts should be responsible for the
preparation of documents that reduce accounts receivable.
b. Responsibility for approval of the write-off of uncollectible accounts should
lie with sales personnel.
c. Balances in the subsidiary accounts receivable ledger should be reconciled
to the G/L control account once a year, preferably at the year end.
d. The billing function should be assigned to persons other than those
responsible for maintaining accounts receivable subsidiary records.
10. Salesmens commissions are based on gross sales. Sales continue to increase;
but uncollectible A/R are also increasing at an alarming rate. The most effective
procedure for preventing the increase in uncollectible A/R is to
a. Have the sales manager review activity of individual salesmen.
b. Age accounts receivable regularly.
c. Have the write-off of accounts properly approved.
d. Have the credit dept approve credit to customers before shipment.
11. The sales department bookkeeper has been crediting house-account sales to
her brother-in-law, an outside salesman. Commissions are paid on outside
sales but not on house-account sales. This might have been prevented by
requiring that
a. Sales order forms be prenumbered and accounted for by the sales
department bookkeeper.
b. Sales commission statements be supported by sales order forms and
approved by the sales manager.
c. Aggregate sales entries be prepared by the general accounting department.
d. Disbursement vouchers for sales commissions be reviewed by the internal
audit department and checked to commission statements.
12. Which of the following control procedures may prevent the failure to bill
customers for some shipments?
a. Each shipment should be supported by a prenumbered sales invoice.
b. Each sales order should be approved by authorized personnel.
c. Sales journal entries should be reconciled to daily sales summaries.
d. Each sales invoice should be supported by a shipping document.
13. To achieve good I/C which department should match shipping documents with
sales orders and prepare daily sales summaries?
a. Billing.
c. Credit.
b. Shipping.
d. Sales.
Shipping document
General ledger master file
General journal
Master price file
Sales journal
Sales invoice
Cash receipts journal
Uncollectible accounts file
Shipping file
Aged trial balance
Open order file
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
COMPUTER
PROCESSING
DEPARTMENT
SALES DEPT.
From
Customer
COMPUTERIZED
SHIPPING PROGRAM:
COMPUTERIZED
ORDER PROGRAM:
Cust.
Credit
File
Customer
Purchase
Order
From
Computer
Processing
Dept.
#2
Sales Order
Sales Order
Sales Order
Sales Order
Transmit
Customer
Data to
Computer
To
Warehouse
and Shipping
Dept.
Shipping Doc.
Shipping
Document
2
#4
Accounts
Rec.
Master
File
Customer
Purchase
Order
Shipping
File
#6
#5
Inventory
Master
File
#3
Customer P.O.
Sales Order
Sales Order
#10
COMPUTERIZED UPDATE
PROGRAM:
Update master files: Prepare
G/L Transaction Summary,
Prepare Accounts Receivable
Ledger, Prepare Aged T/B,
and #11
#8
To
Customer
General Ledger
Transaction
Summary
To
Accounting
COMPUTERIZED
BILLING PROGRAM:
Retrieve Shipping Data;
Enter Price Data;
Prepare Sales
Transaction File; and
Sales
Transaction
File
#12
To
Accounting
#7
2
1
To
Customer
#9
Accounts
Receivable
Ledger
#13
To
Accounts
Receivable
To Customer
Credit
Transmit
Shipping
Information to
Computer
Sales Order
Shipping Doc.
Shipping
Document
To
Customer
with
Goods
3
2
1
FIGURE 1
EXAMPLE OF ON-LINE ENTRY/BATCH PROCESSING FOR A REVENUE
APPLICATION
SALES ORDER
SHIPPING
EDP
Customer's
Order
From
Warehouse
Enter
Order
Data
ORDER PROGRAM
Perform Edit and
Credit Checks;
Print Sales Orders
Customer Order
Sales Order
Sales Order
Sales Order
Accts.
Rec.
Master
File
Sales
Orders
Inventory
Master
File
Open
Order
File
General
Ledger
Master
File
Enter
Shipping
Date
SHIPPING PROGRAM
Retrieve Open Orders;
Add Shipping Data;
Transfer to Shipping File;
Print Shipping Documents
Master
Price
File
Shipping Doc.
Sales Order
Shipping Doc.
4
Shipping Doc.
Shipping
File
Shipping
Document
3
2
3
2
1
1
MASTER FILE
UPDATE PROGRAM
Update Master Files;
Print Sales Journal and
General Ledger
Transaction Summary
To Customer
WAREHOUSE
Release
Goods to
Shipping
Sales Journal
General Ledger
Transaction
Summary
Sales Order
Sales
Order
Sales
Trans.
File
BILLING PROGRAM
Retrieve Shipped Order
Data;
Prepare Invoice;
Accumulate
and Compare Batch
Total;in Sales Transactions
Enter
File; Print Invoices
BILLING
Prepare
Batch
Total
Sales Invoice
Sales
Invoice
Enter Batch
Total; Prepare
Billing
2
1
Sales Order
To
Shipping
with
Goods
Check Agreement
of Goods and
Sales Order
To Accounting
To Customer
Shipping
Document
2
3