Understanding the Revenue and Collection Cycle

Summary

This script discusses the revenue and collection cycle, focusing on a manufacturer that sells goods on credit. It outlines five key steps: receiving and processing orders, credit approval, delivering goods, billing customers, and collecting cash. It emphasizes the importance of internal controls, data protection, and accurate record-keeping to prevent fraud and ensure efficient cash flow.

Takeaways

• 🔍 Auditors need to understand the revenue and collection cycles specific to each company type.
• 📈 For manufacturers that sell on credit, the cycle includes receiving orders, credit approval, delivery, billing, and cash collection.
• 🛂 Step one involves receiving and processing customer orders, which should be securely managed to prevent fraud.
• 💳 Step two is credit approval, ensuring customers are creditworthy to minimize bad debts.
• 🚫 Protecting customer data is crucial to prevent legal issues like lawsuits following data breaches.
• 🚚 Step three involves delivering goods, which requires careful inventory management and documentation.
• 📦 The importance of chain of custody and pre-numbered shipping documents for internal controls is highlighted.
• 💼 Billing customers in step four requires accurate and authorized pricing to ensure correct customer billings.
• 🔑 Auditors perform checks on invoices and sales to ensure they match authorized prices and terms.
• 💵 The final step is collecting and depositing cash, emphasizing daily deposits and accurate customer statements.
• 🔍 Regular audits and checks can detect unusual sales patterns that might indicate unethical practices like channel stuffing.

Q & A

What are the five steps in a company's revenue and collection cycle for a manufacturer that sells goods on credit?

The five steps are: 1) Receiving and processing customer orders, 2) Approving credit, 3) Delivering goods and services, 4) Billing customers and managing accounts receivable, and 5) Collecting and depositing cash.

Why is it important to have a customer master file?

A customer master file is important to maintain a list of all customers and their information, ensuring that only authorized personnel can make changes to prevent the addition of fictitious customers.

What is the purpose of the credit approval process in the revenue and collection cycle?

The credit approval process ensures that customers are creditworthy, preventing bad debts by checking if the customer doesn't exceed their credit limit, isn't delinquent, and actually exists.

How does a company protect customer data during the revenue and collection cycle?

A company should have strict controls and protocols in place to protect customer data, as improper handling can result in lawsuits, as exemplified by Target's 18.5 million payment after a data breach in 2013.

Why is the chain of custody important when delivering goods and services?

The chain of custody is important to track the movement of inventory and to know which employee is responsible if inventory goes missing. It also involves having carriers sign a bill of lading upon receiving goods for shipment.

What is a bill of lading and why is it used?

A bill of lading is a form signed by a carrier acknowledging receipt of inventory for shipment, indicating that the goods have been shipped.

Why should shipping documents be pre-numbered?

Pre-numbered shipping documents serve as an internal control to ensure that shipments are recorded accurately, helping to identify any shipments that were not recorded or recorded twice.

What should a company do to ensure accurate billing and management of accounts receivable?

A company should file a shipment record, notify the billing department to send an invoice to the customer, ensure the sales invoice includes authorized prices and terms, and match pre-numbered shipping documents to related sales invoices.

How can an auditor verify the accuracy of sales invoices?

An auditor can vouch invoices or journal entries for sales to a price list to ensure that prices listed in invoices match the price list, and also match pre-numbered shipping documents to related sales invoices.

What is the significance of recording sales revenue at the fob shipping point?

Recording sales revenue at the fob shipping point indicates that the company has transferred the goods to the customer and that the revenue can be recognized once the goods have been shipped.

How should a company handle the collection and depositing of cash?

A company should deposit checks and cash received from customers daily, reflect journal entries to record cash receipts, and reduce the receivable for the correct customer. Periodic statements should be sent to customers to ensure cash is being received and recorded accurately.